Internal Environment Analysis

K. Rangarajan

INDIAN INSTITUTE OF FOREIGN TRADEINDIAN INSTITUTE OF FOREIGN TRADE

BUSINESS STRATEGYBUSINESS STRATEGY

External EnvironmentExternal EnvironmentWhat the Firm Might DoWhat the Firm Might Do

Internal EnvironmentInternal EnvironmentWhat the Firm Can DoWhat the Firm Can Do

SustainableSustainableCompetitiveCompetitiveAdvantageAdvantage

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

The purpose of SWOT Analysis

It is an easy-to-use tool for developing an overview of a company’s strategic situation

– It forms a basis for matching your company’s strategy to its situation

Strengths

A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability.

Possible Strengths:

– Name recognition– Proprietary technology– Cost advantages– Skilled employees– Loyal Customers

Weaknesses

A WEAKNESS is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage

Possible Weaknesses:

– Poor market image– Obsolete facilities– Internal operating problems– Poor marketing skills

Strengths and Weakness form a basis for INTERNAL analysis

By examining strengths, you can discover untapped potential or identify distinct competencies that helped you succeed in the past.

By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies.

How do we assemble How do we assemble bundlesbundles of Resources, of Resources, Capabilities and Core Competencies to create Capabilities and Core Competencies to create

VALUEVALUE for customers? for customers?

Will environmental changes make our core Will environmental changes make our core competencies obsolete?competencies obsolete?

And...And...

Are substitutes available for our core Are substitutes available for our core competencies?competencies?

Are our core competencies easily Are our core competencies easily imitated?imitated?

Key Questions for Managersin Internal Analysis

Key Questions for Managersin Internal Analysis

Core Competencies

A Competence is a bundle of skills and technologies rather than a Single discrete skill

A Core Competence represents the sum of learning across individual skill sets and individual organisational units.

Example: Federal Express

Logistics – Meta Competencies

Package tracking – Core competencies

Bar Coding – Constituent skill

( Learning: Core competence is very unlikely to reside in its entirety in a single individual or a small team)

Core Competencies … (cont)

Three Tests of a skill:

1. Customer value ( Honda’s know-how in engines)

2. Competitor Differentiation ( Sony’s Miniaturisation)

3. Extendibility ( SKF’s antifriction ideas, precision engg.)

Core Competencies

Why Core Competencies?

Canon Optics, imaging, microprocessor controls

Fax Machines, cameras, desk-top printers, Photocopiers, Image scanners

Sony Miniaturization, Microprocessor design, ultra-thin precision casting

Miniature card calculators, pocket TVs, digital watches, video tape recorders etc

3M Substrates, coatings, adhesives

Magnetic tapes, photographic film, coated abrasives, post-it notes, sticker products

Honda Design & Mfg. of engines and power trains

Cars, motorcycles, generators, lawn mowers

Dep

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e s Product Precision Mechanics Fine Optics Microelectronics Electronic Imaging

Basic camera X X

Compact fashion camera X X

Electronic camera X X

EOS autofocus camera X X X

Video still camera X X X X

Laser beam printer X X X X

Color video printer X X X

Bubble jet printer X X X

Basic fax X X X

Laser fax X X X

Calculator X

Plain paper copier X X X X

Battery PPC X X X X

Color copier X X X X

Laser copier X X X X

Color laser copier X X X X

Still video system X X X X

Laser imager X X X X

Cell analyzer X X X X

Mask aligners X X X

Stepper aligners X X X

Excimer laser aligners X X X X

HOW TO DO AN INTERNAL ANALYSIS

Value Chain AnalysisCustomers demand value from the goods and services they obtain

Customer Value

Product is unique and differentProduct is low pricedQuick response to specific or distinctive customer

needsValue Chain

Systematic way of examining organization's functional activities

•How well these activities create customer value •Organization's strengths and weaknesses in these areas

Processing ingredientsSyrup manufactureBottling/Can Filling

Wholesale distributionRetailing Programming

Disk LoadingMarketingDistribution

Human Resource Management

Customer Service

SOFT DRINKS

SOFTWARE

ACCOUNTANCY

Value Chain CompositionDiffers by Industry & by

Company

Activities, Costs, and Margins of Suppliers

InternallyPerformed

Activities, Costsand Margins

Activities, Costs, Margins

of Forward Channels

Upstream Company DownstreamValue Chains Value Chain Value Chains

ENDUSER

THE VALUE CHAIN SYSTEM

Adapted from Michael Porter, Competitive Advantage, 1985.

Inbound logistics

Operation Outbound logistics

Marketing and sales

Service

Procurement

Technology development

Human resource management

Firm infrastructure

The value chainThe value chain

Support Activities

Primary Activities

Value Chain Activities: Textile Industry

• > 70% fibre from cotton• % of raw cotton in total fibre is declining• 90% cotton yarn prod. Is in lower counts• Share of cotton fibre consumption has come down • Blended yarn segment is growing fast• 80% yarn from mills sector

• 60% share of fabric prodn. with powerloom sector• Share of 100% NC is growing • Ratio is –

1997 – 58:14:282001 – 50:16:34

• Mill’s share is low

• Apparel: Rs.700bl – 950 bl. Highly decentralised 30,000 units +3

million people knitting segment is growing fast.• Tech. Text. Prodn is cap. Intensive. Domestic mkt growing. Weak connected activities• Home Text: organised sector for domestic mkt. Unorganised sector in exports. Exports around Rs70 billion. Fabric export is high than clothing

• 12596 process houses• Majority are hand processing units (83%). • Primitive tech.• More in fabric to clothing stage

Fibre/Yarn Fabric Clothing

Dying /Finishing

Spinning

Weaving

Dyeing/Finishing

Some Aspects in the Textile Value Chain

Description Link in the VC Strategy for Capturing Value

1. Better design, sourcing, production, logistics and inventory management

Inbound Logistics

Operations

Outbound Logistics

1. Reduce delay in the key steps of SCM

2. Shorten the Cycle time

3. Reduce unplanned shipments

2. Ability to reach low cost supplier given changes in tariffs, labor rates and exchange rates

Inbound logistics

Marketing & Sales

1. Reach low-cost supplier to reduce COGS

3. Increase revenue from current customer

Marketing and Sales

After Sales Service

1. Ensure timely availability of high-fashion trendy or highly seasonal goods

4. Reduce process costs Operations 1. Establish Business Processes for sourcing and logistics functions.

Vertically integrated: manufacture own production machinery

•Substantial annual investment in assets • Invented own production machinery• Constant innovation in own production machinery

• Cycle of goodness in Japan; • Japanese management worldwide• Employee participation and involvement in subsidiaries

Multi-plant, multinationals with joint ventures and subsidiaries at appropriate location

Decentralized local autonomy but strong central direction

Little dependence on suppliers

Heavily automated for cost saving.

Production of coils in Japan for subsidiaries worldwode.

High quality of produciton

Tight stock control systems

Coils (semi-finished zips) held in stocks

Concentration on key accounts

Wide range of sizes and colours with fast deliverlies

High quality at competitive prices

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Inbound logistics

•Import of Gold, Silver & other precious metals

• Purchase of Jewellary locally

Operation

•Manufacturing of Jewellary

• Processing of off-the-shelf supplies

• Cutting & polishing of stones

• Quality testing of metals

Outbound logistics

•Decentralised storage points

• Supply routing of raw materials

• Packaging

Marketing and sales•Concentration on govt. supplies & exports•Wide range of jewellary & other items•High quality products to International Stds

Service

•Exhibitions

• Quality testing

Centralised procurement of common facilities

Substantial investment in assets; R & D, design facilities

Strong national workforce: Opportunities for Trg. & Dev.

* One of the Biggest Trading Coy. with offices in various parts of India & outside

* Centralised authority, with Ltd. autonomy

The value chain of MMTC (Precious Metals)The value chain of MMTC (Precious Metals)

Support Activities

Levi Strauss & Co.

World’s largest producer of branded clothing

Second largest maker of Jeans

Levis,Dockers and Slates – Labels

Sales: 1998 - $0.6 billion; 2008 - $ 4.5 billion

Market share: 1998 – 14%; 2008 – 16%

Value Chain of Levi Strauss

Demand Forecasting

Market Research

Design Research

Produc--tion Planning

Raw Material Logistics

Produc-tion

Factory Ware-housing

Shipping by Truck Fleet & Common Carrier

Distrib. Warehouses------------Hub & Spoke

Ship to Retail Stores-----------Truck Fleet

Retail Outlets

Sales & Promo--tions

THE CUSTOMER

Lead-time Uncertainty

Cycle-time Uncertainty

and Variation

Demand Uncertainty

and Variation

Schedule Uncertainty

and Variation

Demand Uncertainty

and Variation

Schedule Variation

Micro Demand

Uncertainty

Customer Satisfaction Level?

Likelihood of Repeat Purchase?

54% of customers generate 90% of sales

76% of women customers not fully satisfied with the purchase

R. M. Inventory~ 15 days

WIP Inventory~ 15 days

F.G. Inventory~ 15 days

F.G. Inventory~ 100 days

F.G. Inventory~ 60 days

INVENTORY

Average 8 Month Lead-Time

Heavy Eqp. Cutting (60 ply)

Sewing Handling &

Shipping

Real Estate Investment

Vehicles Investment

Real Estate Investment

Vehicles Investment

Working Capital

Investment

20,000 SKU’s 500 to 1,000 SKU’s per store, based

on local patterns

FIXED ASSETS

INVENTORY VARIETY

Value Chain of Levi StraussLevi’s Personal Pair Value Chain

PP Kiosk in Retail Store

Raw MaterialLogistics

Cut the order (1 ply) at

Mountain City

EDI link to Mfg.Via CCTC

Sew, Inspect andPack the Pair at

Crystal City

Fed. Exp. Directlyto the Customer

Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders

Never take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

WHY DO AN INTERNAL ANALYSIS?

• Identify organization’s strengths and weaknesses

• Make good strategic decisions

• Provide basis for developing strategic alternatives

Outcomes

By studying the external environment

Organizations identify what they might choose to do

By studying the internal environment

Organizations identify what they can do