Analysis of the Internal Environment

(1)

Strategic Management

Competitiveness and Globalization:

Concepts and Cases

Concepts and Cases Seventh edition

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TRATEGIC

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ANAGEMENT

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TRATEGIC

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ANAGEMENT

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CHAPTER 3 CHAPTER 3

Analysis of the Internal

Environment

Management of Strategy

Concepts and Cases

(2)

K

KNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES

1.

1. Explain the need for firms to study and understand theirExplain the need for firms to study and understand their internal environment.

internal environment.

2.

2. Define value and discuss its importance.Define value and discuss its importance.

3.

3. Describe the differences between tangible andDescribe the differences between tangible and intangible resources.

intangible resources.

4.

4. Define capabilities and discuss how they areDefine capabilities and discuss how they are developed.

developed.

5.

5. Describe four criteria used to determine whetherDescribe four criteria used to determine whether resources and capabilities are core competencies.

resources and capabilities are core competencies.

(3)

K

KNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES (cont(cont’d)’d)

6.

6. Explain how value chain analysis is used to identify andExplain how value chain analysis is used to identify and evaluate resources and capabilities.

evaluate resources and capabilities.

7.

7. Define outsourcing and discuss the reasons for its use.Define outsourcing and discuss the reasons for its use.

8.

8. Discuss the importance of identifying internal strengthsDiscuss the importance of identifying internal strengths and weaknesses.

and weaknesses.

(4)

Competitive Advantage

•

Firms achieve strategic competitiveness and

earn above

-

average returns when their core

competencies are effectively:



Acquired.Acquired.



Bundled.Bundled.



Leveraged.Leveraged.

•

Over time, the benefits of any value

-

creating

strategy can be duplicated by competitors.

(5)

Competitive Advantage (cont

’

d)

•

Sustainability of a competitive advantage is a

function of:



The rate of core competence obsolescence due toThe rate of core competence obsolescence due to environmental changes.

environmental changes.



The availability of substitutes for the coreThe availability of substitutes for the core competence.

competence.



The difficulty competitors have in duplicating or_{The difficulty competitors have in duplicating or}

imitating the core competence.

(6)

External Analyses

’

Outcomes

By studying the external environment, firms

identify what they

identify what they might choose to do.might choose to do.

Opportunities

and threats

(7)

(8)

The Context of Internal Analysis

•

Global Economy



Traditional sources of advantages can be overcome_{Traditional sources of advantages can be overcome}

by competitors

by competitors’’ international strategies and by theinternational strategies and by the flow of resources throughout the global economy.

flow of resources throughout the global economy.

•

Global Mind

-

Set



The ability to study an internal environment in waysThe ability to study an internal environment in ways that are not dependent on the assumptions of a single

that are not dependent on the assumptions of a single

country, culture, or context.

•

Analysis Outcome



Understanding how to leverage the firmUnderstanding how to leverage the firm’’s bundle ofs bundle of heterogeneous resources and capabilities.

(9)

FIGURE

FIGURE 3.13.1 Components of Internal Analysis Leading toComponents of Internal Analysis Leading to

Competitive Advantage and Strategic Competitiveness

(10)

Creating Value

•

By exploiting their core competencies or

competitive advantages, firms create value.

•

Value is measured by:



Product performance characteristicsProduct performance characteristics



Product attributes for which customers are willing toProduct attributes for which customers are willing to pay

pay

•

Firms create value by innovatively bundling and

leveraging their resources and capabilities.

•

(11)

Creating Competitive Advantage

•

Core competencies, in combination with product

-

-market positions, are the firm

market positions, are the firm

’

s most important

sources of competitive advantage.

•

Core competencies of a firm, in addition to its

analysis of its general, industry, and competitor

environments, should drive its selection of

strategies.

(12)

The Challenge of Internal Analysis

•

Strategic decisions in terms of the firm

’

s

resources, capabilities, and core competencies:



Are nonAre non--routine.routine.



Have ethical implications._{Have ethical implications.}



Significantly influence the firmSignificantly influence the firm’’s ability to earn aboves ability to earn above- -average returns.

(13)

The Challenge of Internal Analysis (cont

’

d)

•

To develop and use core competencies,

managers must have:



CourageCourage



Self_Self--confidenceconfidence



IntegrityIntegrity



The capacity to deal with uncertainty and complexityThe capacity to deal with uncertainty and complexity



A willingness to hold people (and themselves)A willingness to hold people (and themselves) accountable for their work

(14)

FIGURE

FIGURE 3.23.2 Conditions Affecting Managerial Decisions aboutConditions Affecting Managerial Decisions about

Resources, Capabilities, and Core Competencies

(15)

Resources, Capabilities and Core Competencies

•

Resources



Are the source of a firmAre the source of a firm’’ss capabilities.

capabilities.



Are broad in scope.Are broad in scope.



Cover a spectrum ofCover a spectrum of individual, social and

individual, social and

organizational

phenomena.



Alone, do not yield aAlone, do not yield a competitive advantage. competitive advantage. Discovering Core Discovering Core Competencies Competencies Resources Resources •

•TangibleTangible

•

•IntangibleIntangible

(16)

Resources

•

Resources



Are a firmAre a firm’’s assets,s assets, including people and

including people and

the value of its brand

name.



Represent inputs intoRepresent inputs into a firm

a firm’’s productions production process, such as:

process, such as:

•

• Capital equipmentCapital equipment

•

• Skills of employeesSkills of employees

•

• Brand namesBrand names

•

• Financial resourcesFinancial resources

•

• Talented managersTalented managers

•

Types of Resources



Tangible resourcesTangible resources

•

• Financial resourcesFinancial resources

•

• Physical resourcesPhysical resources

•

• TechnologicalTechnological resources

resources

•

• OrganizationalOrganizational resources

resources 

Intangible resourcesIntangible resources

•

• Human resourcesHuman resources

•

• Innovation resourcesInnovation resources

•

(17)

TABLE

TABLE 3.13.1 Tangible ResourcesTangible Resources

Financial Resources • The firm’s borrowing capacity

• The firm’s ability to generate internal funds

Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems

Physical Resources • Sophistication and location of a firm’s plant and equipment

• Access to raw materials

(18)

TABLE

TABLE 3.23.2 Intangible ResourcesIntangible Resources

Human Resources • Knowledge

• Trust

• Managerial capabilities

• Organizational routines

Innovation Resources • Ideas

• Scientific capabilities

• Capacity to innovate

Reputational Resources • Reputation with customers

• Brand name

• Perceptions of product quality, durability, and reliability

• Reputation with suppliers

• For efficient, effective, supportive, and mutually beneficial interactions and relationships

(19)

Resources, Capabilities and Core Competencies

•

Capabilities



 Represent the capacity to deployRepresent the capacity to deploy resources that have been

resources that have been

purposely integrated to achieve a

desired end state



 Emerge over time through complexEmerge over time through complex interactions among tangible and

interactions among tangible and

intangible resources



 Often are based on developing,Often are based on developing, carrying and exchanging

carrying and exchanging

information and knowledge through

the firm

the firm’’s human capitals human capital

Discovering Core Discovering Core Competencies Competencies Resources Resources •

•

(20)

Resources, Capabilities and Core Competencies

•

Capabilities (cont

’

d)



The foundation of many_{The foundation of many}

capabilities lies in:

•

• The unique skills andThe unique skills and knowledge of a firm

knowledge of a firm’’ss employees

employees

•

• The functional expertise ofThe functional expertise of those employees

those employees 

Capabilities are oftenCapabilities are often developed in specific

developed in specific

functional areas or as part

of a functional area.

•

(21)

TABLE

TABLE 3.3_3.3 Examples of FirmsExamples of Firms’’ CapabilitiesCapabilities

Functional Areas Capabilities

Distribution Effective use of logistics management techniques Human resources Motivating, empowering, and retaining employees Management Effective and efficient control of inventories through information systems point-of-purchase data collection methods

Marketing Effective promotion of brand-name products Effective customer service

Innovative merchandising

Management Ability to envision the future of clothing Effective organizational structure

Manufacturing Design and production skills yielding reliable products Product and design quality

Miniaturization of components and products Research & Innovative technology

(22)

Resources, Capabilities and Core Competencies

•

Four criteria for

determining strategic

capabilities:



ValueValue



RarityRarity



CostlyCostly--toto--imitateimitate



NonsubstitutabilityNonsubstitutability

Discovering Core

Discovering Core

Competencies

Resources

Resources •

•

Capabilities

Core

Competencies

(23)

Resources, Capabilities and Core Competencies

•

Core Competencies



Resources and capabilities thatResources and capabilities that are the sources of a firm

are the sources of a firm’’ss

competitive advantage:

•

• Distinguish a companyDistinguish a company

competitively and reflect its

personality.

•

• Emerge over time through anEmerge over time through an organizational process of

organizational process of

accumulating and learning

how to deploy different

•

(24)

Resources, Capabilities and Core Competencies

•

Core Competencies



Activities that a firm performsActivities that a firm performs especially well compared to

especially well compared to

competitors.



Activities through which the firmActivities through which the firm adds unique value to its goods

adds unique value to its goods

or services over a long period of

time.

Discovering Core

Competencies

Resources

Resources •

•

Capabilities

Core Core

(25)

Building Core Competencies

•

Four Criteria of

Sustainable Competitive

Advantage



Valuable capabilitiesValuable capabilities



Rare capabilitiesRare capabilities



Costly to imitateCostly to imitate



NonsubstituableNonsubstituable

Discovering Core

Competencies

•

• ValuableValuable

•

• RareRare

•

• Costly to imitateCostly to imitate

•

• NonsubstitutableNonsubstitutable

Four Criteria of

Sustainable

Advantages

(26)

TABLE

TABLE 3.4_3.4 The Four Criteria of Sustainable Competitive AdvantageThe Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities • Help a firm neutralize threats or exploit opportunities

Rare Capabilities • Are not possessed by many others

Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand

name

• Ambiguous cause: The causes and uses of a competence are unclear

• Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

(27)

Building Sustainable Competitive Advantage

•

Valuable capabilities



Help a firm neutralize_{Help a firm neutralize}

threats or exploit

opportunities.

•

Rare capabilities



Are not possessed byAre not possessed by many others.

many others.

Discovering Core

Competencies

•

• RareRare

•

Sustainable

Advantages

(28)

Building Sustainable Competitive Advantage

•

• CostlyCostly--toto--Imitate CapabilitiesImitate Capabilities



HistoricalHistorical

•

• A unique and a valuableA unique and a valuable

organizational culture or brand

name

name 

Ambiguous causeAmbiguous cause

•

• The causes and uses of aThe causes and uses of a competence are unclear

competence are unclear 

Social complexitySocial complexity

•

• Interpersonal relationships,Interpersonal relationships, trust, and friendship among

trust, and friendship among

managers, suppliers, and

customers customers Discovering Core Discovering Core Competencies Competencies •

•

• RareRare

•

• Costly to ImitateCostly to Imitate

•

Four Criteria of

Sustainable

Advantages

(29)

Building Sustainable Competitive Advantage

•

Nonsubstitutable

Capabilities



No strategic equivalentNo strategic equivalent

•

• FirmFirm--specific knowledgespecific knowledge

•

• Organizational cultureOrganizational culture

•

• Superior execution of theSuperior execution of the chosen business model

chosen business model

Discovering Core

Competencies

•

• RareRare

•

Sustainable

Advantages

(30)

Outcomes from Combinations

of the Four Criteria

Valu able ? Rar e? Cos tly toIm itate ? Non subs titut able ? Competitive Consequences Performance Implications No

No NoNo NoNo NoNo Competitive Disadvantage Competitive Disadvantage Below Average Returns Below Average Returns Yes

Yes NoNo NoNo Yes/ No Yes/ No Competitive Parity Competitive Parity Average Returns Average Returns Yes

Yes YesYes NoNo Yes/ No Yes/ No Temporary Com-petitive Advantage Temporary Com-petitive Advantage

Above Average to Average Returns

Yes

(31)

Table

Table 3.53.5 Outcomes from Combinations of the Criteria forOutcomes from Combinations of the Criteria for Sustainable Competitive Advantage

(32)

Value Chain Analysis

•

Allows the firm to understand the parts of its

operations that create value and those that do

not.

•

A template that firms use to:



Understand their cost position.Understand their cost position.



Identify multiple means that might be used to facilitateIdentify multiple means that might be used to facilitate implementation of a chosen business

(33)

Value Chain Analysis (cont

’

d)

•

Primary activities involved with:



A productA product’’s physical creations physical creation



A productA product’’s sale and distribution to buyerss sale and distribution to buyers



The productThe product’’s service after the sales service after the sale

•

Support Activities



Provide the assistance necessary for the primaryProvide the assistance necessary for the primary activities to take place.

(34)

Value Chain Analysis (cont

’

d)

•

Value Chain



Shows how a product moves from the rawShows how a product moves from the raw--materialmaterial stage to the final customer.

stage to the final customer.

•

To be a source of competitive advantage, a

resource or capability must allow the firm:



To perform an activity in a manner that is superior toTo perform an activity in a manner that is superior to the way competitors perform it, or

the way competitors perform it, or



To perform a valueTo perform a value--creating activity that competitorscreating activity that competitors cannot complete

(35)

FIGURE

FIGURE 3.33.3

The Basic Value

Chain

(36)

Table

Table 3.6_3.6 Examining the ValueExamining the Value--Creating Potential of Primary ActivitiesCreating Potential of Primary Activities

Inbound Logistics

Activities, such as materials handling, warehousing, and inventory control, used to receive, store, and disseminate inputs to a product.

Operations

Activities necessary to convert the inputs provided by inbound logistics into final product form.

Machining, packaging, assembly, and equipment maintenance are examples of operations activities.

Outbound Logistics

Activities involved with collecting, storing, and physically distributing the final product to customers. Examples of these activities include finished goods warehousing, materials handling, and order processing.

Marketing and Sales

Activities completed to provide means through which customers can purchase products and to induce them to do so. To effectively market and sell products, firms develop advertising and promotional

campaigns, select appropriate distribution channels, and select, develop, and support their sales force.

Service

Activities designed to enhance or maintain a product’s value. Firms engage in a range of service-related activities, including installation, repair, training, and adjustment.

Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.

(37)

Table

Table 3.7_3.7 Examining the ValueExamining the Value--Creating Potential of Support ActivitiesCreating Potential of Support Activities

Procurement

Activities completed to purchase the inputs needed to produce a firm’s products. Purchased inputs include items fully consumed during the manufacture of products (e.g., raw materials and supplies, as well as fixed assets—machinery, laboratory equipment, office equipment, and buildings).

Technological Development

Activities completed to improve a firm’s product and the processes used to manufacture it. Technological development takes many forms, such as process equipment, basic research and product design, and servicing procedures.

Human Resource Management

Activities involved with recruiting, hiring, training, developing, and compensating all personnel.

Firm Infrastructure

Firm infrastructure includes activities such as general management, planning, finance, accounting, legal support, and governmental relations that are required to support the work of the entire value chain.

Through its infrastructure, the firm strives to effectively and consistently identify external opportunities and threats, identify resources and capabilities, and support core competencies.

(38)

The Value

-

Creating Potential of Primary

Activities

•

Inbound Logistics



Activities used to receive, store, and disseminate_{Activities used to receive, store, and disseminate}

inputs to a product

•

Operations



Activities necessary to convert the inputs provided byActivities necessary to convert the inputs provided by inbound logistics into final product form

inbound logistics into final product form

•

Outbound Logistics



Activities involved with collecting, storing, andActivities involved with collecting, storing, and physically distributing the product to customers

(39)

The Value

-

Activities (cont

’

d)

•

Marketing and Sales



Activities completed to provide the means through_{Activities completed to provide the means through}

which customers can purchase products and to

induce them to do so.

•

Service



Activities designed to enhance or maintain aActivities designed to enhance or maintain a product

product’’s values value

•

• Each activity should be examined relative to competitorEach activity should be examined relative to competitor’’ss abilities and rated as superior, equivalent or inferior.

(40)

The Value

-

Activities: Support

•

Procurement



Activities completed to purchase the inputs needed to_{Activities completed to purchase the inputs needed to}

produce a firm

produce a firm’’s products.s products.

•

Technological Development



Activities completed to improve a firmActivities completed to improve a firm’’s product ands product and the processes used to manufacture it.

the processes used to manufacture it.

•

Human Resource Management



Activities involved with recruiting, hiring, training,Activities involved with recruiting, hiring, training, developing, and compensating all personnel.

(41)

The Value

-

Activities: Support (cont

’

d)

•

Firm Infrastructure



Activities that support the work of the entire value_{Activities that support the work of the entire value}

chain (general management, planning, finance,

accounting, legal, government relations, etc.)

•

• Effectively and consistently identify externalEffectively and consistently identify external opportunities and threats

opportunities and threats

•

• Identify resources and capabilitiesIdentify resources and capabilities

•

• Support core competenciesSupport core competencies



Each activity should be examined relative toEach activity should be examined relative to competitor

(42)

Figure

Figure 3.43.4

Prominent

Applications of

the Internet in

the Value Chain

Source:Reprinted by permission ofHarvard Business Reviewfrom

(43)

Outsourcing

•

The purchase of a value

-

creating activity from an

external supplier



Few organizations possess the resources andFew organizations possess the resources and capabilities required to achieve competitive

capabilities required to achieve competitive

superiority in all primary and support activities.

•

By performing fewer capabilities:



A firm can concentrate on those areas in which it canA firm can concentrate on those areas in which it can create value.

create value.



Specialty suppliers can perform outsourcedSpecialty suppliers can perform outsourced capabilities more efficiently.

(44)

Outsourcing Decisions

A firm may outsource

all or only part of one

or more primary and/or

support activities.

support activities. Mar gin M arg_in Primary Activities S u p p o rt A c ti v it ie s Service F ir m In fr a s tr u c tu re F ir m In fr a s tr u c tu re P ro c u re m e n t H u m a n R e s o u rc e M g m t. T e c h n o lo g i c a l D e v e lo p m e n t

Marketing and Sales

Outbound Logistics

Operations

(45)

Strategic Rationales for Outsourcing

•

Improving business focus



Helps a company focus on broader business issues_{Helps a company focus on broader business issues}

by having outside experts handle various operational

details.

•

Providing access to world

-

class capabilities



The specialized resources of outsourcing providersThe specialized resources of outsourcing providers makes world

makes world--class capabilities available to firms in aclass capabilities available to firms in a wide range of applications.

(46)

Strategic Rationales for Outsourcing (cont

’

d)

•

Accelerating re

-

engineering benefits



Achieves re_{Achieves re}--engineering benefits more quickly byengineering benefits more quickly by having outsiders

having outsiders——who have already achieved worldwho have already achieved world- -class standards

class standards——take over process.take over process.

•

Sharing risks



Reduces investment requirements and makes firmReduces investment requirements and makes firm more flexible, dynamic and better able to adapt to

more flexible, dynamic and better able to adapt to

changing opportunities.

•

Freeing resources for other purposes



Redirects efforts from nonRedirects efforts from non--core activities toward thosecore activities toward those that serve customers more effectively.

(47)

Outsourcing Issues

•

Seeking greatest value



Outsource only to firms possessing a coreOutsource only to firms possessing a core

competence in terms of performing the primary or

supporting the outsourced activity.

•

Evaluating resources and capabilities



Do not

outsource activities in which the firm itselfoutsource activities in which the firm itself can create and capture value.

can create and capture value.

•

Environmental threats and ongoing tasks



Do not

outsource primary and support activities thatoutsource primary and support activities that are used to neutralize environmental threats or to

are used to neutralize environmental threats or to

complete necessary ongoing organizational tasks.

(48)

Outsourcing Issues (cont

’

d)

•

Nonstrategic team resources



Do not

outsource capabilities critical to the firmoutsource capabilities critical to the firm’’ss success, even though the capabilities are not actual

success, even though the capabilities are not actual

sources of competitive advantage.

•

Firm

’

s knowledge base



Do not

outsource activities that stimulate theoutsource activities that stimulate the

development of new capabilities and competencies.

(49)

Cautions and Reminders

•

• Never take for granted that core competencies willNever take for granted that core competencies will

continue to provide a source of competitive advantage. continue to provide a source of competitive advantage.

•

• All core competencies have the potential to becomeAll core competencies have the potential to become corecore rigidities

rigidities——former core competencies that now generateformer core competencies that now generate inertia and stifle innovation.

inertia and stifle innovation.

•

• Determining what the firm can do through continuous andDetermining what the firm can do through continuous and effective analyses of its internal environment will increase effective analyses of its internal environment will increase

the likelihood of long