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Internal Analysis

Internal Analysis. Lecture Topics. Purpose of Internal Analysis Competitive Advantage and Core Competence Value Chain Financial Analysis Combining Internal and External Analyses. Purpose of Internal Analysis.

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Internal Analysis

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  1. Internal Analysis

  2. Lecture Topics • Purpose of Internal Analysis • Competitive Advantage and Core Competence • Value Chain • Financial Analysis • Combining Internal and External Analyses

  3. Purpose of Internal Analysis • An organization’s future success depends on its own internal conditions as well as external conditions • Managers need to be able to identify • Strengths that the company can relay on in order to compete • Weaknesses that need to be corrected or minimized as competitive factors

  4. Managers must understand • The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit • The importance of superior efficiency, innovation, quality, and responsiveness to customers • The sources of their company’s competitive advantage (strengths and weaknesses)

  5. Competitive Advantage • The collection of factors that sets a company apart from its competitors and gives it a unique position in the industry/market • Means to add value for stakeholders • Focus especially on adding value for customers

  6. Core Competence(ies) A unique set of lasting capabilities that a company relies on to achieve competitive advantage and add value • Innovation • Efficiency • Customer Responsiveness • Quality • Special Expertise

  7. The Value Chain • A company is a chain of activities for transforming inputs into outputs that customers value • The transformation process is composed of primary and support activities that add value to the product

  8. Value Chain Service

  9. Value Chain Interpretation • Represents a company or any organization • Simplified illustration of all activities that an organization must perform • Framework for analyzing a company’s strengths and weaknesses • Margin represents profit- expand margin by • Being able to charge a higher price • Operating at a lower cost within the Value Chain

  10. Primary Activities in the Value Chain Activities directly involved in producing, selling, distributing, and servicing product for buyer. • Inbound logistics: receiving, storing, and distributing inputs for production • Operations: all activities involved in transforming inputs into final products • Outbound logistics: collecting, storing, distributing product to final buyer • Marketing and Sales: activities used to get customers to buy company products • Service: installation, repair, support, training for using a product

  11. Support Activities in the Value Chain Activities that enable the performance of primary activities • Firm infrastructure: companywide support of entire value chain; includes quality of management, financial performance, strategy, organizational culture • Human resource management: recruiting, hiring, training, reward systems for employees • Research and development: design of products and processes that enhance company performance; not limited to equipment • Procurement: purchasing and managing inputs used in operations; developing and managing supplier relations

  12. Applying Value Chain Analysis • Framework for identifying company’s strengths and weaknesses • Means to focus on where the company’s core competencies exist and can be used to achieve competitive advantage and add value • Comparison with competitors reveals opportunities for improving company’s competitive position

  13. Resource-Based View (RBV) • RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles • The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources • Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages

  14. Three Basic Resources • Tangible assets are the easiest “resources” to identify and are often found on a firm’s balance sheet • Intangible assets are “resources” such as brand names, company reputation, organizational morale, technical knowledge, patents and trademarks, and accumulated experience • Organizational capabilities are not specific “inputs.” They are the skills that a company uses to transform inputs into outputs

  15. What makes a resource valuable? 4 Guidelines: • Is the resource or skill critical to fulfilling a customer’s need better than that of the firm’s competitors? Resurgence of Environmentalism • Is the resource scarce? Is it in short supply or not easily substituted for or imitated? • Appropriability: Who actually gets the profit created by a resource? • Durability: How rapidly will the resource depreciate?

  16. Elements of Scarcity • Short Supply • Availability of Substitutes • Imitation • Isolating Mechanisms: • Physically Unique Resources • “Path-Dependent” Resources • Casual Ambiguity • Economic Deterrence

  17. Resource Imitation

  18. Using RBV in Internal Analysis It is helpful to: • Disaggregate resources • Utilize a functional perspective • Look at organizational processes • Use the value chain approach

  19. Applying the Resource Based View

  20. Making Meaningful Comparisons • Managers need objective standards to use when examining internal resources and value-building activities • Strategists use the firm’s historical experience as a basis for evaluating internal factors • Benchmarking, or comparing the way “our” company performs a specific activity with a competitor or other company doing the same thing, has become a central concern of managers in quality commitment companies worldwide

  21. Comparison with Key Success Factors in the Industry • The key determinants of success in an industry may be used to identify a firm’s internal strengths and weaknesses • A strategist seeks to determine whether a firm’s current internal capabilities represent strengths or weaknesses in new competitive arenas

  22. Financial Analysis • Uses company’s financial results to assess company’s performance • Requires comparisons of results over multiple years and against industry standards • Important tool to identify company’s strengths and weaknesses and potential problem areas.

  23. Types of Ratios • Profitability • Activity – Efficiency • Liquidity • Debt - Leverage • Growth

  24. Analyzing Competitive Advantage and Profitability • Benchmarking company performance against that of competitors and the company’s own historic performance • Return on invested capital • Net profit = Total revenues – Total costs

  25. Ways to Increase ROIC • Increase the company’s return on sales • Reduce cost of goods sold • Reduce spending on sales force, marketing, general, and administrative expenses • Reduce R&D spending • Increase sales revenue more than costs • Increase sales revenues from invested capital • Reduce the amount of working capital • Reduce amount of fixed capital

  26. Why Companies Fail • Inertia • Companies find it difficult to change their strategies and structures • Prior strategic commitments • Limit a company’s ability to imitate and cause competitive disadvantage • The Icarus paradox • A company can become so specialized based on past success that it loses sight of market realities • Craftsmen, builders, pioneers, salesmen

  27. Combining Internal and External Analyses • Internal and External Analyses commonly referred to as SWOT: Strengths Weaknesses Opportunities Threats • Strengths and Weaknesses identified from Internal Analysis • Opportunities and Threats identified from External Analyses

  28. Internal Analysis • Strengths and Weaknesses identified through the use of tools such as: • Vision, Mission, Objectives • Stakeholder Analysis • Core Competencies • Value Chain • Building Blocks of Competitive Advantage • Financial Analysis

  29. External Analysis • Opportunities and Threats identified through the use of tools such as: • General Environment Assessment • Five Force Analysis • Key Success Factors in Industry • Competitive Changes during Industry Evolution • Strategic Groups • National Competitive Advantage

  30. Results of Internal and External Analysis • Requires creative interpretation • Understanding of company’s competitive position in its industry • Identification of strategic issues the company faces • Strategic issues • Represent dangers to the company’s long-term survival • Suggest areas where the company should concentrate its efforts in order to grow

  31. Internal Analysis • Strengths • Weaknesses • External Analysis • Opportunities • Threats Tools Tools Strategic Issues Strategic Alternatives Strategy

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