Strategic Managment
BUAD 4980
STRATEGIC MANAGEMENT
CHAPTER 3: INTERNAL ANALYSIS
Introduction: Along with the external analysis, the internal analysis is necessary to assess a firm’s ability to achieve competitive advantage.
Purpose of the internal analysis: Identification of strengths (S) and weaknesses (W). Because they are internal to a firm, strengths and weaknesses are under the control of the firm’s managers
- Strengths: a firm’s resources and capabilities that are a source of core competencies
- Weaknesses: a firm’s resources and capabilities that are not a good source of core competencies
Internal organization: it comprises resources and capabilities
1. Resources: assets (or inputs) that are used by a firm to perform its activities. There are two types of resources:
1.1. Tangible resources: assets that can be easily seen or quantified. They main types of tangible resources are (1) financial resources (borrowing capacity), (2) physical resources (e.g. location, equipment, machines), and (3) technological resources (e.g. patents and trademarks). As they are easily imitated by competitors, tangible resources are not a good source of core competencies
1.2. Intangible resources: assets that are more difficult to see or quantify. The main types of intangible resources are (1) innovation resources (e.g. capacity to innovate), (2) human resources (knowledge, skills and experience of managers and employees), and (3) reputational resources (customer loyalty, brand image). Because they are difficult to see or quantify, intangible resources are a good source of core competencies.
2. Capabilities: a firm’s ability to combine and integrate resources in order to perform activities. Because the way to combine and integrate resources tends to be unique for each firm, capabilities are the best source of core competencies. There are two types of capabilities:
2.1. Human capabilities (capital): managers’ and employees’ ability to exploit or deploy resources to develop, transmit, exchange and share information and knowledge about those resources (e.g. leadership styles, decision-making processes, strategies, corporate culture)
2.2. Functional capabilities: a firm’s ability to exploit resources in order to perform the activities of a particular function (e.g. manufacturing capabilities, marketing capabilities, R&D capabilities)
Competitive advantage analysis: to achieve competitive advantage (C.A.), firms need to have core competencies
1. Core competencies: resources and capabilities that a firm successfully uses to create a competitive advantage. If a firm has many strengths and few weaknesses in its resources and capabilities, it is likely to have core competencies and therefore to achieve C.A.
2. Attributes of resources and capabilities: a firm builds core competencies when its resources and capabilities are:
2.1. Valuable: they are valuable when they allow a firm to develop and implement strategies that create value
2.2. Rare: they are rare when few or no competitors possess them
2.3. Costly to imitate: they are costly to imitate when they are difficult to duplicate by competitors except at a high cost
2.4. Non-substitutable: they are non-substitutable when they do not have strategic equivalents
3. Competitive advantage:
3.1. Definition: value-creating strategies that are unique (difficult to duplicate) and that result in above-average performance (financial and strategic). Firms make decisions to create C.A., although several of them lack C.A. as they fail to make sound decisions
3.2. Creation of C.A.: to create a C.A., firms must to excel in either:
- Efficiency: amount of inputs needed to produce a unit of output. Efficiency leads to low cost value
- Quality: characteristics of a product that are valued by customers. Measures of quality: customer complaints, defects, etc. Quality leads to differentiation value
- Innovation: innovation means two things, either:
+ Product innovation: entirely new products or new features in existing products. Product innovation leads to differentiation value
+ Process innovation: new ways of making existing products. Process innovation leads to low cost value
3.3. Failure to achieve C.A.: reasons for failing to achieve C.A. include:
- Inertia: inability or unwillingness to adapt to changes
- Prior strategic commitment: a firm is stuck in outdated course of action
- Icarus paradox: prior successes can in some instances lead to future failures, as managers may fail to realize the need for change because of complacency and over-confidence
Strategic tools needed to conduct a competitive advantage analysis:
1. SWOT analysis:
1.1. SWOT: strategic managers need to identify opportunities (O) and threats (T) in the external environment, and (2) strengths (S) and weaknesses (W) in the internal organization (internal analysis)
1.2. Definition: SWOT analysis is a strategic tool used to evaluate a firm’s ability to leverage its strengths in order to take advantage of opportunities, minimize the impact of threats, and correct weaknesses
2. Value chain analysis:
2.1. Value: value means either (1) low cost: a firm’s products are the least expensive, or (2) differentiation: a firm’s products have distinctive characteristics that buyers prefer (because designing distinctive characteristics is costly, differentiation results in a premium price)
2.2. Value chain:
- Definition: it is a series of activities that take place from inputs, through the process of transformation, to outputs (finished products)
- Types of activities along the value chain: (1) primary activities: activities that create value (e.g. research and development/R&D, operations, marketing, supply chain management), and (2) support activities: activities that facilitate the performance of primary activities (e.g. financial, human resource, information systems activities)
2.3. Definition: value chain analysis is a strategic tool used to identify the activities that a firm should perform in order to create value
2.4. Value creation:
- Strategic focus: value chain analysis helps to identify the activities that create the most value (compared to competitors). For a firm to create the most value, it is important to focus on a few core activities that are central to the survival of the firm
- For value creation to be effective, it is also crucial for a firm to have core competencies necessary to perform these core activities
- Outsourcing: the activities that do not create the most value need to be outsourced (purchased from independent suppliers)
NOTE: outsourcing versus offshoring: Outsourcing refers to buying an activity from an independent supplier (whether a domestic or a foreign company). Offshoring refers to acquiring an activity that was produced in a foreign country (regardless of whether the activity was produced by the firm itself or by an independent supplier)
3. Performance analysis:
3.1. Performance is the accomplishment of objectives (or targets)
3.2. Measures of performance: performance has several dimensions, so multiple measures are needed:
- Financial measures: indicators used to evaluate whether a firm is able to fulfill its economic responsibilities (paying wages, dividends, debts). Financial measures include various returns (e.g. ROA, ROE, ROI), profit margin, stock price, market share, employee turnover
- Strategic measures: indicators used to evaluate whether a firm is able to achieve C.A. Strategic measures include several indicators that tell if a firm can excel in efficiency, quality, and innovation
3.3. Balanced scorecard: an approach used to provide a comprehensive view of performance. It involves multiple measures of both financial and strategic performance to address the interests of all or most stakeholders (e.g. customers, employees, creditors, shareholders, suppliers)
3.4. Definition of performance analysis: it is strategic tool used to evaluate whether a firm has accomplished its objectives (or targets). If a firm has accomplished its targets, it has been effective. Effectiveness is the extent to which a firm has achieved its performance targets.
Outcomes of competitive advantage analysis:
1. Evaluation of competitive advantage: A competitive advantage analysis is complete when managers have conducted a SWOT analysis, a value chain analysis, and a performance analysis. Once the competitive advantage analysis is done, managers should be able to tell whether or not their company has achieved a competitive advantage
2. Strategy formulation: after competitive advantage has been evaluated, strategies must be formulated, regardless of whether a firm has achieved a C.A. or not. If a firm has achieved a C.A., strategies must be formulated in order to sustain the existing C.A. If a firm does not have a C.A., strategies must be formulated in an attempt to create a C.A. Strategy formulation is discussed in chapters 4 through 9.
