Lectures Module 6 (Strategic Analysis ) Internal Analysis

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Strategic ManagementMBA & BBA

Lectures Module 6

(Strategic Analysis )

Internal Analysis

Course Lecturer: Farhan Mir

Chapter Objectives

1. Describe how to perform an internal strategic-management audit.

2. Discuss the Resource-Based View (RBV) in strategic management.

3. Discuss key interrelationships among the functional areas of business.

4. Identify the basic functions or activities that make up management, marketing, finance/accounting production/operations, research and development, and management information systems.

Chapter Objectives

5. Explain how to determine and prioritize a firm’s internal strengths and weaknesses.

6. Explain the importance of financial ratio analysis.

7. Discuss the nature and role of management information systems in strategic management.

8. Develop an Internal Factor Evaluation (IFE) Matrix.

9. Explain cost/benefit analysis value chain analysis, and benchmarking as strategic-management tools.

A Comprehensive Strategic-Management Model

The Strategic Management

Process

Outcomes from External and Internal Environmental Analyses

Examine opportunities and threats

Examine resources, capabilities, and core competencies; identify strengths, weaknesses, and sustainable competitive advantages

What is Internal Analysis – PrimeFactApproach

https://youtu.be/bJVtaFWyr-Y

SWOT Matrix

1. List the firm’s key external opportunities

2. List the firm’s key external threats

3. List the firm’s key internal strengths

4. List the firm’s key internal weaknesses

5. Match internal strengths with external opportunities

The Matching Stage

• The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix helps managers develop four types of strategies:

– SO (strengths-opportunities) Strategies

– WO (weaknesses-opportunities) Strategies

– ST (strengths-threats) Strategies

– WT (weaknesses-threats) Strategies

SO Strategies

Use a firm’sinternal strengthsto take advantage

of external opportunities

SOStrategies

StrengthsWeaknesses

OpportunitiesThreats

WO Strategies

Improving internalweaknesses by

taking advantageof external

opportunities

WOStrategies

StrengthsWeaknesses

ST Strategies

Use a firm’sstrengths

to avoid orreduce the impact

of externalthreats

STStrategies

StrengthsWeaknesses

WT Strategies

Defensive tacticsaimed at reducing

internal weaknesses &

avoidingenvironmental

threats

WTStrategies

StrengthsWeaknesses

A SWOT Matrix for a Retail Computer Store

Limitations with SWOT Matrix

• Does not show how to achieve a competitive advantage

• Provides a static assessment in time

• May lead the firm to overemphasize a single internal or external factor in formulating strategies

Conditions contributing to the challenge of identifying strengths and weaknesses -

Uncertainty

Complexity

Organizational conflicts

Facilitating Internal Analysis via . . .

• Ongoing observation (media reports, problems, successes)

• Brainstorming• Task forces• In-house facilitator or external consultants• Ongoing planning activities• Periodic functional audits• Value chain analysis• “Devil’s advocates”, “upstream swimmers”

Internal Analysis - Explanation

https://youtu.be/g-6BiM45Xi0

Components of Internal Analysis

Value Chain Analysis (VCA)

• The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value

• Value chain analysis (VCA) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value

• VCA takes a process point of view

The Value Chain

Conducting a VCA

1. Identify activities

2. Allocate costs

• VCA proponents hold that the

activity-based VCA approach

would provide a more meaningful

analysis of the procurement

function’s costs and consequent

value added than the traditional

cost accounting approach

Transforming Value Chain Activities into Sustained Competitive Advantage

Key Internal Forces

• Distinctive competencies

– A firm’s strengths that cannot be easily matched or imitated by competitors

• Building competitive advantages involves taking advantage of distinctive competencies.

Resource-Based View (RBV)1. 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

2. The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources

3. Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages

3–26

Resources, Capabilities and Core Competencies

• Resources– Are the source of a firm’s

capabilities

– Are broad in scope

– Cover a spectrum of individual, social and organizational phenomena

– Alone, do not yield a competitive advantage

3–27

• Resources

– Tangible resources

• Financial resources

• Physical resources

• Technological resources

• Organizational resources

– Intangible resources

• Human resources

• Innovation resources

• Reputation resources

3–28

Tangible Resources

Financial Resources •The firm’s borrowing capacity

•The firm’s ability to generate internal

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

Technological Resources •Stock of technology, such as patents,

trade-marks, copyrights, and trade

secrets

SOURCES: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102. Table 3.1

3–29

Intangible ResourcesHuman 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

SOURCES: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.

Table 3.2

3–30

• Capabilities– Are the firm’s capacity to deploy

resources that have been purposely integrated to achieve a desired end state

– Emerge over time through complex interactions among tangible and intangible resources

– Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

– Often based in specific functional areas

3–31

Examples of capabilities

• Efficient distribution – Wal-Mart

• Information systems – Wal-Mart

• Effective customer service – Nordstrom

• LT sales relationship, service – Caterpillar

• Low-cost manufacturing – Nucor Steel

• Production/distribution of high quality research-based children’s educational programming; fund raising/partnerships; licensing; tapping employee inspiration - Sesame Street Workshop

3–32

• Core Competencies

– Resources and capabilities that serve as a source of a firm’s competitive advantage:

• Distinguish a company from its competitors and reflect its personality

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

3–33

Building Sustainable Competitive Advantage

• Four Criteria of Sustainable Competitive Advantage

– Valuable

– Rare

– Costly to imitate

– Nonsubstituable

3–34

Building Sustainable Competitive Advantage

• Valuable capabilities– Help a firm neutralize

threats or exploit opportunities

– Are valued by the marketplace

• Rare capabilities– Are not possessed by

many others

3–35

Building Sustainable Competitive Advantage• Difficult-to-Imitate

Capabilities– Historical

• A unique and a valuable organizational culture or brand name

– Ambiguous cause-effect• The causes and uses of a

competence are unclear

– Social complexity• Interpersonal relationships,

trust, and friendship among managers, suppliers, and customers

3–36

Building Sustainable Competitive Advantage• Nonsubstitutable

Capabilities

– No strategic equivalent

▪ (Organizationally accessible)

Resource Imitation

Using RBV in Internal Analysis

It is helpful to:

• Disaggregate resources

• Utilize a functional perspective

• Look at organizational processes

• Use the value chain approach

Applying the Resource Based View

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

Comparison with 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

Internal Analysis – Organizational Culture Example Cultural Products Defined

Integrating Strategy and Culture

• Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic-management audit.

• If strategies can capitalize on cultural strengths, such as a strong work ethic or highly ethical beliefs, then management often can swiftly and easily implement changes.

The Process of Performing an Internal Audit

• The internal audit

– Requires gathering and assimilating information about the firm’s management, marketing, finance/accounting, production/operations, research and development (R&D), and management information systems operations

– Provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization

Management

• The functions of management consist of five basic activities: planning, organizing, motivating, staffing, and controlling.

• These activities are important to assess in strategic planning because an organization should continually capitalize on its management strengths and improve on its management weaknesses.

The Basic Functions of Management

Management Audit Checklist of Questions

1. Does the firm use strategic-management concepts?

2. Are company objectives and goals measurable and well communicated?

3. Do managers at all hierarchical levels plan effectively?

4. Do managers delegate authority well?

5. Is the organization’s structure appropriate?

Management Audit Checklist of Questions (cont.)

6. Are job descriptions and job specifications clear?

7. Is employee morale high?

8. Are employee turnover and absenteeism low?

9. Are organizational reward and control mechanisms effective?

Marketing

• Marketing

– the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services

Functions of Marketing

Customer analysis

Selling products/services

Product and service planning

Pricing Distribution

Marketing research

Opportunity analysis4-50

Marketing

• Customer analysis

– the examination and evaluation of consumer needs, desires, and wants

– involves administering customer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strategies

– essential in developing an effective mission statement

Desirable Characteristics of Ads Today

Product and Service Planning

• Product and service planning

– includes activities such as test marketing; product and brand positioning; devising warranties; packaging; determining product options, features, style, and quality; deleting old products; and providing for customer service

– important when a company is pursuing product development or diversification

Pricing

• Five major stakeholders affect pricing decisions: consumers, governments, suppliers, distributors, and competitors

• Sometimes an organization will pursue a forward integration strategy primarily to gain better control over prices charged to consumers

Distribution

• Distribution

– includes warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and retailing

– especially important when a firm is striving to implement a market development or forward integration strategy

Marketing Research

• Marketing research

– the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services

– can uncover critical strengths and weaknesses

Cost/Benefit Analysis

Three steps are required to perform a cost/benefit analysis:

1. compute the total costs associated with a decision,

2. estimate the total benefits from the decision,

3. compare the total costs with the total benefits.

Marketing Audit Checklist of Questions

1. Are markets segmented effectively?

2. Is the organization positioned well among competitors?

3. Has the firm’s market share been increasing?

4. Are present channels of distribution reliable and cost effective?

5. Does the firm have an effective sales organization?

6. Does the firm conduct market research?

Marketing Audit Checklist of Questions

7. Are product quality and customer service good?

8. Are the firm’s products and services priced appropriately?

9. Does the firm have an effective promotion, advertising, and publicity strategy?

10. Are marketing, planning, and budgeting effective?

11. Do the firm’s marketing managers have adequate experience and training?

12. Is the firm’s Internet presence excellent as compared to rivals?

Finance/Accounting Functions

The functions of finance/accounting comprise three decisions:

1. the investment decision

2. the financing decision

3. the dividend decision

• Investment decision

– the allocation and reallocation of capital and resources to projects, products, assets, and divisions of an organization

• Financing decision

– determines the best capital structure for the firm and includes examining various methods by which the firm can raise capital

• Dividend decisions

– concern issues such as the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the repurchase or issuance of stock

– determine the amount of funds that are retained in a firm compared to the amount paid out to stockholders

A Summary of Key Financial Ratios

1. How has each ratio changed over time?

2. How does each ratio compare to industry norms?

3. How does each ratio compare with key competitors?

Finance/Accounting Audit Checklist

1. Where is the firm financially strong and weak as indicated by financial ratio analyses?

2. Can the firm raise needed short-term capital?

3. Can the firm raise needed long-term capital through debt and/or equity?

4. Does the firm have sufficient working capital?

5. Are capital budgeting procedures effective?

Finance/Accounting Audit Checklist

7. Are dividend payout policies reasonable?

8. Does the firm have good relations with its investors and stockholders?

9. Are the firm’s financial managers experienced and well trained?

10. Is the firm’s debt situation excellent?

Production/Operations

• Production/operations function

– consists of all those activities that transforms inputs into goods and services

• Production/operations management deals with inputs, transformations, and outputs that vary across industries and markets.

The Basic Functions (Decisions) Within Production/Operations

Implications of Various Strategies on Production/Operations

Production/Operations Audit Checklist

1. Are supplies of raw materials, parts, and subassemblies reliable and reasonable?

2. Are facilities, equipment, machinery, and offices in good condition?

3. Are inventory-control policies and procedures effective?

4. Are quality-control policies and procedures effective?

5. Are facilities, resources, and markets strategically located?

6. Does the firm have technological competencies?

Research and Development Audit

1. Does the firm have R&D facilities? Are they adequate?

2. If outside R&D firms are used, are they cost-effective?

3. Are the organization’s R&D personnel well qualified?

4. Are R&D resources allocated effectively?

5. Are management information and computer systems adequate?

6. Is communication between R&D and other organizational units effective?

7. Are present products technologically competitive?

Management Information Systems

• A management information system’s purpose is to improve the performance of an enterprise by improving the quality of managerial decisions

• An effective information system thus collects, codes, stores, synthesizes, and presents information in such a manner that it answers important operating and strategic questions

Management Information Systems Audit

1. Do all managers in the firm use the information system to make decisions?

2. Is there a chief information officer or director of information systems position in the firm?

3. Are data in the information system updated regularly?

4. Do managers from all functional areas of the firm contribute input to the information system?

5. Are there effective passwords for entry into the firm’s information system?

Management Information Systems Audit

6. Are strategists of the firm familiar with the information systems of rival firms?

7. Is the information system user-friendly?

8. Do all users of the information system understand the competitive advantages that information can provide firms?

9. Are computer training workshops provided for users of the information system?

10.Is the firm’s information system continually being improved in content- and user-friendliness?

The Internal Factor Evaluation (IFE) Matrix

1. List key internal factors as identified in the internal-audit process

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor

3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a strength or weakness

4. Multiply each factor’s weight by its rating to determine a weighted score for each variable

5. Sum the weighted scores for each variable to determine the total weighted score for the organization

A Sample Internal Factor Evaluation Matrix for a Retail Computer Store

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