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Internal Environment Scanning

Outcomes from External and Internal Environmental Analyses

Examine competitors, opportunities and threats

Examine unique resources, capabilities, and competencies

Company Situation Analysis:The Key Questions

1. How well is firm’s present strategy working?

2. What are the firm’s resource strengths and weaknesses vis-à-vis external opportunities and threats?

3. Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition?

4. Is the firm competitively stronger or weaker than key rivals?

5. What strategic issues does the firm face?

How Well is thePresent Strategy Working?

• Best indicators of a well-conceived, well-executed strategy:

– The company is achieving its stated financial and strategic objectives.

– The company is an above-average industry performer.

How Well is thePresent Strategy Working?

• Quantitative– Sales growth – faster / slower– Market share – growing / declining– Retaining old customers, acquiring new customers– Profits increasing / decreasing– Credit rating– Image and reputation– Shareholder value

• Qualitative– Completeness, internal consistency, rationale and

relevance

Indicators of Strategic Success

• Growth in firm’s sales and market share

• Acquisition and retention of customers

• Increasing profit margins, net profits and ROI

• Growing financial strength and credit rating

• Positively viewed by shareholders and customers

• Leadership in factors relevant to market\industry success

• Continuing improvement in operating performance

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Make Meaningful Comparisons

• Comparison with past performance

– Trend analysis – Where are you relative to the past.

– Stages of Industry Evolution

• Emergence, Growth, Maturity and Decline

• Strengths or competencies needed at each stage are different

– Benchmarking with the competitors

• Key competitors

• Best practices irrespective of industry

SWOTPotential Resource Strengths

Potential Resource Weaknesses

Potential External Opportunities

Potential External Threats

• Powerful strategy

• Strong financial condition

• Strong brand name image/reputation

• Widely recognized market leader

• Proprietary technology

• Cost advantages

• Strong advertising

• Product innovation skills

• Good customer service

• Better product quality

• Alliances or JVs

• No clear strategic direction

• Obsolete facilities

• Weak balance sheet; excess debt

• Higher overall costs than rivals

• Missing some key skills/competencies

• Subpar profits

• Internal operating problems . . .

• Falling behind in R&D

• Too narrow product line

• Weak marketing skills

• Serving additional customer groups

• Expanding to new geographic areas

• Expanding product line

• Vertical integration

• Acquisition of rivals

• Alliances or JVs to expand coverage

• Openings to exploit new technologies

• Entry of potent new competitors

• Loss of sales to substitutes

• Slowing market growth

• Adverse shifts in exchange rates & trade policies

• Costly new regulations

• Vulnerability to business cycle

• Growing leverage of customers or suppliers

• Reduced buyer needs for product

• Demographic changes

SWOT Analysis

IdentifyDraw

Conclusions

Translate into Strategic

Action

SWOT Analysis

• Draw conclusions from the SWOT listings about the firm’s overall situation.

• Translate these conclusions into strategic actions by the firm that:

– Match its strategy to its internal strengths and to market opportunities.

– Correct important weaknesses, and defend it against external threats.

SWOT AnalysisHow Strong is the Company’s

Competitive Position?• How firm ranks relative to key rivals on each

industry KSF and relevant measure of competitive strength

• Whether firm has a sustainable competitive advantage or finds itself at disadvantage relative to certain rivals

• Ability of firm to defend its position in light of– Industry driving forces

– Competitive pressures

– Anticipated moves of rivals

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Assessing a Company’s Competitive Strength versus Key Rivals

1. List industry key success factors and other relevant measures of competitive strength

2. Rate firm and key rivals on each factor using rating scale of 1 to 10

3. Decide whether to use a weighted or unweightedrating system (a weighted system is usually superior because the chosen strength measures are unlikely to be equally important)

4. Sum individual ratings to get an overall measure of competitive strength for each rival

5. Determine whether firm enjoys a competitive advantage or suffers from a competitive disadvantage based on the overall strength ratings

Strategic Implications of Competitive Strength Assessment

• The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals.

• The rating score indicates the total net competitive advantage for a firm relative to other firms.

• Firms with high competitive strength scores are targets for benchmarking.

• The ratings show how a company compares against rivals, factor by factor (or capability by capability).

• Strength scores can be useful in deciding what strategic moves to make.

MCKINSEY 7-S FRAMEWORK

McKinsey 7-S Framework

• The 7-S framework of McKinsey is a Value Based Management (VBM) model that describes how one can holistically and effectively organize a company. Together these factors determine the way in which a corporation operates.

Systems

Style

Staff

Skills

Strategy

Structure

Shared values

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Hard Elements Soft Elements

Strategy Structure

Systems

Shared ValuesSkillsStyleStaff

The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft"

elements:

"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems.

"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.

Shared Values

• The interconnecting center of McKinsey's model

• What the organization stands for and what it believes in.

• Central beliefs and attitudes.

• Shared Values are guiding concepts - they are a set of values and aspirations (often unwritten) that go beyond the conventional formal statement of objectives

• Shared Values are the fundamental ideas around which a business is built, they are its main values. Staff who can identify and abide by these core values are very often the ones who have successful career paths.

Shared Values

• Shared Values link with ‘organisational culture’:

– The collection of traditional values, policies, beliefs and attitudes that constitute a pervasive context for everything that is done and thought and taught in organisations.

• They also link to what is termed ‘organisational climate’:

– Prevailing atmosphere surrounding the organisation,

– Level of morale, and the strength of feeling or belonging, care and goodwill among members.

– Perceptions of members towards the organisation.

Strategy

• Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment, competition, customers.

• Strategy relates to those actions that an organisation plans, in response to or anticipation of change in its external environment:– Its Clients and its Competitors

• Strategy is the way an organisation aims to improve its position in relation to its competitors through

• low cost delivery or production

• providing better value to clients

• achieving sales and service dominance

Structure

• The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized (the trend in larger organizations); matrix, network, etc.

• The pattern of relationships among positions in the organisation and among members of the organisation.

• It makes possible the application of the process of management and creates a framework of order and command through which activities of the organisation can be planned, organised, directed and controlled

Structure

• The challenge lies not so much in comprehending all the dimensions of

organisational structure but in developing:

– the ability to focus on those dimensions that are currently important to the

organisation’s evolution

– being ready to refocus as the crucial elements in the business environment

shift

• The central problem with structuring an organization is not the one on

which most organizational designers spend their time - ‘how to divide up

tasks !’

• It is one of emphasis and co-ordination - ‘how to make the whole thing

work !’

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System

• The procedures, processes and routines that characterize how important work is to be done: financial systems; hiring, promotion and performance appraisal systems; information systems.

• Systems are the day-to-day procedures, formal and informal, that make the organisation function and they include:– Ordering systems

– Production procedures

– Deliver procedures

– Capital budgeting procedures

– Training systems

– Cost accounting procedures

– Budgeting systems, etc.• If you want to understand how an organisation does or doesn’t get things done?

Look at its systems

• If you want to change an organisation without disruptive restructuringTry changing its systems

Structure Vs Systems

• Structure enhances power– And therefore authority

• Systems dilute power– And therefore authority

• Systems when they get old, crystallize into structure

• Systems provide the dynamic connection between two structures

• Therefore are also change resistant!

Staff

• Numbers and types of personnel within the organization.

• At the hard end of the spectrum– Appraisal systems

– Pay scales

– Formal training programmes

• And at the soft end we talk about:

– Morale

– Attitude

– Motivation

– Behaviour

Style

• Cultural style of the organization and how key managers behave in achieving the organization’s goals.

• The ‘Style’ of an organisation is very much founded in its Managerial Style

• Staff may listen to what managers say, but they believe what managers do.

• You will not sell to the clients what you cannot sell to the staff.

Skill

• Distinctive capabilities of personnel or of the organization as a whole.

• Core Competences.

• We characterise companies not by their strategies or structures but by what they can do best.

• Examples– McDonalds: efficiency and consistency

– Microsoft: innovation

– Du Pont:research and new products

– Intel: precision

RESOURCE BASED APPROACH

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Components of Internal AnalysisResources, Capabilities and Core

Competencies

• Resources

– The source of a firm’s capabilities

– Cover a spectrum of individual, social and organizational phenomena

– Alone, may not yield a competitive advantage

Resources

• Tangible resources

– Financial resources

– Physical resources

– Technological resources

– Organizational resources

• Intangible resources

– Human resources

– innovation resources

– Reputation resources

Tangible Resources

Financial Resources •The firm’s borrowing capacity•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

Technological Resources Stock of technology, such as patents,trade-marks, copyrights

Intangible Resources

Human Resources •Knowledge•Trust•Managerial capabilities•Organizational routines•Culture

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 •Efficient, effective, supportive, and mutually beneficial interactions and relationships

Intangible resources are more likely than tangible resources to produce competitive

advantage

Resources, Capabilities and Core Competencies

• Capabilities– The firm’s ability to use its

resources effectively– 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

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

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Capabilities

• The foundation of many capabilities lies in:

– The unique skills and knowledge of a firm’s employees

– The functional expertise of those employees

• Capabilities are often developed in specific functional areas or as part of a functional area

Examples of Firms’ Capabilities

Functional Areas Capabilities

Distribution Effective use of Logistics Management Techniques

Human Resources Motivating, empowering and retaining employees

Management Information Systems Effective and efficient control of inventories through point of purchase data collection methods

Marketing Effective promotion of brand name productsEffective customer service

Management Effective organizational structure

Manufacturing Miniaturization of components and productsDesign and product qualityLow-cost manufacturing

Research & development Rapid transformation of technology into new products and processesContinuous innovation

Resources, Capabilities and Core Competencies

• Core Competencies

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

– Distinguish a company competitively and reflect its personality

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

Core Competencies

• Activities that a firm performs especially well compared to competitors

• Activities through which the firm adds unique value to its goods or services

• Collective learning or co-ordination skills behind a firm’s product lines

Core Competencies

• A core competency should:

– Contribute significantly to the end product benefits

– Be difficult for competitors to imitate

• Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies

Core Competencies

• A Competence

– Is an activity that a firm has learned to perform with proficiency—a capability.

• A Core Competence

– Is a proficiently performed internal activity that is central to a firm’s strategy and competitiveness.

• A Distinctive Competence

– Is a competitively valuable activity that a firm performs better than its rivals.

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Competitive Advantage Sustainable Competitive Advantage

Valuable Capabilities Help a firm neutralize threats or exploit opportunitiesOffsetting the cost of acquiring resources and capabilities

Rare Capabilities Are not possessed by many others

Costly-to-Imitate Capabilities

Historical: A unique and a valuableorganizational culture or brand name Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

NonsubstitutableCapabilities

No strategic equivalent

VRIO Framework

Value: Does it provide customer value and competitive advantage?

Rareness: Do other competitors posses it?

Imitability: Is it costly for others to imitate?

Organization: Is the firm organized to exploit the resource?

Sustainable Competitive Advantage• Durability: depreciation rate of the firm’s resources, capabilities, or core

competencies

– Examples: Intel, cassette tapecdmp3mp4

• Imitability: duplication rate by others

– Transparency: speed of other firms in understanding the relationship of resources and capabilities supporting a successful firm’s strategy

– Transferability: competitors ability to get the resources and capabilities necessary for the competitive challenge

– Replicability: competitors duplication ability, the use of resources and capabilities to imitate the firm’s success

• Explicit knowledge vs. Implicit knowledge Which one is easier to copy?

A Resource-based Approach to Strategy Analysis

Select a strategy which best exploits the firm's resources and capabilities relative to external opportunities.

Appraise the rent-generating potential of resources and capabilities in terms of: i) their potential for sustainable competitive advantage, and ii) the appropriability of their returns

Identity the firm's capabilities: What can the firm do more effectively than its rivals? Identify the resources inputs to each capability, and the complexity of each capability.

Identify and classify the firm's resources. Appraise strengths and weaknesses relative to competitors. Identify opportunities for better utilization of resources.

Identify resource gaps which need to be filled. Invest in replenishing, augmenting and upgrading the firm's resource base

Capabilities

Resources

Competitive Advantage

Strategy

The Resource-Based View of a Winning Strategy

• Develop resources and capabilities which are rare, valuable, non-tradeable, that form the basis of the core competencies of the firm

• Make those resulting advantages sustainable by precluding imitation or substitution from competitors

• Ensure efficient use of resources

• Make sure that the implementation process is done in such a way that its associated costs do not upset the resulting benefits.

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Cautions and Reminders

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

• Core competencies may become “core rigidities”

• Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success

Are the Company’sPrices and Costs Competitive?

• Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis

• Key analytical tools

– Strategic cost analysis

– Value chain analysis

– Benchmarking

Strategic Cost Analysis

• Focuses on a firm’s costs relative to its rivals

• Compares a firm’s costs activity by activity against costs of key rivals

– Raw materials purchase to production to price paid by ultimate customer

• Pinpoint which internal activities are a source of cost advantage or disadvantage

• A company’s cost competitiveness depends on how well it manages its value chain relative to how well competitors manage their value chains

Strategic Advantage Profile (SAP)

• Five functional areas in most of the organizations. – Production or Operation

– Finance or Accounting

– Marketing or Distribution

– Human Resource & Corporate Planning

– Research & Development

• Identify their relative strength and weakness

Benchmarking

• Involves improving a firm’s internal activities based on learning other companies’ “best practices.”

• Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in line with its competitors’ activities.

• Sources of Benchmarking Information

– Reports, trade groups, analysts and customers

– Visits to benchmark companies

– Data from consulting firms

VALUE CHAIN ANALYSIS

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Value Chain Analysis

• Value chain– The chain consists of a series of activities that create

and build value.

– They culminate in the total value delivered by an organization.

– a systematic approach to examining the development of competitive advantage.

– VCA disaggregates a business into sets of activities• Primary Activities – Inbound logistics --- Operations ----

Outbound logistics ---- marketing and Sales and service• Support activities – General Administration, HRM, R&D,

Systems Development

The Basic Value Chain

Value Chain Analysis

• Primary activities involved with:

– A product’s physical creation

– A product’s sale and distribution to buyers

– The product’s service after the sale

• Support activities

– Provide the support necessary for the primary activities to take place

The Value-Creating Potential of Primary Activities

• Inbound logistics– Activities used to receive, store, and disseminate inputs to a product

(materials handling, warehousing, inventory control, etc.)

• Operations– Activities necessary to convert the inputs provided by inbound

logistics into final product form (machining, packaging, assembly, etc.)

• Outbound logistics– Activities involved with collecting, storing, and physically distributing

the product to customers (finished goods warehousing, order processing, etc.)

The Value-Creating Potential of Primary Activities

• Marketing and sales– Activities completed to provide means through which customers can

purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)

– all of the activities associated with attracting and keeping customers for your products

• Service– Activities designed to enhance or maintain a product’s value (repair,

training, adjustment, etc.)

Each activity should be examined relative to competitors’ abilities and rated as superior,

equivalent or inferior

Primary Activities and Factors for Assessment

Inbound

Logistics

Operations Outbound

Logistics

Marketing &

Sales

Customer Service

• Soundness of

material and

inventory control

systems

• Efficiency of raw

material

warehousing

activities

• Productivity of

equipment

compared to that of

key competitors

• Appropriate

automation of

production

processes

• Effectiveness of

production control

systems to improve

quality and reduce

costs

• Efficiency of plant

layout and work-

flow design

• Timeliness and

efficiency of

delivery of finished

goods and services

• Efficiency of

finished goods

warehousing

activities

• Effectiveness of

market research to

identify customer

segments & needs

• Innovation in sales

& promotion

• Evaluation of

alternate

distribution

channels

• Competence of

sales force

• Development of

image of quality

and a favorable

reputation

• Extent of brand

loyalty among

customers

• Extent of market

dominance within

the market segment

or overall market

• Means to solicit

customer input for

product

improvements

• Promptness of

attention to

customer

complaints

• Appropriateness of

warranty and

guarantee policies

• Quality of customer

education and

training

• Ability to provide

replacement parts

and repair service

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The Value-Creating Potential of Supporting Activities

• Procurement– Activities completed to purchase the inputs needed to produce a

firm’s products (raw materials and supplies, machines, laboratory equipment, etc.)

• Technological development– Activities completed to improve a firm’s product and the processes

used to manufacture it (process equipment, basic research, product design, etc)

• Human resource management– Activities involved with recruiting, hiring, training, developing, and

compensating all personnel

The Value-Creating Potential of Supporting Activities

• Firm’s infrastructure– Activities that support the work of the entire value chain (general

management, planning, finance, accounting, legal, government relations, etc.)

– Establishment of accounting practices, management information systems, compliance with environmental regulations, tracking and reporting for government programs,

– Effectively and consistently identify external opportunities and threats

– Identify resources and capabilities

– Support core competencies

Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior

Secondary Activities and Factors for Assessment

Firm Infrastructure Human Resource Technology

Development

Procurement

• Capability to identify new

product market

opportunities and

potential environmental

threats

• Quality of the strategic

planning system to

achieve corporate

objectives

• Coordination and

integration of all value

chain activities

• Ability to obtain

relatively low cost funds

for capital expenditures

and working capital

• Timely & accurate

information on general

and competitive

environments

• Effectiveness of

procedures for recruiting,

training, and promoting

all levels of employees

• Appropriateness of

reward systems

• Relations with trade

unions

• Levels of employee

motivation and job

satisfaction

• Success of R&D activities

in leading to product and

process innovations

• Quality of working

relationship between

R&D personnel and other

departments

• Timeliness of technology

development activities in

meeting critical deadlines

• Qualifications &

experience of laboratory

technicians and scientists

• Ability of work

environment to encourage

creativity and innovation

• Development of alternate

sources for inputs to

minimize dependence on

a single supplier

• Procurement of raw

materials on timely basis

at lowest possible cost

and at acceptable levels of

quality

• Development for criteria

for lease-vs.-buy

decisions

• Good, long-term

relationships with

suppliers

Value Chain Analysis

• How to do a VCA– Identify key activities

– Allocate costs to each activity

– Identify the activities that differentiate the firm

– Examine the Value Chain• Different activities may be important – industry and

strategy

• Importance of activities can vary based on a company position in a larger scheme of activities

The Result of the Value Chain

• Margins

– Capture the value from performing value-creating activities as cheaply as possible

– The basic idea is that the consumer is willing to pay a certain amount for the value you create. This is depicted as the size of the overall pentagon.

– The size of the individual activity boxes represents the cost of performing those particular activities.

– Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm.

Internal Value Chain for a Hospital

Referral and

Follow-Up

Discharge

Planning, Rehab/

LTC Referral

Tests, Diagnosis,

Treatment, and

Referral

ER, Admitting, and

Patient Intake

Marketing and

Promotion

Facilities, Security, Maintenance, Housekeeping

Clinical, Financial, and Managemant Information Systems (EMR, CPOE)

Human Resource Management, Medical Staff Relations, Nurse Recruiting

Legal, Compliance, Patient Advocacy, Patient Satisfaction

Medical Research, Medical Student Training

Governance, Stakeholder and Public Relations

Financial Management, Payer Contracting, Billing

Risk Management, Case Management, Quality Assurance

SUPPLIERS

(Physicians,

MCOs)

CUSTOMERS

(Patients, payers,

employers)

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Value Chain System for an Entire Industry

SupplierValue Chains

A Company’s OwnValue Chain

Forward ChannelValue Chains

Activities, Costs, &Margins ofForwardChannelAllies &StrategicPartners

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &Margins ofSuppliers

Buyer or End UserValueChains

Linkages with Supplier Value Chain

• Linkages between suppliers’ value chains and a firms chain provide opportunities for the firm to enhance competitive advantage.

• Division of benefits between firm and its suppliers is a function of supplier’s bargaining power and reflecting in supplier’s margins.

• Both coordination with suppliers and hard bargaining are important to competitive advantage.

The Buyer’s Value Chain

• A firm’s differentiation stems from how its value chain relates to its buyer’s chain.

• Differentiation derives fundamentally from creating value for the buyer through a firm’s impact on the buyer’s value chain.

• Value is created when a firm creates a competitive advantage for its buyer.

• The buyer must perceive the value to pay a premium price.

Outsourcing

• The purchase of a value-creating activity from an external supplier

• A firm may outsource all or only part of one or more primary and/or support activities.

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Forces Driving Outsourcing Strategic Rationales for Outsourcing

• Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities

• Improve business focus– Lets a company focus on broader business issues by having outside

experts handle various operational details– By forming and emphasizing fewer capabilities a firm can concentrate

on those areas in which it can create value

• Provide access to best capabilities– Specialized resources of service providers makes best capabilities

available to firms in a wide range of applications– Specialty suppliers can perform outsourced activities more efficiently

Strategic Rationales for Outsourcing

• Frees resources for other purposes– Redirects efforts from non-core activities toward those that

serve customers more effectively

• Sharing risks– Reduces investment requirements and makes firm more flexible,

dynamic and better able to adapt to changing opportunities

• Reduce and control operating costs• Make capital funds available• Gain access to world class capabilities• Resources are not available internally• Function difficult to manage

Core vs Context

Outsourcing Issues

• Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity

• Do not outsource activities in which the firm itself can create and capture value

• Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks

Outsourcing Issues

• Do not outsource capabilities that are critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage

• Do not outsource activities that stimulate the development of new capabilities and competencies

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Outsourcing Risks Outsourcing Costs

Outsourcing – Organizational Complexity Other Internal Issues

• Organizational Structure: Specialization, control, command, decision, communication flow

• Corporate culture: identity, commitment, stability, and employee behavior

• Marketing: positioning, segmentation, product life cycle, marketing mix, brand

• Financial: financial leverage, capital budgeting• R&D: R&D intensity(% R&D spending), patent,

publication, new product, technology transfer, technology discontinuity

• HR: teams, temporary workers, quality of life and diversity