Analysing the Company’s Internal

Environment

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To examine the scientific approaches used in analysing the firm’s internal environment, with a view to identifying its strengths and weaknesses, in comparison with the industry’s critical success factors.

To identify the firm’s internal strategic factors that are critical to developing competitive advantage.

To assess the capability of the firm in taking advantage of the opportunities identified in the external environment, and overcoming the threats imposed by it.

To examine ways and means of strengthening the competitiveness of the firm

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Introduction Approaches to internal analysis Resource-Based View of the Firm Value Chain Analysis Making Meaningful Comparisons

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Scanning and analysing the external environment for opportunities and threats is not enough to provide a basis for developing effective corporate, business and functional strategies.

Internal analysis looks within the firm itself with a view to identifying internal strategic factors – strengths and weaknesses – that may impact on the firm’s desire to achieve competitive advantage at the marketplace.

Internal analysis is concerned with identifying gaps in organizational resources and value-chain efficiencies, so as to develop ways and means of strengthening the competitiveness of the firm, through:

1) The acquisition of the necessary resources and 2) The development of appropriate culture,

capabilities and competences.

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The analysis seeks to answer five critical questions:

1) How well is the firm’s present strategy working?2) What are the strengths and weaknesses in the

company’s resources?3) Are the company’s prices and costs

competitive in relation to its rivals?4) How strong (or weak) is the company’s

competitive position?5) What strategic factors are critical to the firm’s

success?

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There are several approaches, including:

1. The Resource-Based Approach2. Value-Chain Analysis3. McKinsey’s Model of Organization

Effectiveness4. Review of the Current Business Model

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Traditional methods of charting strategy were based on the concepts of ‘core capability’ or ‘core competence’ – what a firm is capable of doing best.

What a firm is capable of doing best are purely skill, knowledge and attitude-based capabilities which run through a firm’s functional areas.

When identified and nurtured they can be operationalized as basis for developing and sustaining long-term competitive advantage at the marketplace.

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RBV emerged as a means of emphasizing the core competence concept, thus focusing on a more competence-related measurable variables as basis for a meaningful internal analysis.

Central to the RBV are three basic types of resources, which together create the building blocks for achieving distinctive competencies. These are:

1. Tangible assets2. Intangible assets3. Organizational capabilities.

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These are the physical and financial means a company uses to provide value to its customers.

Often found in the balance sheet, and include production facilities, raw material stocks, financial resources, real estate, etc.

For example, Coca Cola’s tangible assets include warehouses, bottling facilities, computerized systems, cash, etc.

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These are invisible, physically untouchable assets, not found on the balance sheet, yet they are very critical in developing sustainable competitive advantage. They include concepts like:

Brand identity/brand image Corporate identity/image – i.e. company

reputation – “goodwill” Organizational culture/morale Talents Accumulated knowledge and experience,

etc.10

The term “Capabilities” refers to a firm’s ability to manage its resources efficiently.

Capabilities reflect in managing through people, technology and organizational processes and procedures for turning inputs into outputs within a time frame.

Capabilities are functionally based; thus a firm may have R&D capabilities, Marketing capabilities, Financial management capabilities, HRM capabilities, Manufacturing capabilities, etc.

For example, Coke leads Pepsi in several capabilities – managing distribution globally, influencing retailer shelf allocation, managing franchise bottler relations, marketing expertise, investing in bottling infrastructure, and speed in responding to environmental changes.

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A competence is a cross-functional integration of capabilities for creating, communicating and delivering superior customer values, relative to the competition.

For example, a firm’s competence in getting to the market first with a new product may be the outcome of effectively and efficiently integrating its R&D capabilities with manufacturing, finance, human resources and marketing capabilities, timorously – i.e. – at a time when the market is ready for the product.

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A core competence is a widespread skill, knowledge and attitude-based competences across organizational functional boundaries. It is something that the organization can do exceedingly well.

For example, a core competence of Avon Cosmetics is its expertise in direct marketing. FedEx has core competence in the use of information technology.

When core competencies are superior to the competition they are called “Distinctive Competencies”.

To excel the competition, a firm must develop and sustain distinctive competences

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General managers are managers with significant profit-and-loss responsibility in an organization, who typically have more than one function reporting to them.

General managers specifically have the responsibility for analyzing the firm’s environment, understanding the industry’s critical success factors, as well as the firm’s strengths and weaknesses, and choosing strategies to maximize value.

Decisions made by general managers have a very large effect on a firm’s performance.

General managers might use line managers to assist in the strategy crafting and implementation effort of the firm, but the quality of a general manager determines the quality of performance of the firm

High-quality general managers is a source of distinctive competence.

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Competitive superiority – Does the resource, capability or competence help to fulfil customers’ needs better than the firm’s competitors?

Resource uniqueness – Is the resource unique to the organization, in terms of the competition?

Imitateability – Can the resource be easily copied, imitated or acquired by competitors?

Substitutability – Are substitutes available which erode the uniqueness of the resource?

Durability – How rapidly would the resource depreciate?

Appropriatability – Is the resource shared equitably for the benefit of the firm? Are the resources accessible to all?

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This approach to analysing a firm’s internal strengths and weaknesses rests on two fundamental assumptions:

1. Resource Heterogeneity: That firms can be thought of as bundles of productive resources and that different firms possess different bundles of these resources [Penrose, (1959) as in J.Barney (2007, p133)]

2. Resource Immobility: That some of these resources are either very costly to copy or inelastic in supply [Selznick and Ricardo (1957) as in J.Barney, 2007 p.133)]

If the resources a firm possesses enable the firm to exploit opportunities or neutralize threats, these resources are possessed by only a small number of competing firms, and if they are costly to copy or inelastic in supply, then they may be firm strengths and thus potential sources of competitive advantage.=

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Resources can conveniently be divided into four categories for effective analysis:

1.Financial capital2.Physical capital3.Human capital4.Organizational capital

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Financial capital includes all the different financial resources that firms can use to conceive of and implement strategies. For example:

1.Investment capital – equity, preference shares, loan (e.g.- from the bank)

2.Retained profits

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1. Physical Capital include the technology used by the firm, plant and equipment, geographical location of these assets, access to raw materials, component parts and supplies.

2. Human Capital includes the training, experience, judgement, intelligence, relationships, and insights of individual managers and workers of the firm.

The importance of the human capital of well-known entrepreneurs such as Bill Gates (Microsoft) and Steve Jobs (Apple) is broadly understood.

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Whereas human capital is an attribute of single individuals, organizational capital is an attribute of the collective employees of the firm. It includes a firm’s

1. Formal organizational structure and administrative reporting system

2. Planning, controlling and coordinating systems

3. Culture and reputation4. Formal/informal relations among groups

within the firm, and between the firm and its industry/operational environment.

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Disaggregate resources – Break them down into specific competences

Utilize a functional perspective – Examine assets/capabilities at various functional areas.

Look at organizational processes – Take a creative gestalt look at what competencies the firm possesses or has the potential to posses that might generate competitive advantage.

Use the value chain approach.

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Robert M. Grant proposes a five-step, resource-based approach to strategy analysis:

1) Identify and classify the firm’s resources in terms of strengths and weaknesses

2) Combine the firm’s strengths into specific capabilities and core competencies

3) Appraise the profit potential of these capabilities and competencies.

4) Select the strategy that best exploits the firm’s capabilities and competencies

5) Identify resource gaps and invest in upgrading the firm’s resource base.

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Structures are designed to support some corporate strategies over others – e.g. within the Ansoff framework, the strategy may be new market development in foreign markets. Each of the foreign markets requires attention and would thus require a market or divisional structure.

Similarly, if a firm decides to diversify its operations – entering new markets with new products, it may require a complex structure based on type of product or market – e.g. a conglomerate structure or SBU structure.

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The simplest way of analyzing a firm’s value chain is by examining its traditional functional areas to identify potential strengths and weaknesses

Primarily, it requires a comprehensive examination of the firm’s organizational culture, structure, strategies, systems, staff, skills and style of leadership/management (Ref. McKinsey 7S)

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1) Thompson, Strickland & Gamble (2010) Crafting & Executing Strategy – Chapter 4

2) Fred R. David (2009) Strategic Management – Concepts & Cases – Chapter 4

3) J.B. Barney (2007) Gaining & Sustaining Competitive Advantage, Chapter 5

4) Wheelen & Hunger (2006) Strategic Management & Business Policy – Chapter 5

5) Robinson & Pearce II (2005) Competitive Strategy – Chapter 5

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