Internal Environment3rd LectureMSc Agricultural Economics and Management

External and Internal AnalysesBy studying the external environment, firms identify what they might choose to doOpportunities and threats

By studying the internal environment, firms identify what they can doUnique resources, capabilities, and core competencies(sustainable competitive advantage)External and Internal Analyses

Challenge of Internal AnalysisHow do we effectively manage current core competencies while simultaneously developing new ones?How do we assemble bundles of resources, capabilities and core competencies to create value for customers?How do we learn to change rapidly?

Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core CompetenciesUncertainty regarding characteristics of the general and the industry environments, competitors actions, and customers preferencesComplexity regarding the interrelated causes shaping a firms environments and perceptions of the environmentsIntraorganizational Conflicts among people making managerial decisions and those affected by them

Choosing the right tools for internal analysisStart with simple techniquesConsider all tools and identify those likely to be usefulDefine the competitive capabilities the enterprise needsIdentify the subsystems which support these capabilitiesIdentify core competence relative to competitive capabilitiesDetermine changes to enhance/improve core competenceTake a systemic view Adjust the methods of analysis in the light of what is found

Some commonly used techniques for internal analysisSingle BusinessesResource Audit Analysis of cost and profitBenchmarking Value Chain AnalysisSupply Chain AnalysisMultiple Businesses Portfolio AnalysisBoth Single and Multiple BusinessesCore Competencies Shareholder Value Analysis

Resource AuditResourcesPhysicalHuman Financial OtherQuality and QuantityUnique resourcesA good initial analysis

Internal AuditInformation from: Management Marketing Finance/accounting Production/operations Research & Development Management information SystemsParallels process of external audit

MarketingMarketing FunctionsCustomer analysisSelling products/servicesProduct & service planningPricingDistributionMarketing researchOpportunity analysis

Finance/AccountingFinance/Accounting FunctionsInvestment decision (Capital budgeting)Financing decisionDividend decision

Production/OperationsProduction/Operations FunctionsProcessCapacityInventoryWorkforceQuality

Research & DevelopmentResearch & Development FunctionsDevelopment of new products before competitorsImproving product qualityImproving manufacturing processes to reduce costs

Information SystemsSecurityUser-friendlyE-commerce Management Information Systems

Analysis of Costs and ProfitCurrent sources of profits and trendsRecast standard reporting to give new insightsPragmatic approach to get value from time and effort spentA good initial analysisSingle BusinessesResource Audit Analysis of cost and profitBenchmarking Value Chain AnalysisSupply Chain Analysis

BenchmarkingObjective comparison with best in classSimple in theory - Hard in practiceObserved differences in performance may be due to differences in parametersQualitative observations may be more valuable than quantitative

Level ofbenchmarkingThroughExamples of measuresResourcesResource auditQuantity of resources,e.g. revenue/employee capital intensityQuality of resources,e.g. qualifications ofemployees age of machinery uniqueness (e.g.patents)Competences inseparate activitiesAnalysing activitiesSales calls/sales personOutput/ employeeMaterials wastageCompetencesthroughmanaging linkagesAnalysing overallperformanceMarket shareProfitabilityProductivityBenchmarking - at three levels

Value Chain AnalysisBasic Value chainElegant in theoryTime-consuming in practiceRevised value chain to reflect power of people and knowledge

Value Creation

ServiceMarketing & SalesOutbound LogisticsOperationsInbound LogisticsFirm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurementMarginMarginPrimary ActivitiesSupport ActivitiesThe BasicValue Chain

To capitalize on the usefulness of the Value Chain concept...it is important to recognize that...

Value Chains are part of a Total Value SystemSupplier Value ChainFirm Value ChainChannel Value ChainBuyer Value Chain

Firm Value ChainChannel Value ChainBuyer Value ChainSupplier Value ChainUpstream ValuePerform valuable activities that complement the firms activitiesValue Chains are part of a Total Value System

Supplier Value ChainFirm Value ChainBuyer Value ChainUpstream ValuePerform valuable activities that complement the firms activitiesChannel Value ChainEach firm must eventually find a way to become a part of some buyers value chainValue Chains are part of a Total Value System

Supplier Value ChainFirm Value ChainChannel Value ChainUpstream ValuePerform valuable activities that complement the firms activitiesBuyer Value ChainUltimate basis for differentiation is the ability to play a role in a buyers value chainThis creates VALUE!!Each firm must eventually find a way to become a part of some buyers value chainValue Chains are part of a Total Value System

Supplier Value ChainFirm Value ChainChannel Value ChainUpstream ValuePerform valuable activities that complement the firms activitiesBuyer Value ChainEach firm must eventually find a way to become a part of some buyers value chainUltimate basis for differentiation is the ability to play a role in a buyers value chainThis creates VALUE!!Value chains vary for firms in an industry, reflecting each firms unique qualities:HistoryStrategySuccess at ImplementationValue Chains are part of a Total Value System

OutsourcingOutsourcing is the purchase of some or all of a value-creating activity from an external supplierUsually this is because the specialty supplier can provide these functions more efficiently

Strategic Rationales for OutsourcingImprove Business Focuslets company focus on broader business issues by having outside experts handle various operational detailsProvide Access to World-Class Capabilitiesthe specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Strategic Rationales for OutsourcingAccelerate Business Re-Engineering Benefitsachieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over processShare Risksreduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Strategic Rationales for OutsourcingFree Resources for Other Purposespermits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Outsourcing IssuesGreatest Valueoutsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourcedEvaluating Resources and Capabilitiesdont outsource activities in which the firm itself can create and capture valueEnvironmental Threats and Ongoing Tasksdo not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing organizational tasks

Outsourcing IssuesNonstrategic Team of Resourcesdo not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantageFirms Knowledge Basedo not outsource activities that stimulate the development of new capabilities and competencies

Revised Value Chain PRIMARYACTIVITIESrevenue,profit,market share,SUPPORTACTIVITIES

Product portfolio matrices

Product portfolio matrices

Portfolio AnalysesOver-coming some pitfalls:Defining `high and `low (growth or share) can be difficult`Plot SBUs not productsApply to market segments not whole marketsAssess the `role of each SBUConsider wider resource implications - not just cashDogs may have a positive role

Tests for Core CompetenceEssential to corporate survival in short and long termInvisible to competitorsDifficult to imitateUnique to the enterpriseResult from a mix of skills, resources and processesA capability which the organization can sustain over timeGreater than the competence of an individualEssential to the development of core products Essential to the implementation of strategic intentEssential to the strategic choices of the enterpriseMarketable and commercially viableFew in number

The roots of core competence for a typical manufacturing business

The roots of core competence for typical professional services firms

Components ofInternal Analysis

Resources, Capabilities and Core CompetenciesCapabilitiesAre the firms capacity to deploy resources that have been purposely integrated to achieve a desired end stateEmerge over time through complex interactions among tangible and intangible resourcesOften are based on developing, carrying and exchanging information and knowledge through the firms human capital

Resources, Capabilities and Core CompetenciesCapabilitiesThe foundation of many capabilities lies in:The unique skills and knowledge of a firms employeesThe functional expertise of those employeesCapabilities are often developed in specific functional areas or as part of a functional area

Examples of Firms Capabilities

Resources, Capabilities and Core CompetenciesCore CompetenciesResources and capabilities that serve as a source of a firms competitive advantage:Distinguish a company competitively and reflect its personalityEmerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

Resources, Capabilities and Core CompetenciesCore CompetenciesActivities that a firm performs especially well compared to competitorsActivities through which the firm adds unique value to its goods or services over a long period of time

Building Sustainable Competitive AdvantageFour Criteria of Sustainable Competitive AdvantageValuableRareCostly to imitateNonsubstituable

The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities Help a firm neutralize threats or exploit opportunities

Rare Capabilities Are not possessed by many others

Costly-to-Imitate Capabilities Historical: A unique and a valuable organizational culture or brand name Ambiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Nonsubstitutable CapabilitiesNo strategic equivalent

Building Sustainable Competitive AdvantageValuable capabilitiesHelp a firm neutralize threats or exploit opportunitiesRare capabilitiesAre not possessed by many others

Building Sustainable Competitive AdvantageCostly-to-Imitate CapabilitiesHistoricalA unique and a valuable organizational culture or brand nameAmbiguous causeThe causes and uses of a competence are unclearSocial complexityInterpersonal relationships, trust, and friendship among managers, suppliers, and customers

Building Sustainable Competitive AdvantageNonsubstitutable CapabilitiesNo strategic equivalent

Core Competence as a Strategic CapabilityThe source ofDoes it satisfy the criteria of sustainable competitive advantage?YesNo

Sustainability of Competitive AdvantageSustainability of competitive advantage is a function of:the rate of core-competence obsolescence due to environmental changesthe availability of substitutes for the core competencethe imitability of the core competence

Performance ImplicationsValuable?Rare?Costly to Imitate?NonsubstitutableCompetitiveConsequencesPerformanceImplicationsNoNoNoNoCompetitiveDisadvantageBelow AverageReturnsYesNoNoYes/NoCompetitiveParityAverage ReturnsYesYesNoYes/NoTemporary Com-petitive AdvantageAbove Average to Average ReturnsYesYesYesYesSustainable Com-petitive AdvantageAbove Average Returns

Core Competencies: Cautions and RemindersNever take for granted that core competencies will continue to provide a source of competitive advantageAll core competencies have the potential to become core rigiditiesCore rigidities are former core competencies that now generate inertia and stifle innovation

Applying Shareholder Value Analysis

The SWOT diagram may summarise the results of analysesStrengthsWeaknessesOpportunitiesThreatsInternalAnalysesExternalAnalyses

Strategic Assessment of a business as a wholeQuestions What business are we really in?What real customer needs do we satisfy?What problem do we solve for our customers?

Summary of Managerial Practices to AdoptUnderstand a firm's internal strengths and weaknesses before attempting to formulate strategies.Make sure the strategy you develop reflects this understanding by using insights gained from your assessment of the firm's internal strengths and weaknesses to shape your strategies.Recognize that internal resources take three related forms: (1) assets that, when combined with (2) capabilities, result in (3) competencies.

Summary of Managerial Practices to AdoptUse the tests that have been developed as part of the resource-based view of competition to assess the ability of internal resources to yield competitive advantages.Identify the critical success factors for your firm and make sure to emphasize them in assessing the firm's strengths and weaknesses and also in formulating strategy. Use the value chain framework to help identify the contributions various activities make to the firm's profit margins, and let this information guide your internal assessment.

Summary of Managerial Practices to AdoptIdentify the firm's core business processes and carefully assess how well they provide value for both external and internal customers by integrating the contributions of various pieces of the value chain.Use a balanced-scorecard approach to evaluating the firm's strengths and weaknesses. You may begin with the financial perspective, but do not stop there. Use the customer, operations, and organizational perspectives to understand the factors that underpin financial performance. Your best chance for influencing financial performance is through factors that only become apparent by adopting these other perspectives.

Summary of Managerial Practices to AdoptUse ratio analysis to assess the financial health of the business in terms of its liquidity, leverage, operating efficiency, and profitability.Don't limit your use of quantitative analysis to financial matters. A well-rounded analysis inevitably draws from nonfinancial matters, and these may lend themselves to quantitative analysis, too.Incorporate qualitative analysis to cover the important aspects of business that are not easily quantified.

In making comparisons, mix and match different standards (industry' norms, historical data, and benchmarks) to suit your purposes and to overcome the limitations inherent in each.Summary of Managerial Practices to Adopt

686970717273Outsourcing (pp. 122-123)Outsourcing is simply contracting out a portion of the firms process to another firm.Firms outsource to varying degrees. BMW USA, for example, outsources virtually everythingand the plant here is primarily an assembly line plant. In contrast Apple computersmanufactures virtually every component in house, right down to the proprietary softwarecomponents that make up the operating system.There are benefits to each approach. Building everything in house give the firmsmanagers greater control over the quality of the components while outsourcing pushes theburden of raw materials and works-in-process inventories off on the component suppliersand frees up capital for other uses.Using the proceeding examples, if BMW were to keep all processes in house, theplant would need to be exponentially larger. BMW would also then be required to tie upbillions of dollars in capital to store raw materials for the various components on site andemploy a vast labor force for the manufacture and processing of the components. Thiswould require a vast infrastructure to support the processes. Each year, when makingchanges to the new car models, a very large outlay of capital and resources to retool theentire operation would be required. By outsourcing the manufacture of these components,this burden is spread across many firms.(Continued on next slide.)

Strategic Rationales for OutsourcingOutsourcing (pp. 122-123) (cont.)This diversification leads to a more efficient utilization of resources. For instance, if thenew model required a new type of component that had never been previously incorporatedinto BMW cars, say a turbocharger, this would require adding an entire turbochargermanufacturing plant to the existing factory if everything were to be insourced.There would also be an engineering and learning curve associated with the developmentof this new component.Using an outsourcing strategy allows BMW to shop for a contract with the manufacturerof highest quality product at the best price currently on the market. In doing so, notonly will BMW be freeing up resources that can be better utilized elsewhere in the firm,they are also capitalizing on the expertise of the supplier.(Continued on next slide.)Strategic Rationales for Outsourcing (cont.)Outsourcing (pp. 122-123) (cont.)In contrast Apple does virtually everything in house. The problems that this practice has createdfor the company illustrate the issues that can arise from this type of strategy. For example,the firm had a limited number of design and engineering teams at its disposal.This led to very long lead times in designing and manufacturing of individual componentsthat went into several of its personal computer models. By the time these modelswere completed and released onto the market, they had been made obsolete by modelspreviously released by Apples competitors, most notably Compaq and IBM. This is illustratedwith Apples release of the Mac Portable in 1989. This machine took nearly threeyears to develop and weighed nearly 17 pounds when released. Sales of the machine werenearly nonexistent; Compaqs LTE, released six weeks after the Mac Portable, was 18months in development and weighed just less than 7 pounds.165