UNIT
III
Internal Analysis
Introduction
Understanding the
elements of external environment helps identify opportunities and threats
and decide which opportunities to
tap. But for formulation of strategy mere identification of the environment is not enough.
A firm needs to identify its
internal strengths and weaknesses
and find ways to overcome
the weaknesses. Therefore an
integrated strategy must emerge
from the combined assessment of
market attractiveness and internal strength.
Internal analysis – Definition
Lawrence R. Jauch and William
F. Gleuck define Internal analysis
and Internal diagnosis in following
words:
“Internal analysis is the process by which the strategists examine the firm’s marketing and distribution,
research and development, production and operations,
corporate resources and personnel, finance and accounting factors to determine
where the firm has significant strengths and weaknesses.
Internal diagnosis is
the process by which strategists determine how to exploit
the opportunities and meet
the threats the environment is presenting
by using strength and
repairing weakness in order to build sustainable
competitive advantage.”
Internal analysis is the process of reviewing organizational
resources (resource audit), scanning organizational activities and linking
them with creation of value to the organization (value chain analysis) and identifying
the unique strengths and
capabilities (core competences).
As is obvious from the above words, that the internal
analysis involves three steps as shown in the following Figure:
1.
Resource Audit.
2.
Value Chain Analysis
3.
Core-competence Identification.
Resource Audit
This audit reviews the resources of an
organization for the purpose of assessing the inherent strengths of those
resources. Resources include physical, financial, human and intangible assets
of an organization, “a Resource is an asset, competency, process, skill or
knowledge controlled by an organization”. It can be a positive strength if
competitors do not possess it or negative when a firm has lesser strength
than competitors”.
1.
Physical Resources The physical resources include plant and machinery, land and building, vehicles, stock, etc. Their numbers and book values are not as important as their expected benefits are.
Therefore an assessment is made in terms of their potential benefits by examining their age, condition, location, capabilities, etc.
2.
Financial Resources Financial resources include cash, bank, debtors, marketable securities, etc. In assessing the financial
resources, the various
sources of finance like equity shares, debentures,
retained earnings, long – term and short term
loans are considered.
Their costofcapital,availabilityandtheireffectontheoverallliquidityand solvency of the firm is examined
3.
Human Resources Human resources are the most valuable
assets of the organization,
especially in the
present business scenarios – where we find people competing than corporations. Traditionally
top management were grand strategists, junior managers were implementers and middle the administrators
of the strategy. Now the trend has been changed. Top managers
are creators of vision for the organization and expect others to deliver. Therefore
emphasis has shifted from ‘strategy,
structure and systems’ model towards ‘purpose process and people’ model. To implement
the second model you must have a lot of faith in your people. Companies like Asea Braun Boveri,
General Electric, Intel, 3M or even Infosys have made
that shift.
VRIO Framework
The framework help raise the following questions.
1. VALUE: Does it provide competitive advantage?
2. RARENESS:
Do other competitors lack it?
3. IMITABILITY:
Is it costly for others
to imitate?
4. ORGANISATION: Is the firm organized to
exploit the resource?
If the answer is
‘yes’, there is distinctive competence. Measure these with
the company’s past performance. The company’s
key competitors,
and the industry as a whole.
Value Chain Analysis
The resources audit provides an understanding of
an organization’s capabilities. The next step is to identify
how the organizational activities contribute to
the value - the price the
customers are willing
to pay for the goods and
services of the organization.
If this value exceeds the costs
of performing those activities, company is said to be profitable, otherwise it is a loss making
company. Therefore to achieve
the long run objective of maximization of wealth and short –run goals of generating reasonable profits, it
is imperative
that the company should
gain a competitive edge over its competitors.
Charles W.L. Hill and Gareth R. Jones maintain
“To gain
a competitive advantage, a company must either perform
value – creation functions at a lower cost the nits rivals
or perform them in a way
that leads to differentiation and a premium price. To
do either, it must have a distinctive competence in one or more
of its value – creation functions. If it has significant weaknesses in
any of these functions, it will be at
a competitive disadvantage” Michael Porter suggested the concept of “value –
chain” that sequences the activities related with creation of value. These
activities can be divided between
(a)
Primary activities,
and
(b)
Support activities.
The primary activities are concerned with
physical creation of the product,
its marketing and delivery to
buyers and after-sales service. The
support activities provide the inputs and infrastructure for the primary activities.
Primary Activities
Some authors classify primary activities
into five categories
a.
Inbound logistics
(activities concerned with
receiving, storing and distributing the material, inventory control, warehousing, etc.)
b.
Operations (activities concerned with transformation of inputs into
final product or service: for example,
matching, packing, assembly testing etc.)
c.
Outbound logistics (activities concerned with collection, storage and physical distribution of finished goods to the consumers)
d.
Marketing and
sales (activities
concerned with advertising, selling, administration of sales personnel,
etc.)
e.
Service (activities
that enhance or maintain the value
of a product/ service, such as
installation, repair, training, etc.)
Some others classify primary activities into two main functions
a.
Manufacturing (physical creation of the product)
b.
Marketing (concerned with marketing,
delivery and after sales service)
Support Activities
The support activities that provide inputs and infrastructure for primary activities of manufacturing and marketing
are classified as follows
a.
Material management activities
b.
Research and Development activities
c.
Human Resources
activities
d.
Information systems activities
e.
Company infrastructure
activities
Material Management activities are concerned with procurement, storage and issuance of material to the production departments. The inventory control that aims at keeping uninterrupted supply of material at minimum
associated costs is undertaken under
this function. Research and
Development activities permeate
manufacturing as well as marketing activities. It aims at developing
new products or process technology that
provide additional benefits to customers,
improve quality, lower the cost of manufacturing and ultimately contribute to the creation of value. The human resource activities aim at meeting the personnel
requirement of manufacturing and marketing departments by proper selection of
staff, their training and development. The information system activities ensure efficient
and expeditious flow of needed information to the concerned managers
for taking decisions and actions.
The infrastructure
activities embrace all
other activities like finance, legal, public
relations, etc which are essential
for the company.
Corporate Value Chain Analysis
It involves the
following steps. Figure depicts a corporate value chain.
1. Examine each product lines value chain in terms of various activities involved in producing a product or service. Examine
the S&W
2. Identify the linkages in product lines value chain. Ex: quality control, check 100% instead of 10% to avoid repairs
and returns
3. Examine the synergies among value chains of different
product lines or SBUS. Ex: Cost of advertising, production etc.
Primary Activities
This analysis helps ascertain where a firm’s products are located
in the overall value chain. An illustrative
value chain is given in Figure
 |
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.
Core Competence Identification
The core competence refers to unique strength of the company that competitors
cannot easily match or imitate, “A
core- competence is a bundle of
skills
and technologies that
enables a company to provide a
particular benefit to customers”.
Following are the examples of core-competence at
global level:
Company
|
Benefit to
customer
|
Core –
competence
|
Sony
|
Pocketability
|
Miniaturization
|
Federal Express
|
on –time Delivery
|
Logistics Management
|
Wal-Mart
|
Choice, availability, value
|
Logistics Management
|
E D S
|
Seamless Information
|
Systems Integration
|
Motorola
|
Unlettered’ communication.
|
Wireless communication
|
According to C.K. Prahalad and Gary Hamel,
“The diversified corporation is a large tree. The
trunk and major limbs are core products,
the smaller branches are business
units; the leaves, flowers and
fruit are end products. The
root system that provided nourishment, sustenance, and stability is
the core competence.”
Core competence provides strategic advantage to the company. In the short run, a company can achieve competitiveness from its price / Performance
attributes; but in the long run
core competence will provide
profitability. With its
core – competence, company can
produce at lower cost and more
speedily than competitors and can differentiate. Thus the real strategic
advantage to a company comes from its core competence. Thus core- competence is
the bedrock of a company’s strategy.
Features of Core Competence
Core competence exhibits the following features(Gary Hamel
and C.K.Prahalad ).
1.
Core competence
does not reside in one particular product or business unit. It underlies
leadership in a range of products or
services. “Core competencies
transcend any single business unit within
the corporation. Core competences are also longer lasting
than any individual product or service.” Sony’s miniaturization competence is
not only confined to
walkman, but also other products
like portable CD player, pocket
television, etc.
2.
As Core competence
contributes to competitiveness
as
winning or losing
the battle for leadership
is highly dependent upon it. “If Motorola
lost its leadership position in wireless
competencies, a broad spectrum of business would suffer including pagers, two – way
mobile radios and cellular
telephones.”
3.
A Core – competence
is not a single discrete skill or technology, rather a
bundle of skills and technologies. Thus a core competence “represents the sum of learning
across individual skill sets and
individual organizational units unlikely
to reside in its entirety in a single
individual or small team.” This Core-competence
has to be nurtured through collective learning of the team members.
Porter’s five forces analysis of competition
A useful approach to
formulating business strategies is based on
MichaelPorter’s“competitiveanalysis”.Porter’smodelprovidesaprocess
to make your competitive strategy
explicit so it can be examined
for focus, consistency, and comprehensive.
Porter’s approach is based on
the analysis of five competitive forces ).
1.
Threat of new entrants,
2.
Bargaining power
of suppliers,
3.
Bargaining power
of buyers,
4.
Threat of substitute products,
5.
Rivalry among existing firms.
Threat of New Entrants
Firms entering an industry bring new capacity and
a desire
to
gain market share and profits,
but whether new firms enter an industry
depends on the barriers
to entry. ( A number of these are
shown in Figure. In addition, established firms in an industry may
benefit from “experience curve” effects. That
is, their cumulative experience in producing
and marketing a product often reduces
their per-unit costs below those
of inexperienced firms. Is general, the
higher the entry barriers, the
less likely outside firms
are to enter the industry.
Bargaining Power of Suppliers
Suppliers can be a competitive threat in
an industry because they can raise the price of raw material or reduce their
quality. Powerful suppliers can reduce the profitability of an
industry if companies
in the industry cannot pay higher prices to cover price increases that
the supplier imposes. Some determinants
of supplier power
are listed in Figure.
Bargaining Power Buyers
Buyers compete with the industry by
forcing prices down, bargaining for higher quality or more services, and
playing competitors off against each other all at the expense of industry
profitability. Some determinants of buyer power are shown in Figure.
Threat of Substitute Products
In a broad sense, all firms in an industry are
competing with industries producing substitute products. Substitutes limit the
potential return in an industry by placing a ceiling on the prices that firms
in the industry can profitably chare. The more attractive the price-performance
alternative offered by substitutes, the tighter the lid on industry profits.
For example, the price of candy, such as Raisinettes chocolate-covered raisins,
may limit the price Del Monte can charge for “healthy snacks,” such as
Strawberry Yogurt Raisins. Some determinants of the degree of substitution
threat are shown in Figure.
Rivalry among Existing Competitors
Rivalry determinants include industry growth, product differences and barriers. This is the
conventional type of competition in which
firms try to take
customers from one another. Strategies such as price
competition, advertising battles, new
product introductions, and increased customer service
are commonly used to attract customers from competitors. The factors influencing intensity of rivalry are shown
in Figure.
Figure:Rivalry factors
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