5david - sm16 - ppt04

Strategic Management Concepts: A
Competitive Advantage Approach

Sixteenth Edition
Chapter 5
The Internal Assessment
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives
1. Describe how to perform an internal strategic-
management audit.
2. Discuss why organizational culture is so important in
formulating strategies.
3. Learn how to Identify and evaluates resources,
capabilities, and core competencies to build CA
4. Explain how to determine and prioritize a firm’s internal

strengths and weaknesses, opportunities and threats
using SWOT analysis
Learning Objectives
5. Discuss the Resource-Based View (RBV) in strategic
management.
6. Discuss Barney’s VRIO framework
7. Explain Portfolio Analysis using BCG Matrix
8. Learn how to use Value chain analysis for any organization
taping on primary activities and support activities to know how to
create and sustain CA.
9. Identify the Challenge of Internal Analysis
10. Develop an Internal Factor Evaluation (IFE) Matrix.
Introduction
Strategic analysis of any Business
enterprise involves two stages: Internal
and External analysis.
Internal analysis is the systematic

evaluation of the key internal features of
an organization.
External analysis will be discussed later.

Four broad areas need to be considered
for internal analysis
1) The organization’s resources, capabilities

2) The way in which the organization configures and
co-ordinates its key value-adding activities
3) The structure of the organization and the
characteristics of its culture
4) The performance of the organization as measured
by the strength of its products.
Why Do an Internal Analysis?
1. It is the only way to identify an organization’s

strengths and weaknesses
2. It’s needed for making good strategic decisions
The Key Factors in Performing an Internal
Audit
– The Company Resources

– Organizational Culture
– The Company’s Management
– Marketing
– Finance/Accounting Functions
– Production/Operations
– Human Recourses
Integrating Strategy and Culture
• Organizational culture significantly affects planning
activities.
• 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.
Organizational Culture
• Organizational culture is “a pattern of behavior that has
been developed by an organization as it learns to cope
with its problem of external adaptation and internal
integration and that has worked well enough to be
considered valid and to be taught to new members as
the correct way to perceive, think, and feel.”
Organizational Culture and Structure
A global business must have a culture and structure which

allow it to carry out its global activities.
The structure of the business must allow it to accomplish its
objectives as effectively and as efficiently as possible.
SWOTANALYSIS
• SWOT analysis is a planning tool used to understand the

Strengths, Weaknesses, Opportunities, and Threats involved in
a project or in a business. It involves specifying the objective of the
business or project and identifying the internal and external factors
that are supportive or unfavorable to achieving that objective. (1)
• SWOT is often used as part of a strategic planning process. SWOT

is an acronym for Strengths, Weaknesses, Opportunities,
Threats.
(2)
SWOTANALYSIS
Advantage & Limitations
• Strengths may not lead to an advantage

• SWOT’s focus on the external environment is too
narrow
• SWOT gives a one-shot view of a moving target
• SWOT overemphasizes a single dimension of
strategy
SWOTANALYSIS, How to
• Set objectives
• Generate alternative strategies
• Evaluate alternative strategies
• Monitor results, and
• Gain commitment among the
stakeholders during each step of this
process
Building Competitive
Advantage
• Building competitive advantages involves

taking advantage of distinctive
competencies.
Core and Distinctive
Competencies
• Resources
– an organization’s assets and are thus the basic
building blocks of the organization
– tangible, intangible
• Capabilities
– refer to a corporation’s ability to exploit its resources
– consist of business processes and routines that
manage the interaction among resources to turn
inputs into outputs
Core and Distinctive Competencies
• Core competency
– a collection of competencies that cross
divisional boundaries, is wide-spread
throughout the corporation and is
something the corporation does
exceedingly well
• Distinctive competency
– core competencies that are superior to
those of the competition
The Resource-Based View (RBV)
• The Resource-Based View (RBV) approach
contends that internal resources are more important for a firm
than external factors in achieving and sustaining competitive
advantage
According to RBV proponents, it is much more feasible to exploit

external opportunities using existing resources in a new way
rather than trying to acquire new skills for each different
opportunity. In RBV model, resources are given the major role in
helping companies to achieve higher organizational
performance. There are two types of resources: tangible and
intangible.
The Resource-Based View (RBV)
• Proponents of the RBV contend that organizational
performance will primarily be determined by internal
resources that can be grouped into three all-
encompassing categories: physical resources, human
resources, and organizational resources
• Physical resources include all plant and equipment, location, technology, raw materials,
machines
• Human resources include all employees, training, experience, intelligence, knowledge,

skills, abilities
• Organizational resources include firm structure, planning processes, information

systems, patents, trademarks, copyrights, databases, and so on
Barney’s VRIO framework
Barney’s VRIO framework
• For a resource to be valuable, it must be either
• 1. Value: Does it provide competitive advantage?
• 2. Rareness: Do other competitors possess it?
• 3. Inimitability: Is it costly for others to imitate?
• 4. Organization: Is the firm organized to exploit the
resource?
• These four characteristics of resources enable a firm to
implement strategies that improve its efficiency and
effectiveness and lead to a sustainable competitive
advantage.
VRIO Framework
Is the Resource Valuable?
Value: Do you offer a resource that adds value

for customers and for the company?
Because of this CA, Are you able to exploit an

opportunity or neutralize competition with an
internal capability?
Is the Resource Rare?
Do you control scarce resources or capabilities?

Do you own something that’s hard to find yet in
demand?
Competitive advantages are gained only from

uncommon resources, resources that are rare to other
competitors
Can the Resource be Imitated?
Is it difficult or expensive to duplicate your

organization’s resource or capability? Is it
difficult to find an equivalent substitute to
compete with your offerings?
Is the Resource Organized to Capture
Value?
Does your company have organized management

systems, processes, structures, and culture to
capitalize on resources and capabilities or it just by
accident/random ?
If Yes to the four VRIO elements: So Your company
has achieved the ultimate goal of sustained
competitive advantage when it has successfully
identified all four components of the VRIO framework.
VRIO Example - NIKE
VRIO Example - Starbucks
VRIO Example - Nestle
Value Chain Analysis (VCA)
Value Chain Analysis
Competitive advantage depends on the ability of the

organization to organize its resources and value-adding
activities in a way that is superior to its competitors.
Value chain analysis is a technique developed by Porter (1985)

for understanding an organization’s value-adding activities
and relationship between them.
Value can be added in two ways:
 By producing products at a lower cost than competitors

 By producing products of greater perceived value than those of
competitors.
Porter extended value chain analysis to the value system,

analysis of the relationship between the organization, its
suppliers, distribution channels and customers.
• Primary Activities
• Inbound logistics involve receiving and storing raw materials and
their usage in manufacturing as the necessity arises.
• Operations relate to the processes of transforming raw materials into
finished goods. For businesses operating in services sector operations
relate to the process of providing the service.
• Outbound logistics is associated with warehousing and distribution of
finished products.
• Marketing and sales refer to the choice and implementation of
marketing strategy to communicate the marketing message to the
target customer segment and generation of sales.
• Service relates to support provided to customers after the sale.
• Support Activities
• Infrastructure of a company comprises its organizational structure,
its departments and committees, organizational culture etc.
• Human Resource Management involve a wide range of activities
related to employee recruitment and selection, training and
development, appraisals, motivation and compensation.
• Technology development involves the use of technology to
increase the effectiveness of primary activities in terms of value
creation.
• Procurement relates to the purchasing practices of raw materials,
tools and equipment.
VCA Example – COCA COLA
VCA Example - Amazon
Portfolio Analysis
A key concept with regard to successful product or

subsidiary strategy is that of portfolio.
Portfolio analysis is used in evaluating the balance of an
organization’s range of products.
A broad portfolio can spread risk across more than one
market.
A narrow portfolio mean that the organization become more
specialized in its knowledge of fewer products and markets
The BCG Matrix
The Boston Consulting Group (BCG) growth-share matrix is

most often used by organizations in multiproduct and
multimarket situations.
BCG matrix offers a way of examining and making sense of a
company’s portfolio of product and market interests.
It based on the idea that market share in mature markets is
highly correlated with profitability and that is relatively less
expensive and less risky to attempt to win share in the
growth stage of the market.
Relative market share
High Low
High
10X 1X
Rate of market growth
Stars Question
marks
Cash cows Dogs

Low
The Boston Consulting Group matrix

BCG Matrix: Cash cows
Cash cows: A product with a high market share in a low-

growth market is normally both profitable and a generator of
cash.
Profits from this product can be used to support other
products that are in their development phase, ‘milked’ on an
on going basis.
Standard strategy would be to manage conservatively, but to
defend strongly against competitors.
BCG Matrix: Dogs
Dogs: A product that has a low market share in a low-
growth market is termed a dog in that it is typically not very
profitable.
Once a dog has been identified as part of a portfolio, it is
often discontinued or disposed of.
More creatively, a small share product can be used to price

aggressively against a very large competitor as it is expensive
for the large competitor to follow suit.
BCG Matrix: Stars
Stars have a high share of a rapidly growing market and
therefore rapidly growing sales.
It is the sales manager’s dream, but the account’s
nightmare.
It is often necessary to spend heavily on advertising and
product improvement so that when the market slows these
products become ‘cash flow.’
If market share is lost, the product will eventually become a
‘dog’ when the market stops growing.
BCG Matrix: Question marks
Question marks are aptly named they create a dilemma.
They already have a foothold in a growing market, but if

market share cannot be improved they will become ‘dogs.’
Resources need to be devoted to winning market share.
Limitation of the BCG Matrix
There are many relevant aspects relating to products that
are not taken into account.
The imprecise nature of its four categories and the

difficulties inherent in predicting future market growth.
Global activity may add extra dimension to the process of

portfolio analysis.
Challenge of Internal Analysis
 How 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?
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, therefore, the ratings
refer to strengths and weaknesses, where 4 = major strength, 3 =
minor strength, 2 = minor weakness, and 1 = major 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
Source: Strategic management: concepts and cases / Fred R. David.—15th ed. (2013)
IFE Matrix for a Food Catering
Manufacturer
REVIEW QUESTIONS
Questions-Choose one Best Answer
1) A firm's strengths that cannot be easily matched or

imitated by competitors are called
A) internal audits.
B) internal properties.
C) external audits.
D) interrelated properties.
E) distinctive competencies.
Questions-Choose one Best
Answer
2) According to Barney's VRIO framework, the firm's
exploitation of a competency pertains to 2) _______
A) organization.
B) rareness.
C) value.
D) durability.
E) imitability.
3) The three all-encompassing internal resource categories

used in the resource-based view are physical resources,
human resources, and
A) organizational resources.
B) financial resources.
C) shareholder resources.
D) technological resources.
E) non-renewable resources.
4) What is the essential bridge between the present and the

future that increases the likelihood of achieving desired
results?
A) Controlling
B) Organizing
C) Motivating
D) Staffing
E) Planning
5) A corporation's ability to exploit its resources well is

referred to as its 5) _______
A) core competencies.
B) critical success factors.
C) key performance factors.
D) resources.
E) capabilities.
6) All of the following are key questions that can reveal

internal strengths and weaknesses in the management
department EXCEPT
A) Do managers delegate authority well?
B) Are the organization's products positioned well against
competing products?
C) Does the firm use strategic-management concepts?
D) Is the organization's structure appropriate?
E) Are reward and control mechanisms effective?
7) The rate at which a firm's underlying resources,

capabilities, or core competencies can not be duplicated
by others is called 7) _______
A) inimitability.
B) durability.
C) transferability.
D) transparency.
E) replicability.
8) When a company's core competencies are superior

to those of competitors, these are known as 8)
_______
A) core competencies.
B) distinctive competencies.
C) critical success factors.
D) resources.
E) key performance factors.
9) The process whereby a firm determines the costs
associated with organizational activities from purchasing
raw materials to manufacturing products to marketing those
products is called
A) strategic cost analysis.
B) the internal factor evaluation matrix.
C) cost-benefit analysis.
D) the resource-based approach.
E) value chain analysis.
10) Which of the following is the first step in developing an
IFE Matrix?
A) Listing key internal strengths and weaknesses

B) Summing the weighted scores for each variable
C) Identifying the organization's functions of business
D) Determining the organization's structure
E) Assigning a weight to each factor
11) The IFE Matrix should be ________ in multidivisional

firms.
A) constructed only for the major divisions

B) developed before the EFE Matrix
C) revised monthly
D) all-inclusive
E) constructed for each division
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Strategic Management Concepts: A

Competitive Advantage Approach

4. Explain how to determine and prioritize a firm’s internal

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

Internal analysis is the systematic

External analysis will be discussed later.

1) The organization’s resources, capabilities

1. It is the only way to identify an organization’s

2. It’s needed for making good strategic decisions

– The Company Resources

A global business must have a culture and structure which

• SWOT analysis is a planning tool used to understand the

• SWOT is often used as part of a strategic planning process. SWOT

• Strengths may not lead to an advantage

• Building competitive advantages involves

According to RBV proponents, it is much more feasible to exploit

• Human resources include all employees, training, experience, intelligence, knowledge,

• Organizational resources include firm structure, planning processes, information

Value: Do you offer a resource that adds value

Because of this CA, Are you able to exploit an

Do you control scarce resources or capabilities?

Competitive advantages are gained only from

Is it difficult or expensive to duplicate your

Does your company have organized management

Competitive advantage depends on the ability of the

Value chain analysis is a technique developed by Porter (1985)

 By producing products at a lower cost than competitors

Porter extended value chain analysis to the value system,

A key concept with regard to successful product or

The Boston Consulting Group (BCG) growth-share matrix is

Cash cows Dogs

The Boston Consulting Group matrix

Cash cows: A product with a high market share in a low-

More creatively, a small share product can be used to price

Question marks are aptly named they create a dilemma.

They already have a foothold in a growing market, but if

Resources need to be devoted to winning market share.

The imprecise nature of its four categories and the

Global activity may add extra dimension to the process of

 How do we effectively manage current core

1) A firm's strengths that cannot be easily matched or

3) The three all-encompassing internal resource categories

4) What is the essential bridge between the present and the

5) A corporation's ability to exploit its resources well is

6) All of the following are key questions that can reveal

7) The rate at which a firm's underlying resources,

8) When a company's core competencies are superior

A) Listing key internal strengths and weaknesses

11) The IFE Matrix should be ________ in multidivisional

A) constructed only for the major divisions

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