Topic 4

Internal Analysis
 Topic Outline

• Resource-based View of the Firm

• SWOT Analysis

• Value Chain Analysis

• Internal Analysis;
Making Meaningful Comparisons
Ingredients Critical to Successful Strategy

Be consistent with
conditions in the
competitive
environment

Place
Placerealistic
realistic Be carefully
requirements
requirementsonon executed
Strategy must …
the
thefirm’s
firm’s
resources
resources
 Ingredients Critical to Successful Strategy
 Consistent; must take advantage of
opportunities and minimize the impact of
major threats
 Realistic; the firm’s pursuit of market
opportunities must be based on external
opportunities and competitive advantages
arises from the firm’s key resources
 focus on “realistic analysis of the firm’s
resources” …. critical to effective strategic
management
What is the Resource-based View (RBV) of the
Firm?
Firms differ in fundamental ways because
each firm possesses a unique “bundle” of
resources – tangible and intangible assets and
organizational capabilities to make use of
those assets
Each firm develops competencies from these
resources and, when developed especially
well, these become the source of the firm’s
competitive advantage
 Resource-based View (RBV)
• Core competence; capability or skill running through
a firm’s businesses that once identified, nurtured,
and deployed throughout the firm became the basis
for lasting competitive advantage
• The RBV; the way to make the core competency
concept more focused and measurable – creating a
more meaningful internal analysis
• There are three basic types of resources that
together create “the building blocks for distinctive
competencies”
 The Three Basic Resources
• Tangible assets
Easiest to identify and often found on a firm’s balance sheet
Include physical and financial assets uses to provide value to
customers
Examples: production facilities, raw materials, financial resources

• Intangible assets
Cannot be seen or touched
Often very critical in creating competitive advantage
Examples: brand names, company reputation, company morale

• Organizational capabilities
Are not specific “inputs” like tangible or intangible assets
Involve skills – ability to combine assets, people, and processes – used
to transform inputs into outputs
 Examples of Different Resources

Tangible Assets Intangible Assets Organizational

Capabilities
Hampton Inn’s Nike’s brand name Dell Computer’s
reservation system customer service
Ford Motor’s cash Dell Computer’s Wal-mart’s purchasing
reserves reputation and inbound logistics
3M’s patents Wendy’s advertising Sony’s product
with Dave Thomas development process
Georgia Pacific’s land Jack Welch as GE’s Coke’s global
holdings leader distribution
coordination
 What Makes a Resource Valuable?

• Competitive superiority: • Appropriability:

Does the resource help Who actually gets the profit
fulfill a customer’s need created by a resource?
better than those of the
firm’s competitors? • Durability: How rapidly will
the resource depreciate?
• Resource scarcity: Is the
resource in short supply? • Substitutability? Are other
alternatives available?
• Imitatability: Is the
resource easily copied or
acquired? – needed
“isolating mechanisms”
 Isolating Mechanisms;
that make resources difficult to imitate

• Physically unique resources

Resources virtually impossible to imitate
E.g., one-of-a-kind real estate location, mineral rights,
patents

• Path-dependent resources
– Resources that must be created over time in a manner
that is often expensive and difficult to accelerate
– E.g., Coca-Cola’s brand name
 Isolating Mechanisms;
that make resources difficult to imitate

• Causal ambiguity
Situations where it is difficult for competitors to
understand how a firm has created its advantage
E.g., Southwest Airlines’ approach
• Same plane, routes, gate procedures, number of attendants
• Culture of fun, family, and frugal yet focused service

• Economic deterrence
Involves large capital investments in capacity to produce
products or services in a given market that are scale
sensitive
 Resource Imitatability

• Easy to imitate
Cash, commodities

• Can be imitated (but may not be)

Capacity preemption, economies of scale

• Difficult to imitate
Brand loyalty, employee satisfaction, reputation for
fairness
• Cannot be imitated
Patents, unique locations, unique assets
 Guidelines:
Using the RBV in Internal Analysis

• Disaggregate resources – break them down into more

specific competencies rather than use broad categories
• Utilize a functional perspective in disaggregating tangible and
intangible assets and organizational capabilities
• Look at organizational processes and combinations of
resources, not only at isolated assets or capabilities
• Use the value chain approach to uncover potentially valuable
capabilities, activities, and processes
 Key Resources Across Functional Areas
(Selected)

Marketing Financial and Accounting

• Firm’s products/services • Ability to raise short-term and
• Concentration of sales in a few long-term capital; debt-equity
products or a few customers • Corporate-level resources
• Ability to gather needed • Cost of capital relative to
information about markets competitors
• Market share • Tax considerations
• Product-service mix and • Relations with owners, investors,
expansion potential and stockholders
• Channels of distribution • Leverage position
• Effective sales organization • Cost of entry and barriers to
entry
 Key Resources Across Functional Areas
(contd.)

Production, Operations, Technical

Personnel
• Raw materials cost and
availability, supplier relationships • Management personnel
• Inventory control systems • Employees’ skills and morale
• Location, layout, and use of • Labor relations costs compared
facilities to competitors
• Economies of scale • Efficiency and effectiveness of
• Technical efficiency of facilities personnel policies
• Effectiveness of subcontracting • Effectiveness of incentives used
use to motivate performance
• Degree of vertical integration • Ability to level peaks and valleys
of employment
 Key Resources Across Functional Areas
(contd.)

Quality Management Information Systems

• Relationships with • Timeliness and accuracy of
suppliers, customers information about sales,
• Internal practices to operations, cash, and
enhance quality of products suppliers
and services • Relevance of information
• Procedures for monitoring for tactical decisions
quality • Information to manage
quality issues, customer
service
• Ability of people to use
information provided
 Key Resources Across Functional Areas
(contd.)

Organization and General Management

• Organizational structure
• Firm’s image and prestige
• Firm’s record in achieving objectives
• Organization of communication system
• Organizational climate and culture
• Use of systematic procedures in decision making
• Top management skills, capabilities, and interest
• Strategic planning system
• Intra-organizational synergy
 SWOT Analysis

Based on assumption an effective strategy derives from a sound

“fit” between a firm’s internal resources and its external situation

Opportunities Threats
A major favorable situation in A major unfavorable situation in
a firm’s environment a firm’s environment

Strengths Weaknesses
A resource advantage relative A limitation or deficiency in one or
to competitors and the needs more resources or competencies
of markets firm serves relative to competitors
 SWOT Analysis Diagram

Numerous environmental
opportunities

Cell 3: Supports a Cell 1: Supports

turnaround-oriented an aggressive
strategy strategy
Substantial
Critical internal
internal
weaknesses
strengths
Cell 4: Supports a Cell 2: Supports a
defensive strategy diversification
strategy

Major environmental threats

 What is a Value Chain?

The term value chain describes a way

of looking at a business as a chain of
activities that transform inputs into
outputs that customers value
 What is Value Chain Analysis?

• Focuses on how a business creates customer value

by examining contributions of different internal
activities to that value
• Divides a business into a set of activities within the
business
– Starts with inputs a firm receives
– Finishes with firm’s products or services and after-sales
service to customers
• Allows for better identification of a firm’s strengths
and weaknesses since the business is viewed as a
process
 The Value Chain

General Administration
Support Activities

Human Resource Management

M
ar
gi
Research, Technology, and Systems Development

n
Procurement

Inbound Operations Outbound Marketing Service

n
Logistics Logistics and Sales

gi
ar
M
Primary Activities
Conducting a Value Chain Analysis

• Identify activities
• Allocate costs
• Recognize the difficulty in activity-based cost
accounting
• Identify the activities that differentiate the firm
• Examine the value chain
• Compare to competitors
 Possible Factors for Assessing Sources of Differentiation in
Primary and Support Activities of the Value Chain
(selected items)

General Administration Human Resource Management

• Capability to identify new • Effectiveness of procedures for
product market opportunities recruiting, training, and promoting
and potential environmental all levels of employees
threats • Appropriateness of reward system
• Quality of strategic planning for motivating and challenging
system to achieve corporate employees
objectives • A work environment minimizing
• Ability to obtain relatively low- absenteeism and keeping turnover
cost funds for capital low
expenditures and working capital
Possible Factors for Assessing Sources of Differentiation
in Primary and Support Activities of the Value Chain
(selected items)

Technology Development Procurement

• Success of R&D activities in • Development of alternate
leading to product and process sources for inputs to minimize
innovation dependence on a single
• Quality of working relationships supplier
between R&D personnel and • Procurement of raw materials
other departments (1) on a timely basis, (2) at
• Timeliness of technology lowest possible cost, and (3) at
development activities in meeting acceptable levels of quality
critical deadlines • Procedures for procurement of
plant, machinery, and buildings
Possible Factors for Assessing Sources of Differentiation
in Primary and Support Activities of the Value Chain
(selected items)

Inbound Logistics Operations Outbound Logistics

Soundness of material and Productivity of equipment Timeliness and efficiency of

inventory control systems compared to key delivery of finished goods
competitors and services
Efficiency of raw material Appropriate automation of Efficiency of finished goods
warehousing activities production processes warehousing activities

Effectiveness of production
control systems to improve
quality and improve costs
Possible Factors for Assessing Sources of Differentiation
in Primary and Support Activities of the Value Chain
(selected items)

Marketing and Sales Service

• Effectiveness of research to • Means to solicit customer input

identify customer segments and for product improvements
needs • Promptness of attention to
• Innovation in sales promotion customer complaints
and advertising
• Appropriateness of warranty and
• Evaluation of alternate
distribution channels guarantee policies
• Motivation and compensation of • Quality of customer education
sales force and training
• Development of quality image • Ability to provide replacement
and favorable reputation parts and repair services
 Internal Analysis:
Making Meaningful Comparisons

1. Comparison with past

performance

4. Comparison with
2. Stages of
industry
Perspectives success factors in
to use industry
evolution

3. Benchmarking –
comparison with competitors
Sources of Distinctive Competence at Different
Stages of Industry Evolution

Functional Introduction Growth Maturity Decline

Area
Marketing Resources/skills Ability to Skills in Cost effective
to create establish brand aggressively means of
widespread recognition, promoting efficient access
awareness and find niche, products to new to selected
find acceptance reduce price, markets and channels and
from customers ; solidify strong holding existing markets; strong
advantageous distribution markets; pricing customer
access to relations, and flexibility; skills loyalty or
distribution develop new in dependence;
channels differentiating strong company
products and image
holding
customer
loyalty
 Sources of Distinctive Competence at Different
Stages of Industry Evolution

Functional Introduction Growth Maturity Decline

Area
Production Ability to expand Ability to add Ability to Ability to prune
operations capacity product variants, improve product product line;
effectively, limit centralize and reduce cost advantage
number of production, or costs; ability to in production,
designs, develop otherwise lower share or reduce location or
standards costs; ability to capacity; distribution;
improve product advantageous simplified
quality; seasonal supplier inventory
subcontracting relationships; control;
capacity subcontracting subcontracting
or long
production runs
 Sources of Distinctive Competence at Different
Stages of Industry Evolution

Functional Introduction Growth Maturity Decline

Area
Finance Resources to Ability to Ability to Ability to reuse
support high net finance rapid generate and or liquidate
cash overflow expansion, to redistribute unneeded
and initial have net cash increasing net equipment;
losses; ability to outflows but cash inflows; advantage in
use leverage increasing effective cost cost of
effectively profits; control systems facilities;
resources to control system
support accuracy;
product streamlined
improvements management
control
 Sources of Distinctive Competence at Different
Stages of Industry Evolution

Functional Introduction Growth Maturity Decline

Area
Personnel Flexibility in Existence of an Ability to cost Capacity to
staffing and ability to add effectively, reduce and
training new skilled reduce reallocate
management; personnel; workforce, personnel
existence of motivated and increase
employees with loyal workforce efficiency
key skills in
new products or
markets
 Sources of Distinctive Competence at Different
Stages of Industry Evolution

Functional Introduction Growth Maturity Decline

Area
Engineering and Ability to make Skill in quality Ability to Ability to
R&D engineering and new reduce costs, support other
changes, have feature develop grown areas or
technical bugs development; variants, to apply
in product and ability to start differentiate product to
process resolved developing products unique
successor customer needs
product
Key functional Engineering: Sales: Production Finance:
area and market consumer efficiency: maximum
strategy focus penetration loyalty; market successor investment
share products recovery