Internal

Environment

3rd Lecture
MSc Agricultural
Economics and
Management
External and Internal Analyses
Environment By studying the external
Sociocultural environment, firms identify
what they might choose to
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Industry do
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Environment
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Opportunities and
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threats
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Competitor
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Environment
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Technological
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General
External and Internal
Analyses
By studying the internal
environment, firms identify
what they can do

Unique resources,
capabilities, and core
competencies
(sustainable
competitive
advantage)
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?
Conditions Affecting Managerial Decisions
About Resources, Capabilities, and Core
Competencies

 Uncertainty regarding characteristics of the

general and the industry environments,
competitors’ actions, and customers’ preferences
 Complexity regarding the interrelated causes
shaping a firm’s environments and perceptions of
the environments
 Intraorganizational Conflicts among
people making managerial decisions and those
affected by them
 Choosing the right tools
for internal analysis
 Start with simple techniques
 Consider all tools and identify those likely to be useful
 Define the competitive capabilities the enterprise needs
 Identify the subsystems which support these capabilities
 Identify core competence relative to competitive capabilities
 Determine changes to enhance/improve core competence
 Take a systemic view
 Adjust the methods of analysis in the light of what is found
Some commonly used techniques
for internal analysis

Single Businesses Multiple Businesses

Resource Audit Portfolio Analysis
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis

Both Single and Multiple Businesses

Core Competencies
Shareholder Value Analysis
Resource Audit

 Resources
 Physical
 Human
 Financial
 Other
 Quality and Quantity
 Unique resources
 A good initial analysis
Internal Audit

Parallels process of external audit

Information from:
 Management
 Marketing
 Finance/accounting
 Production/operations
 Research & Development
 Management information Systems
Marketing
Marketing Functions
 Customer analysis
 Selling products/services
 Product & service planning
 Pricing
 Distribution
 Marketing research
 Opportunity analysis
Finance/Accounting
Finance/Accounting Functions

 Investment decision (Capital

budgeting)
 Financing decision
 Dividend decision
Production/Operations

Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality
Research & Development

Research & Development Functions

 Development of new products

before competitors
 Improving product quality
 Improving manufacturing
processes to reduce costs
Management Information
Systems

 Information Systems
 Security
 User-friendly
 E-commerce
Analysis of Costs and Profit

 Current sources of profits and trends

 Recast standard reporting to give new insights
 Pragmatic approach to get value from time and
effort spent
 A good initial analysis

Single Businesses
Resource Audit
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis
Benchmarking

 Objective comparison with best in class

 Simple in theory - Hard in practice
 Observed differences in performance may be due
to differences in parameters
 Qualitative observations may be more valuable
than quantitative
 Benchmarking - at three levels
Level of Through Examples of measures
benchmarking
Resources Resource audit Quantity of resources,
e.g.
· revenue/employee
· capital intensity

Quality of resources,
e.g.
· qualifications of
employees
· age of machinery
· uniqueness (e.g.
patents)

Competences in Analysing activities Sales calls/sales person

separate activities Output/ employee
Materials wastage

Competences Analysing overall Market share

through performance Profitability
managing linkages Productivity
Value Chain Analysis

 Basic Value chain

 Elegant in theory
 Time-consuming in practice
 Revised value chain to reflect power of people
and knowledge
Value Creation
The Basic
Value Chain
M
gin ar
gin
ar
M

Technological Development
Human Resource Mgmt.
Support Activities

Service
Firm Infrastructure

Marketing & Sales

Procurement
Outbound Logistics
Operations
Inbound Logistics

Primary Activities
To capitalize on the usefulness of the
Value Chain concept...

it is important to recognize that...

Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
Value Chains are part of a Total Value System

Firm Value Chain Channel Value Chain Buyer Value Chain

Supplier Value Chain

Upstream Value

Perform valuable activities

that complement the firm’s
activities
Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Buyer Value Chain

Upstream Channel Value Chain

Value
Perform valuable activities
that complement the firm’s
activities

Each firm must eventually find a

way to become a part of some
buyer’s value chain
Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value Each firm must eventually Buyer Value Chain

find a way to become a part
Perform valuable activities that of some buyer’s value chain
complement the firm’s activities

Ultimate basis for differentiation is

the ability to play a role in a buyer’s
value chain
This creates VALUE!!
Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

Upstream Each firm must eventually find a way to

Value become a part of some buyer’s value
chain
Perform valuable activities
that complement the firm’s Ultimate basis for differentiation is
activities the ability to play a role in a buyer’s
value chain
This creates VALUE!!

Value chains vary for firms in an industry,

reflecting each firm’s unique qualities:

• History
• Strategy
• Success at Implementation
Outsourcing

Outsourcing is the M
gin ar
purchase of some ar gi
M n
or all of a value-

Technological Development
creating activity

Human Resource Mgmt.

from an external
supplier Support Activities
Service

Firm Infrastructure
Usually this is
because the Marketing & Sales

Procurement
specialty supplier Outbound Logistics
can provide these
functions more Operations
efficiently
Inbound Logistics

Primary Activities
Strategic Rationales for
Outsourcing
 Improve Business Focus
 lets company focus on broader business issues by
having outside experts handle various operational
details
 Provide Access to World-Class Capabilities
 the specialized resources of outsourcing providers
makes world-class capabilities available to firms in
a wide range of applications
Strategic Rationales for
Outsourcing
 Accelerate Business Re-Engineering Benefits
 achieves re-engineering benefits more quickly by
having outsiders--who have already achieved
world-class standards--take over process
 Share Risks
 reduces investment requirements and makes firm
more flexible, dynamic and better able to adapt to
changing opportunities
Strategic Rationales for
Outsourcing
 Free Resources for Other Purposes
 permits firm to redirect efforts from non-core
activities toward those that serve customers more
effectively
Outsourcing Issues
 Greatest Value
 outsource only to firms possessing a core competence
in terms of performing the primary or support activity
being outsourced
 Evaluating Resources and Capabilities
 don’t outsource activities in which the firm itself can
create and capture value
 Environmental Threats and Ongoing Tasks
 do not outsource primary and support activities that
are used to neutralize environmental threats or
complete necessary ongoing organizational tasks
Outsourcing Issues
 Nonstrategic Team of Resources
 do not outsource capabilities that are critical to
their success, even though the capabilities are
not actual sources of competitive advantage
 Firm’s Knowledge Base
 do not outsource activities that stimulate the
development of new capabilities and
competencies
 Revised Value Chain

Firm’s infrastructure
SUPPORT
ACTIVITIES Technology trapping and commercialisation

Strategic Management

INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT

basic skills, technical, price, revenue,

PRIMARY management, place, customer
know-how, core profit,
ACTIVITIES marketing, promotion satisfaction,
technologies competence market
sales, product loyalty
strategic production share,
assets service

HUMAN RESOURCE MANAGEMENT

PROCUREMENT AND SUPPLIER MANAGEMENT

 Product portfolio matrices
RELATIVE MARKET SHARE COMPETITIVE POSITION
High Low Strong Average Weak

High
Question
High Stars
marks
INDUSTRY
MARKET ATTRACTIVENESS
GROWTH Med
Cash
Low Dogs
cows
Low

(a) The original Boston Consulting

(b) Attractiveness matrix*
Group Matrix (BCG)
 Product portfolio matrices
COMPETITIVE POSITION
Strong Average Weak
High
Development Public- Political
PUBLIC NEED sector hot box
STAGE OF AND star
Growth
PRODUCT/ SUPPORT +
MARKET FUNDING Back
Golden drawer
EVOLUTION Shake-out ATTRACTIVENESS fleece issue
Low
Maturity High Low
ABILITY TO SERVE
Decline EFFECTIVELY

(c) Product/market evolution matrix (d) Public sector portfolio matrix

Portfolio Analyses
Over-coming some pitfalls:
 Defining `high’ and `low’ (growth or share)
can be difficult
 `Plot’ SBU’s not products
 Apply to market segments not whole markets
 Assess the `role’ of each SBU
 Consider wider resource implications - not just
cash
 Dogs may have a positive role
Tests for Core Competence

 Essential to corporate survival in short and long term

 Invisible to competitors
 Difficult to imitate
 Unique to the enterprise
 Result from a mix of skills, resources and processes
 A capability which the organization can sustain over time
 Greater than the competence of an individual
 Essential to the development of core products
 Essential to the implementation of strategic intent
 Essential to the strategic choices of the enterprise
 Marketable and commercially viable
 Few in number
The roots of core competence for a typical
manufacturing business

Product or Service (as chosen by the customer)

Different products, Rule or process based Knowledge based,

parts, provision, of knowledge person specific
sub-assemblies & functionality professional service

CORE COMPETENCE

Basic technologies, bodies of knowledge, corporate or individual learning, relationship

culture, strategic assets, parts, processes, raw materials, supply chain management
The roots of core competence for typical
professional services firms

Collective
knowledge
Personality of the
Mindset organisation

Inter- Embodied Products

personal Staff Skills as Core &
Skills Competence Services

Task
Skills Professional
knowledge
Components of Value Creation
Internal Analysis
Competitive
Advantage
Core Discovering Core
Competencies Competencies

Capabilities

Four Criteria Value

Resources of Sustainable Chain
 Tangible Advantages Analysis
 Intangible

• Valuable • Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
Resources, Capabilities and Core
Competencies
 Capabilities
 Are the firm’s capacity to deploy
resources that have been
purposely integrated to achieve a
desired end state
 Emerge over time through
complex interactions among
tangible and intangible resources
 Often are based on developing,
carrying and exchanging
information and knowledge
through the firm’s human capital
Resources, Capabilities and Core
Competencies
 Capabilities
 The foundation of many
capabilities lies in:
 The unique skills and
knowledge of a firm’s
employees
 The functional expertise of
those employees
 Capabilities are often
developed in specific
functional areas or as part of
a functional area
Examples of
Firms’
Capabilities
Resources, Capabilities and Core
Competencies
 Core Competencies
 Resources and capabilities that
serve as a source of a firm’s
competitive advantage:
 Distinguish a company
competitively and reflect its
personality
 Emerge over time through an
organizational process of
accumulating and learning how to
deploy different resources and
capabilities
Resources, Capabilities and Core
Competencies
 Core Competencies
 Activities that a firm performs
especially well compared to
competitors
 Activities through which the firm
adds unique value to its goods or
services over a long period of
time
Building Sustainable Competitive
Advantage
 Four Criteria of
Sustainable Competitive
Advantage
 Valuable
 Rare
 Costly to imitate
 Nonsubstituable
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 Capabilities • No strategic equivalent

Building Sustainable Competitive
Advantage

 Valuable capabilities
 Help a firm neutralize
threats or exploit
opportunities
 Rare capabilities
 Are not possessed by
many others
Building Sustainable Competitive
Advantage

 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
Building Sustainable Competitive
Advantage
 Nonsubstitutable Capabilities
 No strategic equivalent
 Core Competence as a Strategic
Capability
Resources Core Competence
 Inputs to a firm’s  A strategic
production process capability

Does it satisfy the Yes

Capability criteria of
 An integration of a sustainable
The source of competitive
team of resources
advantage? No

Capability
 A nonstrategic
team or resource
 Sustainability
of Competitive Advantage

 Sustainability of competitive advantage is a

function of:
 the rate of core-competence obsolescence due to
environmental changes
 the availability of substitutes for the core competence
 the imitability of the core competence
Performance Implications

le
ab
ut
tit
Ra le?

it a to

bs
on ?
Competitive Performance

N te
ab

Im tly
?

su
re
lu

s
Consequences Implications
Co
Va

Competitive Below Average

No No No No Disadvantage Returns

Yes/ Competitive
Yes No No No Parity Average Returns

Yes/ Temporary Com- Above Average to

Yes Yes No No petitive Advantage Average Returns

Sustainable Com- Above Average

Yes Yes Yes Yes petitive Advantage Returns
 Core Competencies:
Cautions and Reminders
 Never take for granted that core competencies
will continue to provide a source of competitive
advantage
 All core competencies have the potential to
become core rigidities
 Core rigidities are former core competencies that
now generate inertia and stifle innovation
 Applying Shareholder
Value Analysis

Shareholder Return
Corporate Creating Shareholder
Dividends
Objective Value
Capital Growth

Valuation Cash from Discount

Debt
Components Operations Rate

Fixed & Working

Value Duration of Sales Growth Cost of
Capital
Value growth Op. Profit Margin Capital
Drivers investment

Management Operating Investment Financing

Decisions
 The SWOT diagram may
summarise the results of analyses

Internal
Internal
Strengths Weaknesses Analyses
Analyses

Threats Opportunities

External
External
Analyses
Analyses
 Strategic Assessment
of a business as a whole

Questions
 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 Adopt
 Understand 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
Adopt
 Use 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
Adopt
 Identify 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
Adopt
 Use 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.
 Summary of Managerial Practices to
Adopt

 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.