Session

Assessing Strengths and

Weaknesses: Internal Analysis

Lecture Objectives
(1) Define internal analysis and discuss why it is important.
(2) Describe the relationship between organizational resources,
organizational capabilities, core competencies, and distinctive
organizational capabilities.
(3) Explain what organizational strengths and weaknesses are.
(4) Define the value chain and describe the primary and support
activities on the value chain.
(5) Explain the strategic options for correcting cost competitiveness
on the value chain system.
(6) Discuss the steps in conducting a competitive strength assessment
(7) Explain how to use the internal audit process
(8) Discuss the features of an internal environmental analysis process
(9) Describe the steps in capabilities assessment profile

What is Internal Analysis?

The process of identifying and evaluating
an organizations specific characteristics
Resources, capabilities, and core competencies
Looks at organizations

Current vision
Mission(s)
Strategic & financial objectives
Strategies

Why Do an Internal Analysis?

Enables a firm to identify its strengths and
weaknesses.
Enables a firm to make good strategic decisions.
Information from internal environment provides
basis for developing strategic alternatives.

A Quick Review of
Organizational Resources
Organizational resources are assets an
organization has for carrying out work activities
and processes
Financial resources
Current debt, credit lines, equity, cash reserves, etc.

Physical resources
Plant & equipment, inventories, supplies, fixtures, etc.

Human resources
Management & employee skills, training, experiences, etc

A Quick Review of
Organizational Resources
Intangible resources
Brand names, patents, trademarks, copyrights, etc.

Structural-cultural resources
Culture, history, work systems policies, formal
reporting structures, etc

Human, intangible, and structural-cultural

resources can be a source of competitive
advantage
Play important role in determining capabilities
or competencies and core competencies

Organizational Capabilities
Organizational capabilities/competencies
The complex and coordinated network of company
routines and processes that determines how
efficiently and effectively the organization
transforms its resources into products (goods &
services)
Involves complex pattern of coordination between
people, & between people and resources
Its an internal activity that a company performs
better than other internal activities

Organizational Capabilities
Organizational routines & processes:
Regular, predictable, and sequential patterns of work
activity by organizational members

Sustainable Competitive Advantage (CA):

The prolonged maintenance of competitive advantage
Capabilities that are capable of leading to CA today may
not continue to do so as conditions & rivals change

Dynamic capabilities
An organizations ability to build, integrate and
reconfigure capabilities to address rapidly changing
environments over time.

Core Competencies
Core competencies
A well-performed internal activity that is central, not
peripheral, to a companys strategy, competitiveness,
and profitability
Major value-creating skills and capabilities that
are shared across multiple product lines or multiple

businesses
Results from the collaboration among different parts of an
organization

Gives a company a potentially valuable competitive

capability

Core Competencies
Types of Capabilities/Core Competencies

Skills in manufacturing a high quality product

System to fill customer orders accurately and swiftly
Fast development of new products
Better after-sale service capability
Superior know-how in selecting good retail locations
Innovativeness in developing popular product features
Merchandising and product display skills
Expertise in an important technology
Expertise in integrating multiple technologies to create
whole families of new products

From Core Competencies to

Distinctive Capabilities
Distinctive Capabilities
Special and unique capabilities that distinguish
the organization from its competitors
A competitively valuable activity that a
company performs better than its rivals
Allow a company to develop a sustainable
competitive advantage and outperform its
competition

From Core Competencies to

Distinctive Capabilities
Characteristics of distinctive capabilities:
(1) Contribute to superior customer value and offers
real benefits to customers
(2) Difficult for competitors to imitate
(3) Allow the organization to use that capability in a
variety of ways

Whats the relationship between

organizational capabilities, core competencies
and distinctive capabilities?

Examples of Distinctive Capabilities

Sharp Corporation
Expertise in flat-panel display technology
Toyota
Low-cost, high-quality manufacturing capability and
short design-to-market cycles
Intel Corporation
Ability to design and manufacture ever more
powerful microprocessors for PCs
Motorola
Defect-free manufacture (six-sigma quality) of cell
phones

Strengths and Weaknesses

Strengths
Resources that an organization possesses and
capabilities that the organization has developed
Both can be exploited and developed into a
sustainable competitive advantage

Weaknesses
Resources and capabilities that are lacking or
deficient; and that
Prevents an organization from developing a
sustainable competitive advantage

How to Do an Internal Analysis

Approaches to internal analysis
(1) Value Chain Analysis
(2) Competitive Strength Assessment
(3) An Internal Audit
(4) Internal Environmental Analysis Process
(5) Capabilities Assessment Profile

(1) Value Chain Analysis

Value Chain Analysis
Customers want (demand) some type of value from
the goods and services they purchase or obtain
Customer value arises from
(1) Uniqueness of product or service
(2) Low-priced product/service
(3) Quick response to specific or distinctive customer needs

Allow assessment of cost competitiveness of

organization with those of its rivals

The Value Chain

The value chain identifies the separate activities and
business processes performed to design, produce,
market, deliver, and support a product/service and how
well they create customer value.
Consists of two types of activities

Primary activities : create customer value

Inbound logistics, Operations; Outboard logistics; Sales
& Marketing; & Customer Service

Support activities: Support primary activities

Procurement; Technological development; HRM;
General Administration (Firm infrastructure)

A Typical Value Chain

Primary Activities and Costs

Inbound
Logistics

Operations

Outbound
Logistics

Sales and
Marketing

Service

Profit
Margin

Procurement; Product R&D, Technology

Human Resources Management
General Administration (Firm Infrastructure)

Support
Activities
and Costs

The Value Chain System

Upstream
Value Chain

Activities,
Costs, &
Margins of
Suppliers

Firms Own
Value Chain

Internally
Performed
Activities,
Costs, &
Margins

Downstream Value Chains

Activities,
Costs, &
Margins of
Forward
Channel
Allies &
Strategic
Partners

Buyer/User
Value
Chains

Examples of Key Value Chain

Activities
Soft Drinks Industry
Processing of basic ingredients
Syrup manufacture
Bottling & can filling
Wholesale distribution
Retailing
Computer Software Industry
Programming
Disk Loading
Marketing
Distribution

The Value Chain System

A companys cost competitiveness
depends on how well it manages its value
chain relative to competitors

Three areas contribute to cost differences

1. Suppliers activities

2. The companys own internal activities

3. Forward channel activities

The Value Chain System

Assessing a companys cost competitiveness
involves comparing costs along the industrys value
chain
Suppliers value chains are relevant because
Costs, quality, and performance of inputs provided by suppliers
influence a firms own costs and product performance

Forward channel allies value chains are relevant

because
Forward channel allies costs and margins are part of price paid
by ultimate end-user
Activities performed affect end-user satisfaction

Strategic Options for Correcting

Costs Competitiveness
Supplier-related costs disadvantages:
Negotiate more favorable prices with suppliers
Work with suppliers to achieve lower costs

Integrate backward
Use lower-priced substitute inputs
Do a better job of managing linkages between
suppliers value chains and firms own chain
Make up difference by initiating cost savings in other
areas of value chain

Strategic Options for Correcting

Costs Competitiveness
Forward channel allies costs disadvantages:
Push for more favorable terms with distributors and
other forward channel allies
Work closely with forward channel allies and
customers to identify win-win opportunities to
reduce costs
Change to a more economical distribution strategy
Make up difference by initiating cost savings earlier
in value chain

Strategic Options for Correcting

Costs Competitiveness
Firms own internal cost disadvantages:
Reengineer performance of high-cost activities or business
processes
Eliminate some cost-producing activities altogether by
revamping value chain system (VCS)
Relocate high-cost activities to lower-cost geographic areas
See if high-cost activities can be performed cheaper by
outside vendors/suppliers
Invest in cost-saving technology
Simplify product design
Achieving savings in backward or forward portions of VCS

From Value Chain Analysis to

Competitive Advantage
A company can create competitive advantage
by managing its value chain so as to
Integrate the knowledge and skills of employees in
competitively valuable ways

Leverage economies of learning or experience curve

effects
Coordinate related activities in ways that build
valuable capabilities
Build dominating expertise in a value chain activity
critical to customer satisfaction or market success

From Value Chain Analysis to

Competitive Advantage
The strategy-making lesson of value chain
analysis is that sustainable competitive
advantage can be created by:

(1). Managing the value chain activities better

than competitors; and
(2). Developing distinctive capabilities to
serve the needs of customers better

(2) Assessing Organizations

Competitive Strength
How does the firm rank relative to key rivals on each
industry KSF and relevant measure of competitive
strength (capabilities or core competencies)?
Does the firm have a sustainable competitive advantage or
disadvantage
What is the ability of the firm to defend its position in
light of
Industry driving forces
Competitive pressures
Anticipated moves of rivals

Assessing Organizations
Competitive Strength
1. List industry key success factors and other relevant
measures of competitive strength
2. Rate firm and key rivals on each factor using rating
scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted rating
system
4. Sum individual ratings to get overall measure of
competitive strength for each rival
5. Determine whether the firm enjoys a competitive
advantage or suffers from competitive disadvantage

Assessing Organizations
Competitive Strength
A weighted competitive strength analysis is
conceptually stronger than an unweighted
competitive strength analysis because
All the strength measures are not equally important.
E.g., in an industry with strong product differentiation,
the significant strength measures may be

Brand awareness
Reputation for quality
Amount of advertising
Distribution capability, etc.

Some KSF/Strength Measures

Quality/product performance
Reputation/image
Manufacturing capability
Technological skills
Dealer network/Distribution channels
New product innovation
Financial resources
Relative cost position
Customer service capability

Assessing Organizations
Competitive Strength
What does a high competitive strength rating relative to
rivals mean?
Strong competitive position & possession of competitive
advantages
Opportunity for company to improve its long-term market
position

Good strategy entails

Looking for opportunities to leverage company strengths into
competitive advantage
Using company strengths to attack the competitive weaknesses
of rivals

Why Do a Competitive Strength

Assessment?
Reveals strength of firms competitive position
Shows how firm stacks up against rivals, measureby-measure -- pinpoints the companys
competitive strengths and competitive weaknesses
Indicates whether firm is at a competitive
advantage / disadvantage against each rival
Identifies possible offensive attacks (pit company
strengths against rivals weaknesses)
Identifies possible defensive actions (a need to
correct competitive weaknesses)

(3) Using an Internal Audit

Internal Audit
A thorough assessment of an organizations
various internal functional areas
Strategic decision makers use the internal audit
to assess the organizations resources and
capabilities from the perspectives of its
different functions

Using an Internal Audit

Six primary functional areas

Production-operations
Marketing
Research & development
Financial and accounting
Management, including HRM
Information System

Depending on products, markets, and industries,

individual organizational structures may vary and,
therefore, may emphasize different sets of functional
areas

(4) Using an Internal

Environmental Analysis Process
Assesses an organizations internal activities
Step 1: Survey strengths and weaknesses
Step 2: Categorize these strengths & weaknesses
(S&W) in terms of resources & capabilities
Step 3: Investigate the potential of strengths to lead
to competitive advantage
Step 4: Evaluate the ability of these competitively
resources & capabilities to serve as the basis for an
appropriate competitive strategy

(5) Capabilities Assessment Profile

Resembles the internal environmental analysis
Similarity: Focuses on deeper evaluation of S&W
Difference: Focuses only on an firms capabilities

Analysis of capabilities is complex

Not as easily identified as organizations function or
even the value creating primary & support activities
Complex nature of capabilities makes it hard for
competitors to imitate

Capabilities Assessment Profile

Analysis Consists of two phases:
Phase I: Identify distinctive capabilities
Phase II: Develop and leverage distinctive capabilities

Identifying Distinctive Organizational Capabilities

Step 1: Prepare current product-market profile

Emphasize organization-customer interactions

What is the organization selling?
Who are the organization selling to?
Is the organization providing superior customer value &
desirable benefits?

Capabilities Assessment Profile

Step 2: Identify sources of competitive
advantage & disadvantage in the main productmarket segment
Determine why customers choose the organizations
products vs. those of competitors
Involves information on cost, product, and service
attributes
When customers purchase
What theyre actually purchasing
What bundle of attributes satisfies their needs

Capabilities Assessment Profile

Step 3: Describe all organizational capabilities &
competencies
Examine resources, skills, & abilities of the various divisions
Determine which resources, skills, & abilities lead to a
competitive advantage

Step 4: Sort the core capabilities/competencies

according to strategic importance
Can capability provide wide access to a number of different
markets?
Does the capability provide tangible customer benefits?
Is the capability difficult for competitors to imitate?

Capabilities Assessment Profile

Step 5: Identify and agree on the key capabilities or
competencies
Provide basis for resource allocation

Classifying an Organizations S&W

Past performance trends
Measures such as financial ratios, operations efficiency, etc,

Specific goal or targets

Organizations goals are statements of desired outcomes

Comparison against competitors

How are competitors doing?

Personal opinions of decision makers & consultants