Analytical Methods of

Business Environment

Analytical Methods of Internal Environment

8. lecture
Ing. Šárka Zapletalová, Ph.D.
Department of Business Economics and Management
BUSINESS ENVIRONMENT
Outline of the lecture

1. Value chain analysis

2. VRIO analysis

3. McKinsey 7S model

4. Stakeholders analysis

5. Portfolio analysis

6. SWOT analysis
Introduction
• Internal business environment is constituted by the organization itself.

• The analysis of internal business environment refers to the analysis of the

business internal environment to assist business strategy and performance, the
internal strengths and weaknesses of the organization.

• Among the analyses of internal business environment the following methods

can be ranked:
• Porter Model of Value Chain Analysis;
• McKinsey 7S;
• VRIO method;
• Stakeholders analysis;
• Portfolio analyses – ABC method, BCG matrix, GE matrix.
Value Chain Analysis

• A value chain is a linked set of value-creating activities that begin with

basic raw materials coming from suppliers, moving on to a series of value-
added activities involved in producing and marketing a product or service,
and ending with distributors getting the final goods into the hands of the
ultimate consumer.

• The focus of value-chain analysis is to examine the corporation in the context

of the overall chain of value-creating activities, of which the firm may be
only a small part.

Typical Value Chain for a Manufactured Product

Porter´s Model of Value Chain Analysis

• Value chain analysis proposes a system view of the organization composed of

stages in a transformation process with inputs and outputs to each of the
distinct stages.

• Value, according to Michael Porter, is the price that a costumer is prepared to

pay for an offering. Profit is the difference between this value and total costs
to the enterprise of providing that offering.

• Value chain analysis divides an enterprise into a chain of activities and each
element in the value chain delivers a part of the total value to the customer
and contributes part of the total profit.

• The purpose of value chain analysis is to measure the value delivered and the
profit contributed by each link of the chain.
Porter´s Model of Value Chain Analysis
Porter´s Model of Value Chain Analysis

• Porter´s value chain model describes five values that are generating primary
activities and support activities.

• Primary activities:
• Inbound logistics;
• Operations;
• Outbound logistics;
• Marketing and sales;
• Service.

• Support activities:
• Procurement;
• Technology development;
• Human resource management;
• Firm infrastructure.
Porter´s Model of Value Chain Analysis

• Value chain analysis involves the following three steps:

1. Examine each product line’s value chain in terms of the various
activities involved in producing that product or service.
2. Examine the “linkages” within each product line’s value chain:
Linkages are the connections between the way one value activity (for
example, marketing) is performed and the cost of performance of
another activity (for example, quality control).
3. Examine the potential synergies among the value chains of
different product lines or business units: Each value element, such
as advertising or manufacturing, has an inherent economy of scale in
which activities are conducted at their lowest possible cost per unit of
output. If a particular product is not being produced at a high enough
level to reach economies of scale in distribution, another product
could be used to share the same distribution channel.
VRIO Analysis

• VRIO analysis was developed by Barney (1995) to identify strategically

valuable resources. The analysis builds on the basic ideas of the resource-
based view RBV.

• Resources that are subjects of VRIO analysis are:

• Tangible (physical) and intangible;
• Human;
• Financial.

• The term VRIO stands for the initials of four questions that can be asked
whether the resource is:
• Valuable?
• Rare?
• Imitable?
• Organised for usage?
Applying the VRIO

Sustainable
V R I O Competitive
Advantage

Competitive Competitive Temporary Temporary

Disadvantage Parity Competitive Competitive
Advantage Advantage

Prostor pro doplňující informace, poznámky

McKinsey 7S Model

• The McKinsey 7S framework was first published by Waterman and others in

1980. The McKinsey consultants argue that in looking at an organization as a
whole, seven variables are important, but the essential thing about them is
that they are inter-linked.

• The model can be used in a wide variety of situations where an alignment

perspective is useful to help organizations:
• Improve the performance of a organization;
• Examine the likely effects of future changes within a organization;
• Align departments and processes during a merger or acquisition;
• Determine how best to implement a proposed strategy.
McKinsey 7S Model
McKinsey 7S Model

• The McKinsey 7S model involves seven interdependent factors which are

categorized as either hard or soft elements.

• Hard elements – are easier to define or identify and management can directly
influence them. These are:
• Strategy;
• Structure;
• Systems.

• Soft elements – can be more difficult to describe and are less tangible and
more influenced by culture. These are:
• Shared values;
• Skills;
• Style;
• Staff.
Stakeholders Analysis
• Stakeholder is any individual or group that is affected by business decision.
Stakeholders have the capacity to affect business performance through their
decisions and behavior.

• Internal stakeholders are all internal members of a organization:

• Employees;
• Directors;
• Shareholders.

• External stakeholders include:

• Customers;
• Suppliers;
• Competitors;
• Politicians;
• Policy-makers;
• Community;
• General public
Stakeholders Analysis
• In terms of environmental analysis, organizations need to have an
understanding of steps in analysis:

• Who are stakeholders of the organization;

• Identification nature of interests of stakeholders;

• Nature and level of their interest in the organization;

• Consider whether there are any conflicts between the interests of

different stakeholders;

• Power of stakeholders to exert influence – consider in what way and to

what extent, each stakeholder exercises power of influence.
Portfolio Analysis
• Portfolio analysis could be defined as a set of techniques that help strategists
in taking strategic decisions with regard to individual products or business in
a organization´s portfolio.

• The objective of the analysis is to determine how to allocate resources to each

of the product or business in the organization´s portfolio.

• It is primarily used for competitive analysis and corporate strategic planning

in multiproduct and multi-business organizations.

• The analysis of products or business can be performed by using these

methods:
• Boston Consulting Group Matrix BCG matrix;
• General Electric Matrix GE matrix.
Portfolio Analysis
BCG matrix

• Boston Consulting Group matrix BCG matrix provides a graphic

representation for a organization to examine the different businesses in a
organization´s portfolio on the basis of their relative market shares and
industry growth rates.

• Vertical axis denotes the rate of growth in sales, in percentage, for a particular
industry.

• Horizontal axis represents the relative market share, which is the ratio of
organization´s sales to the sales of the industry´s largest competitor or market
leader.

• The result of combining the industry growth rate and the relative market share
in a four-cell matrix.
Portfolio Analysis
BCG matrix

Market growth is expressed in percentage terms.

Portfolio Analysis
BCG matrix

• Question marks (problem children) – businesses with high industry growth

but low market share for a organization. They are usually new products which
have a good commercial potential.

• Stars – are businesses with high industry growth and high market share for a
organization. A organization generally pursues an expansion strategy to
establish a strong competitive position with regard to a star business.

• Cash cows – are businesses which generate high market share but their rate of
market growth is slow as cash cow businesses lose their attractiveness and
tend towards a decline.

• Dogs – are businesses with related slow industry growth and have a low
relative market share. They neither generate nor require large amount of cash.
Portfolio Analysis
GE McKinsey matrix

• General Electric McKinsey matrix is very similar to BCG matrix. GE matrix is

used to analyze organization´s product or business unit portfolio and facilitate the
investment decisions.

• GE matrix is a nine cell matrix. It is a more sophisticated business portfolio

framework than the BCG matrix – the matrix has multicriterial character.

• The organization´s products or business units are evaluated on two axes:

• Industry attractiveness;
• Competitive strength.

• There are three groups of boxes (three fields) in GE matrix:

• Investment/growth;
• Selectivity/earnings;
• Harvest/divest boxes.
Portfolio Analysis
GE McKinsey matrix
Portfolio Analysis
GE McKinsey matrix

• Industry attractiveness indicates how hard or easy it will be for a organization to

compete in the market and earn profit.
• Industry attractiveness consists of many factors that collectively determine the
competition level in it. There´s no definite list of which factors should be included to
determine industry attractiveness, but the following are the most common:
• Long run growth rate;
• Industry size;
• Industry profitability (entry barriers, exit barriers etc.);
• Industry structure;
• Product life cycle changes;
• Changes in demand;
• Trend of prices;
• Macro environment factors;
• Seasonality;
• Availability of labor;
• Market segmentation.
Portfolio Analysis
GE McKinsey matrix

• Competitive strength measures how strong, in terms of competition, a particular

business unit (or product) is against its rivals. Managers try to determine whether a
business unit has a sustainable competitive advantage.

• The following factors determine the competitive strength of a business unit:

• Total market share;
• Market share growth compared to rivals;
• Brand strength;
• Profitability of the organization;
• Customer loyalty;
• Resources or capabilities;
• Business unit strength in meeting industry´s critical success factors;
• Strength of a value chain;
• Level of product differentiation;
• Production flexibility.
Portfolio Analysis
GE McKinsey matrix: Steps for performing of GE matrix

• Determine industry attractiveness of each business unit

• Make a list of factors, assign weights, rate the factors, calculate the total scores.
• Determine the competitive strength of each business unit
• Make a list of factors, assign weights, rate the factors, calculate the total scores.
• Plot the business units on a matrix
• Analyze the information
• Invest/grow box – organizations should invest into the business units that fall
into these boxes.
• Selectivity/earning box – manager should invest into these business units only if
manager has the money left over the investments in invest/grow business units
group.
• Harvest/divest box – business unit that are operating in unattractive industries.
• Identify the future direction of each business unit
• Prioritize investments
Portfolio Analysis
GE McKinsey matrix: Advantages and diasadvantages of GE matrix

• Advantages
• Helps to prioritize the limited resources in order to achieve the best
returns.
• Managers become more aware of how their products or business units
perform.
• Identifies the strategic steps the organization needs to make to improve the
performance of its business portfolio.

• Disadvantages
• Requires a consultant or a highly experienced person to determine industry
´s attractiveness and business unit strength as accurately as possible.
• It is costly to conduct.
• It doesn´t take into account the synergies that could exist between two or
more business units.
SWOT Analysis
• SWOT analysis combines internal and external analyses – the Strengths and
Weaknesses of the organizations coupled with the Opportunities and Threats
in the external business environment.

• Benefits of SWOT analysis

• Simplicity;
• Lower costs;
• Flexibility;
• Integration and synthesis;
• Collaboration.

• Criticisms against SWOT analysis:

• It allows companies to create lists without serious consideration of the
issues;
• It often becomes a sterile academic exercise of classifying data and
information.
SWOT Analysis

Strengths Weaknesses

Opportunities S-O strategy W-O strategy

maxi – maxi mini – maxi
Aggressive strategy Turnaround strategy

Threates S-T strategy W-T strategy

maxi – mini mini – mini
Diversification strategy Defensive strategy