Assessing The Internal Environment - Session 4

Strategic capability of organisations
STRATEGIC MANAGEMENT
ASSESSING THE INTERNAL ENVIRONMENT
Defined by: (A) Threshold product features and CSFs Threshold product features: that all potential providers must be able to offer if they are to stay in a particular market or market segment. It includes product and service features. Critical success factors (CSFs): which are the product features that are particularly valued by a group of customers and, therefore, where the organisation must excel to outperform competition. E.g., performance of a product.
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BCOM Strategic Management 2008-4
CSFs will differ from one market segment to another since different customer groups value different product features (e.g., price, reliability, performance, servicability, durability etc). Organisations therefore need to compete on different bases and through different resources and competences.
BCOM Strategic Management 2008-4 3
(B)
Resources to provide the products/ services that meet customer requirements: What resources are available to an organisation, from both within and outside, to support its strategies? What is the threshold level of resources needed to support particular strategies? If an organisation does not possess these resources it will be unable to meet customers threshold requirements on one or more product features.
What unique resources might organisations have to meet the critical success factors of a particular segment and gain competitive advantage? Some organisations might have inadequate resources and be unable to meet the threshold requirements of customers. This occurs not only because resources dissipate (disintegrate/ waste away) but, more importantly, because customer requirements are constantly changing. But these resources may be adequate for meeting the requirements of customers in other market segments.
Strategic Importance of Resources

Available resources From a strategic perspective an organisations available resources include both those that are owned by the organisation and those that can be accessed to support its strategies. Some strategically important resources may be outside an organisations ownership, such as its network of contacts or customers. The resources fall into four main categories: Physical resources; Human resources; Financial resources and Intellectual capital.
1.
Physical resources such as machines, buildings or production capacity. The nature of these resources, such as the age, condition, capability and location of each resource, will determine the usefulness of the resources.
Human resources including knowledge, skills of people and adaptability of human resources. This applies both to employees and to other people in an organisations networks. In knowledge-based economies people do genuinely become the most valuable asset. But to gain advantage of this will require a strong link between overall business strategies and human resource strategies.
Financial resources such as capital, cash, debtors and creditors, and suppliers of money (shareholders, bankers, etc.). Intellectual capital is the intangible resource of an organisation and is often overlooked or undervalued. This would include the knowledge that has been captured in patents, brands, business systems, customer databases and relationships with partners.
2.
A set of Threshold resources are needed to exist as a provider to any market segment. But this threshold tends to rise with time (through the activities of competitors and new entrants) so there is a need continuously to improve this resource base just to stay in business. E.g., In the banking sector, traditional branches may be replaced by Internet banking.
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3.
Unique resources Unique resources are those resources which critically underpin competitive advantage. They sustain the ability to provide value in the product, are better than competitors resources and are difficult to imitate. The ability of an organisation to meet the critical success factors in a particular market segment may be underpinned by unique resources. E.g., patented products (or talented individuals) that give advantage.
(C)
Having the Core/Distinctive Competence Competence is created when resources are deployed into the separate activities of the organisation and into the processes through which these activities are linked together. Competence is about the activities of an organisation and the processes that link activities together both within and beyond the organisation.
A core/distinctive competence is a firms strength that cannot be easily matched or imitated by competitor, thus giving the firm competitive advantage. Although an organisation will need to reach a threshold level of competence in all the activities that it undertakes, only some of these activities are core competencies.
Core competencies are those competencies that underpin the organisations ability to outperform competition by meeting the critical success factors better than competitors. For example, the ability for team work, and good coordination may help an organisation outperform competition. In order to achieve this competitive advantage, core competencies must fulfil the following criteria:
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The competence must relate to an activity or process that fundamentally underpins the value in the product or service features as seen through the eyes of the customer (or other powerful stakeholder). The competence should be rare and lead to significant superior levels of performance from an activity or process relative to competitors.
The competence must be difficult for competitors to imitate. Core competencies are not about how specific improvements are achieved but about the whole process by which continuous change and improvement occur. The competences must be nonsubstitutable that is, it is not possible to find strategic equivalents.
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Differentiating core competencies and critical success factors

The critical success factors with customers may be such as the reputation of brand, excellence of service, delivery, product range and innovation. The success can be understood by being more specific about what the CSFs mean, e.g., excellent service may be due to flexibility and rapid response. These factors for success emerge when the reasons are unpacked by identifying the resources and competencies that underpin these items.
Assessing organisational activities the value chain analysis

A firm represents a collection of activities necessary to design, produce, market, deliver and support its products. Each of these activities adds value to a product or a service. Each of them can also be a source of competitive advantage for a firm.
Value activities can be divided into two major categories: Primary activities contribute to the physical creation of the product or a service, its sale and transfer to the buyer, and after-sale service. Support activities assist the primary activities and each other.
Primary activities
1. 2. 3. 4. 5.
The five categories of primary activities are: Inbound logistics Operations Outbound logistics Marketing and sales Service.
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1.
Inbound logistics
Inbound logistics encompasses the activities of receiving, storing and managing inputs, and includes such functions as materials handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers. Improvements in any one of these activities typically result in cost reductions and increased productivity.
2.
Operations
Operations involve the activities required to convert inputs into final products. These include activities such as machining, packaging, assembly, equipment maintenance and testing. Improvements in these activities often lead to higher-quality products, greater efficiency and quicker response to market conditions.
3.
Outbound Logistics
Once the finished goods are produced, they need to be distributed to the firms customers. This involves such outbound logistics as warehousing, materials handling, delivery vehicle operation and order processing. Improvements in these activities often result in greater efficiency and higher levels of service to the firms customers.
4.
Marketing and sales

A firms marketing and sales activities revolve around four key issues: product mix, price, promotion, and channels of distribution. Improvements in these activities leads to better response to customer requirements, increased customer satisfaction, brand loyalty and customer retention.
5.
Customer Service
Customer service includes activities such as installation, repair, customer training, parts supply, and product adjustment, as well as courtesy, providing advice and prompt response to customer inquiries and complaints. Improvements in these services results in high customer satisfaction and retention.
Support activities
1. 2. 3. 4.
Human resource management Technology development Procurement Firm infrastructure
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1.
Human Resource Management

HRM includes recruitment, training, developing, and compensating all levels of employees. The overall costs of human resource management activities include issues such as the cost of employee turnover and executive compensation packages.
Costs associated with human resource management are increasing, e.g., an increasing burden in providing health care insurance, and other benefits to employees. These expenses affect a firms competitive position. Improving the skill levels of employees and maintaining good employee relations are vital to creating value and lowering costs.
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By training employees in several jobs, managers can help their companies respond to the market faster through increased efficiency, quality, productivity and job satisfaction. Good human resource is a corporations most valuable and flexible asset, and in an environment of unpredictable and rapid changes it is necessary to develop a work force that can adapt quickly.
2.
Technology Development
Technology pervades every value activity in an organization. It affects activities ranging from product and process developments to order entry and the distribution of goods and services to the customer. It extends beyond technologies applied only to the product itself.
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3.
Procurement
Procurement refers to the function of purchasing inputs used in the firms value chain. Inputs include raw materials, supplies, and other inputs directly used in the production process, as well as equipment, machinery and buildings.
However, investment in technology is also a potential source of risk for the business. Not only are large investments involved but there are uncertainties associated with changes in consumer demand, rapid imitation by competitors and changes in the technology itself.
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Purchased inputs are important for support activities as well as primary activities. E.g, the decision to select a particular advertising agency to promote a firm involves considerable financial commitment and may have a major impact on a firms sales and profitability. Improved procurement practices, such as identifying and contracting suppliers and close monitoring for defects, can lead to better quality inputs at reduced costs.
4.
Firm Infrastructure
Firm infrastructure includes activities such as: Finance and accounting Legal and governmental affairs Information systems and General management
a. b. c. d.
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a.
Finance and Accounting Competitive advantage can be achieved through the ability to raise capital from equity markets and lending sources, establishment of sophisticated capital budgeting practices, and understanding and effective implementation of appropriate cost accounting systems. These systems allow managers to make meaningful comparisons of the performances of different divisions.
b.
Legal Issues and Government Relations Handling legal issues and government relations effectively can have a significant impact on a corporations long-term viability. Legal liabilities caused by defective products and environmental disasters lead to economic and non-economic burdens to corporations in terms of compensation paid to victims and the loss of goodwill. Managers must constantly seek to minimize the potential liabilities their firms face from the political and legal environment.
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c.
Information Systems The information system component consists of the activities necessary to collect, process and channel the data required to perform an activity. Information systems can be used to enhance a firms competitive advantage. The bargaining power of buyers can be reduced by introducing switching costs that make it more costly for a buyer to go to a competitor.
E.g., introducing on-line order entry terminals, inventory management software and access to information that make it easier for customers to choose to stay with a particular firm. However, the costs involved in developing such systems can be so high, that they discourage new entry. Information systems can therefore also provide a means to deter entry into an industry.
d.
General management General management encompasses both the structure and systems that support all of an organizations activities. It includes reorganization of the corporation, rightsizing the organization, divestment of many marginally profitable operations, and sometimes a change in top management.
Significance of the value chain analysis

Besides understanding how different activities of the firm are interrelated, the value chain analysis (VCA) refers to the process whereby a firm determines the costs associated with organisational activities from purchasing raw materials to manufacturing product(s) to marketing those products.
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VCA aims to identify where low-cost advantages or disadvantages exist. VCA can enable a firm to better identify its own strengths and weaknesses. Substantial objective judgement is required in performing a VCA because different items along the chain impact other items positively or negatively. E.g., exceptional customer service may be especially expensive yet may reduce the costs of returns and increase revenue.
Conducting a VCA involves dividing the firms activities into specific tasks A cost is then attached to each discrete activity in terms of money, time, human resource and physical facilities. The cost data is interpreted by looking for competitive cost strengths and weaknesses that may yield competitive advantage or disadvantage. Firms become competitive by being especially efficient and effective along various parts of the value chain.
BEYOND THE VALUE CHAIN

OTHER ISSUES IN INTERNAL ANALYSIS To make a more complete internal assessment of an organization, five other important considerations are: financial analysis, culture, leadership, legitimacy and reputation.
1. FINANCIAL ANALYSIS
Assessing the financial position of a firm includes the computation and analysis of five basic categories of financial ratios: liquidity, leverage, activity, profitability and growth. Liquidity ratios provide measures of a firms capacity to meet its short-term financial obligations.
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Leverage ratios provide a measure of the extent to which a firm has been financed by debt. Include debt-to-total assets ratio, debt-to-equity ratio, long-term debt-toequity ratio. Activity ratios reflect whether or not a firm is using its resources efficiently. Include inventory turnover, fixed assets turnover, average collection period.
Profitability ratios provide information regarding a firms overall economic performance as shown by the returns generated on sales and investment. Include profit margins, return on total assets, earnings per share. Growth ratios measure the firms ability to maintain its economic position in the growth of the economy and industry. Include sales, net income, dividends per share.
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2. ORGANISATIONAL CULTURE AND LEADERSHIP

Organizational culture can be viewed as a complex set of values, beliefs, assumptions and symbols that define the way in which a firm conducts its business. Organizational culture has a major influence on goals, strategies and policies; it also facilitates or inhibits the implementation of a chosen strategy.
Organizational culture can represent a major strength or weakness for a firm. It may provide the underlying reasons for strengths and weaknesses in the business functions of a firm. The quality of leadership which top management provides has a critical influence on the formation and evolution of an organisations culture and the overall strategic direction of the company.
Some aspects of culture and leadership: The sense of identity and affiliation the firm provides to organizational members. Consistency of the cultures of subunits with each other and with the overall corporate culture. Ability of the culture to foster innovation, creativity and openness to new ideas.
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the negative side, leadership can use culture to inhibit effective strategies. First, leaders may miss the significance of changing external conditions because they are blinded by strongly held beliefs. Second, when a particular culture has been effective in the past, the natural response is to stick with it in the future, even when change is needed.
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3.
LEGITIMACY AND REPUTATION

Strategies to enhance an organisations legitimacy (credibility and authenticity) and reputation are aimed at producing favourable public opinion. At times, the public may perceive that a firms or industrys products or activities are harmful to the environment or to consumers. This can lead to legislation or public outcry that severely affects growth and profit potential.
Some of the criteria for legitimacy and reputation that may be assessed include: Effectiveness in coping with restrictive regulations (i.e., environmental, antitrust and product liability). Relationship with consumer activist groups. Relationship with the media. Relationship with policy makers and government officials.
DELIVERING VALUE FOR MONEY

1. Managing costs
Delivering value for money is another important strength worth assessing. Price is an important product feature and organisations must be competent in managing cost. Delivering value includes managing costs and providing product features valued by customers.
Cost efficiency is a measure of the level of resources needed to create a given level of value. Customers can benefit from cost efficiency in terms of lower prices or more product features for the same price. Cost efficiency is determined by a number of factors called cost drivers. These include: economies of scale, supply costs, product/process design and experience.
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Sources of Cost Efficiency Cost drivers

Economies of Scale Cost efficiency Supply costs Product/process design Experience
a)
Economies of scale are traditionally an important source of cost advantage in manufacturing organisations, since the high capital costs of infrastructure need to be recovered over a high volume of output. Activities to maintain these scale advantages include competence in massconsumer advertising (to maintain volume) or the ability to develop and sustain global networks of partners or distributors.
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b)
Supply costs: influence an organisations overall cost position. Closeness of raw materials to manufacturers as well as ownership of raw materials may present cost advantages.
c)
Product/process design also influences cost position. Efficiency gains in production processes may be achieved through improvements in capacity-fill (producing at capacity), labour productivity, yield (from materials) or working capital utilisation.
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d)
Product design will influence costs e.g., by the amount and kinds of material required. Process design may influence costs through efficiency and timeliness, as well as through parts of the value chain such as distribution or after-sales services.
Experience can be a key source of cost advantage and there is an important relationship between the cumulative experience gained by an organisation and its unit costs described as the experience curve. The experience curve suggests that an organisation undertaking any activity learns to do it more efficiently over time, and hence develops core competencies in this activity.
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2. Product features
a)
The success of an organisation is also related to how well it is able to provide product features that are valued at a given price. If organisations are to be profitable this requires an ability to operate effectively. Effectiveness is the ability to meet customer requirements on product features at a given cost. Effectiveness will be achieved only if managers are able to do the following:
b)
c)
They must be clear which product features will be valued by customers. They must understand what the drivers of uniqueness within their organisation or wider value system are, and how they can create and sustain this uniqueness. They must be able to convince customers that any added costs of providing better features are more than recovered through the value which customers place on this uniqueness the price they are prepared to pay.
d)
e)
Since value is often about perception, the ways in which a products features are communicated are important and could constitute a core competence. In a fast-changing world, competitive advantage is increasingly concerned with service rather than the product per se. So business processes that provide information to potential customers, the ordering process, billing and after-sales service are where the difference between competitors might lie.
3. What is valued varies with time

What customers value will vary over time particularly the critical success factors. So competencies will become redundant if not changed Previous unique product features may become threshold competencies, thus the industry standards. There is therefore, need for constant review and innovation, as advantage is temporary and short-lived in a hyper-competitive environment.
The Place Of The Internal Analysis In Strategy Formulation

The Business Level. Firms compete with one another for customers. Success in this competition is dependent upon sustaining competitive advantage. Cost advantages relative to competitors can arise from more efficient manufacturing processes, lower labor and material costs, or a cost-effective distribution system.
A firm can differentiate its products on the basis of such factors as product features, price, service, or quality. Advantages derived from faster response times may reflect a firms ability to innovate rapidly, quickly adjust to market conditions, or offer faster delivery of products and services.
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The Functional level: The many functions within a company contribute to its overall competitive advantage. Every department or function has some effect on the goods or services provided to customers. So, every function must be managed to create value for the customer which will, in turn, be translated into a competitive advantage for the firm.
The Corporate Level. Managers at the corporate level have the responsibility for creating value for the firms owners the Stockholders. Stockholder value refers to wealth that the corporation creates for its owners through either stock price appreciation or profits returned to owners in the form of dividends. Creating wealth depends upon the success of the diversification strategy and the resulting success of the various business units that comprise the corporation.
The Global Level. When managers formulate strategies at the global level, they consider expanding into various countries. Success in any country is based on creating superior customer value which can be translated into a competitive advantage. A carefully constructed global strategy can work to greatly strengthen a firms entire value chain in any one country.

Assessing The Internal Environment - Session 4

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Strategic capability of organisations

BCOM Strategic Management 2008-4

Strategic Importance of Resources

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

Differentiating core competencies and critical success factors

Assessing organisational activities the value chain analysis

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

Marketing and sales

Human resource management Technology development Procurement Firm infrastructure

BCOM Strategic Management 2008-4

Human Resource Management

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

Significance of the value chain analysis

BCOM Strategic Management 2008-4

BEYOND THE VALUE CHAIN

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

2. ORGANISATIONAL CULTURE AND LEADERSHIP

BCOM Strategic Management 2008-4

LEGITIMACY AND REPUTATION

DELIVERING VALUE FOR MONEY

BCOM Strategic Management 2008-4

Sources of Cost Efficiency Cost drivers

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

BCOM Strategic Management 2008-4

3. What is valued varies with time

The Place Of The Internal Analysis In Strategy Formulation

BCOM Strategic Management 2008-4

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