Analyzing the Internal Environment

Dr. Shalini R. Tiwari

IMT, Ghaziabad
 Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment

THE FIRM THE

Goals and INDUSTRY
Values ENVIRONMENT
Resources and
Capabilities STRATEGY •Competitors
STRATEGY
Structure and •Customers
Systems •Suppliers

The The
Firm-Strategy Environment-Strategy
Interface Interface
External Analyses’ Outcomes

Opportunities
and threats

By studying the external environment, firms identify

what they might choose to do.
Internal Analyses’ Outcomes

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment, firms

identify what they can do
EUROPEAN SUPERMARKET PROFITABILITY

FIRM Operating ROTA (%) ROE (%)

Margin (%)
TESCO 6.2 13.1 39.6

CARREFOUR 3.8 6.3 20.2

AHOLD 4.9 8.8 21.0

 Resources, Capabilities and Core Competencies

• Resources
Discovering Core – Are the source of a firm’s
Competencies
capabilities.
– Are broad in scope.
Core
Competencies – Cover a spectrum of individual,
social and organizational
Capabilities
phenomena.
– Alone, do not yield a competitive
Resources
•Tangible advantage.
•Intangible
RESOURCES – Important to remember

A firm is a unique bundle of resources

RESOURCES ARE STOCKS OF IMPORTANT
FACTORS OWNED OR CONTROLLED BY THE FIRM

FIRM-SPECIFIC ASSETS ENABLING SUPERIOR

PERFORMANCE

– Heterogeneous across firms

– Difficult to change/transfer
– Aligned with the industry
 Resources
• Resources
– Represent inputs into a firm’s
production process, such as:
• Capital equipment
• Skills of employees
• Brand names
• Financial resources
• Talented managers
• Types of Resources
– Tangible resources
• Financial resources
• Physical resources
• Technological resources
• Organizational resources
– Intangible resources
• Knowledge
• Innovation resources
• Reputation resources
 Examples of Resources
Financial Resources • The firm’s borrowing capacity
• The firm’s ability to generate internal
funds
Organizational Resources • The firm’s formal reporting structure
and its formal planning, controlling, and
coordinating systems
Physical Resources • Sophistication and location of a firm’s
plant and equipment
• Access to raw materials
Technological Resources • Stock of technology, such as patents,
copyrights.

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R.
M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102.
 Examples of Resources
Human Resources • Knowledge
• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources • Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality, durability,
and reliability
• Reputation with suppliers
• For efficient, effective, supportive, and
mutually beneficial interactions and
relationships
Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136–139;
R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.
 Resources, Capabilities and Core Competencies

• Capabilities
Discovering Core – Capacity to deploy resources that have been
Competencies purposely integrated to achieve a desired end state
– Emerge over time through complex interactions
among tangible and intangible resources
Core
Competencies – Often are based on developing, carrying and
exchanging information and knowledge through
Capabilities the firm’s human capital

Resources
•Tangible
•Intangible
 Resources, Capabilities and Core Competencies

• Capabilities (cont’d)
Discovering Core – The foundation of many capabilities
Competencies
lies in:
• The unique skills and knowledge of a
Core firm’s employees
Competencies
• The functional expertise of those
Capabilities
employees
– Capabilities are often developed in
Resources specific functional areas or as part
•Tangible
•Intangible of a functional area.
 CAPABILITIES
Resources
Financial R&D Customer
Staff
Strength knowledge skills

Capabilities
New product Customer
Development service

Competitive Advantage
 Examples of Firms’ Capabilities
Functional Areas Capabilities
Distribution Effective use of logistics management techniques
Human resources Motivating, empowering, and retaining employees
Inventory Management Effective and efficient control of inventories through planning
information systems point-of-purchase data collection methods
Marketing Effective promotion of brand-name products
Effective customer service
Innovative merchandising
Management Ability to envision the future of business
Effective organizational structure
Manufacturing Design and production skills yielding reliable products
Product and design quality
Miniaturization of components and products
Research & Innovative technology
development Development of sophisticated elevator control solutions
Rapid transformation of technology into new products and processes
Digital technology
 Resources, Capabilities and Core Competencies

• Four criteria for determining

Discovering Core strategic capabilities:
Competencies
– Value
Core – Rarity
Competencies
– Costly-to-imitate
Capabilities
– Non-substitutability/Organization
Resources
•Tangible
•Intangible
 Outcomes from Combinations
of the Four Criteria
Competitive Performance
Consequences Implications
No No No No Competitive Below Average
Disadvantage Returns

Yes No No Yes/ Competitive Average Returns

No Parity

Yes Yes No Yes/ Temporary Com- Above Average to

No petitive Advantage Average Returns

Yes Yes Yes Yes Sustainable Com- Above Average

petitive Advantage Returns
 Resources, Capabilities and Core Competencies

• Core Competencies
Discovering Core
Competencies – Capabilities that are the sources of a
firm’s competitive advantage:
• Distinguish a company competitively and
Core
Competencies reflect its personality.
• Emerge over time through an
Capabilities organizational process of accumulating
and learning how to deploy different
Resources resources and capabilities.
•Tangible
•Intangible
 Resources, Capabilities and Core Competencies

• Core Competencies
Discovering Core
Competencies – Activities that a firm performs especially
well compared to competitors.
Core – Activities through which the firm adds
Competencies unique value to its goods or services
over a long period of time.
Capabilities
– IMP – Can be leveraged across multiple
Resources products and businesses
•Tangible
•Intangible
Honda’s competitive differentiation is built on superior, core expertise in
gasoline engine and drive-train technology. It exploits its capabilities in cost
efficient /high- quality manufacturing, brand reputation – and its ability to
transfer technology and capabilities from one business to the other.
 CAPABILITIES AND PRODUCTS
precision mechanics fine optics

35mm SLR camera

Compact fashion canera
EOS autofocus camera Plain-paper copier
Digital camera Color copier
Video still camera Color laser copier
Basic fax Laser copier
Laser fax

Mask aligners Inkjet printer

Excimer laser aligners Laser printer
Stepper aligners Color video printer

Calculator
Notebook computer

micro-electronics
Links between Products & Capabilities at 3M

Sandpaper Road signs Videotape

Carborundum & markings Floppy disks &
mining Scotchtape data storage
Audio tape
products
Acetate
Post-it notes
film Housewares/kit-
PRODUCTS
Surgical tapes chen products
& dressings
Pharmaceuticals
Materials sciences
Flexible
Health sciences circuitry
CAPABILITIES Microreplication
New-product
Abrasives Adhesives Thin-film development &
technologies introduction
 What are Dynamic Capabilities?

Dynamic capabilities are an organisation’s abilities

to renew and recreate its strategic capabilities to
meet the needs of a changing environment.
 DYNAMIC CAPABILITIES

CAPABILITY CAPABILITY
2011 2016
Less Critical
CAPABILITY 1

Build
CAPABILITY 2

Maintain
CAPABILITY 3

Create
CAPABILITY 4
Diagnosing Strategic Capability

Value chain/
Activity maps
Value network

Benchmarking SWOT analysis

 Value Chain Analysis
• Allows the firm to understand the parts of its operations that
create value and those that do not.
• A template that firms use to:
– Understand their cost position.
– Identify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.
 Value Chain Analysis (cont’d)
• Primary activities involved with:
– A product’s physical creation
– A product’s sale and distribution to buyers
– The product’s service after the sale

• Support Activities
– Provide the assistance necessary for the primary activities to take
place.
The Basic Value Chain
 Outsourcing
• The purchase of a value-creating activity from an external
supplier
– Few organizations possess the resources and capabilities required to
achieve competitive superiority in all primary and support activities.
• By performing fewer capabilities:
– A firm can concentrate on those areas in which it can create value.
– Specialty suppliers can perform outsourced capabilities more
efficiently.
 Outsourcing Decisions
A firm may outsource
all or only part of one
or more primary and/or
support activities.

Technological Development
Human Resource Mgmt.
Service

Support Activities

Firm Infrastructure
Marketing and Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics

Primary Activities
 Strategic Rationales for Outsourcing
• Improving business focus
• Providing access to world-class capabilities
• Sharing risks
• Freeing resources for other purposes
 What is a Value Network?

A value network is the set of interorganisational

links and relationships that are necessary to create a
product or service.
The Value Network
 Understanding the Capabilities in Relation to the Value
Network

• Where could slack or hold-up might occur?

• Where are the profit pools?
• What should be outsourced?
• Who might be the best partners in the parts of the value
network?
An Activity System Map
Lessons Learned from Activity Maps

Reinforcement of best practices

Difficulties of imitation

Too complicated to handle

 Approaches to Benchmarking

• Historical benchmarking
• Industry/sector benchmarking
• Best-in-class benchmarking
 SWOT Analysis

Strengths Weaknesses

Opportunities Threats
 Identifying Resource Strengths
and Competitive Capabilities
• A strength is something a firm does well or a characteristic that
enhances its competitiveness
– Valuable competencies or know-how
– Valuable physical assets
– Valuable human assets
– Valuable organizational assets
– Valuable intangible assets
– Important competitive capabilities
– An attribute that places a company in
a position of market advantage
– Alliances or cooperative ventures
 Identifying Resource Weaknesses
and Competitive Deficiencies

• A weakness is something a firm lacks, does

poorly, or a condition placing it at a
disadvantage
• Resource weaknesses relate to
– Deficiencies in know-how or expertise or
competencies
– Lack of important physical, organizational, or
intangible assets
– Missing capabilities in key areas
 Identifying External Threats
• Emergence of cheaper/better technologies
• Introduction of better products by rivals
• Intensifying competitive pressures
• Onerous regulations
• A rise in interest rates
• Potential of a hostile takeover
• Unfavorable demographic shifts
• Adverse shifts in foreign exchange rates
• Political upheaval in a country
 Role of SWOT Analysis in crafting a Better
Strategy
• Developing a clear understanding of a company’s
– Resource strengths
– Resource weaknesses
– Best opportunities
– External threats
• Drawing conclusions
about how best to deploy
resources in light of the company’s internal
and external situation
• Thinking strategically about how to strengthen the
company’s resource base for the future
 The Links between Resources, Capabilities
and Competitive Advantage

INDUSTRY KEY
COMPETITIVE DRIVERS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

•Financial •Skills/know-how
•Technology •Capacity for
•Physical •Reputation communication &
•Culture collaboration
•Motivation
Thank You!