Lect 3 internal-analysis
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By studying both the external and internal environments, firms can identify opportunities and threats as well as their own unique resources, capabilities, and core competencies. Internal analysis focuses on determining a firm's competitive advantages through examining its competencies, capabilities, and resources. Competencies include core, distinctive, strategic, and threshold competencies. Capabilities emerge from resources and allow firms to deploy resources to achieve goals. Core competencies are sources of competitive advantage and distinguish a firm. Building sustainable competitive advantages requires capabilities that are valuable, rare, costly to imitate, and nonsubstitutable. Firms can also analyze their value chain to understand how to create value and identify competitive advantages.
Lect 3 internal-analysis
- 1. 3–3 External Analyses’ OutcomesExternal Analyses’ Outcomes By studying the external environment, firmsBy studying the external environment, firms identify what theyidentify what they might choose to do.might choose to do. OpportunitiesOpportunities and threatsand threats
- 2. 3–4 Internal Analyses’ OutcomesInternal Analyses’ Outcomes By studying the internal environment,By studying the internal environment, firms identify what theyfirms identify what they can docan do Unique resources,Unique resources, capabilities, andcapabilities, and competenciescompetencies ((required forrequired for sustainablesustainable competitive advantagecompetitive advantage))
- 3. Components of Internal Analysis Leading toComponents of Internal Analysis Leading to Competitive Advantage and Strategic CompetitivenessCompetitive Advantage and Strategic Competitiveness
- 5. CORE COMPETENCECORE COMPETENCE • Core competenceCore competence isis defined as thedefined as the combination of individualcombination of individual technologies andtechnologies and production skills thatproduction skills that underlie a company’sunderlie a company’s product lines.product lines.
- 6. • It should relate to an activity or process thatIt should relate to an activity or process that inherently underlies theinherently underlies the valuevalue in the product orin the product or service as perceived by the customer.service as perceived by the customer. • It should lead to aIt should lead to a level of performancelevel of performance in ain a product or process which is significantly betterproduct or process which is significantly better than those of competitors.than those of competitors. • It should beIt should be robust.robust. TO ACHIEVE CORETO ACHIEVE CORE COMPETENCECOMPETENCE
- 7. • Distinctive competence is the unique capabilityDistinctive competence is the unique capability that helps an organization in capitalizing upon athat helps an organization in capitalizing upon a particular opportunity; the competitive edge itparticular opportunity; the competitive edge it may give a firm in the marketplace.may give a firm in the marketplace. • The focus in distinctive competence is onThe focus in distinctive competence is on exploiting a market opportunity.exploiting a market opportunity. DISTINCTIVE COMPETENCEDISTINCTIVE COMPETENCE
- 8. • Strategic competence is theStrategic competence is the • competence level required to formulate,competence level required to formulate, implement and produce results with a particularimplement and produce results with a particular strategy.strategy. • It may involve combination or convergence ofIt may involve combination or convergence of different capabilities.different capabilities. STRATEGIC COMPETENCESTRATEGIC COMPETENCE
- 9. • Threshold competence is the competence levelThreshold competence is the competence level required just for survival in the market orrequired just for survival in the market or business.business. • Companies with threshold competence can overCompanies with threshold competence can over time, graduate to a higher level of competence.time, graduate to a higher level of competence. • Continued threshold competence can lead toContinued threshold competence can lead to closure of business also.closure of business also. THRESHOLD COMPETTENCETHRESHOLD COMPETTENCE
- 10. COMPETENCE VERSUS CAPABILITY: THECOMPETENCE VERSUS CAPABILITY: THE WALMART STORYWALMART STORY • ‘‘Everyday low prices’ policyEveryday low prices’ policy • ‘‘Relentless focus’ onRelentless focus’ on customer satisfaction.customer satisfaction. • ‘‘Cross-docking’Cross-docking’ • Installed a private satelliteInstalled a private satellite communication networkcommunication network which transmits point-of-salewhich transmits point-of-sale data on daily basis.data on daily basis. • Fast and efficientFast and efficient transportation system.transportation system. • Stock options and profitStock options and profit sharing for HRsharing for HR
- 11. CAPABILITIES DIFFER FROM CORE COMPETENCES:CAPABILITIES DIFFER FROM CORE COMPETENCES: THE CASE OF HONDATHE CASE OF HONDA • Expertise in ‘dealerExpertise in ‘dealer management’management’ • Skill at ‘productSkill at ‘product realization’realization’
- 12. IMPACT OF CHANGING COMPETENCE ONIMPACT OF CHANGING COMPETENCE ON REVENUE GROWTHREVENUE GROWTH
- 13. COMPETENCES, RESOURCES ANDCOMPETENCES, RESOURCES AND COMPETITIVE POSITIONSCOMPETITIVE POSITIONS
- 14. Competitive AdvantageCompetitive Advantage • Firms achieve strategic competitiveness andFirms achieve strategic competitiveness and earn above-average returns when their coreearn above-average returns when their core competencies are effectively:competencies are effectively: Acquired.Acquired. Bundled.Bundled. Leveraged.Leveraged. • Over time, the benefits of any value-creatingOver time, the benefits of any value-creating strategy can be duplicated by competitors.strategy can be duplicated by competitors.
- 15. Competitive Advantage (cont’d)Competitive Advantage (cont’d) • Sustainability of a competitive advantage is aSustainability of a competitive advantage is a function of:function of: The rate of core competence obsolescence due toThe rate of core competence obsolescence due to environmental changes.environmental changes. The availability of substitutes for the coreThe availability of substitutes for the core competence.competence. The difficulty competitors have in duplicating orThe difficulty competitors have in duplicating or imitating the core competence.imitating the core competence.
- 16. The Challenge of Internal AnalysisThe Challenge of Internal Analysis • Strategic decisions in terms of the firm’sStrategic decisions in terms of the firm’s resources, capabilities, and core competencies:resources, capabilities, and core competencies: Are non-routineAre non-routine Significantly influence the firm’s ability to earnSignificantly influence the firm’s ability to earn above-average returns.above-average returns.
- 17. The Challenge of Internal Analysis (cont’d)The Challenge of Internal Analysis (cont’d) • To develop and use core competencies,To develop and use core competencies, managers must have:managers must have: Self-confidenceSelf-confidence The capacity to deal with uncertainty andThe capacity to deal with uncertainty and complexitycomplexity A willingness to hold people (and themselves)A willingness to hold people (and themselves) accountable for their workaccountable for their work
- 18. Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies • ResourcesResources Are the source of a firm’sAre the source of a firm’s capabilities.capabilities. Are broad in scope.Are broad in scope. Cover a spectrum ofCover a spectrum of individual, social andindividual, social and organizationalorganizational phenomena.phenomena. Alone, do not yield aAlone, do not yield a competitive advantage.competitive advantage. Discovering CoreDiscovering Core CompetenciesCompetencies ResourcesResources •TangibleTangible •IntangibleIntangible CapabilitiesCapabilities CoreCore CompetenciesCompetencies
- 19. COST MANAGEMENT, COST COMPETENCES, COSTCOST MANAGEMENT, COST COMPETENCES, COST EFFICIENCYEFFICIENCY AND COST EFFECTIVENESSAND COST EFFECTIVENESS
- 20. SOURCES OF COST EFFICIENCYSOURCES OF COST EFFICIENCY
- 21. THE EXPERIENCE CURVETHE EXPERIENCE CURVE
- 22. SOURCES OF COST EFFECTIVENESSSOURCES OF COST EFFECTIVENESS
- 23. ResourcesResources • ResourcesResources Are a firm’s assets,Are a firm’s assets, including people andincluding people and the value of its brandthe value of its brand name.name. Represent inputs intoRepresent inputs into a firm’s productiona firm’s production process, such as:process, such as: • Capital equipmentCapital equipment • Skills of employeesSkills of employees • Brand namesBrand names • Financial resourcesFinancial resources • Talented managersTalented managers • Types of ResourcesTypes of Resources Tangible resourcesTangible resources • Financial resourcesFinancial resources • Physical resourcesPhysical resources • TechnologicalTechnological resourcesresources • OrganizationalOrganizational resourcesresources Intangible resourcesIntangible resources • Human resourcesHuman resources • Innovation resourcesInnovation resources • Reputation resourcesReputation resources
- 24. Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies • CapabilitiesCapabilities Represent the capacity to deployRepresent the capacity to deploy resources that have beenresources that have been purposely integrated to achieve apurposely integrated to achieve a desired end statedesired end state Emerge over time through complexEmerge over time through complex interactions among tangible andinteractions among tangible and intangible resourcesintangible resources Often are based on developing,Often are based on developing, carrying and exchangingcarrying and exchanging information and knowledge throughinformation and knowledge through the firm’s human capitalthe firm’s human capital Discovering CoreDiscovering Core CompetenciesCompetencies ResourcesResources •TangibleTangible •IntangibleIntangible CapabilitiesCapabilities CoreCore CompetenciesCompetencies
- 25. Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies • Capabilities (cont’d)Capabilities (cont’d) The foundation of manyThe foundation of many capabilities lies in:capabilities lies in: • The unique skills andThe unique skills and knowledge of a firm’sknowledge of a firm’s employeesemployees • The functional expertise ofThe functional expertise of those employeesthose employees Capabilities are oftenCapabilities are often developed in specificdeveloped in specific functional areas or as partfunctional areas or as part of a functional area.of a functional area. Discovering CoreDiscovering Core CompetenciesCompetencies ResourcesResources •TangibleTangible •IntangibleIntangible CapabilitiesCapabilities CoreCore CompetenciesCompetencies
- 26. Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies • Four criteria forFour criteria for determining strategicdetermining strategic capabilities:capabilities: ValueValue RarityRarity Costly-to-imitateCostly-to-imitate NonsubstitutabilityNonsubstitutability Discovering CoreDiscovering Core CompetenciesCompetencies ResourcesResources •TangibleTangible •IntangibleIntangible CapabilitiesCapabilities CoreCore CompetenciesCompetencies
- 27. Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies • Core CompetenciesCore Competencies Resources and capabilities thatResources and capabilities that are the sources of a firm’sare the sources of a firm’s competitive advantage:competitive advantage: • Distinguish a companyDistinguish a company competitively and reflect itscompetitively and reflect its personality.personality. • Emerge over time through anEmerge over time through an organizational process oforganizational process of accumulating and learningaccumulating and learning how to deploy differenthow to deploy different resources and capabilities.resources and capabilities. Discovering CoreDiscovering Core CompetenciesCompetencies ResourcesResources •TangibleTangible •IntangibleIntangible CapabilitiesCapabilities CoreCore CompetenciesCompetencies
- 28. Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies • Core CompetenciesCore Competencies Activities that a firm performsActivities that a firm performs especially well compared toespecially well compared to competitors.competitors. Activities through which the firmActivities through which the firm adds unique value to its goodsadds unique value to its goods or services over a long period ofor services over a long period of time.time. Discovering CoreDiscovering Core CompetenciesCompetencies ResourcesResources •TangibleTangible •IntangibleIntangible CapabilitiesCapabilities CoreCore CompetenciesCompetencies
- 29. Building Core CompetenciesBuilding Core Competencies • Four Criteria ofFour Criteria of Sustainable CompetitiveSustainable Competitive AdvantageAdvantage Valuable capabilitiesValuable capabilities Rare capabilitiesRare capabilities Costly to imitateCostly to imitate NonsubstituableNonsubstituable Discovering CoreDiscovering Core CompetenciesCompetencies • ValuableValuable • RareRare • Costly to imitateCostly to imitate • NonsubstitutableNonsubstitutable Four Criteria ofFour Criteria of SustainableSustainable AdvantagesAdvantages
- 30. Building Sustainable Competitive AdvantageBuilding Sustainable Competitive Advantage • Valuable capabilitiesValuable capabilities Help a firm neutralizeHelp a firm neutralize threats or exploitthreats or exploit opportunities.opportunities. • Rare capabilitiesRare capabilities Are not possessed byAre not possessed by many others.many others. Discovering CoreDiscovering Core CompetenciesCompetencies • ValuableValuable • RareRare • Costly to imitateCostly to imitate • NonsubstitutableNonsubstitutable Four Criteria ofFour Criteria of SustainableSustainable AdvantagesAdvantages
- 31. Building Sustainable Competitive AdvantageBuilding Sustainable Competitive Advantage • Costly-to-Imitate CapabilitiesCostly-to-Imitate Capabilities HistoricalHistorical • A unique and a valuableA unique and a valuable organizational culture or brandorganizational culture or brand namename Ambiguous causeAmbiguous cause • The causes and uses of aThe causes and uses of a competence are unclearcompetence are unclear Social complexitySocial complexity • Interpersonal relationships,Interpersonal relationships, trust, and friendship amongtrust, and friendship among managers, suppliers, andmanagers, suppliers, and customerscustomers Discovering CoreDiscovering Core CompetenciesCompetencies • ValuableValuable • RareRare • Costly to ImitateCostly to Imitate • NonsubstitutableNonsubstitutable Four Criteria ofFour Criteria of SustainableSustainable AdvantagesAdvantages
- 32. Building Sustainable Competitive AdvantageBuilding Sustainable Competitive Advantage • NonsubstitutableNonsubstitutable CapabilitiesCapabilities No strategic equivalentNo strategic equivalent • Firm-specific knowledgeFirm-specific knowledge • Organizational cultureOrganizational culture • Superior execution of theSuperior execution of the chosen business modelchosen business model Discovering CoreDiscovering Core CompetenciesCompetencies • ValuableValuable • RareRare • Costly to imitateCostly to imitate • NonsubstitutableNonsubstitutable Four Criteria ofFour Criteria of SustainableSustainable AdvantagesAdvantages
- 33. Outcomes from CombinationsOutcomes from Combinations of the Four Criteriaof the Four Criteria Valuable?R are? C ostly to Im itate? N onsubstitutable? Competitive Consequences Performance Implications No No No No Competitive Disadvantage Below Average Returns Yes No No Yes/ No Competitive Parity Average Returns Yes Yes No Yes/ No Temporary Com- petitive Advantage Above Average to Average Returns Yes Yes Yes Yes Sustainable Com- petitive Advantage Above Average Returns
- 34. The Basic ValueThe Basic Value ChainChain
- 35. Value Chain AnalysisValue Chain Analysis • Allows the firm to understand the parts of itsAllows the firm to understand the parts of its operations that create value and those that dooperations that create value and those that do not.not. • A template that firms use to:A template that firms use to: Understand their cost position.Understand their cost position. Identify multiple means that might be used to facilitateIdentify multiple means that might be used to facilitate implementation of a chosen business-level strategy.implementation of a chosen business-level strategy.
- 36. Value Chain Analysis (cont’d)Value Chain Analysis (cont’d) • Primary activities involved with:Primary activities involved with: A product’s physical creationA product’s physical creation A product’s sale and distribution to buyersA product’s sale and distribution to buyers The product’s service after the saleThe product’s service after the sale • Support ActivitiesSupport Activities Provide the assistance necessary for the primaryProvide the assistance necessary for the primary activities to take place.activities to take place.
- 37. Value Chain Analysis (cont’d)Value Chain Analysis (cont’d) • Value ChainValue Chain Shows how a product moves from the raw-materialShows how a product moves from the raw-material stage to the final customer.stage to the final customer. • To be a source of competitive advantage, aTo be a source of competitive advantage, a resource or capability must allow the firm:resource or capability must allow the firm: To perform an activity in a manner that is superior toTo perform an activity in a manner that is superior to the way competitors perform it, orthe way competitors perform it, or To perform a value-creating activity that competitorsTo perform a value-creating activity that competitors cannot completecannot complete
- 38. OutsourcingOutsourcing • The purchase of a value-creating activity from anThe purchase of a value-creating activity from an external supplierexternal supplier Few organizations possess the resources andFew organizations possess the resources and capabilities required to achieve competitive superioritycapabilities required to achieve competitive superiority in all primary and support activities.in all primary and support activities. • By performing fewer capabilities:By performing fewer capabilities: A firm can concentrate on those areas in which it canA firm can concentrate on those areas in which it can create value.create value. Specialty suppliers can perform outsourcedSpecialty suppliers can perform outsourced capabilities more efficiently.capabilities more efficiently.
- 39. Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing • Improving business focusImproving business focus Helps a company focus on broader business issuesHelps a company focus on broader business issues by having outside experts handle various operationalby having outside experts handle various operational details.details. • Providing access to world-class capabilitiesProviding access to world-class capabilities The specialized resources of outsourcing providersThe specialized resources of outsourcing providers makes world-class capabilities available to firms in amakes world-class capabilities available to firms in a wide range of applications.wide range of applications.
- 40. Strategic Rationales for Outsourcing (cont’d)Strategic Rationales for Outsourcing (cont’d) • Accelerating re-engineering benefitsAccelerating re-engineering benefits Achieves re-engineering benefits more quickly byAchieves re-engineering benefits more quickly by having outsiders—who have already achieved world-having outsiders—who have already achieved world- class standards—take over process.class standards—take over process. • Sharing risksSharing risks Reduces investment requirements and makes firmReduces investment requirements and makes firm more flexible, dynamic and better able to adapt tomore flexible, dynamic and better able to adapt to changing opportunities.changing opportunities. • Freeing resources for other purposesFreeing resources for other purposes Redirects efforts from non-core activities toward thoseRedirects efforts from non-core activities toward those that serve customers more effectively.that serve customers more effectively.
- 41. Outsourcing IssuesOutsourcing Issues • Seeking greatest valueSeeking greatest value Outsource only to firms possessing a coreOutsource only to firms possessing a core competence in terms of performing the primary orcompetence in terms of performing the primary or supporting the outsourced activity.supporting the outsourced activity. • Evaluating resources and capabilitiesEvaluating resources and capabilities Do notDo not outsource activities in which the firm itselfoutsource activities in which the firm itself can create and capture value.can create and capture value. • Environmental threats and ongoing tasksEnvironmental threats and ongoing tasks Do notDo not outsource primary and support activitiesoutsource primary and support activities that are used to neutralize environmental threats or tothat are used to neutralize environmental threats or to complete necessary ongoing organizational tasks.complete necessary ongoing organizational tasks.
- 42. Outsourcing Issues (cont’d)Outsourcing Issues (cont’d) • Nonstrategic team resourcesNonstrategic team resources Do notDo not outsource capabilities critical to the firm’soutsource capabilities critical to the firm’s success, even though the capabilities are not actualsuccess, even though the capabilities are not actual sources of competitive advantage.sources of competitive advantage. • Firm’s knowledge baseFirm’s knowledge base Do notDo not outsource activities that stimulate theoutsource activities that stimulate the development of new capabilities and competencies.development of new capabilities and competencies.
- 43. Cautions and RemindersCautions and Reminders • Never take for granted that core competencies willNever take for granted that core competencies will continue to provide a source of competitive advantage.continue to provide a source of competitive advantage. • All core competencies have the potential to becomeAll core competencies have the potential to become corecore rigiditiesrigidities——former core competencies that now generateformer core competencies that now generate inertia and stifle innovation.inertia and stifle innovation. • Determining what the firm can do through continuous andDetermining what the firm can do through continuous and effective analyses of its internal environment will increaseeffective analyses of its internal environment will increase the likelihood of long-term competitive success.the likelihood of long-term competitive success.