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Internal Environment

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Management information Systems. Parallels process of external audit. Marketing ... Often are based on developing, carrying and exchanging information and knowledge ... – PowerPoint PPT presentation

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Title: Internal Environment


1
Internal Environment
  • 3rd Lecture
  • MSc Agricultural Economics and Management

2
External and Internal Analyses
By studying the external environment, firms
identify what they might choose to do
Opportunities and threats
3
External and Internal Analyses
By studying the internal environment, firms
identify what they can do
Unique resources, capabilities, and core
competencies (sustainable competitive advantage)
The Firm
4
Challenge of Internal Analysis
  • How do we effectively manage current core
    competencies while simultaneously developing new
    ones?
  • How do we assemble bundles of resources,
    capabilities and core competencies to create
    value for customers?
  • How do we learn to change rapidly?

5
Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies
  • Uncertainty regarding characteristics of the
    general and the industry environments,
    competitors actions, and customers preferences
  • Complexity regarding the interrelated causes
    shaping a firms environments and perceptions of
    the environments
  • Intraorganizational Conflicts among people making
    managerial decisions and those affected by them

6
Choosing the right tools for internal analysis
  • Start with simple techniques
  • Consider all tools and identify those likely to
    be useful
  • Define the competitive capabilities the
    enterprise needs
  • Identify the subsystems which support these
    capabilities
  • Identify core competence relative to competitive
    capabilities
  • Determine changes to enhance/improve core
    competence
  • Take a systemic view
  • Adjust the methods of analysis in the light of
    what is found

7
Some commonly used techniques for internal
analysis
Single Businesses Resource Audit Analysis of
cost and profit Benchmarking Value Chain
Analysis Supply Chain Analysis
Multiple Businesses Portfolio Analysis
Both Single and Multiple Businesses Core
Competencies Shareholder Value Analysis
8
Resource Audit
  • Resources
  • Physical
  • Human
  • Financial
  • Other
  • Quality and Quantity
  • Unique resources
  • A good initial analysis

9
Internal Audit
Parallels process of external audit
  • Information from
  • Management
  • Marketing
  • Finance/accounting
  • Production/operations
  • Research Development
  • Management information Systems

10
Marketing
Marketing Functions
  • Customer analysis
  • Selling products/services
  • Product service planning
  • Pricing
  • Distribution
  • Marketing research
  • Opportunity analysis

11
Finance/Accounting
Finance/Accounting Functions
  • Investment decision (Capital budgeting)
  • Financing decision
  • Dividend decision

12
Production/Operations
Production/Operations Functions
  • Process
  • Capacity
  • Inventory
  • Workforce
  • Quality

13
Research Development
Research Development Functions
  • Development of new products before competitors
  • Improving product quality
  • Improving manufacturing processes to reduce costs

14
Management Information Systems
  • Information Systems
  • Security
  • User-friendly
  • E-commerce

15
Analysis of Costs and Profit
  • Current sources of profits and trends
  • Recast standard reporting to give new insights
  • Pragmatic approach to get value from time and
    effort spent
  • A good initial analysis

Single Businesses Resource Audit Analysis of
cost and profit Benchmarking Value Chain
Analysis Supply Chain Analysis
16
Benchmarking
  • Objective comparison with best in class
  • Simple in theory - Hard in practice
  • Observed differences in performance may be due
    to differences in parameters
  • Qualitative observations may be more valuable
    than quantitative

17
Benchmarking - at three levels
Level of
Through
Examples of measures
benchmarking
Resources
Resource audit
Quantity of resources,
e.g.
revenue/employee

capital intensity

Quality of resources,
e.g.
qualifications of

employees
age of machinery

uniqueness (e.g.

patents)
Competences in
Analysing activities
Sales calls/sales person
separate activities
Output/ employee
Materials wastage
Competences
Analysing overall
Market share
through
performance
Profitability
Productivity
managing linkages
18
Value Chain Analysis
  • Basic Value chain
  • Elegant in theory
  • Time-consuming in practice
  • Revised value chain to reflect power of people
    and knowledge

19
Value Creation
20
The Basic Value Chain
Margin
Margin
Service
Marketing Sales
Technological Development
Human Resource Mgmt.
Support Activities
Outbound Logistics
Firm Infrastructure
Procurement
Operations
Inbound Logistics
Primary Activities
21
To capitalize on the usefulness of the Value
Chain concept...
it is important to recognize that...
22
Value Chains are part of a Total Value System
Firm Value Chain
Supplier Value Chain
Channel Value Chain
Buyer Value Chain
23
Value Chains are part of a Total Value System
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Supplier Value Chain
Upstream Value
Perform valuable activities that complement the
firms activities
24
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Buyer Value Chain
Upstream Value
Channel Value Chain
Perform valuable activities that complement the
firms activities
Each firm must eventually find a way to become a
part of some buyers value chain
25
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Upstream Value
Each firm must eventually find a way to become a
part of some buyers value chain
Perform valuable activities that complement the
firms activities
Ultimate basis for differentiation is the ability
to play a role in a buyers value chain
This creates VALUE!!
26
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Each firm must eventually find a way to become a
part of some buyers value chain
Upstream Value
Perform valuable activities that complement the
firms activities
Ultimate basis for differentiation is the ability
to play a role in a buyers value chain
This creates VALUE!!
Value chains vary for firms in an industry,
reflecting each firms unique qualities
  • History
  • Strategy
  • Success at Implementation

27
Outsourcing
Outsourcing is the purchase of some or all of a
value-creating activity from an external
supplier Usually this is because the specialty
supplier can provide these functions more
efficiently
28
Strategic Rationales for Outsourcing
  • Improve Business Focus
  • lets company focus on broader business issues by
    having outside experts handle various operational
    details
  • Provide Access to World-Class Capabilities
  • the specialized resources of outsourcing
    providers makes world-class capabilities
    available to firms in a wide range of applications

29
Strategic Rationales for Outsourcing
  • Accelerate Business Re-Engineering Benefits
  • achieves re-engineering benefits more quickly by
    having outsiders--who have already achieved
    world-class standards--take over process
  • Share Risks
  • reduces investment requirements and makes firm
    more flexible, dynamic and better able to adapt
    to changing opportunities

30
Strategic Rationales for Outsourcing
  • Free Resources for Other Purposes
  • permits firm to redirect efforts from non-core
    activities toward those that serve customers more
    effectively

31
Outsourcing Issues
  • Greatest Value
  • outsource only to firms possessing a core
    competence in terms of performing the primary or
    support activity being outsourced
  • Evaluating Resources and Capabilities
  • dont outsource activities in which the firm
    itself can create and capture value
  • Environmental Threats and Ongoing Tasks
  • do not outsource primary and support activities
    that are used to neutralize environmental threats
    or complete necessary ongoing organizational
    tasks

32
Outsourcing Issues
  • Nonstrategic Team of Resources
  • do not outsource capabilities that are critical
    to their success, even though the capabilities
    are not actual sources of competitive advantage
  • Firms Knowledge Base
  • do not outsource activities that stimulate the
    development of new capabilities and competencies

33
Revised Value Chain
SUPPORT ACTIVITIES
revenue, profit, market share,
PRIMARY ACTIVITIES
34

Product portfolio matrices
35
Product portfolio matrices
36
Portfolio Analyses
  • Over-coming some pitfalls
  • Defining high and low (growth or share) can
    be difficult
  • Plot SBUs not products
  • Apply to market segments not whole markets
  • Assess the role of each SBU
  • Consider wider resource implications - not just
    cash
  • Dogs may have a positive role

37
Tests for Core Competence
  • Essential to corporate survival in short and long
    term
  • Invisible to competitors
  • Difficult to imitate
  • Unique to the enterprise
  • Result from a mix of skills, resources and
    processes
  • A capability which the organization can sustain
    over time
  • Greater than the competence of an individual
  • Essential to the development of core products
  • Essential to the implementation of strategic
    intent
  • Essential to the strategic choices of the
    enterprise
  • Marketable and commercially viable
  • Few in number

38
The roots of core competence for a typical
manufacturing business
39
The roots of core competence for typical
professional services firms
40
Components of Internal Analysis
41
Resources, Capabilities and Core Competencies
  • Capabilities
  • Are the firms capacity to deploy resources that
    have been purposely integrated to achieve a
    desired end state
  • Emerge over time through complex interactions
    among tangible and intangible resources
  • Often are based on developing, carrying and
    exchanging information and knowledge through the
    firms human capital

42
Resources, Capabilities and Core Competencies
  • Capabilities
  • The foundation of many capabilities lies in
  • The unique skills and knowledge of a firms
    employees
  • The functional expertise of those employees
  • Capabilities are often developed in specific
    functional areas or as part of a functional area

43
Examples of Firms Capabilities
44
Resources, Capabilities and Core Competencies
  • Core Competencies
  • Resources and capabilities that serve as a source
    of a firms competitive advantage
  • Distinguish a company competitively and reflect
    its personality
  • Emerge over time through an organizational
    process of accumulating and learning how to
    deploy different resources and capabilities

45
Resources, Capabilities and Core Competencies
  • Core Competencies
  • Activities that a firm performs especially well
    compared to competitors
  • Activities through which the firm adds unique
    value to its goods or services over a long period
    of time

46
Building Sustainable Competitive Advantage
  • Four Criteria of Sustainable Competitive
    Advantage
  • Valuable
  • Rare
  • Costly to imitate
  • Nonsubstituable

47
The Four Criteria of Sustainable Competitive
Advantage
Valuable Capabilities Help a firm neutralize
threats or exploit opportunities Rare
Capabilities Are not possessed by many
others Costly-to-Imitate Capabilities
Historical A unique and a valuable
organizational culture or brand name
Ambiguous cause The causes and uses of a
competence are unclear Social complexity
Interpersonal relationships, trust, and
friendship among managers, suppliers,
and customers Nonsubstitutable
Capabilities No strategic equivalent
48
Building Sustainable Competitive Advantage
  • Valuable capabilities
  • Help a firm neutralize threats or exploit
    opportunities
  • Rare capabilities
  • Are not possessed by many others

49
Building Sustainable Competitive Advantage
  • Costly-to-Imitate Capabilities
  • Historical
  • A unique and a valuable organizational culture or
    brand name
  • Ambiguous cause
  • The causes and uses of a competence are unclear
  • Social complexity
  • Interpersonal relationships, trust, and
    friendship among managers, suppliers, and
    customers

50
Building Sustainable Competitive Advantage
  • Nonsubstitutable Capabilities
  • No strategic equivalent

51
Core Competence as a Strategic Capability
Yes
Does it satisfy the criteria of sustainable
competitive advantage?
The source of
No
52
Sustainability of Competitive Advantage
  • Sustainability of competitive advantage is a
    function of
  • the rate of core-competence obsolescence due to
    environmental changes
  • the availability of substitutes for the core
    competence
  • the imitability of the core competence

53
Performance Implications
Costly to Imitate?
Nonsubstitutable
Valuable?
Competitive Consequences
Performance Implications
Rare?
Competitive Disadvantage
Below Average Returns
No
No
No
No
Yes/ No
Competitive Parity
Average Returns
Yes
No
No
Above Average to Average Returns
Yes/ No
Temporary Com- petitive Advantage
Yes
Yes
No
Above Average Returns
Sustainable Com- petitive Advantage
Yes
Yes
Yes
Yes
54
Core Competencies Cautions and Reminders
  • Never take for granted that core competencies
    will continue to provide a source of competitive
    advantage
  • All core competencies have the potential to
    become core rigidities
  • Core rigidities are former core competencies that
    now generate inertia and stifle innovation

55
Applying Shareholder Value Analysis
56
The SWOT diagram may summarise the results of
analyses
Internal Analyses
Weaknesses
Strengths
Opportunities
Threats
External Analyses
57
Strategic Assessment of a business as a whole
  • Questions
  • What business are we really in?
  • What real customer needs do we satisfy?
  • What problem do we solve for our customers?

58
Summary of Managerial Practices to Adopt
  • Understand a firm's internal strengths and
    weaknesses before attempting to formulate
    strategies.
  • Make sure the strategy you develop reflects this
    understanding by using insights gained from your
    assessment of the firm's internal strengths and
    weaknesses to shape your strategies.
  • Recognize that internal resources take three
    related forms (1) assets that, when combined
    with (2) capabilities, result in (3) competencies.

59
Summary of Managerial Practices to Adopt
  • Use the tests that have been developed as part of
    the resource-based view of competition to assess
    the ability of internal resources to yield
    competitive advantages.
  • Identify the critical success factors for your
    firm and make sure to emphasize them in assessing
    the firm's strengths and weaknesses and also in
    formulating strategy.
  • Use the value chain framework to help identify
    the contributions various activities make to the
    firm's profit margins, and let this information
    guide your internal assessment.

60
Summary of Managerial Practices to Adopt
  • Identify the firm's core business processes and
    carefully assess how well they provide value for
    both external and internal customers by
    integrating the contributions of various pieces
    of the value chain.
  • Use a balanced-scorecard approach to evaluating
    the firm's strengths and weaknesses. You may
    begin with the financial perspective, but do not
    stop there. Use the customer, operations, and
    organizational perspectives to understand the
    factors that underpin financial performance. Your
    best chance for influencing financial performance
    is through factors that only become apparent by
    adopting these other perspectives.

61
Summary of Managerial Practices to Adopt
  • Use ratio analysis to assess the financial health
    of the business in terms of its liquidity,
    leverage, operating efficiency, and
    profitability.
  • Don't limit your use of quantitative analysis to
    financial matters. A well-rounded analysis
    inevitably draws from nonfinancial matters, and
    these may lend themselves to quantitative
    analysis, too.
  • Incorporate qualitative analysis to cover the
    important aspects of business that are not easily
    quantified.

62
Summary of Managerial Practices to Adopt
  • In making comparisons, mix and match different
    standards (industry' norms, historical data, and
    benchmarks) to suit your purposes and to overcome
    the limitations inherent in each.
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