assessing the internal environment - session 4

8/13/2019 Assessing the Internal Environment - Session 4

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BCOM Strategic Management 2008-4 1

STRATEGICMANAGEMENT

ASSESSING THE INTERNALENVIRONMENT


Strategic capability of organisationsDefined by:(A) Threshold product features and CSFs

Threshold product features : that all potentialproviders 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 theproduct features that are particularly valuedby a group of customers and, therefore,where the organisation must excel tooutperform competition. E.g., performance ofa product.


CSFs will differ from one marketsegment to another since differentcustomer groups value differentproduct features (e.g., price, reliability,performance, servicability, durabilityetc).Organisations therefore need tocompete on different bases andthrough different resources andcompetences.


(B) Resources to provide the products/services that meet customer requirements:What resources are available to anorganisation, from both within and outside,to support its strategies?What is the threshold level of resourcesneeded to support particular strategies? Ifan organisation does not possess theseresources it will be unable to meet

customers threshold requirements on oneor more product features.


What unique resources might organisationshave to meet the critical success factors ofa particular segment and gain competitiveadvantage?Some organisations might have inadequateresources and be unable to meet thethreshold requirements of customers. Thisoccurs not only because resourcesdissipate (disintegrate/ waste away) but,more importantly, because customerrequirements are constantly changing. Butthese resources may be adequate formeeting the requirements of customers inother market segments.


Strategic Importance of Resources1. Available resources

From a strategic perspective anorganisations available resources includeboth those that are owned by theorganisation and those that can beaccessed to support its strategies. Somestrategically important resources may beoutside an organisations ownership, suchas its network of contacts or customers.

The resources fall into four main categories:Physical resources; Human resources;Financial resources and Intellectual capital.


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Physical resources such as machines,buildings or production capacity. Thenature of these resources, such as theage, condition, capability and location ofeach resource, will determine theusefulness of the resources.


Human resources including knowledge,skills of people and adaptability of humanresources. This applies both to employeesand to other people in an organisations

networks. In knowledge-based economiespeople do genuinely become the mostvaluable asset. But to gain advantage ofthis will require a strong link betweenoverall business strategies and humanresource strategies.


Financial resources such as capital,cash, debtors and creditors, andsuppliers of money (shareholders,bankers, etc.).Intellectual capital is the intangibleresource of an organisation and is oftenoverlooked or undervalued. This wouldinclude the knowledge that has beencaptured in patents, brands, business

systems, customer databases andrelationships with partners.


2. A set of Threshold resources areneeded to exist as a provider to anymarket segment. But this threshold tendsto rise with time (through the activities ofcompetitors and new entrants) so thereis a need continuously to improve thisresource base just to stay in business.E.g., In the banking sector, traditionalbranches may be replaced by Internet

banking.


3. Unique resourcesUnique resources are those resourceswhich critically underpin competitiveadvantage. They sustain the ability toprovide value in the product, are better thancompetitors resources and are difficult toimitate.The ability of an organisation to meet thecritical success factors in a particularmarket segment may be underpinned byunique resources. E.g., patented products(or talented individuals) that giveadvantage.


(C) Having the Core/DistinctiveCompetence

Competence is created when resourcesare deployed into the separate activitiesof the organisation and into the processesthrough which these activities are linkedtogether.Competence is about the activities of anorganisation and the processes that linkactivities together both within and beyondthe organisation.


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A core/distinctive competence is a firmsstrength that cannot be easily matched orimitated by competitor, thus giving the firmcompetitive advantage.

Although an organisation will need toreach a threshold level of competence inall the activities that it undertakes, onlysome of these activities are corecompetencies.


Core competencies are thosecompetencies that underpin theorganisations ability to outperformcompetition by meeting the critical successfactors better than competitors. For

example, the ability for team work, andgood coordination may help anorganisation outperform competition.In order to achieve this competitiveadvantage, core competencies must fulfilthe following criteria:


The competence must relate to an activityor process that fundamentally underpinsthe value in the product or service features

as seen through the eyes of thecustomer (or other powerful stakeholder).The competence should be rare and leadto significant superior levels of

performance from an activity or processrelative to competitors.


The competence must be difficult forcompetitors to imitate . Core competenciesare not about how specific improvementsare achieved but about the whole processby which continuous change andimprovement occur.The competences must be non-substitutable that is, it is not possible tofind strategic equivalents.


Differentiating core competenciesand critical success factors

The critical success factors with customersmay be such as the reputation of brand,excellence of service, delivery, product rangeand innovation.The success can be understood by being morespecific about what the CSFs mean, e.g.,excellent service may be due to flexibility andrapid response. These factors for successemerge when the reasons are unpacked byidentifying the resources and competenciesthat underpin these items.


Assessing organisational activities the value chain analysis

A firm represents a collection ofactivities necessary to design, produce,market, deliver and support its products.Each of these activities adds value to aproduct or a service.Each of them can also be a source ofcompetitive advantage for a firm.


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Value activities can be divided into twomajor categories:Primary activities contribute to thephysical creation of the product or a

service, its sale and transfer to thebuyer, and after-sale service.Support activities assist the primaryactivities and each other.


Primary activities

The five categories of primaryactivities are:

1. Inbound logistics

2. Operations3. Outbound logistics4. Marketing and sales5. Service.


1. Inbound logisticsInbound logistics encompasses theactivities of receiving, storing andmanaging inputs, and includes suchfunctions as materials handling,warehousing, inventory control, vehiclescheduling, and returns to suppliers.Improvements in any one of theseactivities typically result in costreductions and increased productivity.


2. OperationsOperations involve the activitiesrequired to convert inputs into finalproducts. These include activities suchas machining, packaging, assembly,equipment maintenance and testing.Improvements in these activities oftenlead to higher-quality products, greaterefficiency and quicker response tomarket conditions.


3. Outbound LogisticsOnce the finished goods areproduced, they need to be distributedto the firms customers. This involvessuch outbound logistics aswarehousing, materials handling,delivery vehicle operation and orderprocessing. Improvements in theseactivities often result in greaterefficiency and higher levels of serviceto the firms customers.


4. Marketing and sales A firms marketing and sales activitiesrevolve around four key issues:product mix, price, promotion, andchannels of distribution.Improvements in these activities leadsto better response to customerrequirements, increased customersatisfaction, brand loyalty andcustomer retention.


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5. Customer ServiceCustomer service includes activitiessuch as installation, repair, customertraining, parts supply, and productadjustment, as well as courtesy,providing advice and prompt responseto customer inquiries and complaints.Improvements in these services resultsin high customer satisfaction andretention.


Support activities

1. Human resource management2. Technology development

3. Procurement4. Firm infrastructure


1. Human Resource ManagementHRM includes recruitment, training,developing, and compensating all levelsof employees.The overall costs of human resourcemanagement activities include issuessuch as the cost of employee turnoverand executive compensation packages.


Costs associated with human resourcemanagement are increasing, e.g., anincreasing burden in providing health careinsurance, and other benefits toemployees. These expenses affect a firmscompetitive position.Improving the skill levels of employeesand maintaining good employee relationsare vital to creating value and loweringcosts.


By training employees in several jobs,managers can help their companiesrespond to the market faster throughincreased efficiency, quality, productivityand job satisfaction.Good human resource is a corporationsmost valuable and flexible asset, and inan environment of unpredictable andrapid changes it is necessary to developa work force that can adapt quickly.


2. Technology DevelopmentTechnology pervades every valueactivity in an organization. It affectsactivities ranging from product andprocess developments to order entryand the distribution of goods andservices to the customer. It extendsbeyond technologies applied only to theproduct itself.


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However, investment in technology isalso a potential source of risk for thebusiness. Not only are large investmentsinvolved but there are uncertaintiesassociated with changes in consumerdemand, rapid imitation by competitorsand changes in the technology itself.


3. ProcurementProcurement refers to the function ofpurchasing inputs used in the firmsvalue chain.Inputs include raw materials, supplies,and other inputs directly used in theproduction process, as well asequipment, machinery and buildings.


Purchased inputs are important for supportactivities as well as primary activities. E.g,the decision to select a particularadvertising agency to promote a firminvolves considerable financialcommitment and may have a major impacton a firms sales and profitability.Improved procurement practices, such asidentifying and contracting suppliers and

close monitoring for defects, can lead tobetter quality inputs at reduced costs.


4. Firm InfrastructureFirm infrastructure includes activitiessuch as:

a. Finance and accountingb. Legal and governmental affairsc. Information systems andd. General management


a. Finance and Accounting Competitive advantage can be achieved

through the ability to raise capital fromequity markets and lending sources,establishment of sophisticated capitalbudgeting practices, and understandingand effective implementation ofappropriate cost accounting systems.These systems allow managers to makemeaningful comparisons of theperformances of different divisions.


b. Legal Issues and Government RelationsHandling legal issues and governmentrelations effectively can have a significantimpact on a corporations long-termviability.Legal liabilities caused by defectiveproducts and environmental disasters leadto economic and non-economic burdens tocorporations in terms of compensationpaid to victims and the loss of goodwill.Managers must constantly seek tominimize the potential liabilities their firmsface from the political and legalenvironment.


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c. Information SystemsThe information system componentconsists of the activities necessary tocollect, process and channel the datarequired to perform an activity.

Information systems can be used toenhance a firms competitive advantage.The bargaining power of buyers can bereduced by introducing switching coststhat make it more costly for a buyer to goto a competitor.


E.g., introducing on-line order entryterminals, inventory managementsoftware and access to information thatmake it easier for customers to choose tostay with a particular firm.

However, the costs involved indeveloping such systems can be so high,that they discourage new entry.Information systems can therefore alsoprovide a means to deter entry into anindustry.


d. General management General management encompassesboth the structure and systems thatsupport all of an organizationsactivities.It includes reorganization of thecorporation, rightsizing the organization,divestment of many marginally profitableoperations, and sometimes a change in

top management.


Significance of the value chainanalysisBesides understanding how differentactivities of the firm are interrelated, thevalue chain analysis (VCA) refers to theprocess whereby a firm determines thecosts associated with organisationalactivities from purchasing raw materials tomanufacturing product(s) to marketingthose products.


VCA aims to identify where low-costadvantages or disadvantages exist.

VCA can enable a firm to better identifyits own strengths and weaknesses.Substantial objective judgement isrequired in performing a VCA becausedifferent items along the chain impactother items positively or negatively. E.g.,exceptional customer service may beespecially expensive yet may reduce thecosts of returns and increase revenue.


Conducting a VCA involves dividing thefirms activities into specific tasks

A cost is then attached to each discreteactivity in terms of money, time, humanresource and physical facilities.The cost data is interpreted by looking forcompetitive cost strengths and weaknessesthat may yield competitive advantage ordisadvantage.Firms become competitive by beingespecially efficient and effective alongvarious parts of the value chain.


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BEYOND THE VALUE CHAIN

OTHER ISSUES IN INTERNALANALYSIS

To make a more complete internal

assessment of an organization, fiveother important considerations are:financial analysis, culture, leadership,legitimacy and reputation.


1. FINANCIAL ANALYSIS

Assessing the financial position of a firmincludes the computation and analysis offive basic categories of financial ratios:

liquidity, leverage, activity, profitability and growth.Liquidity ratios provide measures of afirms capacity to meet its short-termfinancial obligations.


Leverage ratios provide a measure of theextent to which a firm has been financedby debt. Include debt-to-total assets ratio,debt-to-equity ratio, long-term debt-to-equity ratio.

Activity ratios reflect whether or not a firmis using its resources efficiently. Includeinventory turnover, fixed assets turnover,

average collection period.


Profitability ratios provide informationregarding a firms overall economicperformance as shown by the returnsgenerated on sales and investment.Include profit margins, return on totalassets, earnings per share.Growth ratios measure the firms ability tomaintain its economic position in thegrowth of the economy and industry.

Include sales, net income, dividends pershare.


2. ORGANISATIONAL CULTURE AND LEADERSHIPOrganizational culture can be viewed as acomplex set of values, beliefs,assumptions and symbols that define theway in which a firm conducts its business.Organizational culture has a majorinfluence on goals, strategies and policies;it also facilitates or inhibits theimplementation of a chosen strategy.


Organizational culture can represent amajor strength or weakness for a firm. It

may provide the underlying reasons forstrengths and weaknesses in thebusiness functions of a firm.The quality of leadership which topmanagement provides has a criticalinfluence on the formation and evolutionof an organisations culture and theoverall strategic direction of thecompany.


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Some aspects of culture and leadership:The sense of identity and affiliation the firmprovides to organizational members.Consistency of the cultures of subunits

with each other and with the overallcorporate culture.

Ability of the culture to foster innovation ,creativity and openness to new ideas.


On the negative side, leadership canuse culture to inhibit effective strategies.

First, leaders may miss thesignificance of changing externalconditions because they are blindedby strongly held beliefs.Second, when a particular culture hasbeen effective in the past, the naturalresponse is to stick with it in the future,even when change is needed.


3. LEGITIMACY AND REPUTATIONStrategies to enhance an organisationslegitimacy (credibility and authenticity) andreputation are aimed at producingfavourable public opinion.

At times, the public may perceive that afirms or industrys products or activitiesare harmful to the environment or toconsumers. This can lead to legislation orpublic outcry that severely affects growthand profit potential.


Some of the criteria for legitimacy andreputation that may be assessed include:

Effectiveness in coping with restrictiveregulations (i.e., environmental, antitrustand product liability).Relationship with consumer activistgroups.Relationship with the media.Relationship with policy makers andgovernment officials.


DELIVERING VALUE FOR MONEY

Delivering value for money is anotherimportant strength worth assessing.Price is an important product feature andorganisations must be competent inmanaging cost.Delivering value includes managing costsand providing product features valued bycustomers.


1. Managing costsCost efficiency is a measure of the levelof resources needed to create a givenlevel of value. Customers can benefit fromcost efficiency in terms of lower prices ormore product features for the same price.Cost efficiency is determined by a numberof factors called cost drivers . Theseinclude: economies of scale , supply costs ,

product/process design and experience .


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Economiesof Scale Experience

Costefficiency

Supplycosts

Product/processdesign

Sources of Cost Efficiency Cost drivers


a) Economies of scale are traditionally animportant source of cost advantage inmanufacturing organisations, since thehigh capital costs of infrastructure need tobe recovered over a high volume ofoutput.

Activities to maintain these scaleadvantages include competence in mass-consumer advertising (to maintainvolume) or the ability to develop andsustain global networks of partners ordistributors.


b) Supply costs : influence anorganisations overall cost position.Closeness of raw materials tomanufacturers as well as ownership ofraw materials may present costadvantages.


c) Product/process design alsoinfluences cost position. Efficiencygains in production processes may beachieved through improvements incapacity-fill (producing at capacity) ,labour productivity, yield (frommaterials) or working capital utilisation.


Product design will influence costs e.g., by the amount and kinds of materialrequired.Process design may influence coststhrough efficiency and timeliness, as wellas through parts of the value chain suchas distribution or after-sales services.


d) Experience can be a key source ofcost advantage and there is an

important relationship between thecumulative experience gained by anorganisation and its unit costs described as the experience curve.The experience curve suggests thatan organisation undertaking anyactivity learns to do it more efficientlyover time, and hence develops corecompetencies in this activity.


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2. Product featuresThe success of an organisation is alsorelated to how well it is able to provideproduct features that are valued at agiven price. If organisations are to beprofitable this requires an ability tooperate effectively. Effectiveness is theability to meet customer requirementson product features at a given cost.Effectiveness will be achieved only ifmanagers are able to do the following:


a) They must be clear which productfeatures will be valued by customers.

b) They must understand what the drivers ofuniqueness within their organisation orwider value system are, and how theycan create and sustain this uniqueness.

c) They must be able to convince customersthat any added costs of providing betterfeatures are more than recovered throughthe value which customers place on thisuniqueness the price they are preparedto pay.


d) Since value is often about perception,the ways in which a products featuresare communicated are important andcould constitute a core competence.

e) In a fast-changing world, competitiveadvantage is increasingly concernedwith service rather than the product perse. So business processes that provideinformation to potential customers, theordering process, billing and after-sales

service are where the differencebetween competitors might lie.


3. What is valued varies with timeWhat customers value will vary over time particularly the critical success factors. Socompetencies will become redundant if notchangedPrevious unique product features maybecome threshold competencies, thus theindustry standards.There is therefore, need for constant reviewand innovation, as advantage is temporaryand short-lived in a hyper-competitiveenvironment.


The Place Of The Internal Analysis InStrategy Formulation

The Business Level . Firms competewith one another for customers. Successin this competition is dependent uponsustaining competitive advantage. Costadvantages relative to competitors canarise from more efficient manufacturingprocesses, lower labor and materialcosts, or a cost-effective distributionsystem.


A firm can differentiate its products onthe basis of such factors as productfeatures, price, service, or quality.

Advantages derived from fasterresponse times may reflect a firmsability to innovate rapidly, quickly adjustto market conditions, or offer fasterdelivery of products and services.


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The Functional level : The manyfunctions within a company contribute toits overall competitive advantage. Everydepartment or function has some effecton the goods or services provided tocustomers. So, every function must bemanaged to create value for thecustomer which will, in turn, betranslated into a competitive advantagefor the firm.


The Corporate Level . Managers at thecorporate level have the responsibility forcreating value for the firms owners theStockholders. Stockholder value refers towealth that the corporation creates for its

owners through either stock priceappreciation or profits returned to ownersin the form of dividends.Creating wealth depends upon the successof the diversification strategy and theresulting success of the various businessunits that comprise the corporation.


The Global Level . When managersformulate strategies at the global level,they consider expanding into variouscountries.Success in any country is based oncreating superior customer value whichcan be translated into a competitiveadvantage. A carefully constructedglobal strategy can work to greatly

strengthen a firms entire value chain inany one country.

assessing the internal environment - session 4

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