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    BPSM: Module 5 Internal Analysis 1

    Business Policy & Strategic ManagementModule 5

    Internal Environmental Analysis

    N.R.Govinda Sharma

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    Internal Environmental Analysis

    Above-average return of a firm is a

    function of External &

    Internal Environment To what do you attribute the success of

    Cognizant to?

    Is it the industry it is operating in (i.e., IT) Or, its capabilities and internal resources?

    BPSM: Module 5 Internal Analysis 2

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    I E A If the success is attributable to industry alone,

    why is it that they are a number of IT start-upcompanies which fail?

    Why, even a bellwether company like Infy is facing

    rough wind? Research by Richard Rumelt & Associates,

    industry structure explains only 10% of variance

    in profit across companies (page 63 of text) This means, individual company difference

    explains much of the success

    BPSM: Module 5 Internal Analysis 3

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    Great companies Only economic prosperity

    can produce progress.

    Prosperity arises out ofinnovation and enterprise,from the technological

    ingenuity and the skillsthat are housed in thegreat companies

    Indra Nooyi, PepsicoChairman and CEO

    (As quoted on page 46 in Strategic Management byGovinda Bhat and Govinda Sharma)

    BPSM: Module 5 Internal Analysis 4

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    Value Chain Analysis &Competitive Advantage

    In this module, we study internal sources

    of competitive advantages

    Let us look at Value Chain Analysis as a

    tool for identifying sources of competitiveadvantage

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    Value Chain Business is all about creating andcapturing value

    Utility (to the consumer) is different

    from price (See pages 77-81 of text)

    Value = Utility (U) Cost (C)

    The part of the value so created is

    captured by the firm in the form of

    profit Profit = Price (P) Cost (C)

    The part that is available to theconsumer is the Consumer Surplus

    Consumer Surplus = Utility (U) Price (P)

    See pages 77-81 of text for a goodunderstanding of pricing options

    BPSM: Module 5 Internal Analysis 6

    Cost (C),Includingcost ofcapital

    Profit Margin =(Price Cost)

    Consumer Surplus= U - P

    Utility(U)

    Price

    (P)

    Cost(C)

    Cost (C),Includingcost ofcapital

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    Advertisement that cause desire

    Utility is a matter of perception

    Perception is the only reality

    Everything else is an illusion

    Al Ries and Jack Trout The utility can be increased by

    advertisement

    Equating the pleasure of drinking Pepsi toNirvana!

    Analysis_of_Midterm_2012 7

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    Value Chain Analysis

    What is a company or a firm?

    A company is a chain of activities forconverting inputs into outputs that thecustomers value

    Create and capture a part of the value socreated

    Consider a car for illustration

    Analysis_of_Midterm_2012 8

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    Value chain - Car

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    Value chain

    Value gets added at

    Design

    R&D

    Material procurement Production

    Distribution

    After sales

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    Generic Value Chain

    Value Chain - Margin at eachactivity

    11

    Firm Infrastructure

    Human Resources Management

    Technology Development

    Procurement

    InboundLogistics

    Margin

    MarginOperations

    OutboundLogistics

    Marketing &Sales

    Services

    Su

    pportActivities

    Primary Activities

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    Margin

    Concept of margin

    At each stage of value chain, a margin is created

    Margin is the difference between the total value andcollective cost for performing an activity

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    Value Chain

    The purpose of value chain analysis is to

    examine each activity and find out whetherit is adding value or just cost Do wholesalers add value or just a cost?

    Is it possible to dispense with wholesalers anddistributors without affecting the value delivered?

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    Dell Computers

    Business model of Dell is based on the

    premise that computers can built to orderand delivered directly to the customers

    The cost saved by cutting out wholesalers& dealers gave Dell savings in cost

    This gave Dell pricing options

    Either he could have retained the savings withhimself or

    Passed on the savings to customersBPSM: Module 5 Internal Analysis 14

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    Dells strategy He chose to pass on the savings to

    customers and grew business This was his strategy

    Growth Strategy

    Strategy is not necessarily always tomaximise the profit

    Survival / Stability strategy

    Growth strategy

    Retrenchment strategy

    Combination strategy or portfolio restructuringBPSM: Module 5 Internal Analysis 15

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    Socio-cultural factors Dispensing wholesalers and retailers was

    made possible by use of internet fordirectly selling

    This type of direct selling was not possible inChina and India where customers want totouch and feel before purchase

    So, the strategy depends on the socio-culturalenvironment prevailing in the market

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    Importance of value chainanalysis

    Purpose of the value chain analysis is to

    examine each activity to find out whichone of the activity is adding value and

    Which other activity can be outsourced

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    Outsourcing Nike will perform many activities as part of

    business Design the footwear

    Manufacture the footwear

    Market the footwear

    Nike performs designing and marketing

    much betterthan manufacturing

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    Outsourcing Therefore, it chooses to outsource

    manufacturing to China and develops designingand marketing as its core competence

    Manufacturers in China can manufacture

    footwear better and cheaper than Nike In doing that Nike has to protect its intellectual

    property (design) through IPR

    (So, legal and political systems play animportant role)

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    Resources, Capabilities,Strategy and Competencies

    BPSM: Module 5 Internal Analysis 20

    Resources

    Capabilities

    DistinctiveCompetencies

    Strategies CompetitiveAdvantage SuperiorProfitability

    Shape

    Figure 3.1, pp 76,77 of text

    Build

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    Building Blocks of

    Competitive Advantage

    BPSM: Module 5 Internal Analysis 21

    SuperiorEfficiency

    Superior

    CustomerResponsiv

    eness

    Superior

    Quality

    SuperiorInnovation

    Competitive

    AdvantageLow Cost

    Differentiation

    Fig 3.6, pp 85-89 of text

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    Analysing Competitive

    Advantage

    BPSM: Module 5 Internal Analysis 22

    ROIC

    Walmart: 14:1%Target: 10.6%

    ROS

    Walmart: 3.43%Target: 4.5%

    Capital Turnover

    Walmart: 3.82

    Target: 2.08It is a ratio & not %

    COGS / SalesWalmart: 76.5%Target: 66.1%

    SG & A / SalesWalmart: 18.77%Target: 22.95%

    Working Cap / SalesWalmart: (-) 2.9 %Target: 11.24%

    Plnt, Prprty & Equp / SalesWalmart: 25.9 %Target: 38.02%Fig 3.10, pp 93-95 of text

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    Durability of CA Given time and skill, no competitive advantage is

    eternal

    The essence of strategy lies in creating tomorrowscompetitive advantages faster than competitors mimicthe ones you possess today Gary Hamel and C K

    Prahlad, as quoted in Crafting and Executing Strategy by Thompson, Strickland, Gamble and Jain

    Durability depends on three factors (pp 95 oftext)

    Barriers to imitation Capability of competitors

    Dynamism of the industry environment

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    Barriers to imitation Barriers depend on whether the competitor

    is trying to imitate Resource or

    Capability

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    Summary of the module Research shows that industry structure explains only

    10% of variance in profit across companies This means, individual company difference explains

    much of the success

    Thus the importance of internal analysis

    Value chain analysis is an important tool for internalanalysis and helps us identify is adding value and whichis adding just cost

    Activities that do not add significant value are candidatesfor outsourcing

    Some one else specialises in that activity can perform it betterand cheaper

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    Summary of the module Resources and capabilities help build the distinct

    competencies which shape the strategies but the

    relationship is not linear And hence new resources and competencies required by

    the strategies are to be built and therefore, the cyclecontinues

    Strategies lead to competitive advantages which lead tohigher profitability

    Building blocks of competitive advantages are superior

    quality, superior efficiency customer responsiveness andsuperior innovation

    Innovation is central to all the building blocks

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    Summary of the module A tool for analysing Competitive advantage and

    profitability between the companies is the Du Pontanalysis

    No competitive advantage is permanent

    Durability of CA however, depends on barriers to

    imitation, capability of competitors, industry dynamism

    End of the module

    BPSM: Module 5 Internal Analysis 27