Download - BPSM Mod 5 Internal Analysis

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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?



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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



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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)



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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


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


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


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


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


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