internal analysys of strategic management

Business Strategy – Internal Analysis of the

Company

Prepeared By Debashish Bramha.

Please Click Debashish Bramha’s Blog: http://debashishbramha.blogspot.com

What do we mean by strategy? Strategy refers to the plans made and

action taken to enable an organization to fulfill its indented objectives

Strategy is management’s game plan for strengthening the organization’s position, pleasing customers, and achieving performance targets.http://debashishbramha.blogspot.com

Without a strategy, managers have:

No thought-out course to follow

No roadmap to manage by

No action program to produce the intended result

http://debashishbramha.blogspot.com

Good strategy andgood strategy execution

are the most trustworthy signs

of good management.http://debashishbramha.blogspot.com

Components ofStrategic Management

Process Vision Company Mission Company Profile Recognizing and evaluating external and

internal environment. Strategic Analysis and Choice Strategy Formulation Strategy Implementation Evaluation of performance


which are required for firms to which are required for firms to achieve:achieve:

Above-Average Above-Average ReturnsReturns

Strategic Strategic CompetitivenessCompetitivenessSustained Competitive Sustained Competitive AdvantageAdvantage

The Strategic Management The Strategic Management ProcessProcessInvolves the full set of:Involves the full set of:

ActioActionsns

CommitmentCommitmentss

DecisiDecisionsons


Sustained Competitive Sustained Competitive AdvantageAdvantage

Above-Average Above-Average ReturnsReturnsReturns in excess of what an investor Returns in excess of what an investor

expects to earn from other expects to earn from other investments with similar riskinvestments with similar risk

Occurs when a firm develops a strategy Occurs when a firm develops a strategy that competitors are not simultaneously that competitors are not simultaneously implementingimplementing

Provides benefits which current and Provides benefits which current and potential competitors are unable to potential competitors are unable to duplicateduplicate

Strategic Strategic CompetitivenessCompetitivenessAchieved when a firm successfully Achieved when a firm successfully

formulates and implements a formulates and implements a value-creating strategyvalue-creating strategy


What does a company’s strategy consist of?

How to satisfy customers Broad or narrow product line? Amount of customer service provided?

How to grow the business Concentrate on a single business strategy? Diversify into related or unrelated

industries? Expand globally?

Company strategies concern:


How to respond to changing industry and market conditions

How best to capitalize on new opportunities How to manage each functional piece of the

business How to achieve strategic and financial

objectives

What does a company’s strategy consist of?


What is an Internal Analysis?

Internal Analysis Identifies and evaluates resources,

capabilities, and core competencies Looks at the organization’s

o Current visiono Missiono Strategic objectiveso Strategies

Why Do an Internal Analysis?

1. It is the only way to identify an organization’s strengths and weaknesses

1. It’s needed for making good strategic decisionshttp://

debashishbramha.blogspot.com

Value Chain Analysis The premise behind value chain analysis is

that customers demand value from goods and services they obtainCustomer value Product is unique and different Product is low priced Quick response to specific or distinctive

customer needs A value chain is a systematic way of

examining organization’s functional activities



General administration

Human resource management

Technology development

Procurement

Inbound logistics

OperationsOutbound logistics

Marketing and sales

Service

The Value Chain

Value Chain Analysis

Inbound LogisticsInbound Logistics•••

Materials control systemInventory control systemRaw material handling and warehousing

OperationsOperations••••

Equipment comparison to competitorsPlant layoutProduction control systemLevel of automation in production processes



Outbound LogisticsOutbound Logistics••

Timeliness and efficiency of finished products delivery

Warehousing of finished productsMarketing and SalesMarketing and Sales

••••••••

Marketing researchSales promotions and advertisingAlternative distribution channelsCompetency and motivation of sales forceOrganization’s image of qualityOrganization’s reputationBrand loyalty of customersDomination of various market segments



Customer ServiceCustomer Service•••••

Customer input for product improvementsHandling of customer complaintsWarranty and guarantee policiesEmployee training in customer education &

service issuesReplacement parts and services


Value Chain AnalysisProcurementProcurement

•••••

Alternate sources for obtaining needed resourcesTimeliness of resources procurementProcurement of large capital expenditure

resourcesLease-versus-purchase decisionsLong-term relationships with reliable suppliersTechnological DevelopmentTechnological Development

••••••

R&D activities in product and process innovationsRelationship between R&D and other

departmentsMeeting deadlines in technological development

activitiesQuality of labs and other research facilitiesQualifications of lab technicians and scientistsCreativity and innovation in organizational

culture http://debashishbramha.blogspot.com

Value Chain AnalysisHuman Resource ManagementHuman Resource Management•••••••

Recruiting, selecting, orienting, and training employees

Employee promotion policiesReward systems to motivate and challenge

employeesAbsenteeism and turnoverUnion-organization relationsEmployee participation in professional

organizationsEmployee motivation, job commitment, and

satisfaction



Firm InfrastructureFirm Infrastructure•••••••

Identification of external opportunities and threats

Accomplishing goals with strategic planning system

Coordination and integration of value chain activities

Low-cost capital expenditures & working capital funds

IS support for strategic and operational decisionsRelationships with stakeholdersPublic image as a responsible corporate citizen


The Analysis Process

Within the organization's strategic context specify the decisions to be made,

Select, gather and analysis the most relevant data about the organization, its environment, operations and people.

Based on these data, formulate conclusions about the organization its environment, operations and people.

Determine and appraise feasible alternatives, weighing risks and opportunities.

Select the most appropriate alternative. Implement the selected alternative and monitor

results.


Interrelationships among Value-Chain Activities within and across Organizations

Interrelationships among activities within the firm

Relationships among activities within the firm and with other organizations (e.g., customers and suppliers)

HR

M

MIS

Rand MD

P/O

F

ENVIRONMENTAL

INPUTS

ENVIRONMENTAL

OUTPUT

INTERRELATIONSHIPS AMONG FUNCTIONAL AREAS

ENVIRONMENT

ENVIRONMENT

STRATEGIC INTERNAL FACTORS

Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources

Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity

Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment

Tangible Resources

Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks

Organizational resources Effective strategic planning processes Excellent evaluation and control systems

Tangible Resources

Innovation and creativity Technical and scientific skills Innovation capacities

Reputation Effective strategic planning processes Excellent evaluation and control systems

Intangible Resources

Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

HumanExperience and capabilities of employeesTrustManagerial skillsFirm-specific practices and procedures

Intangible Resources

Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital

Organizational Capabilities

For a strategic capability to be a Core For a strategic capability to be a Core Competency, it must be:Competency, it must be:

Core CompetenciesCore Competencies

ValuableValuable

RareRare

Costly to ImitateCostly to Imitate

No substitutableNo substitutable

What a firm Does...that is Strategically Valuable

Is the Resource Valuable?Organizational resources can be a source of competitive advantage only when they are valuable Enable a firm to formulate and implement strategies

that improve its efficiency or effectiveness

Is the Resource Rare?Organizational resources also possessed by competitors are not sources of competitive advantage Common strategies based on similar resources give

no one firm an advantage Competitive advantages are gained only from

uncommon resources, resources that are rare to other competitors

Can the Resource be Imitated?Difficulty in imitating resources is key to value creation because it constrains competition Profits generated from inimitable resources are more

likely to be sustainable Physical uniqueness Path dependency Causal ambiguity Social complexity

Are Substitutes Readily Available?

There must be no strategically equivalent valuable resources that are themselves not rare or inimitable Substitutability may take at least two forms

Competitor may be able to substitute a similar resource that enables it to develop and implement the same strategy

Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

Criteria for Sustainable Competitive Advantage and Strategic Implications

Valuable Rare Difficult Without Implications to Imitate Substitutes for Competitiveness

No No No No Competitive disadvantage

Yes No No No Competitive parity

Yes Yes No No Temporary competitive advantage

Yes Yes Yes Yes Sustainable competitive advantage

Is a resource or capability…

Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99-120.

Challenge of Internal Analysis How do we effectively manage current core How do we effectively manage current core

competencies while simultaneously developing competencies while simultaneously developing new ones?new ones?

How do we assemble bundles of resources, How do we assemble bundles of resources, capabilities and core competencies to create value capabilities and core competencies to create value for customers?for customers?

How do we learn to change rapidly?How do we learn to change rapidly?

What a firm Does...

Capabilities Represent:

The firm’s capacity or ability to integrate individualfirm resources to achieve a desired objective.

Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities become important when they are combined Capabilities become important when they are combined in in unique combinations unique combinations which create core competencies which create core competencies which havewhich have strategic value strategic value and can lead toand can lead to competitive competitive advantageadvantage..

CapabilitiesCapabilities

Human Resource Development Initiations

Measures :- Employee Motivation For Strategic Effectiveness

Developed in-built appraisal system like–

(a) Productivity Honorarium Scheme

(b) Quarterly Incentive Scheme

(c ) Group Incentives for cohesive team working &

(d) Reward and Reconviction Scheme.

Coverage and Evaluation of Ratios

The different types of financial ratios in Financial Strategic Management includes: Liquidity Activity Debt Profitability

04/08/23 40

Liquidity Ratio Analysis Liquidity ratios measure a firm’s ability to

meet its current financial obligations. Liquidity Ratios include:

Net working capital Current Ratio Quick Ratio

04/08/23 41

Net Working Capital While not technically a ratio, Net Working

Capital (NWC) is a key element for internal control.

The higher this number the better. NWC is found by subtracting current

liabilities from current assets. This is a sign of growing assets while keeping

their liabilities stable.

04/08/23 42

Current Ratio The Current Ratio is a direct evaluation of a

company’s liquidity. The higher this value, the more liquid a firm’s

resources are. Current Ratio is found by dividing current

assets by current liabilities. This could be improved by lowering the

reliance on debt financing.

04/08/23 43

Quick Ratio The Quick Ratio is comparable to the Current

Ratio except that it takes inventory levels into consideration.

This is found by subtracting inventories from current assets and then dividing by current assets.

04/08/23 44

Activity Ratio Analysis Activity Ratios are used to measure the speed

with which accounts are converted into cash. Activity Ratios include:

Inventory Turnover Average Collection Period Total Asset Turnover

04/08/23 45

Inventory Turnover Inventory Turnover is measurement of a

firm’s inventory liquidity. This is found by cost of goods sold(COGS)

by inventory. Generally a lower number is better.

Total Asset Turnover Total Asset Turnover illustrates the firm’s ability

and proficiency in using its assets to generated sales. It is found by dividing sales by total assets, and is

measured in times per year When using cross-sectional analysis, a company

must take special care in comparing Total Asset Turnover because new assets tend to have lower turnover.

Debt Ratio Analysis A company’s debt position is a measure of how

much of the firm’s profits are generated using money borrowed from other companies or individuals.

Debt Ratios include: Financial Leverage Multiplier Debt Ratio Interest Coverage Ratio

Financial Leverage Multiplier The Financial Leverage Multiplier (FLM) is

used to convert the company’s Return On Assets to its Return on Equity. This reflects the impact of leverage, or use of debt, on owners’ return.

It is the ratio of total assets to stockholders’ equity.

Profitability Ratio AnalysisProfitability Ratio Analysis Profitability Ratios evaluate a company’s earnings

with respect to sales, assets, owner’s investments and share values.

Profitability Ratios include Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets Return on Equity

Gross Profit Margin

The Gross Profit Margin(GPR) is the percentage of each sales dollar that remains after the firm has paid for the goods sold.

It is found by subtracting COGS from sales and dividing by sales.

Net Profit Margin

Net Profit Margin(NPR), one of the most popular indicators of company health, measures the percentage of sales revenue remaining after ALL expenses are paid.

NPR is found by dividing net profits by sales

Return on Total Assets

Return of Total Assets(ROA), also known as return on investment, measures a firm’s effectiveness at generating profits with its assets.

ROA is found by dividing the net profits after taxes by total assets.

Return on Equity

The Return on Equity(ROE) is extremely important to potential investors.

ROE is found by dividing net profit by owner’s equity.

internal analysys of strategic management

Business

gross profit

net profit

net working

financial

total asset

companys strategy

sustained

competitive