Lecture 3 - Internal Analysis

Strategic Management (BUS211) – week 3

Week 3 – BUS211

Internal analysis

Presented by

Dr Bishnu Sharma

Week 3: What do we do today?

• Analysis of how well the company’s strategy is working• Value creation and competitive advantage • Generic building blocks of competitive advantage• Business functions and the value chain• Distinctive competencies, resources, and capabilities• Durability of competitive advantage• Why do companies fail?• Avoiding failure and sustaining competitive advantage• Assessment of company’s competitive strength

Assessment of how well the present strategy is working

• Qualitative assessment –What is the strategy?

– Completeness

– Internal consistency

– Rationale

– Relevance

• Quantitative assessment – What are the results?

– Is company achieving its financial and strategic objectives?

– Is company an above-average industry performer?

Competitive advantage: value creation, low cost, and differentiation

• Key questions– What is competitive advantage?– What is sustained competitive advantage?– How to achieve competitive advantage and sustain it?

• Profitability of a firm depends on ...

– The amount of value that customers place on a company’s

products/ services

– The price that a company charges for its products/services

– The costs of creating that value

Source: Hill and Jones (2010: 3)

Profitability of Walmart & Competitors

Value Creation per Unit


Value Creation and Pricing Options

There is a dynamic relationship among utility, pricing, demand, and

costs.


Comparing Toyota and General Motors

Superior value creation requires the gap between perceived utility (U) and costs of production (C) be greater than attained by competitors.


Strategy, Resources, Capabilities, and Competencies


Relationship among strategies, resources and capabilities

Resources &Capabilities

(Competencies)Strategies

Shape

Build

Source: Hill et al. (2007: 112)

Drivers of Profitability (ROIC) - ways to increase itIncrease Company’s Return on SalesIncrease Company’s Return on Sales Increase sales revenue more than costs Increase sales revenue more than costs Reduce cost of goods soldReduce cost of goods sold Reduce spending on Sales, General & Reduce spending on Sales, General & Administrative ‘SG&A”Administrative ‘SG&A” Reduce R&D expenses Reduce R&D expenses

Increase Capital Turnover Increase Capital Turnover Reduce the amount of working capital Reduce the amount of working capital Reduce the amount of fixed capital Reduce the amount of fixed capital


* PPE = Property, plant and equipment ‘Fixed Capital’

*

**Interest bearing debt plus shareholders’ equity

**

Generic Building Blocks of Competitive Advantage


The impact of quality on profits

IncreasedReliabilityIncreasedReliability

Higher Prices

Higher Prices

IncreasedQuality

IncreasedQuality

Higher Profits

Higher Profits

IncreasedProductivityIncreased

Productivity Lower Costs Lower Costs

Source: Hill & Jones (1998:117)

Summary of the impact of efficiency, quality, innovation, and customer responsiveness on unit costs and prices

Innovation

Lower Unit Costs

Higher Unit Prices

CustomerResponsiveness

CustomerResponsiveness

Quality

EfficiencySource: Hill et al. (2007: 106)

Competitive Advantage & Value Creation Cycle


Competencies - Core Competencies - Distinctive Competencies

• A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity

• A core competence is a well-performed internal activity central to a company’s competitiveness and profitability

• A distinctive competence is a competitively valuable activity a company performs better than its rivals

• Tangible (financial and physical)

– Land

– Buildings

– Plant

– Equipment

– Cash/debt/equity

• Intangible

– Brand names

– Company’s reputation

– Patents

– Skills ‘technical or marketing know-how’

– Information

– Relational assets/networks

Two types of resources

Resources are:Resources are:Resources are:Resources are:

VRINE model (Carpenter and Sanders 2009: 79)

• VRINE Model: An analytical model which suggests that a firm with resources and capabilities which are valuable (V), rare (R), inimitable (I), non-substitutable (N), and exploitable (E) will gain a competitive advantage.

• This model helps managers systematically test the importance of particular resources and capabilities and the desirability of acquiring new resources and capabilities.

The Value Chain“…company is a chain of activities for transforming inputs into outputs customers

value – including primary & support activities”.


What determines whether a company is cost competitive?

• Cost competitiveness depends on how well a company manages its value chain relative to its competitors.

• High-cost activities can exist anywhere in the industry value chain.

Forwardchannel

activities, costs, & margins

Company’s own

internallyperformed activities, costs, & margins

Suppliers’ activities, costs, &margins

Buyer/uservalue

chains

Source: Thompson, Strickland and Gamble (2010:120)

Supplier-related value chain A company’s own value chain Forward channel value chains

The role of luck

• Luck is a factor in competitive success and competitive failure

• At its extreme, the luck argument devalues importance of planned strategy

• Sustained competitive advantage relies on more than just luck

The durability of competitive advantage

• Non-substitutability– The degree to which a resource has an equivalent

substitute

• Barriers to imitation– Imitating resources– Imitating capabilities

• Capability of competitors– Strategic commitment

• Industry dynamism

Why do companies fail?

• Inertia• Prior strategic commitments• The Icarus paradox

Avoiding failure and sustaining competitive advantage

• Focus on the building blocks of competitive advantage

• Institute continuous improvement and learning

• Track best industrial practice and use benchmarking

• Overcome inertia

Conclusions from SWOT analysis

Source: Thompson, Strickland and Gamble (2010: 114)

TOWS matrix

External Opportunities

(O)External Threats

(T)

Internal Strengths(S)

SO"Maxi-Maxi" Strategy

Strategies that use strengths to maximize opportunities.

ST"Maxi-Mini" Strategy

Strategies that use strengths to minimize threats.

Internal Weaknesses (W) WO"Mini-Maxi" Strategy

Strategies that minimize weaknesses by taking

advantage of opportunities.

WT "Mini-Mini" Strategy

Strategies that minimize weaknesses and avoid

threats.

Source: Weihrich (1982)

Source: Thompson, Strickland and Gamble (2010: 112)

Source: Thompson, Strickland and Gamble (2010:129)

Quiz – True or False1. Competitive advantage is usually generated by value creation. 2. For strategic management purposes, the terms ‘value’ and ‘price’

are the same thing. False3. The simplest measure of efficiency is the quantity of inputs that it

takes to produce a given output. TRUE4. High product quality can result in a firm achieving lower unit costs. 5. Achieving a competitive advantage through innovation may allow

a firm to achieve lower unit costs. TRUE6. Top management is considered part of a company’s

infrastructure. TRUE7. Brand name is an intangible resource. TRUE8. Competitive success and failure is entirely a matter of luck. False9. A firm’s organisational capabilities can cause inertia. TRUE10.The higher the barriers to imitation, the less sustainable a

company’s competitive advantage. False

Multi-choice questions (1)Q1. Competitive advantage is when a company

a. is able to outperform its rivals.b. has a higher share price than its rivals.c. is able to do something that no other company can do.d. has acquired more assets than its competitors.e. is in a position to takeover another company.

Q2. The four basic building blocks of competitive advantage area. low cost, quality, efficiency, and customer responsiveness.b. differentiation, quality, innovation, and customer responsiveness.c. quality, efficiency, differentiation, and customer responsiveness.d. customer responsiveness, quality, efficiency, and human resources.e. quality, customer responsiveness, innovation, and efficiency.

Multi-choice questions (2)Q3. The two basic ways to obtain a competitive advantage in an

industry area. low cost and efficiency.b. low cost and differentiation.c. premium pricing and differentiation.d. innovation and differentiation.e. innovation and customer responsiveness.

Q4. The value chain concept suggestsa. that only primary activities add value to a product.b. that after-sales services is an important support activity.c. that all value-creation functions play a role in achieving superior quality, efficiency, innovation, and customer responsiveness.d. that materials management has a primary role.e. All of these apply.

Questions

• What was the most important thing you learned during this class?

• What important question remains unanswered?

List of references

• Carpenter, M.A. and Sanders, W.G. (2009), Strategic Management – A Dynamic Perspective, 2nd Edition, Pearson Education, Upper Saddle River.

• Hill, C.W.L. and Jones, G.R. (1998), Strategic Management - An Integrated Approach, 4th Edition, Houghton Mifflin, Boston.

• Hill, C.W.L., Jones, G.R., Galvin, P. and Haidar, A. (2007), Strategic Management - An Integrated Approach, 2nd Australasian Edition, John Wiley & Sons, Milton.

• Porter, M.E. (1980), Competitive Strategy – Techniques for Analysing Industries and Competitors, The Free Press, New York.

• Thompson, A.A., Strickland III, A.J. and Gamble, J.E. (2010), Crafting and executing strategy – The quest for competitive advantage, 17th Edition, McGraw Hill, Boston.

• Weihrich, H. (1982), The TOWS Matrix - A Tool for Situational Analysis, Long Range Planning, Vol.15, No. 2, pp. 54-66.

• Wheelen, T.L. and Hunger, J.D. (2008), Strategic Management and Business Policy, 11th Edition, Prentice Hall, New Jersey.

Lecture 3 - Internal Analysis

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