Internal Environment

3rd Lecture MSc Agricultural Economics and Management

External

and Internal Analyses

Environment Sociocultural Industry Environment

By studying the external environment, firms identify what they

might choose to do

Opportunities and threats

Competitor Environment Technological General

External and

Internal

Analyses

By studying the internal environment, firms identify what they

can do

Unique resources, capabilities, and core competencies (sustainable competitive advantage)

Challenge of Internal Analysis

   How do we effectively manage current core competencies while simultaneously developing new ones?

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

How do we learn to change rapidly?

Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies

 

Uncertainty

regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences

Complexity

regarding the interrelated causes shaping a firm’s environments and perceptions of the environments 

Intraorganizational Conflicts

people making managerial decisions and those affected by them among

Choosing the right tools for internal analysis

        Start with simple techniques Consider all tools and identify those likely to be useful Define the competitive capabilities the enterprise needs Identify the subsystems which support these capabilities Identify core competence relative to competitive capabilities Determine changes to enhance/improve core competence Take a systemic view Adjust the methods of analysis in the light of what is found

Some commonly used techniques for internal analysis

Single Businesses

Resource Audit Analysis of cost and profit Benchmarking Value Chain Analysis Supply Chain Analysis

Multiple Businesses

Portfolio Analysis

Both Single and Multiple Businesses

Core Competencies Shareholder Value Analysis

Resource Audit

    Resources  Physical    Human Financial Other Quality and Quantity Unique resources A good initial analysis

Internal Audit

Parallels process of external audit

Information from:



Management



Marketing



Finance/accounting



Production/operations



Research & Development



Management information Systems

Marketing

Marketing Functions       

Customer analysis Selling products/services Product & service planning Pricing Distribution Marketing research Opportunity analysis

Finance/Accounting

Finance/Accounting Functions   

Investment decision (Capital budgeting) Financing decision Dividend decision

Production/Operations

Production/Operations Functions     

Process Capacity Inventory Workforce Quality

Research & Development

Research & Development Functions   

Development of new products before competitors Improving product quality Improving manufacturing processes to reduce costs

Management Information Systems

   

Information Systems Security User-friendly E-commerce

Analysis of Costs and Profit

    Current sources of profits and trends Recast standard reporting to give new insights Pragmatic approach to get value from time and effort spent A good initial analysis

Single Businesses

Resource Audit Analysis of cost and profit Benchmarking Value Chain Analysis Supply Chain Analysis

Benchmarking

    Objective comparison with best in class Simple in theory - Hard in practice Observed differences in performance may be due to differences in parameters Qualitative observations may be more valuable than quantitative

Benchmarking - at three levels Level of benchmarking Resources Competences in separate activities Through

Resource audit Analysing activities

Competences through managing linkages

Analysing overall performance

Examples of measures

Quantity of resources, e.g.

· revenue/employee · capital intensity Quality of resources, e.g.

· qualifications of employees · · age of machinery uniqueness (e.g.

patents) Sales calls/sales person Output/ employee Materials wastage Market share Profitability Productivity

Value Chain Analysis

    Basic Value chain Elegant in theory Time-consuming in practice Revised value chain to reflect power of people and knowledge

Value Creation

The Basic Value Chain

Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities

To capitalize on the usefulness of the Value Chain concept...

it is important to recognize that...

Value Chains are part of a

Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

Value Chains are part of a

Total Value System

Firm Value Chain Channel Value Chain Buyer Value Chain Supplier Value Chain Upstream Value Perform valuable activities that complement the firm’s activities

Value Chains are part of a

Total Value System

Supplier Value Chain Firm Value Chain Buyer Value Chain

Upstream Value Perform valuable activities that complement the firm’s activities

Channel Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain

Value Chains are part of a

Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value Perform valuable activities that complement the firm’s activities Each firm must eventually find a way to become a part of some buyer’s value chain

Buyer Value Chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!!

Value Chains are part of a

Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Perform valuable activities

that complement the firm’s

activities Each firm must eventually find a way to become a part of some buyer’s value chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!!

Value chains vary for firms in an industry, reflecting each firm’s unique qualities: • History • Strategy • Success at Implementation

Outsourcing

Outsourcing is the purchase of some or all of a value creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities

Strategic Rationales for Outsourcing

  Improve Business Focus  lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities  the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Strategic Rationales for Outsourcing

  Accelerate Business Re-Engineering Benefits  achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process Share Risks  reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Strategic Rationales for Outsourcing

 Free Resources for Other Purposes  permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Outsourcing Issues

   Greatest Value  outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced Evaluating Resources and Capabilities  don’t outsource activities in which the firm itself can create and capture value Environmental Threats and Ongoing Tasks  do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing organizational tasks

Outsourcing Issues

  Nonstrategic Team of Resources  do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage Firm’s Knowledge Base  do not outsource activities that stimulate the development of new capabilities and competencies

Revised Value Chain

SUPPORT ACTIVITIES Firm’s infrastructure Technology trapping and commercialisation Strategic Management PRIMARY ACTIVITIES

INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT

basic skills, know-how, technologies strategic assets core competence technical, management, marketing, sales, production price, place, promotion product service customer satisfaction, loyalty HUMAN RESOURCE MANAGEMENT

PROCUREMENT AND SUPPLIER MANAGEMENT

revenue, profit, market share,

Product portfolio matrices

RELATIVE MARKET SHARE High Low MARKET GROWTH High Low Stars Cash cows Question marks Dogs

High

INDUSTRY ATTRACTIVENESS

Med Low

COMPETITIVE POSITION

Strong Average Weak (a) The original Boston Consulting Group Matrix (BCG) (b) Attractiveness matrix*

Product portfolio matrices

Development

STAGE OF PRODUCT/ COMPETITIVE POSITION

Strong Average Weak Growth

MARKET EVOLUTION

Shake-out Maturity High

PUBLIC NEED AND Public sector star SUPPORT + FUNDING ATTRACTIVENESS Golden fleece

Low High Decline

Political hot box Back drawer issue

Low

ABILITY TO SERVE EFFECTIVELY

(c) Product/market evolution matrix (d) Public sector portfolio matrix

Portfolio Analyses

    Over-coming some pitfalls:  Defining `high’ and `low’ (growth or share) can be difficult `Plot’ SBU’s not products Apply to market segments not whole markets Assess the `role’ of each SBU Consider wider resource implications - not just cash  Dogs may have a positive role

Components of Internal Analysis

Core Competencies

Capabilities

Resources

  Tangible Intangible Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable Value Creation

Competitive Advantage

Value Chain Analysis • Outsource

Resources, Capabilities and Core Competencies

 Capabilities    Are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

Resources, Capabilities and Core Competencies

 Capabilities  The foundation of many capabilities lies in:    The unique skills and knowledge of a firm’s employees The functional expertise of those employees Capabilities are often developed in specific functional areas or as part of a functional area

Resources, Capabilities and Core Competencies

 Core Competencies  Resources and capabilities that serve as a source of a firm’s competitive advantage:   Distinguish a company competitively and reflect its personality Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

Resources, Capabilities and Core Competencies

 Core Competencies  Activities that a firm performs especially well compared to competitors  Activities through which the firm adds unique value to its goods or services over a long period of time

Building Sustainable Competitive Advantage

 Four Criteria of Sustainable Competitive Advantage  Valuable    Rare Costly to imitate Nonsubstituable

Building Sustainable Competitive Advantage

  Valuable capabilities  Help a firm neutralize threats or exploit opportunities Rare capabilities  Are not possessed by many others

Building Sustainable Competitive Advantage

 Costly-to-Imitate Capabilities  Historical    A unique and a valuable organizational culture or brand name Ambiguous cause  The causes and uses of a competence are unclear Social complexity  Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Building Sustainable Competitive Advantage

 Nonsubstitutable Capabilities  No strategic equivalent

Core Competence as a Strategic Capability

Resources  Inputs to a firm’s production process Core Competence  A strategic capability

The source of

Capability  An integration of a team of resources

Does it satisfy the criteria of sustainable competitive advantage?

Yes No Capability  A nonstrategic team or resource

Sustainability of Competitive Advantage

 Sustainability of competitive advantage is a function of:  the rate of core-competence obsolescence due to environmental changes   the availability of substitutes for the core competence the imitability of the core competence

Performance Implications

No No Yes No No No No Yes/ No Yes Yes No Yes/ No Yes Yes Yes Yes Competitive Consequences Competitive Disadvantage Competitive Parity Performance Implications Below Average Returns Average Returns Temporary Com petitive Advantage Above Average to Average Returns Sustainable Com petitive Advantage Above Average Returns

Core Competencies: Cautions and Reminders

   Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation

The SWOT diagram may summarise the results of analyses Strengths Weaknesses Internal Analyses Threats Opportunities External Analyses

Strategic Assessment of a business as a whole

Questions

 What business are we really in?

  What real customer needs do we satisfy?

What problem do we solve for our customers?