Internal Analysis Introduction Strategic analysis of any Business

Internal Analysis

Introduction Ø Strategic analysis of any Business enterprise involves two stages: Internal and External analysis. Ø Internal analysis is the systematic evaluation of the key internal features of an organization. Ø External analysis will be discussed later.

Four broad areas need to be considered for internal analysis Ø The organization’s resources, capabilities Ø The way in which the organization configures and co-ordinates its key valueadding activities Ø The structure of the organization and the characteristics of its culture Ø The performance of the organization as measured by the strength of its products.

Analysis of the global business Global value chain analysis: configuration and co-ordination Resources, capabilities and core competences Cultural and structural analysis Global products and performance Internal analysis

Resources Ø Resources are assets that are employed in the activities and processes of the organization. Ø They can be tangible or intangible. Ø They can be obtained externally (organization- addressable) or internally generated (organizationspecific). Ø They can be specific and non-specific: Ø Specific resources can only be used for highly specialized purposes and are very important to the organization in adding value to goods and services. Ø Assets that are less specific are less important in adding value, but are more flexible.

Ø Resources fall within several categories: ØHuman ØFinancial ØPhysical ØTechnological ØInformational Ø An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and

General Competences/capabilities Ø They are assets like industry-specific skills, relationships and organizational knowledge which are largely intangible and invisible assets. Ø Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations. Ø Certain competences are likely common to competing businesses within a global industry or strategic group.

Core Competences/Distinctive Capabilities Ø Core competences or distinctive capabilities are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage. Ø Kay (1993) identified four potential sources of Core competences: Ø Reputation Ø Architecture (i. e. , internal and external relationship) Ø Innovation Ø Strategic assets

Criteria to evaluate Core Competences Ø Complexity: How elaborate is the bundle of resources and capabilities which comprise the core competence? Ø Identifiability: How difficult is it to identify? Ø Imitability: How difficult is it to imitate? Ø Durability: How long does it be replaced by an alternative competences? Ø Superiority: Is it clearly superior to the competences of other organizations? Ø Adaptability: How easily can the competence be leveraged or adapted? Ø Customer orientation: How is the competence perceived by customers and how far is it linked to their needs?

Resources: Capabilities: Core competence human, financial, Industry-specific Distinctive and superior physical, skills, relationships, skills, technology technological, + organizational relationships, = legal, informational knowledge and Intangible reputation of the firm Tangible and invisible Unique, and visible assets difficult to copy Inputs to the firm’s processes Perceived customer benefits/value added Integration of resources into value-adding activities Not all capabilities are competences – only those that add greater value than those of competitors Denotes feedback loop denotes core competence development The relationships between resources, capabilities and core competence

Global Value Chain Analysis Ø Competitive advantage depends on the ability of the organization to organize its resources and value-adding activities in a way that is superior to its competitors. Ø Value chain analysis is a technique developed by Porter (1985) for understanding an organization’s value-adding activities and relationship between them.

Ø Value can be added in two ways: ØBy producing products at a lower cost than competitors ØBy producing products of greater perceived value than those of competitors. Ø Porter extended value chain analysis to the value system, analysis of the relationship between the organization, its suppliers, distribution channels and customers.

The Value Chain Ø The value chain is the chain of activities which results in the final value of a business’s products. Ø Value added, or margin is indicated by sales revenue minus costs. Ø Porter divided internal parts of organization into primary and support activities

Ø Primary activities are those that directly contribute to production of good or services and organization’s provision to customer Ø Inbound logistics Ø Operations Ø Outbound logistics Ø Marketing and sales Ø Services Ø Support activities are those that aid primary activities, but do not themselves add value Ø Procurement Ø Technology development Ø Human resource management Ø Firm infrastructure

The value chain gin ar M Service Marketing and sales Outbound logistics Operations Inbound logistics Primary activities Support activities M Technology development n i g ar Infrastructure Human resource management Procurement

Ø Certain activities or combinations of activities are likely to relate closely to the organization’s core competences, termed core activities. They are: Ø Add the greatest value Ø Add more value than the same activities in competitors’ value chains Ø Relate to and reinforce core competences Ø Other value chain activities relate to capabilities, but do not add greater value than competitors and therefore do not relate to core competence.

The Value System Ø The value chain of an individual organization provide an incomplete picture of its ability to add value. Ø Many value-adding activities are shared between organizations often in the form of a collaborative network. Ø As organizations identify and concentrate on their core competences and core activities, they increasingly outsource activities to other business for whom such activities are core.

Ø The value system is the chain of activities from supply of resources through to final consumption of a product. Ø The total value system, in addition to the organization’s own value chain, can consists of upstream linkages with suppliers and downstream linkages with distributions and customers. Ø The value system is a similar concept to that of the supply chain and illustrates the interactions between an organization, its suppliers, distribution channels and customers.

Distribution channel Supplier Competitor Supplier Organization Distribution channel Customers Supplier Competitor Distribution channel Customers The Value System Customers

The “Global” Value Chain Ø The configuration of an organization’s activities relates to where and in how many nations each activities in the value chain is performed. Ø Co-ordination is concerned with the management of dispersed international activities and the linkages between them. Ø Managers must examine the current configuration of value-adding activities and the extent and methods of co-ordination as part of their strategic analysis, which may determine possibilities for reconfiguration or improving co-ordination

Ø A global business has two broad choices of configuration: Ø Concentration of the activity in a limited number of locations to take advantage of benefits offered by those locations. Ø Dispersion of the activity to a large number of locations. Ø Change in the business environment (e. g. , technological change) may well lead to changes over time in the configuration that gives greatest competitive advantage.

Ø Co-ordination is essentially about overseeing the complexity of the organization’s configuration such that all value-adding parts of the business act in concert with each other to facilitate an effective overall synergy. Ø Those business that overcome the potential difficulties of co-ordination are those that sustain the greatest competitive advantage. Ø Analysis of configuration and methods of co- ordination assists in the process of understanding current competences and identifying the potential for strengthening and adding to them.

Core competences Core activities Value chain Co-ordination Configuration Concentration Dispersion Internal activities External activities Internal co-ordination External co-ordination Internal linkages External linkages Valueadding activities Value system Suppliers Channels Customers Managing the value system

Global Organizational Culture and Structure Ø A global business must have a culture and structure which allow it to carry out its global activities. Ø The structure of the business must allow it to accomplish its objectives as effectively and as efficiently as possible. Ø Culture is an important determinant of how effectively the organization operates and has important implications for employee motivation.

Portfolio Analysis Ø A key concept with regard to successful product or subsidiary strategy is that of portfolio. Ø Portfolio analysis is used in evaluating the balance of an organization’s range of products. Ø A broad portfolio can spread risk across more than one market. Ø A narrow portfolio mean that the organalization become more specialized in its knowledge of fewer products and markets

The BCG Matrix Ø The Boston Consulting Group (BCG) growth-share matrix is most often used by organizations in multiproduct and multimarket situations. Ø BCG matrix offers a way of examining and making sense of a company’s portfolio of product and market interests. Ø It based on the idea that market share in mature markets is highly correlated with profitability and that is relatively less expensive and less risky to attempt to win share in the growth stage of the market.

Relative market share Low 1 X 10 X Stars Question marks Cash cows Dogs Low Rate of market growth High The Boston Consulting Group matrix

BCG Matrix: Cash cows Ø Cash cows: A product with a high market share in a low-growth market is normally both profitable and a generator of cash. Ø Profits from this product can be used to support other products that are in their development phase, ‘milked’ on an on going basis. Ø Standard strategy would be to manage conservatively, but to defend strongly against competitors.

BCG Matrix: Dogs Ø Dogs: A product that has a low market share in a low-growth market is termed a dog in that it is typically not very profitable. Ø Once a dog has been identified as part of a portfolio, it is often discontinued or disposed of. Ø More creatively, a small share product can be used to price aggressively against a very large competitor as it is expensive for the large competitor to follow suit.

BCG Matrix: Stars Ø Stars have a high share of a rapidly growing market and therefore rapidly growing sales. Ø It is the sales manager’s dream, but the account’s nightmare. Ø It is often necessary to spend heavily on advertising and product improvement so that when the market slows these products become ‘cash flow. ’ Ø If market share is lost, the product will eventually become a ‘dog’ when the market stops growing.

BCG Matrix: Question marks Ø Question marks are aptly named they create a dilemma. Ø They already have a foothold in a growing market, but if market share cannot be improved they will become ‘dogs. ’ Ø Resources need to be devoted to winning market share.

Limitation of the BCG Matrix Ø There are many relevant aspects relating to products that are not taken into account. Ø The imprecise nature of its four categories and the difficulties inherent in predicting future market growth. Ø Global activity may add extra dimension to the process of portfolio analysis.