Chapter 4
Assessing Strengths and
Weaknesses: Internal Analysis
Instructor: Moses Acquaah, Ph.D.
377 Bryan Building
Phone: (336)334-5305
Email: [email protected]
Lecture Objectives
(1) Define internal analysis and discuss why it is important.
(2) Describe the relationship between organizational resources,
organizational capabilities, core competencies, and distinctive
organizational capabilities.
(3) Explain what organizational strengths and weaknesses are.
(4) Define the value chain and describe the primary and support
activities on the value chain.
(5) Explain the strategic options for correcting cost competitiveness
on the value chain system.
(6) Discuss the steps in conducting a competitive strength assessment
(7) Explain how to use the internal audit process
(8) Discuss the features of an internal environmental analysis process
(9) Describe the steps in capabilities assessment profile
What is Internal Analysis?
• The process of identifying and evaluating
an organization’s specific characteristics
– Resources, capabilities, and core competencies
– Looks at organization’s
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Current vision
Mission(s)
Strategic & financial objectives
Strategies
Why Do an Internal Analysis?
• Enables a firm to identify its strengths and
weaknesses.
• Enables a firm to make good strategic decisions.
• Information from internal environment provides
basis for developing strategic alternatives.
A Quick Review of
Organizational Resources
• Organizational resources are assets an
organization has for carrying out work activities
and processes
– Financial resources
• Current debt, credit lines, equity, cash reserves, etc.
– Physical resources
• Plant & equipment, inventories, supplies, fixtures, etc.
– Human resources
• Management & employee skills, training, experiences, etc
A Quick Review of
Organizational Resources
– Intangible resources
• Brand names, patents, trademarks, copyrights, etc.
– Structural-cultural resources
• Culture, history, work systems policies, formal
reporting structures, etc
• Human, intangible, and structural-cultural
resources can be a source of competitive
advantage
– Play important role in determining capabilities
or competencies and core competencies
Organizational Capabilities
• Organizational capabilities/competencies
– The complex and coordinated network of company
routines and processes that determines how
efficiently and effectively the organization
transforms its resources into products (goods &
services)
– Involves complex pattern of coordination between
people, & between people and resources
– It’s an internal activity that a company performs
better than other internal activities
Organizational Capabilities
• Organizational routines & processes:
• Regular, predictable, and sequential patterns of work
activity by organizational members
• Sustainable Competitive Advantage (CA):
• The prolonged maintenance of competitive advantage
• Capabilities that are capable of leading to CA today may
not continue to do so as conditions & rivals change
• Dynamic capabilities
• An organization’s ability to build, integrate and
reconfigure capabilities to address rapidly changing
environments over time.
Core Competencies
• Core competencies
– A well-performed internal activity that is central, not
peripheral, to a company’s strategy, competitiveness,
and profitability
– Major value-creating skills and capabilities that
• are shared across multiple product lines or multiple
businesses
• Results from the collaboration among different parts of an
organization
– Gives a company a potentially valuable competitive
capability
Core Competencies
• Types of Capabilities/Core Competencies
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Skills in manufacturing a high quality product
System to fill customer orders accurately and swiftly
Fast development of new products
Better after-sale service capability
Superior know-how in selecting good retail locations
Innovativeness in developing popular product features
Merchandising and product display skills
Expertise in an important technology
Expertise in integrating multiple technologies to create
whole families of new products
From Core Competencies to
Distinctive Capabilities
• Distinctive Capabilities
– Special and unique capabilities that distinguish
the organization from its competitors
– A competitively valuable activity that a
company performs better than its rivals
– Allow a company to develop a sustainable
competitive advantage and outperform its
competition
From Core Competencies to
Distinctive Capabilities
• Characteristics of distinctive capabilities:
(1) Contribute to superior customer value and offers
real benefits to customers
(2) Difficult for competitors to imitate
(3) Allow the organization to use that capability in a
variety of ways
• What’s the relationship between
organizational capabilities, core competencies
and distinctive capabilities?
Examples of Distinctive Capabilities
• Sharp Corporation
– Expertise in flat-panel display technology
• Toyota
– Low-cost, high-quality manufacturing capability and
short design-to-market cycles
• Intel Corporation
– Ability to design and manufacture ever more
powerful microprocessors for PCs
• Motorola
– Defect-free manufacture (six-sigma quality) of cell
phones
Strengths and Weaknesses
• Strengths
– Resources that an organization possesses and
capabilities that the organization has developed
– Both can be exploited and developed into a
sustainable competitive advantage
• Weaknesses
– Resources and capabilities that are lacking or
deficient; and that
– Prevents an organization from developing a
sustainable competitive advantage
How to Do an Internal Analysis
Approaches to internal analysis
(1) Value Chain Analysis
(2) Competitive Strength Assessment
(3) An Internal Audit
(4) Internal Environmental Analysis Process
(5) Capabilities Assessment Profile
(1) Value Chain Analysis
• Value Chain Analysis
– Customers want (demand) some type of value from
the goods and services they purchase or obtain
– Customer value arises from
(1) Uniqueness of product or service
(2) Low-priced product/service
(3) Quick response to specific or distinctive customer needs
– Allow assessment of cost competitiveness of
organization with those of its rivals
The Value Chain
• The value chain identifies the separate activities and
business processes performed to design, produce,
market, deliver, and support a product/service and how
well they create customer value.
• Consists of two types of activities
– Primary activities : create customer value
• Inbound logistics, Operations; Outboard logistics; Sales
& Marketing; & Customer Service
– Support activities: Support primary activities
• Procurement; Technological development; HRM;
General Administration (Firm infrastructure)
A Typical Value Chain
Primary Activities and Costs
Inbound
Logistics
Operations
Outbound
Logistics
Sales and
Marketing
Service
Profit
Margin
Procurement; Product R&D, Technology
Human Resources Management
General Administration (Firm Infrastructure)
Support
Activities
and Costs
The Value Chain System
Upstream
Value Chain
Activities,
Costs, &
Margins of
Suppliers
Firm’s Own
Value Chain
Internally
Performed
Activities,
Costs, &
Margins
Downstream Value Chains
Activities,
Costs, &
Margins of
Forward
Channel
Allies &
Strategic
Partners
Buyer/User
Value
Chains
Examples of Key Value Chain
Activities
• Soft Drinks Industry
Processing of basic ingredients
Syrup manufacture
Bottling & can filling
Wholesale distribution
Retailing
• Computer Software Industry
Programming
Disk Loading
Marketing
Distribution
The Value Chain System
• A company’s cost competitiveness
depends on how well it manages its value
chain relative to competitors
• Three areas contribute to cost differences
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities
The Value Chain System
• Assessing a company’s cost competitiveness
involves comparing costs along the industry’s value
chain
• Suppliers’ value chains are relevant because
– Costs, quality, and performance of inputs provided by suppliers
influence a firm’s own costs and product performance
• Forward channel allies’ value chains are relevant
because
– Forward channel allies’ costs and margins are part of price paid
by ultimate end-user
– Activities performed affect end-user satisfaction
Strategic Options for Correcting
Costs Competitiveness
• Supplier-related costs disadvantages:
– Negotiate more favorable prices with suppliers
– Work with suppliers to achieve lower costs
– Integrate backward
– Use lower-priced substitute inputs
– Do a better job of managing linkages between
suppliers’ value chains and firm’s own chain
– Make up difference by initiating cost savings in other
areas of value chain
Strategic Options for Correcting
Costs Competitiveness
• Forward channel allies’ costs disadvantages:
– Push for more favorable terms with distributors and
other forward channel allies
– Work closely with forward channel allies and
customers to identify win-win opportunities to
reduce costs
– Change to a more economical distribution strategy
– Make up difference by initiating cost savings earlier
in value chain
Strategic Options for Correcting
Costs Competitiveness
• Firm’s own internal cost disadvantages:
– Reengineer performance of high-cost activities or business
processes
– Eliminate some cost-producing activities altogether by
revamping value chain system (VCS)
– Relocate high-cost activities to lower-cost geographic areas
– See if high-cost activities can be performed cheaper by
outside vendors/suppliers
– Invest in cost-saving technology
– Simplify product design
– Achieving savings in backward or forward portions of VCS
From Value Chain Analysis to
Competitive Advantage
• A company can create competitive advantage by
managing its value chain so as to
– Integrate the knowledge and skills of employees in
competitively valuable ways
– Leverage economies of learning or experience curve
effects
– Coordinate related activities in ways that build
valuable capabilities
– Build dominating expertise in a value chain activity
critical to customer satisfaction or market success
From Value Chain Analysis to
Competitive Advantage
• The strategy-making lesson of value chain
analysis is that sustainable competitive
advantage can be created by:
(1). Managing the value chain activities better
than competitors; and
(2). Developing distinctive capabilities to
serve the needs of customers better
(2) Assessing Organization’s
Competitive Strength
• How does the firm rank relative to key rivals on each
industry KSF and relevant measure of competitive
strength (capabilities or core competencies)?
• Does the firm have a sustainable competitive advantage or
disadvantage
• What is the ability of the firm to defend its position in
light of
– Industry driving forces
– Competitive pressures
– Anticipated moves of rivals
Assessing Organization’s
Competitive Strength
1. List industry key success factors and other relevant
measures of competitive strength
2. Rate firm and key rivals on each factor using rating
scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted rating
system
4. Sum individual ratings to get overall measure of
competitive strength for each rival
5. Determine whether the firm enjoys a competitive
advantage or suffers from competitive disadvantage
Assessing Organization’s
Competitive Strength
• A weighted competitive strength analysis is
conceptually stronger than an unweighted
competitive strength analysis because
– All the strength measures are not equally important.
– E.g., in an industry with strong product differentiation,
the significant strength measures may be
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Brand awareness
Reputation for quality
Amount of advertising
Distribution capability, etc.
Some KSF/Strength Measures
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Quality/product performance
Reputation/image
Manufacturing capability
Technological skills
Dealer network/Distribution channels
New product innovation
Financial resources
Relative cost position
Customer service capability
Assessing Organization’s
Competitive Strength
• What does a high competitive strength rating relative to
rivals mean?
– Strong competitive position & possession of competitive
advantages
– Opportunity for company to improve its long-term market
position
• Good strategy entails
– Looking for opportunities to leverage company strengths into
competitive advantage
– Using company strengths to attack the competitive weaknesses
of rivals
Why Do a Competitive Strength
Assessment?
• Reveals strength of firm’s competitive position
• Shows how firm stacks up against rivals, measureby-measure -- pinpoints the company’s
competitive strengths and competitive weaknesses
• Indicates whether firm is at a competitive
advantage / disadvantage against each rival
• Identifies possible offensive attacks (pit company
strengths against rivals’ weaknesses)
• Identifies possible defensive actions (a need to
correct competitive weaknesses)
(3) Using an Internal Audit
• Internal Audit
– A thorough assessment of an organization’s
various internal functional areas
– Strategic decision makers use the internal audit
to assess the organization’s resources and
capabilities from the perspectives of its
different functions
Using an Internal Audit
• Six primary functional areas
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Production-operations
Marketing
Research & development
Financial and accounting
Management, including HRM
Information System
• Depending on products, markets, and industries,
individual organizational structures may vary and,
therefore, may emphasize different sets of functional
areas
(4) Using an Internal
Environmental Analysis Process
• Assesses an organization’s internal activities
– Step 1: Survey strengths and weaknesses
– Step 2: Categorize these strengths & weaknesses
(S&W) in terms of resources & capabilities
– Step 3: Investigate the potential of strengths to lead
to competitive advantage
– Step 4: Evaluate the ability of these competitively
resources & capabilities to serve as the basis for an
appropriate competitive strategy
(5) Capabilities Assessment Profile
• Resembles the internal environmental analysis
– Similarity: Focuses on deeper evaluation of S&W
– Difference: Focuses only on an firm’s capabilities
• Analysis of capabilities is complex
– Not as easily identified as organization’s function or
even the value creating primary & support activities
– Complex nature of capabilities makes it hard for
competitors to imitate
Capabilities Assessment Profile
• Analysis Consists of two phases:
– Phase I: Identify distinctive capabilities
– Phase II: Develop and leverage distinctive capabilities
• Identifying Distinctive Organizational Capabilities
– Step 1: Prepare current product-market profile
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Emphasize organization-customer interactions
What is the organization selling?
Who are the organization selling to?
Is the organization providing superior customer value &
desirable benefits?
Capabilities Assessment Profile
– Step 2: Identify sources of competitive
advantage & disadvantage in the main productmarket segment
• Determine why customers choose the organization’s
products vs. those of competitors
• Involves information on cost, product, and service
attributes
– When customers purchase
– What they’re actually purchasing
– What bundle of attributes satisfies their needs
Capabilities Assessment Profile
– Step 3: Describe all organizational capabilities &
competencies
• Examine resources, skills, & abilities of the various divisions
• Determine which resources, skills, & abilities lead to a
competitive advantage
– Step 4: Sort the core capabilities/competencies
according to strategic importance
• Can capability provide wide access to a number of different
markets?
• Does the capability provide tangible customer benefits?
• Is the capability difficult for competitors to imitate?
Capabilities Assessment Profile
– Step 5: Identify and agree on the key capabilities or
competencies
• Provide basis for resource allocation
• Classifying an Organization’s S&W
– Past performance trends
• Measures such as financial ratios, operations efficiency, etc,
– Specific goal or targets
• Organization’s goals are statements of desired outcomes
– Comparison against competitors
• How are competitors doing?
– Personal opinions of decision makers & consultants