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THE PROCESS OF INTERNAL ENVIRONMENT


APPRAISAL

ORGANISATIONAL APPRAISAL

Introduction

 The process of observe an organizational internal environment to identify the


strengths and weaknesses that may influence the organization's ability to achieve
goals.
 A firm can exploit its opportunities successfully, depending on its corporate
strengths.
 It can be said that the corporate capabilities of the firm become the focal point for
its performance and survival.
 They play a crucial role, both in identifying the strategy and its success.
 Corporate capabilities go beyond sales, profit and net worth. It is concerned with
the state of mind and outlook of the firm.
 Corporate strategy ultimately means a matching game between environmental
opportunities and organizational strengths to gain competitive advantage.
 Assessment of organization's strengths and weaknesses is also known as
Corporate Appraisal.
 The internal environment of an organization includes forces that operate inside
the organization with specific implications for managing organizational
performance.
 Internal environmental factors, unlike external environmental factors come from
within.
 These factors, collectively defined both trouble sports that need strengthening
and the core competencies that the firm can build.
 An organization can better analyze how much activity might and value or
contribute significantly to shape an effective strategy by systematically examining
its internal environment.

MEANING OF STRENGTHS & WEAKNESSES:

 Organizational analysis requires data and information about the internal


environment.
 SWOT analysis refines this information by applying a general framework for
understanding and managing the environment under which a company operates.
 SWOT analysis consists of evaluating a company's internal strengths and
weaknesses and its external opportunities and threats.

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 SWOT analysis underscores the basic point that strategy must produce a good fit
between a firm's internal capabilities.
 Organization strengths and weaknesses are a matter of interpretation.

Though, no definition may ever be complete, we would define strengths and


weaknesses as follows:

Corporate Strengths:

 A strength is a strong point for the company i.e., something a company is good at
doing or characteristic that gives it an important capability.
 Strength can be a skill, a competence, a valuable organizational resource or
competitive capability or achievement that gives that company an advantage.
 It refers to competitive advantages and other distinct competencies which a
company can exert in the market place.
 The management and performance of organization can also be analyzed with the
help of ‘7-s' Framework, developed by McKinsey and co., a leading consulting
firm of USA.
 According to this framework, strategy is only one element that determines the
performance.
 The first three elements: strategy, structure and systems are consider the ‘hard'
elements and the next four shared values, skills, staff and style are considered as
the ‘soft' elements.
 With the help of this framework a competitive competitor analysis can provide
deep insight on the strengths and weakness of the competitors.

Corporate Weakness:

 It refers to constraints or obstacles which check movement in certain desired


direction, and may also inhibit organization in gaining a distinctive competitive
advantage.
 A weakness is something the company does not have or does poorly or a
condition that outs it at a disadvantageous positions.
 A weakness may or may not make an organization competitively vulnerable on
how much it matters in the competition battle.

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THE CRITERIA FOR DETERMINING STRENGTHS AND WEAKNESSES:

 A major problem which must be resolved prior to any analysis of corporate


capabilities is the criteria that would determine whether an element under
examination is a strength or a weakness.
 Four types of criteria have been suggested to classify an element into strength or
weakness. These are: i. Historical; ii. Normative; iii. Competitive parity; and iv.
Critical Factors for Success.

1. THE HISTORICAL CRITERION

Here, the analyst compares the characteristics under examination with past performances.
An improvement over the past performance may be seen as strength, and a decline a
weakness. Before, arriving at such conclusion, it is always advisable to check the
reliability of the ‘past' in future. In a large number of situations ‘past' may not be valid for
future and this would certainly invalidate our assessment or judgment.

2. THE NORMATIVE CRITERION

Here, the basis of judgment is ‘what ought to be' the level of performance to classify a
particular element into a strength or a weakness. Thus, based on theory, expert opinion,
industry practices or personal opinions, one can develop ‘norms' for evaluation.

3. THE COMPETITIVE PARITY CRITERION

As its basis for judgment, this criterion utilizes the action successful direct competitors or
potential competitors. It is based on the premise that a firm must, at the minimum, meet
the actions of the competitors. Thus, if the industry practice of providing 60 days credit to
the trade is not followed, it may be considered a weakness.

4. THE CRITICAL FACTORS FOR SUCCESS CRITERION

Each business, in some sense, is unique. It requires a set of minimum performance


standards and hence capabilities. This criterion helps to examine the strengths and
weakness in the context of meeting the minimum requirements for success.

One criterion is seldom sufficient for a complete evaluation of a firm. Some elements like
‘financial strengths' may be evaluated better on ‘historical' and ‘competition' criteria; and
‘marketing' may be best evaluated on the basis of ‘competition' and ‘critical factors for
success criterion.

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MEASURING STRENGHS AND WEAKNESSES:

Strengths and weaknesses may exist in varying degrees. Some may view an organisation
as very strong which others may consider it not that strong. The same may apply to its
weaknesses. This would call for measurement of strengths and weaknesses. There are
three measures 1. Attribute Measures, 2. Effectiveness Measures and 3. Efficiency
Measures.

1. Attribute Measures

This statement is developed to identify or list a characteristic or quality which an


organisation possesses or is expected to possess in the near future. Thus, leaving the
analysis only at the ‘attribute statement' level may be incomplete and inadequate. In many
situations it may however, be the only alternative to express one's strengths or
weaknesses.

2. Effectiveness Measures

In this approach, a characteristic is represented by a statement that identifies a capability


of an organisation that will help in the accomplishment of a particular task or objective.

3. The Efficiency Measures

As the word ‘efficiency' suggests, it measures the productivity of an organisation in


converting inputs into desired outputs. Apparently efficiency measure is implementable
only in quantifiable situation.

The use of three types of the measurements is a function of the degree of specificity
possible for a given element or characteristic. Attribute measurement is simply a listing
of the capabilities of an organisation; an effectiveness measure relates to the abilities of
an organisation to achieve objectives; and an efficiency measure is concerned with the
optimum conversion of firm's resources into desired output. The type of measurement a
firm would employ will be a function of - the characteristic which is being measured and
the level within the organisation which is to utilize the measurement.

ANALYSIS OF STRENGTHS AND WEAKNESSES:

A comprehensive and objective analysis of strengths and weaknesses may be facilitated


by the use of a format or a framework. In this section we will study a few of such formats
or frameworks.

The Check List

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Some writers have suggested the use or organisational checklists to evaluate
organisational capabilities and weaknesses. One such checklist contains 446 checkpoints.
Pearce and Robinson suggest the following checklist.

Marketing

1. Firm's products/services; breadth of product line.


2. Ability to gather needed information about markets.
3. Market share of submarket shares.
4. Product/service mix and expansion potential; life cycle of key7 products;
profit/sales balance in produce/service.
5. Channels of distribution.
6. Effective sales organisation; knowledge of customer needs.
7. Concentration of sales in a few products or to a few customers.
8. Product/service image reputation, and quality.
9. Imaginative, efficient, and effective sales promotion and adverting.
10. Pricing strategy.
11. Producers for digesting market feedback and developing new products/service or
markets.
12. After sales service and follow-up.
13. Goodwill/ brand loyalty.

Finance and Accounting

1. Ability to raise short-term capital.


2. Ability to raise long-term capital; debt, equity.
3. Corporate-level resources (multibusiness firm).
4. Cost of Capital relative to industry and competitors.
5. Tax considerations.
6. Relations with owners, investors, and stockholders.
7. Leverage position: Capacity to utilise alternative financial strategies such as lease
or sale and leaseback.
8. Cost of entry and barriers to entry.
9. Presence of financial planning and budgeting practices.
10. Working capital.
11. Effective cost control; ability to reduce cost.
12. Financial size.
13. Efficient and effective accounting system for cost, budget and profit planning.

Production/Operations/Technical

1. Raw materials cost and availability.


2. Inventory control systems.
3. Location of facilities.
4. Layout and utilisation of facilities.
5. Technical efficiency of facilities and utilisation of capacity.

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6. Effective use of subcontracting.
7. Degree of vertical integrations: value added and profit margin.
8. Efficiency and cost/benefits of equipment.
9. Effective operation control procedures: design, scheduling, purchasing, quality
control and efficiency.
10. Costs and technological competencies relative to industry and competitors.
11. Research and development/technology/innovation.
12. Patent, Trademarks, and similar legal protection.

Personnel

1. Management personnel.
2. Employees skill and morale.
3. Labour relations/costs compared to industry and competition.
4. Efficient and effective personnel policies.
5. Effective use of incentives to motivate performance.
6. Ability to level peaks and valleys of employment.
7. Employee turnover and absenteeism.
8. Specialised skills.
9. Experience.

Organisation/General Management

1. Organisational structure.
2. Firm's image and prestige.
3. Firm's record for achieving objectives.
4. Organisation communication system.
5. Overall organisational control system effectiveness and utilisation.
6. Organisational climate.
7. Use of systematic procedures and techniques in decision making.
8. Top management skill, capabilities and interest.

The Conceptual Approach:

 Bates and Eldredge have suggested what has been described as conceptual
approach to analyse strengths and weaknesses.
 According to them, the format for analysis can be divided into three
dimensions : Management, Operations, and Finance.
 These three dimensions would be common for a majority of the organisations.
 '‘Management''dimension covers top management functions and broader issues
encompassing the total organisation. Some of these could be strategic planning
processes and systems, organisation climate and culture, managerial succession,
top management values etc.

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 ‘Operations' dimension includes resource conversion and distribution functions
like production, material management design, marketing, etc. ‘Finances' include
issues like capital structure, working capital, credit policies etc.

Analysis of Management Dimension:

 At the corporate level, i.e. at the level of corporate strategy, the strategist must
begin the assessment of organisational strengths and weaknesses with an analysis
of firm's management.
 To a large extent, the quality of top management determines and affects corporate
strengths and weakness, not only the current but the ‘potential' strengths as well.
 As an illustration, Bates and Eldredge have suggested the following dimensions to
evaluate the strategic planning system of a firm.

Critical Factors: Identification of the present and future conditions having a bearing
on the achievement of objectives.

Resources: Identification and provision for resources required to meet present and future
conditions for achieving objectives.

Objectives: Clearly spelt out results and details of the means to be used to measure
accomplishment.

Appraisal: Comparing actual with expected performance that results in timely


/corrective action.

Deployment of Resources: Establishing and delegating areas of responsibility and


authority for critical factors. For its strategic planning system, a firm's strengths and
weaknesses can be evaluated on the above dimensions.

Analysis of ‘Financial' Dimension

A firm's performance is largely determined through its financial performance like sales
revenue, profits net worth, divided pay out, etc. A number of dimensions within finance
viz., capital structure, capital budgeting, dividend policy, debt policy, interest cost, credit
policies, management of working capital etc., need to be examined to assess a firm's
strengths and weaknesses.

Analysis of the ‘Operations' Dimensions

 The resource conversion process requires operational arrangements.


 The efficiency of the ‘conversion' process reflects strengths or weaknesses.

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 Besides conversion, the organisation also needs to transform the products and
services through the process of marketing and distribution into liquid or cash
resources which are then recycled.
 Organisational audit, therefore, must include the assessment of corporate
strengths and weaknesses in each functional area.
 In the area of marketing, this may mean assessment of factors like familiarity with
the industry breadth of the products/services offered, quality of the marketing
research, customer pre and after sales service, consumer, loyalty, etc.

Strengths and Weaknesses Profile:

After the corporate audit on three dimensions: management, finance, and operation have
been done. Bates and Eldredge suggest consolidation of all these dimensions to develop a
profile. This is shown below:
Strengths and Weaknesses Profile

Dimension

Basis of Comparison

Ranking

Existing

Strengths of weaknesses

Management

Financial

perations

 The purpose is to ensure that the strategist is aware of a basis of comparison and
its appropriateness to the factor under assessment.
 Ranking indicates degree of importance of the factor under assessment to the
orgnisation's success.
 All critical factors should have a ranking in one in their respective dimensions.
 A brief description of what exists.Strengths or weaknesses are coded as follows:
0- neutral; +=strength, and the more pluses, the greater the strength; -weakness
and the more minuses, the greater the weakness.

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 The profile gives a quick view of the total situation as well as the criteria which
an analyst has used to arrive at conclusions. By ranking, it also helps in focusing
attention on more important rather than less important factor.

The Grid Approach:

The earlier framework of Bates and Eldredge suggested a diagnosis around three
dimensions: Management, Finance, Operations. Almost a similar approach has been
suggested by Ansoff. This is shown below:
GRID for Organization Audit

Facilities Equipment

Personnel Skills

Organisational capabilities

Management capabilities

General Management & Finance

R&D

Operations

Marketing

Warehousing Retail outlets Sales Offices Transportation equipment Training facilities for
sales staff Data processing equipment

Door-to-Door selling Retail selling holesale selling Direct industry selling Dept. of
Defense selling Cross-industry selling Applications engineering Advertising Sales
promotion Servicing Contract administration Sales analysis Data analysis Forecasting
Computer modelling Product Planning Background of people Corporate culture

Direct sales

Distributor chain Retail chain Consumer service organisation Industrial service


organisation Dept. of Defense product support Inventory distribution & Control. Ability
to make quick response to customer requirements Ability to adapt to socio-political
upheavals in the market place Loyal set of customers Cordial relations with media

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and channels Flexibility in all phases of corporate life Consumer financing Discount
policy Team work Product quality.

Industrial marketing Consumer merchandising Dept. of Defense marketing State and


municipality marketing Well-informed and respective management Large customer
base Decentralized control. Favorable public image Future orientation Ethical
standards.

The ‘rows' contain various functions and the ‘columns' capabilities. With the help of
comprehensive checklist, you can identify the relevant characteristics for a firm vis-à-vis
various functions.

The 7 'S' Framework:

The 7 ‘S' framework can be used both all the corporate level as well as at the functional
level. One such matrix for the corporate level is shown below:
The 7 ‘S' Framework Functions

Dimension

Marketing

Finance

Human Resources

Production

1. Strategy

2. Structure

3. Systems

4. Shared Values

5. Skills

6. Style

7. Staff

a)The level at which the exercise of corporate audits (strengths and weaknesses) is being
performed.

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b)The ‘characteristics' which are being examined i.e. approach to planning, management
culture, marketing management, distribution system etc.

c)The ‘use' which management wants to make of the strengths and weaknesses analysis.
If the idea is to reformulate a corporate strategy, management may employ two or three
frameworks to have different viewpoints for the total organisation. If the use is ‘gap
analysis' in some specific functional area, it may confine to only one framework, using
the various ‘measures' to come to sound decisions.

The framework suggests that there is a multiplicity of factors that influence an


organisation's ability to change and its proper mode of change. Because of the
interconnectedness of the variables it would be difficult to make significant
progress in one area without making progress in the others as well. Organisational
change may be understood to be a complex relationship between strategy, structure,
systems, style, skills, staff and superordinate goals.

1. Strategy and Super ordinate Goals- The concept of strategy includes purposes,
mission, objectives, goals and major action plans and policies. Super ordinate
goals may be considered to be the equivalent of the term organisational purposes.
Super ordinate goals refer to a set of values and aspirations that goes beyond the
conventional formal statement of corporate objectives. Superordinate goals are the
fundamental ideas around which a business is built. They are its main values.
2. Structure- The design of organisation structure is a critical task of the top
management of an organisation.Organisational structure refers to the relatively
more durable organisational arrangements and Relationships. It prescribes the
formal relationships among various positions and activities.
3. Systems- refers to all the rules, regulations and procedures, both formal and
informal that complement the organisation structure. This includes production
planning and control systems, cost accounting procedures, capital budgeting
systems, recruitment, training and development systems, planning and budgeting
systems, etc.,
4. Style- The style of an organisation becomes evident through the patterns of
actions taken by member of the top management over a period of time. The
aspects of business most emphasised by members of the top management tend to
be given more attention by people down in the organisation.
5. Staff- is the process of acquiring human resources for the organisation and
assuring that they have the potential to contribute to the achievement of the
organisation's goals.
6. Skills- is one of the most crucial attributes or capabilities of an organisation. The
term skills include those characteristics which most people use to describe a
company. These are developed over a period of time and are a result of the
interaction of a number of factors: performing certain tasks successfully over a
period of time, the kind of people in the organisation, the top management style,
the organisation structure, the management systems, the external environmental
influences etc., Hence, when organisations make a strategic shift it becomes
necessary to consciously build new skills.

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MATCHING STRENGTHS AND WEAKNESSES:

The purpose is to arrive at a ‘match' between corporate strengths and environmental


opportunities for competitive advantage. The purpose is to improve corporate
performance. A simple but powerful question to keep us on the right track, lest the
exercise becomes unwieldy and an end in itself is to ask: ‘so what'?

SUMMARY:

 The analysis of corporate capabilities and weaknesses becomes a pre-requisite for


successful formulation and reformulation of corporate strategies.
 This analysis can be done at various levels: functional, divisional and corporate.
 The classification of an item or characteristic in terms of strength and weakness
can be done on the basis of some criteria like historical criterion, normative
criterion, competitive parity criterion and the critical factor of success criterion.
 In order to measure the degree of strength or weakness, we can use three
measures: attribute measures, effectiveness measures and efficiency measures.
 A format like a 'checklist', a grid or a matrix helps in making a comprehensive
analysis.
 It also helps in consolidating the analysis on corporate audit. While performing
the audit, it is important to remember than in the ultimate analysis, it is the
entrepreneurial viewpoint of strengths and weaknesses which can make or break a
company.
 In this view, the concept of synergy holds the key to enhance the pay offs from
the existing corporate capabilities.
 A strong mind, even with limited capabilities, may build a giant organization and
a weak mind may cripple a sound organization by magnifying the minor
weaknesses.
 The frame of mind, thus may appeal to be a more important intangible strength
than all the tangible assets.

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TECHNIQUES OF ANALYSING CORPORATE RESOURCES

They are basically four,namely:

1) Value Chain Analysis;


2) Value Network Analysis;
3) Benchmarking; and
4) Portfolio Analysis: The BCG Model

VALUE CHAIN

Popular Visualization

The value chain, also known as value chain analysis, is a concept from business
management that was first described and popularized by Michael Porter in his 1985 best-
seller, Competitive Advantage: Creating and Sustaining Superior Performance.

Firm Level

 A value chain is a chain of activities for a firm operating in a specific industry.


The business unit is the appropriate level for construction of a value chain, not the
divisional level or corporate level.
 Products pass through all activities of the chain in order, and at each activity the
product gains some value.

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 The chain of activities gives the products more added value than the sum of the
independent activity's value.
 It is important not to mix the concept of the value chain with the costs occurring
throughout the activities.
 A diamond cutter, as a profession, can be used to illustrate the difference of cost
and the value chain.
 The cutting activity may have a low cost, but the activity adds much of the value
to the end product, since a rough diamond is significantly less valuable than a cut
diamond.
 Typically, the described value chain and the documentation of processes,
assessment and auditing of adherence to the process routines are at the core of the
quality certification of the business, e.g. ISO 9001.

Activities

The value chain categorizes the generic value-adding activities of an organization. The
"primary activities" include: inbound logistics, operations (production), outbound
logistics, marketing and sales (demand), and services (maintenance). The "support
activities" include: administrative infrastructure management, human resource
management, technology (R&D), and procurement. The costs and value drivers are
identified for each value activity.

Industry Level

 An industry value chain is a physical representation of the various processes that


are involved in producing goods (and services), starting with raw materials and
ending with the delivered product (also known as the supply chain).
 It is based on the notion of value-added at the link (read: stage of production)
level.
 The sum total of link-level value-added yields total value.
 The French Physiocrat's Tableau économique is one of the earliest examples of a
value chain.
 Wasilly Leontief's Input-Output tables, published in the 1950s, provide estimates
of the relative importance of each individual link in industry-level value-chains
for the U.S. economy.

Significance

1) The value-chain concept has been extended beyond individual firms. It


can apply to whole supply chains and distribution networks. The delivery
of a mix of products and services to the end customer will mobilize
different economic factors, each managing its own value chain. The
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industry wide synchronized interactions of those local value chains create
an extended value chain, sometimes global in extent. Porter terms this
larger interconnected system of value chains the "value system." A value
system includes the value chains of a firm's supplier (and their suppliers
all the way back), the firm itself, the firm distribution channels, and the
firm's buyers (and presumably extended to the buyers of their products,
and so on).
2) Capturing the value generated along the chain is the new approach taken
by many management strategists. For example, a manufacturer might
require its parts suppliers to be located nearby its assembly plant to
minimize the cost of transportation. By exploiting the upstream and
downstream information flowing along the value chain, the firms may try
to bypass the intermediaries creating new business models, or in other
ways create improvements in its value system.
3) Value chain analysis has also been successfully used in large
Petrochemical Plant Maintenance Organizations to show how Work
Selection, Work Planning, Work Scheduling and finally Work Execution
can (when considered as elements of chains) help drive Lean approaches
to Maintenance. The Maintenance Value Chain approach is particularly
successful when used as a tool for helping Change Management as it is
seen as more user friendly than other business process tools.
4) Value chain analysis has also been employed in the development sector as
a means of identifying poverty reduction strategies by upgrading along the
value chain. Although commonly associated with export-oriented trade,
development practitioners have begun to highlight the importance of
developing national and intra-regional chains in addition to international
ones.

BENCHMARKING

Benchmarking

Introduction

 is the process of comparing one's business processes and performance metrics to


industry bests and/or best practices from other industries.
 Dimensions typically measured are quality, time and cost. Improvements from
learning mean doing things better, faster, and cheaper.
 Benchmarking involves management identifying the best firms in their industry,
or any other industry where similar processes exist, and comparing the results and
processes of those studied (the "targets") to one's own results and processes to
learn how well the targets perform and, more importantly, how they do it.
 The term benchmarking was first used by cobblers to measure people's feet for
shoes.

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 They would place someone's foot on a "bench" and mark it out to make the
pattern for the shoes. Benchmarking is most used to measure performance using a
specific indicator (cost per unit of measure, productivity per unit of measure,
cycle time of x per unit of measure or defects per unit of measure) resulting in a
metric of performance that is then compared to others.
 Also referred to as "best practice benchmarking" or "process benchmarking", it is
a process used in management and particularly strategic management, in which
organizations evaluate various aspects of their processes in relation to best
practice companies' processes, usually within a peer group defined for the
purposes of comparison.

This then allows organizations to develop plans on how to make improvements or adapt
specific best practices, usually with the aim of increasing some aspect of performance.
Benchmarking may be a one-off event, but is often treated as a continuous process in
which organizations continually seek to improve their

The Following Is An Example Of A Typical Benchmarking Methodology:

1. Identify your problem areas - Because benchmarking can be applied to any


business process or function, a range of research techniques may be required.
They include: informal conversations with customers, employees, or suppliers;
exploratory research techniques such as focus groups; or in-depth marketing
research, quantitative research, surveys, questionnaires, re-engineering analysis,
process mapping, quality control variance reports, or financial ratio analysis.
Before embarking on comparison with other organizations it is essential that you
know your own organization's function, processes; base lining performance
provides a point against which improvement effort can be measured.
2. Identify other industries that have similar processes - For instance if one were
interested in improving hand offs in addiction treatment he/she would try to
identify other fields that also have hand off challenges. These could include air
traffic control, cell phone switching between towers, transfer of patients from
surgery to recovery rooms.
3. Identify organizations that are leaders in these areas - Look for the very best
in any industry and in any country. Consult customers, suppliers, financial
analysts, trade associations, and magazines to determine which companies are
worthy of study.
4. Survey companies for measures and practices - Companies target specific
business processes using detailed surveys of measures and practices used to
identify business process alternatives and leading companies. Surveys are
typically masked to protect confidential data by neutral associations and
consultants.
5. Visit the "best practice" companies to identify leading edge practices -
Companies typically agree to mutually exchange information beneficial to all
parties in a benchmarking group and share the results within the group.
6. Implement new and improved business practices - Take the leading edge
practices and develop implementation plans which include identification of

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specific opportunities, funding the project and selling the ideas to the organization
for the purpose of gaining demonstrated value from the process.

Costs

The three main types of costs in benchmarking are:

• Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost
labor time.
• Time Costs - Members of the benchmarking team will be investing time in
researching problems, finding exceptional companies to study, visits, and
implementation. This will take them away from their regular tasks for part of each
day so additional staff might be required.
• Benchmarking Database Costs - Organizations that institutionalize
benchmarking into their daily procedures find it is useful to create and maintain a
database of best practices and the companies associated with each best practice
now.

The cost of benchmarking can substantially be reduced through utilizing the many
internet resources that have sprung up over the last few years. These aim to capture
benchmarks and best practices from organizations, business sectors and countries to make
the benchmarking process much quicker and cheaper.

Types

• Process benchmarking - the initiating firm focuses its observation and


investigation of business processes with a goal of identifying and observing the
best practices from one or more benchmark firms. Activity analysis will be
required where the objective is to benchmark cost and efficiency; increasingly
applied to back-office processes where outsourcing may be a consideration.
• Financial benchmarking - performing a financial analysis and comparing the
results in an effort to assess your overall competitiveness and productivity.
• Benchmarking from an investor perspective- extending the benchmarking
universe to also compare to peer companies that can be considered alternative
investment opportunities from the perspective of an investor.
• Performance benchmarking - allows the initiator firm to assess their
competitive position by comparing products and services with those of target
firms.
• Product benchmarking - the process of designing new products or upgrades to
current ones. This process can sometimes involve reverse engineering which is
taking apart competitors products to find strengths and weaknesses.
• Strategic benchmarking - involves observing how others compete. This type is
usually not industry specific, meaning it is best to look at other industries.
• Functional benchmarking - a company will focus its benchmarking on a single
function to improve the operation of that particular function. Complex functions
such as Human Resources, Finance and Accounting and Information and

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Communication Technology are unlikely to be directly comparable in cost and
efficiency terms and may need to be disaggregated into processes to make valid
comparison.
• Best-in-class benchmarking - involves studying the leading competitor or the
company that best carries out a specific function.
• Operational benchmarking - embraces everything from staffing and
productivity to office flow and analysis of procedures performed.[4]
• Energy benchmarking - developing an accurate model of a building's energy
consumption with the purpose of measuring reductions in usage.

PORTFOLIO ANALYSIS: THE BOSTON CONSULTING GROUP

Growth-share matrix

Introduction

The BCG matrix (aka B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston
Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce
Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing
their business units or product lines. This helps the company allocate resources and is
used as an analytical tool in brand marketing, product management, strategic
management, and portfolio analysis.

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Chart

BCG Matrix

To use the chart, analysts plot a scatter graph to rank the business units (or products) on
the basis of their relative market shares and growth rates.

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• Cash cows are units with high market share in a slow-growing industry. These
units typically generate cash in excess of the amount of cash needed to maintain
the business. They are regarded as staid and boring, in a "mature" market, and
every corporation would be thrilled to own as many as possible. They are to be
"milked" continuously with as little investment as possible, since such investment
would be wasted in an industry with low growth.
• Dogs, or more charitably called pets, are units with low market share in a mature,
slow-growing industry. These units typically "break even", generating barely
enough cash to maintain the business's market share. Though owning a break-
even unit provides the social benefit of providing jobs and possible synergies that
assist other business units, from an accounting point of view such a unit is
worthless, not generating cash for the company. They depress a profitable
company's return on assets ratio, used by many investors to judge how well a
company is being managed. Dogs, it is thought, should be sold off.
• Question marks (also known as problem child) are growing rapidly and thus
consume large amounts of cash, but because they have low market shares they do
not generate much cash. The result is a large net cash consumption. A question
mark has the potential to gain market share and become a star, and eventually a
cash cow when the market growth slows. If the question mark does not succeed in
becoming the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks must be
analyzed carefully in order to determine whether they are worth the investment
required to grow market share.
• Stars are units with a high market share in a fast-growing industry. The hope is
that stars become the next cash cows. Sustaining the business unit's market
leadership may require extra cash, but this is worthwhile if that's what it takes for
the unit to remain a leader. When growth slows, stars become cash cows if they
have been able to maintain their category leadership, or they move from brief
stardom to dogdom.
• As a particular industry matures and its growth slows, all business units become
either cash cows or dogs. The natural cycle for most business units is that they
start as question marks, then turn into stars. Eventually the market stops growing
thus the business unit becomes a cash cow. At the end of the cycle the cash cow
turns into a dog.

The overall goal of this ranking was to help corporate analysts decide which of their
business units to fund, and how much; and which units to sell. Managers were supposed
to gain perspective from this analysis that allowed them to plan with confidence to use
money generated by the cash cows to fund the stars and, possibly, the question marks. As
the BCG stated in 1970:

Only a diversified company with a balanced portfolio can use its strengths to
truly capitalize on its growth opportunities. The balanced portfolio has:

• stars whose high share and high growth assure the future;
• cash cows that supply funds for that future growth; and

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• question marks to be converted into stars with the added funds.

Practical Use of the BCG Matrix

 For each product or service, the 'area' of the circle represents the value of its sales.
The BCG Matrix thus offers a very useful 'map' of the organization's product (or
service) strengths and weaknesses, at least in terms of current profitability, as well
as the likely cashflows.
 The need which prompted this idea was, indeed, that of managing cash-flow.
 It was reasoned that one of the main indicators of cash generation was relative
market share, and one which pointed to cash usage was that of market growth
rate.
 Derivatives can also be used to create a 'product portfolio' analysis of services.
 So Information System services can be treated accordingly.

Relative Market Share

 This indicates likely cash generation, because the higher the share the more cash
will be generated.
 As a result of 'economies of scale' (a basic assumption of the BCG Matrix), it is
assumed that these earnings will grow faster the higher the share.
 The exact measure is the brand's share relative to its largest competitor.
 Thus, if the brand had a share of 20 percent, and the largest competitor had the
same, the ratio would be 1:1.
 If the largest competitor had a share of 60 percent; however, the ratio would be
1:3, implying that the organization's brand was in a relatively weak position.
 If the largest competitor only had a share of 5 percent, the ratio would be 4:1,
implying that the brand owned was in a relatively strong position, which might be
reflected in profits and cash flows.
 If this technique is used in practice, this scale is logarithmic, not linear.
 On the other hand, exactly what is a high relative share is a matter of some debate.
 The best evidence is that the most stable position (at least in Fast Moving
Consumer Goods FMCG markets) is for the brand leader to have a share double
that of the second brand, and triple that of the third.

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 Brand leaders in this position tend to be very stable—and profitable; the Rule of
123.
 The reason for choosing relative market share, rather than just profits, is that it
carries more information than just cash flow.
 It shows where the brand is positioned against its main competitors, and indicates
where it might be likely to go in the future.
 It can also show what type of marketing activities might be expected to be
effective.

Market Growth Rate

 Rapidly growing in rapidly growing markets, are what organizations strive for;
but, as we have seen, the penalty is that they are usually net cash users - they
require investment.
 The reason for this is often because the growth is being 'bought' by the high
investment, in the reasonable expectation that a high market share will eventually
turn into a sound investment in future profits.
 The theory behind the matrix assumes, therefore, that a higher growth rate is
indicative of accompanying demands on investment.
 The cut-off point is usually chosen as 10 per cent per annum.
 Determining this cut-off point, the rate above which the growth is deemed to be
significant (and likely to lead to extra demands on cash) is a critical requirement
of the technique; and one that, again, makes the use of the BCG Matrix
problematical in some product areas.
 What is more, the evidence, from FMCG markets at least, is that the most typical
pattern is of very low growth, less than 1 per cent per annum.
 This is outside the range normally considered in BCG Matrix work, which may
make application of this form of analysis unworkable in many markets.
 Where it can be applied, however, the market growth rate says more about the
brand position than just its cash flow.
 It is a good indicator of that market's strength, of its future potential (of its
'maturity' in terms of the market life-cycle), and also of its attractiveness to future
competitors. It can also be used in growth analysis.

Critical Evaluation

 The matrix ranks only market share and industry growth rate, and only implies
actual profitability, the purpose of any business.

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 (It is certainly possible that a particular dog can be profitable without cash
infusions required, and therefore should be retained and not sold.)
 The matrix also overlooks other elements of industry.
 With this or any other such analytical tool, ranking business units has a subjective
element involving guesswork about the future, particularly with respect to growth
rates.
 Unless the rankings are approached with rigor and scepticism, optimistic
evaluations can lead to a dot com mentality in which even the most dubious
businesses are classified as "question marks" with good prospects; enthusiastic
managers may claim that cash must be thrown at these businesses immediately in
order to turn them into stars, before growth rates slow and it's too late. Poor
definition of a business's market will lead to some dogs being misclassified as
cash cows.
 As originally practiced by the Boston Consulting Group, the matrix was
undoubtedly a useful tool, in those few situations where it could be applied, for
graphically illustrating cashflows.
 If used with this degree of sophistication its use would still be valid.
 However, later practitioners have tended to over-simplify its messages.
 In particular, the later application of the names (problem children, stars, cash
cows and dogs) has tended to overshadow all else—and is often what most
students, and practitioners, remember.

This is unfortunate, since such simplistic use contains at least two major problems:

 'Minority applicability'. The cashflow techniques are only applicable to a very


limited number of markets (where growth is relatively high, and a definite pattern
of product life-cycles can be observed, such as that of ethical pharmaceuticals). In
the majority of markets, use may give misleading results.
 'Milking cash cows'. Perhaps the worst implication of the later developments is
that the (brand leader) cash cows should be milked to fund new brands. This is not
what research into the FMCG markets has shown to be the case. The brand
leader's position is the one, above all, to be defended, not least since brands in this
position will probably outperform any number of newly launched brands. Such
brand leaders will, of course, generate large cash flows; but they should not be
`milked' to such an extent that their position is jeopardized. In any case, the
chance of the new brands achieving similar brand leadership may be slim—
certainly far less than the popular perception of the Boston Matrix would imply.
 Perhaps the most important danger is, however, that the apparent implication of
its four-quadrant form is that there should be balance of products or services
across all four quadrants; and that is, indeed, the main message that it is intended
to convey. Thus, money must be diverted from `cash cows' to fund the `stars' of
the future, since `cash cows' will inevitably decline to become `dogs'. There is an
almost mesmeric inevitability about the whole process. It focuses attention, and
funding, on to the `stars'. It presumes, and almost demands, that `cash cows' will
turn into `dogs'.

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 The reality is that it is only the `cash cows' that are really important—all the other
elements are supporting actors. It is a foolish vendor who diverts funds from a
`cash cow' when these are needed to extend the life of that `product'. Although it
is necessary to recognize a `dog' when it appears (at least before it bites you) it
would be foolish in the extreme to create one in order to balance up the picture.
The vendor, who has most of his (or her) products in the `cash cow' quadrant,
should consider himself (or herself) fortunate indeed, and an excellent marketer,
although he or she might also consider creating a few stars as an insurance policy
against unexpected future developments and, perhaps, to add some extra growth.
There is also a common misconception that 'dogs' are a waste of resources. In
many markets 'dogs' can be considered loss-leaders that while not themselves
profitable will lead to increased sales in other profitable areas.

Alternatives

As with most marketing techniques, there are a number of alternative offerings vying
with the BCG Matrix although this appears to be the most widely used (or at least most
widely taught—and then probably 'not' used). The next most widely reported technique is
that developed by McKinsey and General Electric, which is a three-cell by three-cell
matrix—using the dimensions of `industry attractiveness' and `business strengths'. This
approaches some of the same issues as the BCG Matrix but from a different direction and
in a more complex way (which may be why it is used less, or is at least less widely
taught). Perhaps the most practical approach is that of the Boston Consulting Group's
Advantage Matrix, which the consultancy reportedly used itself though it is little known
amongst the wider population.

Other Uses

The initial intent of the growth-share matrix was to evaluate business units, but the same
evaluation can be made for product lines or any other cash-generating entities. This
should only be attempted for real lines that have a sufficient history to allow some
prediction; if the corporation has made only a few products and called them a product
line, the sample variance will be too high for this sort of analysis to be meaningful.

INTERPRATING INTERNAL ANALYSIS

SWOT ANALYSIS

Introduction

SWOT analysis is a strategic planning method used to evaluate the Strengths,


Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It
involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favorable and unfavorable to achieve that objective.

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The technique is credited to Albert Humphrey, who led a convention at Stanford
University in the 1960s and 1970s using data from Fortune 500 companies.

A SWOT analysis must first start with defining a desired end state or objective. A SWOT
analysis may be incorporated into the strategic planning model. Strategic Planning has
been the subject of much research.

• Strengths: characteristics of the business or team that give it an


advantage over others in the industry.
• Weaknesses: are characteristics that place the firm at a
disadvantage relative to others.
• Opportunities: external chances to make greater sales or profits in
the environment.
• Threats: external elements in the environment that could cause
trouble for the business.

Identification of SWOTs is essential because subsequent steps in the process of planning


for achievement of the selected objective may be derived from the SWOTs.

First, the decision makers have to determine whether the objective is attainable, given the
SWOTs. If the objective is NOT attainable a different objective must be selected and the
process repeated.

The SWOT analysis is often used in academia to highlight and identify strengths,
weaknesses, opportunities and threats.It is particularly helpful in identifying areas for
development.

Matching and Converting

 Another way of utilizing SWOT is matching and converting.


 Matching is used to find competitive advantages by matching the strengths to
opportunities.
 Converting is to apply conversion strategies to convert weaknesses or threats into
strengths or opportunities.
 An example of conversion strategy is to find new markets.
 If the threats or weaknesses cannot be converted a company should try to
minimize or avoid them.

Evidence on the Use Of SWOT

 SWOT analysis may limit the strategies considered in the evaluation.


 J. Scott Armstrong notes that "people who use SWOT might conclude that they
have done an adequate job of planning and ignore such sensible things as defining
the firm's objectives or calculating ROI for alternate strategies.
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 Findings from Menon et al. (1999) and Hill and Westbrook (1997) have shown
that SWOT may harm performance.
 As an alternative to SWOT, Armstrong describes a 5-step approach alternative
that leads to better corporate performance.

Internal and External Factors

The aim of any SWOT analysis is to identify the key internal and external factors that are
important to achieving the objective. These come from within the company's unique
value chain. SWOT analysis groups key pieces of information into two main categories:

• Internal factors – The strengths and weaknesses internal to the


organization.
• External factors – The opportunities and threats presented by the
external environment to the organization. -

 The internal factors may be viewed as strengths or weaknesses depending upon


their impact on the organization's objectives.
 What may represent strengths with respect to one objective may be weaknesses
for another objective.
 The factors may include all of the 4P's; as well as personnel, finance,
manufacturing capabilities, and so on.
 The external factors may include macroeconomic matters, technological change,
legislation, and socio-cultural changes, as well as changes in the marketplace or
competitive position.
 The results are often presented in the form of a matrix.
 SWOT analysis is just one method of categorization and has its own weaknesses.
 For example, it may tend to persuade companies to compile lists rather than think
about what is actually important in achieving objectives.
 It also presents the resulting lists uncritically and without clear prioritization so
that, for example, weak opportunities may appear to balance strong threats.
 It is prudent not to eliminate too quickly any candidate SWOT entry.
 The importance of individual SWOTs will be revealed by the value of the
strategies it generates.
 A SWOT item that produces valuable strategies is important. A SWOT item that
generates no strategies is not important.

Use of SWOT Analysis

The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT


analysis may be used in any decision-making situation when a desired end-state
(objective) has been defined. Examples include: non-profit organizations, governmental
units, and individuals. SWOT analysis may also be used in pre-crisis planning and
preventive crisis management. SWOT analysis may also be used in creating a
recommendation during a viability study/survey.

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SWOT - landscape Analysis

 The SWOT-landscape systematically deploys the relationships between overall


objective and underlying SWOT-factors and provides an interactive, query-able
3D landscape.
 The SWOT-landscape grabs different managerial situations by visualizing and
foreseeing the dynamic performance of comparable objects according to findings
by Brendan Kitts, Leif Edvinsson and Tord Beding (2000).
 Changes in relative performance are continually identified. Projects (or other units
of measurements) that could be potential risk or opportunity objects are
highlighted.
 SWOT-landscape also indicates which underlying strength/weakness factors that
have had or likely will have highest influence in the context of value in use (for
ex. capital value fluctuations).

Corporate Planning

As part of the development of strategies and plans to enable the organization to achieve
its objectives, then that organization will use a systematic/rigorous process known as
corporate planning. SWOT alongside PEST/PESTLE can be used as a basis for the
analysis of business and environmental factors.

• Set objectives – defining what the organization is going to do


• Environmental scanning
o Internal appraisals of the organization's SWOT, this needs
to include an assessment of the present situation as well as a
portfolio of products/services and an analysis of the
product/service life cycle
• Analysis of existing strategies, this should determine relevance
from the results of an internal/external appraisal. This may include gap
analysis which will look at environmental factors
• Strategic Issues defined – key factors in the development of a
corporate plan which needs to be addressed by the organization
• Develop new/revised strategies – revised analysis of strategic
issues may mean the objectives need to change
• Establish critical success factors – the achievement of objectives
and strategy implementation
• Preparation of operational, resource, projects plans for strategy
implementation
• Monitoring results – mapping against plans, taking corrective
action which may mean amending objectives/strategies.[8]

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Marketing

Marketing management

In many competitor analyses, marketers build detailed profiles of each competitor in the
market, focusing especially on their relative competitive strengths and weaknesses using
SWOT analysis. Marketing managers will examine each competitor's cost structure,
sources of profits, resources and competencies, competitive positioning and product
differentiation, degree of vertical integration, historical responses to industry
developments, and other factors.

Marketing management often finds it necessary to invest in research to collect the data
required to perform accurate marketing analysis. Accordingly, management often
conducts market research (alternately marketing research) to obtain this information.
Marketers employ a variety of techniques to conduct market research, but some of the
more common include:

• Qualitative marketing research, such as focus groups


• Quantitative marketing research, such as statistical surveys
• Experimental techniques such as test markets
• Observational techniques such as ethnographic (on-site)
observation
• Marketing managers may also design and oversee various
environmental scanning and competitive intelligence processes to help
identify trends and inform the company's marketing analysis.

Using SWOT to analyse the market position of a small management consultancy with
specialism in HRM.[8]

Strengths Weaknesses Opportunities Threats


Reputation in Shortage of Well established Large consultancies
marketplace consultants at position with a well operating at a minor
operating level rather defined market niche level
than partner level
Expertise at partner Unable to deal with Identified market for Other small
level in HRM multi-disciplinary consultancy in areas consultancies looking
consultancy assignments because other than HRM to invade the
of size or lack of marketplace
ability

STRATEGIC FIT

 Strategic fit express the degree to which an organization is matching its resources
and capabilities with the opportunities in the external environment.

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 The matching takes place through strategy and it is therefore vital that the
company have the actual resources and capabilities to execute and support the
strategy.
 Strategic fit can be used actively to evaluate the current strategic situation of a
company as well as opportunities as M&A and divestitures of organizational
divisions.
 Strategic fit is related to the Resource-based view of the firm which suggests that
the key to profitability is not only through positioning and industry selection but
rather through an internal focus which seeks to utilize the unique characteristics of
the company’s portfolio of resources and capabilities.
 A unique combination of resources and capabilities can eventually be developed
into a competitive advantage which the company can profit from.
 However, it is important to differentiate between resources and capabilities.
 Resources relate to the inputs to production owned by the company, whereas
capabilities describe the accumulation of learning the company possesses.

Resources can be classified both as tangible and intangible:

Tangible:

• Financial (Cash, securities)


• Physical (Location, plant, machinery)

Intangible:

• Technology (Patents, copyrights)


• Human resources
• Reputation (Brands)
• Culture

 Several tools have been developed one can use in order to analyze the resources
and capabilities of a company.
 These include SWOT, value chain analysis, cash flow analysis and more.
Benchmarking with relevant peers is a useful tool to assess the relative strengths
of the resources and capabilities of the company compared to its competitors.
 Strategic fit can also be used to evaluate specific opportunities like M&A
opportunities.
 Strategic fit would in this case refer to how well the potential acquisition fits with
the planned direction (strategy) of the acquiring company.
 In order to justify growth through M&A transactions the transaction should yield
a better return than Organic growth.

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 The Differential Efficiency Theory states that the acquiring firm will be able
increase its efficiency in the areas where the acquired firm is superior.
 In addition the theory argues that M&A transactions give the acquiring firm the
possibility of achieving positive synergy effects meaning that the two merged
companies are worth more together than the sums of their parts individually.
 This is because merging companies may enjoy from economics of scale and
economics of scope.
 However, in reality many M&A transactions fails due to different factors, one of
them being lack of strategic fit.
 A CEO survey conducted by Bain & Company showed that 94% of the
interviewed CEO’s considered the strategic fit to be vitally influential in the
success or failure of an acquisition.
 A high degree of strategic fit from can potentially yield many benefits for an
organization.
 Best case scenario a high degree of strategic fit may be the key to a successful
merger, an efficient organization, synergy effects or cost reductions.
 It is a vital term and it should be taken into consideration when evaluating a
company’s strategy and opportunities.

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