La Trobe University CORPORATE STRATEGY

MBA PROGRAM
LECTURE 3

Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

Drawn from Hill & Jones Strategic Management - 8TH Edition - Chapter 3 & other contemporary sources of information

In preparing for battle I have always found that plans are useless, but planning is indispensable.
- Dwight D. Eisenhower

External and Internal Analyses

Environment Sociocultural
Ge ne De ra mo gra l ph ic

Industry Environment

By studying the external environment, firms identify what they might choose to do

Po lit En ical/L vir on egal me nt

al n er Ge omic on Ec

Opportunities and Threats

al ob nt Gl me on vir En

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)

THE CONTEXT OF INTERNAL ANALYSIS

Global Economy
Traditional sources of advantages can be overcome

by competitors international strategies and

By the flow of resources throughout the global

economy.

Global Mind-Set
The ability to study an internal environment in ways

that are not dependent on the assumptions of a

Single country Single culture, or Single context.

THE CONTEXT OF INTERNAL ANALYSIS

Analysis Outcome
Understanding how to leverage the firms

bundle of heterogeneous resources and capabilities.

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?

Internal Analysis
The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organisation. It includes assessments of:
The firms resources and capabilities Distinctive competencies

Components of Internal Analysis

Core Competencies Capabilities Resources Tangible Intangible Four Criteria of Sustainable Advantages Discovering Core Competencies

Value Creation

Competitive Advantage

Value Chain Analysis

Valuable Rare Costly to Imitate Nonsubstitutable

Outsource

Internal Analysis
Building and sustaining a competitive advantage requires a company to achieve superior:
Efficiency Quality Innovations Responsiveness to Customers

Internal Analysis: Strengths and Weaknesses

Internal analysis + external analysis = Information Strengths
Assets that boost profitability

Weaknesses
Liabilities that depress profitability

Key Strategic Leadership Actions:

Establishing Balanced Organisational Controls

The Balanced Scorecard

A framework used to verify that the firm

has established both strategic and financial controls to assess its performance.
Prevents over-emphasis of financial

controls at the expense of strategic controls

The Balanced Scorecard

Developed by Robert Kaplan and David Norton (1990s)
Plan, set goals, and measure success A plan is more important than specific tools An approach that extends beyond financial

measures and incorporates other priorities of the organisation

Links strategic organisational plans and priorities

Kaplan & Norton

A Balanced Scorecard Approach

The first step
Determine the organisations strategic objectives These should be precise and measurable

Curb Vagueness
(eg Improve the organisations customer service)

Be Precise
(eg Increase respond to customer orders by 33.3% by

completion of the next financial year)

Strategic objectives must align with organisational goals

Must align with the organisations Vision and Mission

The Balanced Scorecard

Allows for an increased focus on strategy and results Aligns strategy with the Organisations Vision and Mission Identifies the drivers of future performance for current strategic planning Aligns strategy with human resources

A Balanced Scorecard Approach

Strategy Mapping
Stakeholder Improved Returns on Investments More rapid and accessible services

Internal Process

Economic Model Process

Reduce Re-Activities thru ABC/M

Establish Web Based Self Services

Learning & Growth

Expand Global Facility Reach

Leadership Development

Knowledge Management

Investments

Facilities and Fixed Assets

Human Capital

IT Infrastructure

Strategy Mapping
Drivers and outcomes matched against the core competencies of the organisations business model
Splitting the Perspective Outcomes

Customer Perspective
Retention Rate Price Quality Customer Satisfaction Service Reputation

Customer Growth Timely Delivery

Drivers

Strategy Maps: Communicating the Strategy

Executive consensus and accountability: Building the map eliminates ambiguity and clarifies responsibility. Educate and Communicate: Build awareness and understanding of organisation strategy across the workforce.

Ensure Alignment: Each sub-unit and individual link their objectives to the map.

Promote Transparency: Communicate with and educate constituents, partners, oversight bodies, and the general public.

Source: Robert S. Kaplan (2004) "Using Balanced Scorecard Technology to Create Strategy-Focused Public Sector Organisations

A Touch of Theory: Career Anchors

Edgar Schein Most people have two strong career anchors Our anchor is the "dominant motivator" that guides us into the type of work we want to do. Technical / Functional
Being good at something Will work to become a guru or expert
Edgar Schein

Career Anchors
General Managerial
Want to be managers A liking for problem-solving and dealing

with other people

Thrive on responsibility Need emotional competence

Autonomy / Independence
Primary need to work under their own rules

and steam
They avoid standards and prefer to work alone

Career Anchors
Entrepreneurial Creativity
Like to invent things, be creative and, most of all,

to run their own businesses

Ownership very important Easily bored

Security / Stability
Seek stability and continuity Avoid risks and are generally 'lifers' in their job

Career Anchors
Service / Dedication to a cause
Driven by how they can help other people

Pure Challenge
Driven by challenge Seek constant stimulation and

difficult problems
Will change jobs when bored Career can be very varied

Career Anchors
Lifestyle
Focused first on lifestyle and their whole pattern of

living
Integrate work and life May take long periods off work

Schein also suggests that it is often mid-life (late 30s and 40s) before an individual's career anchor becomes clear Also Recall McClellands Theory of Needs
Source: Schein, Edgar H, (1990). Career Anchors (discovering your real values).

 Life is short, the art long, opportunity fleeting, experiment treacherous, judgement difficult.
Hippocrates

Shifting the Analysis: From External to the Internal Environment

THE FIRM Goals and Values Resources and Capabilities Structure and Systems

THE INDUSTRY ENVIRONMENT

STRATEGY

Competitors Customers Suppliers

The Firm-Strategy Interface

The Environment-Strategy Interface

Shifting the Analysis: From External to the Internal Environment WHY?

When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. Resources and capabilities are the primary sources of profitability

Organisational Organisational Capability Capability Architecture Architecture

ORGANISATIONAL CAPABILITY
SKILLS & Organisation Management KNOWLEDGE Structure Systems VALUES & NORMS TECHNICAL MANAGERIAL RESOURCES SYSTEMS SYSTEMS Human skills & know-how
Technology Culture (values, norms)
Source: Dorothy Leonard-Barton Core Capabilities & Core Rigidities Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation. Robert M Grant: Contemporary Strategy Analysis.

Capabilities, Strategy, Resources, and Competencies

Organisational Capability

Core Competence as a Strategic Capability

Resources Inputs to a firms production process Core Competence A strategic capability
Does it satisfy the criteria of sustainable competitive advantage?

The source of

Capability An integration of a team of resources

Yes

No

Capability A nonstrategic team or resource

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The Basic Value Chain

M ar

gin

ar

gin

Technological Development

Human Resource Mgmt.

Firm Infrastructure

Support Activities

Service Procurement Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities

Outsourcing
Outsourcing is the purchase of some or all of a valuecreating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently
gi ar M n M ar gi

Technological Development

Human Resource Mgmt.

Support Activities

Firm Infrastructure

Service Procurement Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities

Competitive Advantage
Competitive Advantage
A firms profitability is greater than the average

profitability for all firms in its industry.

Sustained Competitive Advantage

A firm maintains above average and superior

profitability and profit growth for a number of years.

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Competitive Advantage
How does Competitive Advantage emerge?

External sources of change e.g.: Changing customer demand Changing prices Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective in exploiting change

Some firms have greater creative and innovative capability

Competitive Advantage, Value Creation, and Profitability

How profitable a company becomes depends on three basic factors: Value or utility the customer gets from owning the product
Price that a company charges for its products

Costs of creating that product Consumer surplus is the excess utility a

consumer captures beyond the price paid Basic Principle: the more utility that consumers get from a companys products or services, the more pricing options the organisation has.

Competitive Advantage
COST COST ADVANTAGE ADVANTAGE

COMPETITIVE COMPETITIVE ADVANTAGE ADVANTAGE

t duc pro t ilar r cos m i e S ow at l

fro m

un iq

ue pro du ct

DIFFERENTIATION DIFFERENTIATION ADVANTAGE ADVANTAGE

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BeforePorter.. Porter Before

The McKinsey Business System A business delivers its products or services sequentially. At each link of the business system, management can choose how to conduct the business.

TECHNOLOGY

PRODUCT DESIGN

MANUFACTURING

MARKETING

DISTRIBUTION

SERVICE

The Porter Value Chain

A business is a chain of activities for transforming inputs into outputs that customers value including the primary and support activities.

Building Blocks of Competitive Advantage

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Complexity Theory
Organisations are complex systems Human crowds, flocks of birds, ant colonies are also complex systems They are all systems in which large numbers of independent agents interact Complexity Theory shows that complex systems display common and predictable patterns of adaptive behaviour

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Complexity Theory
Premise is that there is a hidden order to the behaviour (and evolution) of complex systems, whether that system is
A national economy An eco-system An organisation A production line

Used in business as a way to encourage innovative thinking and real-time responses to change by allowing business units to selforganise.

Complexity Theory
Complex adaptive systems have common features Unpredictability
Waves of change are constantly interacting

and re-shaping competitive landscapes

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Complexity Theory
Self-organisation
A key feature of biological and social systems

is their capacity for self-organisation

Similarly to shoals of fish, companies have

the capacity to self-organise, adapt to change, and create new structures and systems in the absence of formal authority

Self-Organisation
For human organisations there are three main requirements for self-organisation

Identity Organisations need to have an intent that drives the sense-making process within the organisation Information The medium through which an organisation relates to its environment The medium through which individuals within the organisation know how to react to external changes

Self-Organisation
Relationships
Pathways through which information is transformed

into intelligent, co-ordinated action

The more access individuals have to one another, the

greater the possibilities for organised activity

Appropriate responses to external circumstances,

requires every person to have a wide range of connections to others, with the potential for unplanned connections Networking!!

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Complexity Theory
Inertia and Chaos
Evolutionary processes in organisations can

produce three types of outcome

Order change is so limited that the systems suffers inertia Disorder changes produce chaotic outcomes Intermediate small changes resulting in power and process distribution Small and large shifts Most rapid evolutionary adaption

Complexity Theory
Step back from the day-to-day running of the organisation Watch for
Emergent properties and Organisational patterns

Those conditions or patterns that bring about the best solutions should be preserved whenever possible

Complexity Vs Chaos
Complexity theory is very similar to Chaos Theory Complexity theorists maintain that chaos, by itself, does not account for the coherence of selforganising, complex systems. There are advantages for systems that evolve to the edge of chaos ...ie they know when to stop!

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Analysing Competitive Advantage and Profitability

Competitive Advantage
When a companys profitability is greater than the

average of all other companies in the same industry that compete for the same customers

Benchmarking
Comparing company performance against that of

competitors and the companys historic performance

The Durability of Competitive Advantage

The durability of a companys competitive advantage over its competitors depends on: Barriers to Imitation - Making it difficult to copy a companys
distinctive competencies

Capability of Competitors
Strategic commitment Absorptive capacity

Industry Dynamism - Ability of an industry to change rapidly

Why Companies Fail

When a company loses its competitive advantage, its profitability falls below that of the industry.
It loses the ability to attract and generate

resources.
Profit margins and invested capital shrink

rapidly.

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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 former core competencies that now generate inertia and stifle innovation.

CAUTIONS AND REMINDERS

Determining what the firm can do through continuous and effective analyses of its internal environment will increase the likelihood of longterm competitive success.

Developing a sound and healthy organisation requires understanding the environment as much as understanding the organisation.

- Gary Hamel
Management Guru & Author

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