Internal Analysis

yunan@muraelpiji.com

Lecture Topics
Purpose

of Internal Analysis
Competitive Advantage and Core
Competence
Value Chain
Financial Analysis
Combining Internal and External
Analyses

Purpose of Internal Analysis

An

organizations future success depends on

its own internal conditions as well as external
conditions
Managers need to be able to identify

Strengths that the company can relay on in order

to compete
Weaknesses that need to be corrected or
minimized as competitive factors

Managers must
The role of resources, capabilities,
understand

and distinctive competencies in the

process by which companies create
value and profit
The importance of superior
efficiency, innovation, quality, and
responsiveness to customers
The sources of their companys
competitive advantage (strengths
and weaknesses)

Competitive Advantage

The collection of factors that sets a company

apart from its competitors and gives it a
unique position in the industry/market
Means to add value for stakeholders
Focus especially on adding value for
customers

Core Competence(ies)
A unique set of lasting capabilities that a
company relies on to achieve competitive
advantage and add value
Innovation
Efficiency
Customer Responsiveness
Quality
Special Expertise

The Value Chain

A

company is a chain of activities for

transforming inputs into outputs that
customers value
The transformation process is composed
of primary and support activities that
add value to the product

Value Chain

Service

Value Chain Interpretation

Represents

a company or any
organization
Simplified illustration of all activities
that an organization must perform
Framework for analyzing a companys
strengths and weaknesses
Margin represents profit- expand margin
by
Being

able to charge a higher price

Operating at a lower cost within the Value
Chain

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Primary Activities in the

Value Chain
Activities directly involved in
producing, selling, distributing, and
servicing product for buyer.
Inbound

logistics: receiving, storing, and

distributing inputs for production
Operations: all activities involved in
transforming inputs into final products
Outbound logistics: collecting, storing,
distributing product to final buyer
Marketing and Sales: activities used to get
customers to buy company products
Service: installation, repair, support, training
for using a product

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Support Activities in the

Value Chain
Activities that enable the performance
of primary activities

Firm infrastructure: companywide support of entire

value chain; includes quality of management, financial
performance, strategy, organizational culture
Human resource management: recruiting, hiring,
training, reward systems for employees
Research and development: design of products and
processes that enhance company performance; not
limited to equipment
Procurement: purchasing and managing inputs used
in operations; developing and managing supplier
relations

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Applying Value Chain Analysis

Framework

for identifying companys strengths

and weaknesses
Means to focus on where the companys core
competencies exist and can be used to
achieve competitive advantage and add value
Comparison with competitors reveals
opportunities for improving companys
competitive position

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Resource-Based View (RBV)

RBV is a method of analyzing

and identifying a firms
strategic advantages based on
examining its distinct
combination of assets, skills,
capabilities, and intangibles
The RBVs underlying premise
is that firms differ in
fundamental ways because
each firm possesses a unique
bundle of resources
Each firm develops
competencies from these
resources, and these become
the source of the firms
competitive advantages

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Three Basic
Resources
1. Tangible assets are the easiest
2.

3.

resources to identify and are often

found on a firms balance sheet
Intangible assets are resources
such as brand names, company
reputation, organizational morale,
technical knowledge, patents and
trademarks, and accumulated
experience
Organizational capabilities are
not specific inputs. They are the
skills that a company uses to
transform inputs into outputs

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What makes a resource valuable?

4 Guidelines:
1.

2.

3.
4.

Is the resource or skill critical to

fulfilling a customers need better than
that of the firms competitors?
Resurgence of Environmentalism
Is the resource scarce? Is it in short
supply or not easily substituted for or
imitated?
Appropriability: Who actually gets the
profit created by a resource?
Durability: How rapidly will the
resource depreciate?

Elements of
Scarcity

16

Short Supply
Availability of Substitutes
Imitation
Isolating Mechanisms:

Physically Unique Resources

Path-Dependent Resources
Casual Ambiguity
Economic Deterrence

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Resource limitation

18

Using RBV in Internal

Analysis
It is helpful to:
Disaggregate resources
Utilize a functional
perspective
Look at organizational
processes
Use the value chain approach

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Applying the Resource Based View

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Making Meaningful Comparisons

Managers need objective standards to

use when examining internal resources
and value-building activities
Strategists use the firms historical
experience as a basis for evaluating
internal factors
Benchmarking, or comparing the
way our company performs a
specific activity with a competitor or
other company doing the same thing,
has become a central concern of
managers in quality commitment
companies worldwide

Comparison with
Key Success Factors
in the Industry

21

The key determinants of success in an

industry may be used to identify a
firms internal strengths and
weaknesses
A strategist seeks to determine
whether a firms current internal
capabilities represent strengths or
weaknesses in new competitive arenas

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Financial Analysis
Uses

companys financial results to assess

companys performance
Requires comparisons of results over multiple
years and against industry standards
Important tool to identify companys strengths
and weaknesses and potential problem areas.

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Types of Ratios
Profitability
Activity

Efficiency
Liquidity
Debt - Leverage
Growth

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Analyzing Competitive
Advantage
and
Profitability

Benchmarking company performance against

that of competitors and the companys own
historic performance
Return on invested capital

ROIC

Net profit
Invested capital

Net profit = Total revenues Total costs

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Ways to Increase ROIC

Increase

Reduce cost of goods sold

Reduce spending on sales force, marketing,
general, and administrative expenses
Reduce R&D spending
Increase sales revenue more than costs

Increase

capital

the companys return on sales

sales revenues from invested

Reduce the amount of working capital

Reduce amount of fixed capital

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Why Companies Fail

Inertia

Companies find it difficult to change their

strategies and structures

Prior

Limit a companys ability to imitate and

cause competitive disadvantage

The

strategic commitments

Icarus paradox

A company can become so specialized

based on past success that it loses sight
of market realities
Craftsmen, builders, pioneers, salesmen

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Combining Internal and

External Analyses
Internal

and External Analyses

commonly referred to as SWOT:
Strengths
Weaknesses
Opportunities
Threats

Strengths

and Weaknesses identified

from Internal Analysis
Opportunities and Threats identified
from External Analyses

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Internal Analysis
Strengths

and Weaknesses identified

through the use of tools such as:

Vision, Mission, Objectives

Stakeholder Analysis
Core Competencies
Value Chain
Building Blocks of Competitive Advantage
Financial Analysis

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External Analysis
Opportunities

and Threats identified

through the use of tools such as:

General Environment Assessment

Five Force Analysis
Key Success Factors in Industry
Competitive Changes during Industry
Evolution
Strategic Groups
National Competitive Advantage

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Results of Internal and External

Analysis
Requires

creative interpretation
Understanding of companys
competitive position in its industry
Identification of strategic issues the
company faces
Strategic issues
Represent

dangers to the companys longterm survival

Suggest areas where the company should
concentrate its efforts in order to grow

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Internal Analysis

External Analysis

Strengths

Opportunities

Weaknesses

Threats

Tools

Tools

Strategic
Issues

Strategic
Alternatives

Strategy