STRATEGIC MANAGEMENT:

INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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The Big Picture: the strategy
model
FIRM
Environ
-ment
Strategy
Internal Analysis




Analysis
Implementation
Formulation
The Strategy Process
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In preparing for battle I have
always found that plans are
useless, but planning is
indispensable.
- General
Dwight D.
Eisenhower
RoyaltyFree/ Stockdisc/ Getty Images
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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Internal Analysis
The purpose of internal analysis is to pinpoint the
strengths and weaknesses of the organization.
Strengths lead to superior performance.
Weaknesses lead to inferior performance.
+The purpose of strategy is to create
superior performance (competitive
advantage)

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Internal Analysis:
Strengths and Weaknesses
Internal analysis - along with the external analysis of
the companys environment - gives managers the
information to choose the strategies and business
model to attain a sustained competitive advantage.
Strengths
Of the enterprise
are assets that
boost
profitability
Weaknesses
Of the enterprise
are liabilities that
lead to lower
profitability
Internal Analysis
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Building and sustaining a competitive advantage
requires a company to achieve superior:


Efficiency
Quality
Innovations
Responsiveness to customers
Internal Analysis includes an assessment of:
+ Quantity and quality of a companys
resources and capabilities
+ Ways of building unique skills
and company-specific or
distinctive competencies



STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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Internal Analysis:
A Three-Step Process
1. Understand the process by which companies
create value for customers and profit for
themselves.
+Resources + Capabilities Distinctive competencies
2. Understand the importance of superiority in
creating value and generating high profitability.
+Efficiency
+Quality
3. Analyze the sources of the companys
competitive advantage. (if any)
+Strengths that are driving profitability
+Weaknesses opportunities for improvement
+ Innovation
+ Responsiveness to Customers
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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.
The Primary Objective of Strategy
is to achieve a
Sustained Competitive Advantage
as measured by
Superior Profit and Profit Growth.
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Profitability in the
Computer Industry, 1998-2003
Dell has achieved a sustained competitive advantage over its rivals.
Data Source: Value Line Investment Survey
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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Strategy, Resources,
Capabilities, and Competencies
Figure 3.1
=
Resource Based View of the Firm
(Some kinds of) RESOURCES
+
(Some kinds of) CAPABILITIES

DISTINCTIVE
COMPETENCIES
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Resource Based View of the Firm
+ALL companies have
+resources and capabilities

+Only a FEW companies have distinctive
competencies
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Distinctive Competencies and
Role of Resources & Capabilities
Resources
Tangible (physical) and intangible (non-physical)
Allow a company to create value for its customers
Must have skills to take advantage of the resources
Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a companys products lead to
distinctive competencies
Capabilities
Coordinating resources & putting to productive use
Skills reside in the organizations rules, routines
and procedures
Product of its organization, processes & controls
Firm-specific capabilities to manage its resources
lead to distinctive competencies
=
Resources
+Resources
Tangible (physical) and intangible (non-physical)
Name some tangible and intangible resources you are
likely to find in a business

Allow a company to create value for its customers
Must have skills to take advantage of the resources
Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a companys products lead to
distinctive competencies

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Capabilities
+Capabilities
Coordinating resources & putting to
productive use
Skills reside in the organizations rules,
routines and procedures
Product of its organization, processes &
controls

Name some capabilities of organizations

Firm-specific capabilities to manage its
resources lead to
distinctive competencies

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Distinctive Competencies
to Gain Competitive Advantage
Distinctive Competencies
Firm-specific strengths allow a company to
differentiate its products and/or achieve
substantially lower costs than its rivals in
order to gain a competitive advantage.
=
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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Competitive Advantage,
Value Creation, and Profitability

1. VALUE or UTILITY the customer gets from
owning the product
2. PRICE that a company charges for its
products
3. COSTS of creating those products
+ 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 company has.
How profitable a company becomes
depends on three basic factors:
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Value Creation per Unit
Figure 3.2
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Value Creation
and Pricing Options
There is a dynamic
relationship among utility,
pricing, demand, and costs.
Figure 3.3
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Comparing Toyota
and General Motors
Superior value creation requires that the gap between
perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.
Figure 3.4
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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The Value Chain
A company is a chain of activities for transforming
inputs into outputs that customers value
including the primary and support activities.
Figure 3.5
Do we know what these mean?
+Primary Activities
1.Research and Development
2.Production
3.Marketing and Sales
4.Customer Service
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Do we know what these mean?
+Support Activities
1. Company Infrastructure
Organizational structure, culture, control systems
2. Information Systems
Systems that provide information needed to
manage business
3. Materials Management
Logistics for materials flow
4. Human Resources
Right people in right place at right time
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The Value Chain
A company is a chain of activities for transforming
inputs into outputs that customers value
including the primary and support activities.
Figure 3.5
The Value Chain Process:
Western Perspective ?
R&D

Production

Marketing

Service

What could be a better perspective
of the same process?
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The Value Chain Process

What could be a different perspective
of the same process?

What do the arrows mean ?

What do they say about how products are
made?
What do they say about the flow of
information in the organization?
Does R&D need to know anything that
marketing knows?


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The Value Chain Process:
Western Perspective ?
R&D

Production

Marketing

Service

What could be a different perspective
of the same process?
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The Value Chain Process:
An Asian Perspective ?
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R & D
Customer
Service
Production
Marketing
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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Internal Building Blocks
of Competitive Advantage



C
The Generic
Distinctive Competencies
Allow a company to:
Differentiate product offering
Offer more utility to customer
Lower the cost structure
regardless of the industry,
its products, or its services

Figure 3.6
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Efficiency
+ Measured by the quantity of inputs it
takes to produce a given output:
Efficiency = Outputs / Inputs
+ Productivity leads to greater efficiency
and lower costs:
Employee productivity
Capital productivity
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure.
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Quality
Reliable and
Differentiated by attributes that customers
perceive to have higher value
+The impact of quality on competitive
advantage:
High-quality products differentiate and increase
the value of the products in customers eyes.
Greater efficiency and lower unit costs are
associated with reliable products.
Superior quality = customer perception
of greater value in a products attributes
Form, features, performance, durability, reliability, style, design
Quality products are goods and services that are:
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A Quality Map for Automobiles
When customers
evaluate the quality of a
product, they commonly
measure it against two
kinds of attributes:
1. Quality as Excellence
2. Quality as Reliability
Figure 3.7
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Innovation
Innovation is the act of creating
new products or new processes
Product innovation
Creates products that customers
perceive as more valuable and
Increases the companys pricing options
Process innovation
Creates value by lowering production costs

Successful innovation can be a major
source of competitive advantage
by giving a company something unique,
something its competitors lack.
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Responsiveness to Customers


+ Superior quality and innovation are integral to
superior responsiveness to customers.
+ Customizing goods and services to the unique
demands of individual customers or customer
groups.
+ Enhanced customer responsiveness
Customer response time, design,
service, after-sales service and support

Superior responsiveness to customers
differentiates a companys products and services
and leads to brand loyalty and premium pricing.
Identifying and satisfying customers
needs better than the competitors
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Competitive Advantage:
The Value Creation Cycle
Figure 3.8
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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The Durability of Competitive
Advantage
1.Barriers to Imitation
Making it difficult to copy a companys distinctive competencies
+ Imitating Resources
+ Imitating Capabilities
2.Capability of Competitors
+ Strategic commitment
Commitment to a particular way of doing business
+ Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
3.Industry Dynamism
Ability of an industry to change rapidly
The DURABILITY of a companys competitive advantage over
its competitors depends on:
Competitors are also seeking to develop distinctive
competencies that will give them a competitive edge.
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Industry Dynamism, Punctuated
Equilibrium and Competitive
Structure
Periods of long
term stability
Periods of long
term stability
Industry
Structure
revolutionized
by innovation
Figure 2.6
Punctuated
Equilibrium occurs
when an industrys
long term stable
structure is punctuated
with periods of rapid
change by innovation.
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Why Companies Fail
+ Inertia
Companies find it difficult to change their
strategies and structures
+ Prior Strategic Commitments
Limit a companys ability to imitate and
cause competitive disadvantage
+ The Icarus Paradox
A company can become so specialized and inner directed
based on past success that it loses sight of market realities
Categories of rising and falling companies:
Craftsmen Builders Pioneers Salespeople
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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Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on the Building Blocks of Competitive
Advantage
Develop distinctive competencies and superior performance in:
+ Efficiency + Quality
+ Innovation + Responsiveness to Customers
2. Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
3. Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global
competitors
4. Overcome Inertia
Overcome the internal forces that are barriers to change
Luck may play a role in success, so
always exploit a lucky break - but remember:
The harder I work, the luckier I seem to get.
J P Morgan
The Big Picture: the strategy
model
FIRM
Environ
-ment
Strategy
Internal Analysis
STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
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Developing a sound and
healthy organization requires
understanding the environment
as much as understanding the
organization.
- Gary Hamel
RoyaltyFree/ Stockdisc/ Getty Images
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Drivers of Profitability (ROIC)
Figure 3.9
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Ways to Increase ROIC
Increase Companys Return on Sales
Increase sales revenue more than costs
Reduce cost of goods sold
O Reduce spending on SG&A
Sales, Marketing, General & Administrative Expenses
O Reduce R&D expenses
Research & Development
Increase Capital Turnover
Reduce the amount of working capital
Inventory, Accounts Receivable, Payables
O Reduce the amount of fixed capital
PPE - Property, Plant & Equipment

O
O
O
O
O
O
Question
+Define the Vietnamese cell phone
industry: what are its principal products
and/or services?
+What are the minimum resources and
capabilities needed to compete in this
industry?

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