Lesson 6-Internal Environment Analysis PDF

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Summary

Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into th...

Description

Internal Environment Analysis The requirement today is that managers throughout an organization be continuously committed to understanding and adapting to environmental developments that can affect strategies and operations.

Situational Analysis: SWOT Approach  

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Strategy formulation o concerned with developing a corporation’s mission, objectives, strategies and policies Situation analysis o the process of finding a strategic fit between external opportunities and internal strengths while working around external and internal weaknesses Environmental analysis of any Business enterprise involves two stages: Internal and External analysis. Internal analysis is the systematic evaluation of the key internal features of an organization.

SWOT  Factors affecting an organization can usually be classified as:  Internal factors o Strengths (S) o Weaknesses (W)  External factors o Opportunities (O) o Threats (T) acronym used to describe the particular Strengths, Weaknesses, Opportunities and Threats that are potential strategic factors for a specific company  

Strategy = opportunity/capacity Opportunity has no real value unless a company has the capacity to take advantage of that opportunity. Determining what the firm can do through continuous and effective analyses of its internal environment increase the long-term competitive success

Areas need to be considered for internal analysis   

The organization’s resources, capabilities The way in which the organization configures and co-ordinates its key value-adding activities The structure of the organization and the characteristics of its culture

Outcomes  Strengths  Weakness  Capabilities  Core competencies S/W 

A strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting objectives.

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A weakness is a limitation or deficiency in one or more of a firm’s resources or capabilities relative to its competitors that create a disadvantage in effectively meeting objectives.

Approaches for scanning and analysing Internal Variables   

Functional Analysis Core Competencies Analysis Value Chain Analysis

The Resource-Based View of the Firm Elements of Competitive Advantage

Source: Adapted from Peteraf (1993) and Ghemawat (1991).

Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name     

Resources represent inputs into a firm’s production process... Resources are assets employed in the activities and processes of the organization. They can be tangible or intangible. They can be obtained externally (organization-addressable) or internally generated (organization-specific). They can be specific and non-specific: o Specific resources can only be used for highly specialized purposes and are very important to the organization in adding value to goods and services. o Assets that are less specific are less important in adding value, but are more flexible.

Capabilities

What a firm Does...

Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

Competencies vs. Core Competencies vs. Distinctive Competencies   

A competency is an internal capability that a company performs better than other internal capabilities. A core competency is a well-performed internal capability that is central, not peripheral, to a company’s strategy, competitiveness, and profitability. A distinctive competence is a competitively valuable capability that a company performs better than its rivals.

Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies   

Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Intraorganizational Conflicts among people making managerial decisions and those affected by them

Distinctive Competence Valuable

What a firm Does... that is Strategically

For a strategic capability to be a Distinctive Competence, it must be:   

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Valuable o Capabilities that help a firm neutralize threats or exploit opportunities Rare o Capabilities that are not possessed by many others Costly to Imitate o Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Exploitable by the Organization o Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances Example: Sampath Bank ATM Causal Ambiguity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage. E.g.: Core of Siddalepa Social Complexity Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers Resource Imitation

Inputs to the firm’s processes

Integration of resources into value-adding activities

Not all capabilities are core competences – only those that add greater value than those of competitors

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Value Chain Analysis 

Value chain analysis is a technique developed by Porter (1985) for understanding an organization’s value-adding activities and relationship between them.

Identifying Resources and Capabilities That Can Add Value

Primary activities are those that directly contribute to production of good or services and organization’s provision to customer

Support activities are those that aid primary activities, but do not themselves add value

PRIMARY ACTIVITIES

Financial Ratio Analysis 

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Five types of financial ratios o Short-term solvency or liquidity o Long-term solvency measures o Asset management (or turnover) o Profitability o Market value Meaningful ratio analysis must include o Analysis of how ratios change over time o How ratios are interrelated

Financial Ratio Analysis: Historical Comparisons

Exhibit 3.8 Historical Trends: Return on Sales (ROS) for a Hypothetical Company

Financial Ratio Analysis: Comparison with Industry Norms

Exhibit: How Financial Ratios Differ across Industries Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000, Desktop Edition, SIC #0100-8999

Financial Ratio Analysis: Comparison with Key Competitors

Source: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data courtesy of Lehman Brothers and Procter & Gamble....