Intrernal Scanning and Organizational Analysis

Internal Scanning: Organizational Analysis

Internal Audit

•Information from:•Management

•Marketing

•Finance/accounting

•Production/operations

•Research & Development

•Management information Systems

Parallel process with external audit

Organizational analysis

Internal strategic factors – those critical strengths and weakness that are likely to determine if the firm will be able to take advantage of opportunities while avoiding threats

Internal resources are more important than external factors

Core and Distinctive Competences

Resources are an organization’s assets and are thus the basic building blocks of the organization.

Capabilities refer to corporation’s ability to exploit its resources.

A competency is a cross-functional integration and coordination of capabilities.

Core and Distinctive Competences

A core competency is a collection of competencies that crosses divisional boundaries, is widespread within the corporation, and is something that the corporation can do exceedingly well.

When core competencies are superior to those of the competition, they are called distinctive competences.

VRIO framework of analysis:

1. Value: Does it provide competitive advantage?

2. Rareness: Do other competitors possess it?

3. Imitability: Is it cost for others to imitate?

4. Organization: Is the firm organized to exploit the resource?

If answer is yes for a particular competency, it is considered to be a strength and thus a distinctive competence.

Applying the VRIO Framework

in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat?

the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levi’s reputation allows it to charge a premium for itsDocker’s pants)

The Question of Value


• if a resource is not rare, then perfect competition dynamics are likely to be observed

• a resource must be rare enough that perfect competition has not set in

• thus, there may be other firms that possess the resource, but still few enough that there is scarcity

Several pharmaceuticals sell cholesterol-loweringdrugs, but the drugs are still scarce—look at prices

The Question of Rarity


• the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource

• intangible resources are usually more costly to imitate than tangible resources and bundles of resources are more costly than single resources

Harley-Davidson’s styles may be easily imitated, but its reputation cannot

The Question of Imitability


• a firm’s structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firm’s resources

• examples: formal and informal reporting structures, management controls, compensation policies,

relationships, etc.

• these structure and control mechanisms complement other firm resources—taken together, they can help a firm achieve sustained competitive advantage

3M Company – rewards innovation and risk-taking

The Question of Organization

Mobilizing Company Resources to Produce Competitive Advantage

Competitive Advantage

Strategic Assets and Market Achievements

Core and Distinctive Competencies

Competitive Capabilities

Company Resources

Competitive Advantage

Competitive advantage• A firm’s 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 with turn results in Superior Profit and Profit Growth

Determining the CompetitiveValue of a Company Resource

To qualify as the basis for sustainable competitive advantage, a “resource” must pass 4 tests:

1. Is the resource hard to copy ?

2. Does the resource have staying power -- is it durable ?

3. Is the resource really competitively superior ?

4. Can the resource be trumped by the different capabilities of rivals ?

Grant’s five-step, resource-based approach to strategy analysis:

1. Identify and classify the firm’s resources in terms of strengths and weaknesses

2. Combine the firm’s strengths into corporate capabilities – core competences.

3. Appraise the profit potential of these resources and capabilities in terms of their potential for sustainable competitive advantage.

4. Select the strategy that best exploits the firm’s resources and capabilities relative to external opportunities.

5. Identify resource gaps and invest in upgrading weaknesses.

Value Chain Analysis

A value chain is a linked set of value-creating activities beginning with basic raw materials coming from suppliers, moving on to series of value-added activities involved in producing and marketing a product or service, and ending with distributors getting final goods into the hands of the ultimate consumer.

Value Chain Analysis

Raw Materials

PrimaryManufacturing

FabricationProduct

ProducerDistributor Retailer

Typical Value Chain for a Manufactured Product

Corporate Value Chain Analysis

DistributionAnd

OutboundLogistics

Operations

PurchasedSupplies

andInboundLogistics

Sales and Marketing

ServiceProfit

Margin

Product R&D, Technology, Systems Development

Human Resources Management

General Administration

Primary Activities and Costs

Support Activities and Costs

Value Chain Analysis is a three-step process:

Activity Analysis: you identify the activities you undertake to deliver your product or service;

Value Analysis: for each activity, you think through what you would do to add the greatest value for your customer;

Evaluation and Planning: you evaluate whether it is worth making changes, and then plan for action.

An UnweightedCompetitive Strength Assessment

Rating Scale: 1 = very weak; 5 = average; 10 = very strong

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Overall strength rating

8 7 10

2 10 4

10 1 7

9 4 10

9 4 10

5 10 7

5 10 3

5 7 10

61 58 71

1

5

3

5

5

3

1

1

25

KSF/Strength Measure

Quality/product performance

ABC Co. Rival 1 Rival 2

8 5 10

Rival 3

1

Rival 4

6

6

1

8

1

1

1

4

4

32

A WeightedCompetitive Strength Assessment

Rating Scale: 1 = very weak; 5 = average; 10 = very strong

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Rival 1 Rival 2

5/0.50 10/1.00

7/0.70 10/1.00

10/1.00 4/0.40

1/0.05 7/0.35

4/0.20 10/0.50

4/0.20 10/0.50

10/1.00 7/0.70

ABC Co.

8/0.80

8/0.80

2/0.20

10/0.50

9/0.45

9/0.45

5/0.50

Rival 3

1/0.10

1/0.10

5/0.50

3/0.15

5/0.25

5/0.25

3/0.30

Rival 4

6/0.60

6/0.60

1/0.10

8/0.40

1/0.05

1/0.05

1/0.10

Weight

0.10

0.10

0.10

0.05

0.05

0.05

0.10

Relative cost position

Customer service capability

10/3.50 3/1.05

7/1.05 10/1.50

5/1.75

5/0.75

1/0.35

1/0.15

4/1.40

4/1.60

0.35

0.15

Sum of weights 1.00

Overall strength rating 6.20 8.20 7.00 2.10 2.90

Scanning Functional Resources

Simple structure Functional structure Divisional structure Strategic business units (SBUs) Conglomerate structure

Basic Organizational Structures

Basic Organizational Structures

Owner-Manager

Workers

Top management

Manufacturing Sales Finance Personnel

Top management

Product division A Product division B

Manufacturing

Sales Sales

ManufacturingFinance Finance

Personnel Personnel

Simple Structure

Functional Structure

Divisional Structure

Integrating Strategy & Culture

Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integration…is considered valid and taught to new members

Corporate Culture

Corporate Culture

A change in mission, objectives, strategies, or policies is not likely to be successful if it is in opposition to the accepted culture of the firm.

Like structure, if an organization’s culture is compatible with a new strategy, it is internal strength. In opposite – it is a serious weakness.

CulturalProducts

Values

Legends Beliefs

Heroes Rites

Symbols RitualsMyths

Integrating Strategy & Culture

Strategic Marketing Issues

Customer Needs/Wants for Products/Services

1. Market position: who are our customers?

2. Market segmentation: what niches to seek,

which new types of products to develop?

3. Marketing Mix refers to the particular combination of key variables (product, place, promotion, and price)

4. Product Life Cycle is a graph showing time plotted against the dollar sales of a product as it moves from introduction through growth and maturity to decline

Strategic Financial Issues

1. Financial Leverage (the ratio of total debt to total assets) is helpful in describing how debt is used to increase the earnings available to common shareholders.

2. Capital budgeting is the analyzing and ranking of possible investments in fixed assets such as land, buildings, and equipment in terms of additional outlays which will result from each investment.

Strategic Research & Development Issues

Development of new products before competitors

Improving product quality

Improving manufacturing processes to reduce costs

Strategic Operations Issues

Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality

The primary task of HRM is to improve the match between individuals and jobs.

Self-managing work teams

Cross-functional cross teams

Concurrent engineering

Strategic Human Resource Management Issues

Management

Planning

Stage When Most ImportantFunction

Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing

Controlling

Strategy Implementation

Strategy Evaluation

Management Information Systems

MIS are used

to automate back-office processes to automate individual tasks to provide sufficient data for analysis to enhance key business functions (marketing &

operations) to provide customer support and help in distribution and

logistics to develop competitive advantage

Internet Intranet Extranet

IFAS– Maytag (1995)

Key Internal Factors Weight RatingWtd

Score

Strengths

1. Quality Maytag culture 0.15 5.0 0.75

2. Experienced top management 0.05 4.2 0.21

3. Vertical integration 0.10 3.9 0.39

4. Employee relations 0.05 3.0 0.15

5. Hoover’s international orientation 0.15 2.8 0.42

Synthesis of Internal Factors: IFAS

IFAS– Maytag (1995)

Key Internal Factors Weight RatingWtd

Score

Weaknesses

1. Process-oriented R&D 0.05 2.2 0.11

2. Distribution channels 0.05 2.0 0.10

3. Financial position 0.15 2.0 0.30

4. Global positioning 0.20 2.1 0.42

5. Manufacturing facilities 0.05 4.0 0.20

TOTAL 1.00 3.05

Internal Factors Analysis Summary IFAS

The Maytag’s total weight is 3.05 means that the corporation was about average compared to the strengths and weaknesses of others in the major home appliance industry in 1995.

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Intrernal Scanning and Organizational Analysis