Chapter Four:Analyzing an Industry

By: Lauren Sterna, Collin Gillaspie, Clint Chapman, Craig Crowell, Jennifer Eccles, & Scott Addison

What is an Internal Analysis?

•Evaluates an organization’s resources and capabilities, and core competencies▫Resources include financial, physical,

human, intangible, and structural-cultural.

•Provides information on assets, skills, and work activities

Organizational Capabilities

•Definition: The various routines and processes that transform those inputs (resources) into outputs (physical goods and services)

•These organizational routines and processes are the regular and predictable work activities done by organizational members▫Delta Air Lines vs. Southwest Airlines

Sustainable Competitive Advantage

•Capabilities that lead to a competitive advantage now may not do so in the future as conditions and competitors change

•Dynamic Capabilities: an organizations ability to build, integrate, and reconfigure capabilities to address rapidly changing environments

Performance Results

Competitive

Advantage

Distinctive Organization

al Capabilities

Core Competencie

s

Organizational

Capabilities

Organizational Resources

•Financial assets•Physical assets•Human Resources•Intangible Assets•Structural-Cultural

•Organizational processes and routines•Accumulated knowledge•Actual work activities

Unique Resources

Figure 4.2The Strategic Role ofOrganizational Resources and Organizational Capabilties

Organizational Capabilities, Core Competencies & Distinctive Capabilities• Core Competencies-Any major value-creating capabilities

organizations have that are essential to their business.• Nokia-Product design, customer research• Dordstrom-customer service

• What comes first out of the 3? Organizational Capabilities • Fundamental building blocks for developing core

competencies

• Distinctive Organizational Capabilities-the special and unique capabilities that distinguish an organization from its competitors.• Southwest-Processes and routines(turnaround, ticketing,

and interaction)

Distinctive Capabilities

•Three Characteristics▫First, a distinctive capability contributes to superior customer value and offers real benefits to customers.

▫Second, the should be difficult to imitate.

▫Third, should be able to be used in a variety of ways.

Ex. Honda

Strengths & Weaknesses

•Internal Analysis-Find S&W▫ Strengths-resources that the organization possesses and

capabilities that it has developed which can be turned into a competitive advantage. Not every strength will lead to a sustainable competitive advantage,

but an organization’s strengths should be nurtured and reinforced as its main competitive weapons

▫ Weaknesses-resources and capabilities that are lacking or deficient and prevent the organization from developing a sustainable competitive advantage. To be corrected if they’re in critical areas that are preventing the

organization from developing a sustainable competitive advantage. Most organizations simply minimize the impact of the weakness.

Value Chain Analysis

•A systematic way of examining all the organization’s functional activities and how well they create customer value.

•Value comes from 3 broad categories: ▫Product is unique and different▫Product is low priced▫Product meets the needs of a specific group

of customers quickly and efficiently

Assessing the Activities in the Value Chain•Primary Activities

▫Inbound logistics▫Operations▫Outbound logistics▫Marketing and sale▫Customer service

•Support Activities▫Procurement▫Technological

development▫Human resource

management▫Firm infrastructure

Assessing the Primary Activities in the Value Chain• Inbound Logistics

▫ Materials control system, inventory control system, raw materials

• Operations▫ Plant layout, productive equipment as compared to

competitors• Outbound logistics

▫ Finished products• Marketing and Sales

▫ Marketing research, brand loyalty, alternative distribution channels

• Customer Service▫ Customer input, product warranty, employee training, repair

and replacement services

Assessing the Support Activities in the Value Chain• Procurement

▫Alternate resources, long-term relationships and reliable suppliers

• Technological Development▫R & D activities, organizational culture, trained

technicians• Human Resource Management

▫Effective recruiting, and training programs, promotion policies, reward systems, employee motivation

• Firm Infrastructure▫External opportunities and threats, organizational

goals, public image, stakeholder relationships

Overview•Value chain analysis is important because it

creates the varying levels of customer value and organizational costs.

•They assess the organization’s ability to create customer value through its work activities.

•The advantage of the value chain analysis is that it emphasizes the importance of how well an organization performs the primary and support activities in creating customer value

Internal Audit

•A thorough examination of an organization’s internal areas.

•Begins with the premise that every organization has functions it must perform, and strengths and weaknesses are based on how well they are performed.

•Looks at six organizational functional areas and measures the efficiency of each area.

•Central theme of auditing is looking for competencies in each area.

Organizational functional areas

•Production and operations•Marketing•Research and Development•Financial and Accounting•Management•Information systems and Information

technology

3 Additional Organizational Elements

•Strategic Managers-board of directors and top managers

•Organizational Structure•Organizational Culture

Capabilities Assessment Profile

CAP is an in-depth evaluation of an organization’s capabilities.

•Assessing capabilities can be complex since they arise from the ways that resources are combined in the organization’s basic work processes and routines.

•Capabilities assessment consists of two phases:▫Identify distinctive capabilities▫Developing and leveraging these distinctive

capabilities

Capabilities Assessment Profile

The first step in assessing organizational capabilities is preparing a current product-market profile.▫Emphasizes organization-customer

interactions.▫Identifies what we’re selling, who we’re

selling to, and whether we’re providing superior customer value and offering the customer desirable benefits.

Capabilities Assessment ProfileIn order to prepare a current product-market

profile we need:▫Information about specific products and markets▫Principal competitors in each of these product-

market segments▫Performance measures for each product-market

segment. Sales growth rate Market share Competitive position Contribution to sales and earnings

Capabilities Assessment Profile

The next step is identifying sources of competitive advantage and disadvantage in the main product-market segments. ▫We need to know why customers choose our

products instead of our competitors. ▫Identify specific costs, product, and service

attributes. ▫When someone buys our product they are

buying a bundle of attributes that they believe will satisfy their needs.

▫We need to know what these attributes are!!!

Capabilities Assessment Profile

The third step involves describing organizational capabilities and competencies. ▫Examine the resources, skills, and abilities

of your organizations different divisions. ▫Uncover what resources and capabilities

lead to your competitive advantage.

Capabilities Assessment ProfileThe last step involves sorting these capabilities and

competencies according to their strategic importance. ▫ Which capabilities are most important for building the

organization’s future. ▫ We should evaluate each category according to three

criteria: Does the capability provide tangible customer benefits? Is the capability difficult for competitors to imitate? Can the capability provide wide access to a number of

different markets?

By sorting organizational capabilities according to level of strategic importance, strategic decision makers gain an understanding of their organization’s critical strengths and weaknesses.

Capabilities Assessment Profile

The final step involves identifying and agreeing on the key competencies and capabilities. ▫By ranking key competencies and

capabilities, decision makers can easily identify the key ones.

▫The hard part is agreeing with competencies and departments deserve future resource allocation.

Determining Strengths and WeaknessesThe first criteria used to determine

strengths and weaknesses is past performance.▫Financial ratios▫Operational efficiency statistics▫Employee productivity statistics▫Quality control data

•Is market share increasing or decreasing?•Are liquidity ratios going up or down?•Ect…

Determining Strengths and WeaknessesThe second criteria is how actual

performance measures up against specific performance goals. ▫Organizational goals are statements of

desired outcomes. ▫Looking at performance trends and

organizational goals isn’t enough, we need something to compare them to.

Determining Strengths and Weaknesses•The third criteria is comparing resources

and capabilities against competitors. ▫To do this you use SEC fillings, industry

association newsletters, annual reports, customer contacts, and the competitor's web page.

▫However it’s unethical to go through someone’s garbage cans.

Determining Strengths and WeaknessesThe fourth and last criterion for judging

organizational strengths and weaknesses is personal or subjective opinions.▫These can come from decision makers or

consultants from inside or outside the company.

Summary

•Internal Analysis▫Evaluating a company based on its

resources and capabilities

•Strengths and Weaknesses

•Capabilities Assessment Profile