Download - Lecture 3 - Internal Analysis
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Strategic Management (BUS211) – week 3
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Week 3 – BUS211
Internal analysis
Presented by
Dr Bishnu Sharma
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Week 3: What do we do today?
• Analysis of how well the company’s strategy is working• Value creation and competitive advantage • Generic building blocks of competitive advantage• Business functions and the value chain• Distinctive competencies, resources, and capabilities• Durability of competitive advantage• Why do companies fail?• Avoiding failure and sustaining competitive advantage• Assessment of company’s competitive strength
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Assessment of how well the present strategy is working
• Qualitative assessment –What is the strategy?
– Completeness
– Internal consistency
– Rationale
– Relevance
• Quantitative assessment – What are the results?
– Is company achieving its financial and strategic objectives?
– Is company an above-average industry performer?
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Competitive advantage: value creation, low cost, and differentiation
• Key questions– What is competitive advantage?– What is sustained competitive advantage?– How to achieve competitive advantage and sustain it?
• Profitability of a firm depends on ...
– The amount of value that customers place on a company’s
products/ services
– The price that a company charges for its products/services
– The costs of creating that value
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Source: Hill and Jones (2010: 3)
Profitability of Walmart & Competitors
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Value Creation per Unit
Source: Hill and Jones (2010: 78)
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Value Creation and Pricing Options
There is a dynamic relationship among utility, pricing, demand, and
costs.
Source: Hill and Jones (2010: 79)
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Comparing Toyota and General Motors
Superior value creation requires the gap between perceived utility (U) and costs of production (C) be greater than attained by competitors.
Source: Hill and Jones (2010: 80)
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Strategy, Resources, Capabilities, and Competencies
Source: Hill and Jones (2010: 76)
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Relationship among strategies, resources and capabilities
Resources &Capabilities
(Competencies)Strategies
Shape
Build
Source: Hill et al. (2007: 112)
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Drivers of Profitability (ROIC) - ways to increase itIncrease Company’s Return on SalesIncrease Company’s Return on Sales Increase sales revenue more than costs Increase sales revenue more than costs Reduce cost of goods soldReduce cost of goods sold Reduce spending on Sales, General & Reduce spending on Sales, General & Administrative ‘SG&A”Administrative ‘SG&A” Reduce R&D expenses Reduce R&D expenses
Increase Capital Turnover Increase Capital Turnover Reduce the amount of working capital Reduce the amount of working capital Reduce the amount of fixed capital Reduce the amount of fixed capital
Source: Hill and Jones (2010: 92)
* PPE = Property, plant and equipment ‘Fixed Capital’
*
**Interest bearing debt plus shareholders’ equity
**
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Generic Building Blocks of Competitive Advantage
Source: Hill and Jones (2010: 86)
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The impact of quality on profits
IncreasedReliabilityIncreasedReliability
Higher Prices
Higher Prices
IncreasedQuality
IncreasedQuality
Higher Profits
Higher Profits
IncreasedProductivityIncreased
Productivity Lower Costs Lower Costs
Source: Hill & Jones (1998:117)
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Summary of the impact of efficiency, quality, innovation, and customer responsiveness on unit costs and prices
Innovation
Lower Unit Costs
Higher Unit Prices
CustomerResponsiveness
CustomerResponsiveness
Quality
EfficiencySource: Hill et al. (2007: 106)
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Competitive Advantage & Value Creation Cycle
Source: Hill and Jones (2010: 90)
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Competencies - Core Competencies - Distinctive Competencies
• A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity
• A core competence is a well-performed internal activity central to a company’s competitiveness and profitability
• A distinctive competence is a competitively valuable activity a company performs better than its rivals
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• Tangible (financial and physical)
– Land
– Buildings
– Plant
– Equipment
– Cash/debt/equity
• Intangible
– Brand names
– Company’s reputation
– Patents
– Skills ‘technical or marketing know-how’
– Information
– Relational assets/networks
Two types of resources
Resources are:Resources are:Resources are:Resources are:
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VRINE model (Carpenter and Sanders 2009: 79)
• VRINE Model: An analytical model which suggests that a firm with resources and capabilities which are valuable (V), rare (R), inimitable (I), non-substitutable (N), and exploitable (E) will gain a competitive advantage.
• This model helps managers systematically test the importance of particular resources and capabilities and the desirability of acquiring new resources and capabilities.
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The Value Chain“…company is a chain of activities for transforming inputs into outputs customers
value – including primary & support activities”.
Source: Hill and Jones (2010: 82)
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What determines whether a company is cost competitive?
• Cost competitiveness depends on how well a company manages its value chain relative to its competitors.
• High-cost activities can exist anywhere in the industry value chain.
Forwardchannel
activities, costs, & margins
Company’s own
internallyperformed activities, costs, & margins
Suppliers’ activities, costs, &margins
Buyer/uservalue
chains
Source: Thompson, Strickland and Gamble (2010:120)
Supplier-related value chain A company’s own value chain Forward channel value chains
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The role of luck
• Luck is a factor in competitive success and competitive failure
• At its extreme, the luck argument devalues importance of planned strategy
• Sustained competitive advantage relies on more than just luck
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The durability of competitive advantage
• Non-substitutability– The degree to which a resource has an equivalent
substitute
• Barriers to imitation– Imitating resources– Imitating capabilities
• Capability of competitors– Strategic commitment
• Industry dynamism
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Why do companies fail?
• Inertia• Prior strategic commitments• The Icarus paradox
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Avoiding failure and sustaining competitive advantage
• Focus on the building blocks of competitive advantage
• Institute continuous improvement and learning
• Track best industrial practice and use benchmarking
• Overcome inertia
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Conclusions from SWOT analysis
Source: Thompson, Strickland and Gamble (2010: 114)
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TOWS matrix
External Opportunities
(O)External Threats
(T)
Internal Strengths(S)
SO"Maxi-Maxi" Strategy
Strategies that use strengths to maximize opportunities.
ST"Maxi-Mini" Strategy
Strategies that use strengths to minimize threats.
Internal Weaknesses (W) WO"Mini-Maxi" Strategy
Strategies that minimize weaknesses by taking
advantage of opportunities.
WT "Mini-Mini" Strategy
Strategies that minimize weaknesses and avoid
threats.
Source: Weihrich (1982)
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Source: Thompson, Strickland and Gamble (2010: 112)
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Source: Thompson, Strickland and Gamble (2010: 112)
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Source: Thompson, Strickland and Gamble (2010:129)
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Source: Thompson, Strickland and Gamble (2010:129)
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Quiz – True or False1. Competitive advantage is usually generated by value creation. 2. For strategic management purposes, the terms ‘value’ and ‘price’
are the same thing. False3. The simplest measure of efficiency is the quantity of inputs that it
takes to produce a given output. TRUE4. High product quality can result in a firm achieving lower unit costs. 5. Achieving a competitive advantage through innovation may allow
a firm to achieve lower unit costs. TRUE6. Top management is considered part of a company’s
infrastructure. TRUE7. Brand name is an intangible resource. TRUE8. Competitive success and failure is entirely a matter of luck. False9. A firm’s organisational capabilities can cause inertia. TRUE10.The higher the barriers to imitation, the less sustainable a
company’s competitive advantage. False
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Multi-choice questions (1)Q1. Competitive advantage is when a company
a. is able to outperform its rivals.b. has a higher share price than its rivals.c. is able to do something that no other company can do.d. has acquired more assets than its competitors.e. is in a position to takeover another company.
Q2. The four basic building blocks of competitive advantage area. low cost, quality, efficiency, and customer responsiveness.b. differentiation, quality, innovation, and customer responsiveness.c. quality, efficiency, differentiation, and customer responsiveness.d. customer responsiveness, quality, efficiency, and human resources.e. quality, customer responsiveness, innovation, and efficiency.
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Multi-choice questions (2)Q3. The two basic ways to obtain a competitive advantage in an
industry area. low cost and efficiency.b. low cost and differentiation.c. premium pricing and differentiation.d. innovation and differentiation.e. innovation and customer responsiveness.
Q4. The value chain concept suggestsa. that only primary activities add value to a product.b. that after-sales services is an important support activity.c. that all value-creation functions play a role in achieving superior quality, efficiency, innovation, and customer responsiveness.d. that materials management has a primary role.e. All of these apply.
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Questions
• What was the most important thing you learned during this class?
• What important question remains unanswered?
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List of references
• Carpenter, M.A. and Sanders, W.G. (2009), Strategic Management – A Dynamic Perspective, 2nd Edition, Pearson Education, Upper Saddle River.
• Hill, C.W.L. and Jones, G.R. (1998), Strategic Management - An Integrated Approach, 4th Edition, Houghton Mifflin, Boston.
• Hill, C.W.L., Jones, G.R., Galvin, P. and Haidar, A. (2007), Strategic Management - An Integrated Approach, 2nd Australasian Edition, John Wiley & Sons, Milton.
• Porter, M.E. (1980), Competitive Strategy – Techniques for Analysing Industries and Competitors, The Free Press, New York.
• Thompson, A.A., Strickland III, A.J. and Gamble, J.E. (2010), Crafting and executing strategy – The quest for competitive advantage, 17th Edition, McGraw Hill, Boston.
• Weihrich, H. (1982), The TOWS Matrix - A Tool for Situational Analysis, Long Range Planning, Vol.15, No. 2, pp. 54-66.
• Wheelen, T.L. and Hunger, J.D. (2008), Strategic Management and Business Policy, 11th Edition, Prentice Hall, New Jersey.