internal analysis of firm

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InternalAnalysis

CompetitiveAdvantage

AfirmhasCompetitiveAdvantageifitsprofitabilityisgreaterthantheaverage

profitabilityofallthefirmsintheindustry

IfitisabletomaintainforlongerperiodthenitiscalledSustainableCompetitiveAdvantage

A

firm

has

to

find

out

what

internal

resources

willgiveSustainableCompetitiveAdvantage


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CreatingValue

Byexploitingtheircorecompetenciesfirmscreatevalue.

Valueismeasuredby:

Productperformancecharacteristics

Productattributesforwhichcustomersarewillingtopay

Firmscreate

value

by

innovatively

bundling

and

leveragingtheirresourcesandcapabilities.

CompetitiveAdvantage,Value

Creation,andProfitability

1. VALUEorUTILITYthecustomergetsfromowningtheproduct

2. PRICEthatacompanychargesforitsproducts

3. COSTSofcreatingthoseproducts

Consumersurplus istheexcessutilityaconsumercapturesbeyondthepricepaid.

Basic Princip le: the more utility that consumersget from a companys products or services, the

more pricing opt ions the company has.

How prof itable a company becomesdepends on three basic factors:


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SWOTAnalysis

Potential

Resource

Strengths Potential

Resource

Weaknesses Potential

Company

Opportunities Potential

External

Threats

Powerfulstrategy

Strongfinancial

condition

Strongbrandname

image/reputation

Widelyrecognized

marketleader

Proprietary

technology

Costadvantages

Strongadvertising

Productinnovation

skills

Goodcustomer

service

Betterproductquality

AlliancesorJVs

Noclearstrategic

direction

Obsoletefacilities

Weakbalancesheet;

excessdebt

Higheroverallcosts

thanrivals

Missingsomekey

skills/competencies

Subparprofits...

Internaloperating

problems...

FallingbehindinR&D

Toonarrowproduct

line

Weakmarketingskills

Servingadditional

customergroups

Expandingtonew

geographicareas

Expandingproduct

line

Transferringskillsto

newproducts

Verticalintegration

OpeningstotakeMS

fromrivals

Acquisitionofrivals

AlliancesorJVsto

expandcoverage

Openingsto

exploit

newtechnologies

Openingstoextend

brandname/image

Entryofpotentnew

competitors

Lossofsalesto

substitutes

Slowingmarket

growth

Adverseshiftsin

exchangerates&trade

policies

Costlynew

regulations

Vulnerabilityto

businesscycle

Growingleverageof

customers

or

suppliers Shiftinbuyerneeds

forproduct

Demographicchanges

ValueChain

Analysis

ValueChainanalysiswasfirstsuggestedby

MichaelPorter(1995)asawayof

presentingtheconstructionofvalueas

relatedtoendcustomer.


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ValueChain

Theterm

value

chain describes

away

of

looking

atabusinessasachainofactivitiesthat

transforminputsintooutputsthatcustomers

value

69

ValueChain

Analysis

(VCA)

Valuechainanalysis(VCA)attemptstounderstandhowabusinesscreatescustomervaluebyexaminingthecontributionsofdifferentactivitieswithinthebusinesstothatvalue

Italsohelpsustounderstandonhowtoimprovethevalueby Performingtheseactivitiesbetter

or Atalowercostthanthecompetitors

VCAtakesaprocesspointofview


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ValueChainAnalysis

Thevalue

chain

identifies

the

separate

activities

and

businessprocessesperformedtodesign,produce,

market,deliver,andsupportaproduct/serviceand

howwelltheycreatecustomervalue.

Consistsoftwotypesofactivities Primaryactivities :createcustomervalue

Inboundlogistics,Operations;Outboardlogistics;Sales&Marketing;&CustomerService

Supportactivities:Supportprimaryactivities Procurement;Technologicaldevelopment;HRM;Firm

infrastructure


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MARGIN

MARGIN

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUNDLOGISTICS

OPER-ATIONS

OUTBOUNDLOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-ITIES

THE GENERIC VALUE CHAIN

PrimaryActivities

Inboundlogistics

Activitiesusedtoreceive,store,anddisseminateinputstoaproduct(materialshandling,warehousing,inventory

control,etc.)

Operations

Activitiesnecessarytoconverttheinputsprovidedbyinboundlogisticsintofinalproductform(machining,

packaging,assembly,etc.)

Outboundlogistics

Activitiesinvolvedwithcollecting,storing,andphysicallydistributingtheproducttocustomers(finishedgoods

warehousing,orderprocessing,etc.)


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PrimaryActivities(contd)

Marketingand

sales

Activitiescompletedtoprovidemeansthroughwhichcustomerscanpurchaseproductsandto

inducethemtodoso(advertising,promotion,

distributionchannels,etc.)

Service

Activitiesdesignedtoenhanceormaintainaproductsvalue(repair,training,adjustment,

etc.)

SupportActivities

Procurement

Activitiescompletedtopurchasetheinputsneededtoproduceafirmsproducts

TechnologicalDevelopment

Activitiescompletedtoimproveafirmsproductandtheprocessesusedtomanufactureit(processequipment,basicresearch,productdesign,etc)

HumanResourceManagement

Activitiesinvolvedwithrecruiting,hiring,training,developing,andcompensatingallpersonnel

Firminfrastructure

Activitiesthatsupporttheworkoftheentirevaluechain(generalmanagement,planning,finance,accounting,legal,governmentrelations,etc.)


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ConductingaVCA

1. Identifyactivities

2. Allocatecosts usingactivitybasedcosting

3. Analyzetheactivities

617

ActivityBased

Costing

in

VCA

ActivityBasedVCAapproach wouldprovidea

moremeaningfulanalysisoftheprocurement

functionscostsandconsequent valueadded

thanthetraditionalcostaccountingapproach

Existing

financial

management

and

accounting

systemsinmanyfirmsarenotsetuptoeasily

provideactivitybasedcostbreakdowns


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AnalyzingActivities

Eachactivityshouldbeexaminedrelativetocompetitorsabilitiesandratedassuperior,equivalentorinferior

Focusonactivitiesthatdifferentiatesthecompanyfromothercompetitors Lowercostoruniquevalue

Keepinmind theIndustry,Positionoffirminindustryvaluechainandobjectiveofthefirm

Identifythe

activities

where

the

firms

competitivestrengthishighaswellaslow

AssessingOrganizations

Competitive

Strength

Whatdoesahighcompetitivestrengthratingrelativetorivalsmean?

Strongcompetitiveposition&possessionofcompetitiveadvantages

Opportunityforcompanytoimproveitslongtermmarketposition

Good

strategy

entails Lookingforopportunitiestoleveragecompanystrengths into

competitiveadvantage

Usingcompanystrengthstoattackthecompetitiveweaknessesofrivals


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WhyDoaCompetitiveStrength

Assessment?

Revealsstrengthoffirmscompetitiveposition

Showshowfirmstacksupagainstrivals,measurebymeasure pinpointsthecompanyscompetitivestrengthsandcompetitiveweaknesses

Indicateswhetherfirmisatacompetitiveadvantage/disadvantageagainsteachrival

Identifiespossibleoffensiveattacks(pitcompanystrengthsagainstrivalsweaknesses)

Identifiespossibledefensiveactions(aneedto

correctcompetitive

weaknesses)

ResourceBased

View

(RBV)

RBV isamethodofanalyzingandidentifyingafirmsstrategicadvantagesbasedonexaminingitsdistinctcombinationofassets,skills,capabilities,andintangibles

TheRBVsunderlyingpremiseisthatfirmsdifferinfundamentalwaysbecauseeachfirmpossessesauniquebundleofresources

Eachfirmdevelopscompetenciesfromtheseresources,

and

these

become

the

source

of

the

firmscompetitiveadvantages

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ThreeBasicResources

1. Tangibleassets

are

the

easiest

resources

to

identify

andareoftenfoundonafirmsbalancesheet

2. Intangibleassets areresourcessuchasbrand

names,companyreputation,organizationalmorale,

technicalknowledge,patentsandtrademarks

3. Organizationalcapabilitiesarenotspecificinputs.

Theyaretheskillsthatacompanyusestotransform

inputsintooutputs

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The VRIO Framework

If a firm has resources that are:

valuable,

rare, and

costly to imitate, and

the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustainedcompetitive advantage.


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The VRIO Framework

a resource or bundle of resources is subjected toeach question (VRIO) to determine the competitiveand economic implications of the resource

Applying the Tool

each question is considered in a competitivecontext

may also be applied to strategic initiatives(new products, new markets, new strategy, etc.)

Applying the VRIO Framework

The Question ofValue

in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?

the practice: Does the resource result in an

increase in revenues (change demand curve),a decrease in costs (change cost curve), orsome combination of the two?


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The Question ofRarity

a resource must be rare enough that perfectcompetition has not set in

if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)

thus, there may be other firms that possess theresource, but still few enough that there is scarcity


The Question ofImitability

if there are high costs of imitation, then the firmmay enjoy a period of sustained competitiveadvantage

a sustained competitive advantage will last

only until a duplicate or substitute emerges

if a firm has a competitive advantage, otherswill attempt to imitate it


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Costs ofImitation

Unique Historical Conditions (LIC)

first mover advantages

path dependence



Costs ofImitation

Causal Ambiguity (Infosys)

causal links between resources and

competitive advantage may not beunderstood

bundles of resources fog these causallinks


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Costs ofImitation

Social Complexity (RIL)

the social relationships entailed inresources may be so complex thatmanagers cannot really manage themnor replicate them



Costs ofImitation

Patents (Apple)

patents may be a two-edged sword

offer a period of protection if the firm isable to defend its patent rights

required disclosure may actually decreasethe cost of imitation, and the timing


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The Question ofOrganization

a firms structure and control mechanismsmust be aligned so as to give people abilityand incentive to exploit the firms resources

examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.

these structure and control mechanisms complementother firm resourcestaken together, they can help afirm achieve sustained competitive advantage

WhenResourcesProvideCompetitive

Advantage?

Add-Value?

No

Yes Rare?

No

Yes Hard to

Imitate?

No

Yes

Source of

Competitive Parity

Source of Temporary

Competitive Advantage

Irrelevant

Source of Sustained

Competitive Advantage


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ModificationstoVIRO

Theremustbenostrategicallyequivalent

valuableresourcesthatarethemselvesnotrare

orinimitable

Substitutabilitymaytakeatleasttwoforms

Competitormaybeabletosubstituteasimilarresourcethatenablesittodevelopandimplementthesame

strategy(iOS vs Android)

Verydifferentfirmresourcescanbecomestrategic

substitutes(Amazon

and

Wal

Mart

and

Barnes

&

Nobles)

CoreCompetence

Set of integrated and harmonized resourcesand capabilities that serve as a source of

competitive advantage over rivals.

Core competencies distinguish a companycompetitively and make it distinctive

McKinsey recommends using three to fourcompetencies when framing strategic actions


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CoreCompetencies

CompetenciestypicallycombinemultiplekindsofResources/Capabilities.

Severalcorecompetenciesmayunderlieabusinessunit.

Severalbusinessunitsmaydrawfromsamecompetency

CoreCompetence

Hondas abilitytoproducesomeoftheworldsbestenginesandpowertrainsdoes

providecustomerswithhighlyvaluedbenefits

ofsuperiorfueleconomy,zippyacceleration,

lessnoiseandvibration

Sony Miniaturizationinelectronics

Motorola Wirelesscommunication

MoserBaer OpticalMedia


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CoreCompetence SKF

SKF,theworldsleadingmanufacturerofrollerbearinghascompetenciesinantifriction,

precisionengineeringandmakingperfectly

sphericaldevices.

Risksof

ignoring

core

competencies

Opportunities for growth will be needlessly turned down.

May desensitize a company to its growing dependence onoutside suppliers of core products.

A company that fails to understand the core competence basisfor competition in its industry may be surprised by new entrantswho rely on competencies developed in other end markets.

May unwittingly relinquish valuable skills when they divest anunderperforming business

A company focused only on end products may fail to investadequately in new core competencies that can propel growth inthe future.

As a company divides and fractures into smaller business units,competencies may become fragmented and weakened


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internal analysis of firm

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