Internal Analysis- Anmol Razdan (UM9302) Payal Desai (UM9304) Sajal Agrawal (UM9309) Sarvjeet Kaur (UM9311 )

Purpose of Internal AnalysisAn organization’s future success depends on its own internal conditions as well as external conditions

Managers need to be able to identify▫Strengths that the company can relay on in

order to compete▫Weaknesses that need to be corrected or

minimized as competitive factors

Broad 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

• The performance of the organization as measured by the strength of its products.

Internal AnalysisAnalysis of the global business

Resources, capabilities and

core competences

Cultural and structural analysis

Global value chain analysis: configuration

and co-ordination

Global products and performance

1. Resources• 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:• Specific resources can only be used for highly

specialized purposes and are very important to the organization in adding value to goods and services.

• Assets that are less specific are less important in adding value, but are more flexible.

1. Resources• Resources fall within several categories:

• Human• Financial• Physical• Technological• Informational

• An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and performance.

2. General Competencies/ Capabilities

• They are assets like industry-specific skills, relationships and organizational knowledge which are largely intangible and invisible assets.

• Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations.

• Certain competences are likely common to competing businesses within a global industry or strategic group.

3. Core Competences/Distinctive Capabilities

• Core competences or distinctive capabilities are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage.

• Kay (1993) identified four potential sources of Core competences:• Reputation• Architecture (i.e., internal and external relationship)• Innovation• Strategic assets

Criteria to evaluate Core Competencies• Complexity: How elaborate is the bundle of resources

and capabilities which comprise the core competence?• Identifiability: How difficult is it to identify?• Imitability: How difficult is it to imitate?• Durability: How long does it be replaced by an

alternative competences?• Superiority: Is it clearly superior to the competences of

other organizations?• Adaptability: How easily can the competence be

leveraged or adapted?• Customer orientation: How is the competence perceived

by customers and how far is it linked to their needs?

The relationships between resources, capabilities and core competence

Core competenceDistinctive and superior

skills, technology relationships,

knowledge and reputation of the firm

Unique, and difficult to copy

Resources:human, financial,

physical, technological,

legal, informational

Tangible andvisible assets

Capabilities:Industry-specific

skills, relationships,organizational

knowledgeIntangible

and invisibleassets

Perceivedcustomer

benefits/value added

+ =

Inputs to the firm’sprocesses

Integration ofresources intovalue-addingactivities

Not all capabilities are corecompetences – only thosethat add greater value thanthose of competitors

Denotes feedback loop denotes core competence development

Analyzing Capabilities by Functional Areas

Functional Area Capability

Corporate Management

Effective financial control systemsExpertise in strategic control of diversified corporationEffectiveness in motivating and coordinating divisional and business-unit managementManagement of acquisitionsValues-driven, in-touch corporate leadership

Information Management

Comprehensive and effective MIS network, with strong central coordination

Research and Development

Capability in basic researchAbility to develop innovative new productsSpeed of new product development

Analyzing Capabilities by Functional Areas

Functional Area Capability

Manufacturing Efficiency in volume manufacturingCapacity for continual improvements in production processesFlexibility and speed of response

Product Design Design capabilityMarketing Brand management and brand promotion

Promoting and exploiting reputation for qualityResponsive to market trends

Sales and Distribution

Effectiveness in promoting and executing salesEfficiency and speed of distributionQuality and effectiveness of customer service

Porter’s Value Chain Model

Value Chain Interpretation

•Represents a company or any organization

•Simplified illustration of all activities that an organization must perform

•Framework for analyzing a company’s strengths and weaknesses

•Margin represents profit- expand margin by▫Being able to charge a higher price▫Operating at a lower cost within the Value

Chain

Primary Activities in Value ChainActivities directly involved in producing, selling, distributing, and servicing product for buyer.

•Inbound logistics: receiving, storing, and distributing inputs for production

•Operations: all activities involved in transforming inputs into final products

•Outbound logistics: collecting, storing, distributing product to final buyer

•Marketing and Sales: activities used to get customers to buy company products

•Service: installation, repair, support, training for using a product

Secondary Activities in Value ChainActivities that enable the performance of primary activities

• Firm infrastructure: companywide support of entire value chain; includes quality of management, financial performance, strategy, organizational culture

• Human resource management: recruiting, hiring, training, reward systems for employees

• Research and development: design of products and processes that enhance company performance; not limited to equipment

• Procurement: purchasing and managing inputs used in operations; developing and managing supplier relations

Applying Value Chain Analysis

•Framework for identifying company’s strengths and weaknesses

•Means to focus on where the company’s core competencies exist and can be used to achieve competitive advantage and add value

•Comparison with competitors reveals opportunities for improving company’s competitive position

Financial Analysis

•Uses company’s financial results to assess company’s performance

•Requires comparisons of results over multiple years and against industry standards

•Important tool to identify company’s strengths and weaknesses and potential problem areas.

Types of Ratios

•Profitability

•Activity

•Liquidity

•Leverage

•Growth

Financial Ratios

Financial Ratios

Financial Ratios

Financial Ratios

Finance/Accounting Audit Checklist

1. Where is the firm financially strong and weak as indicated by financial ratio analyses?

2. Can the firm raise needed short-term capital?3. Can the firm raise needed long-term capital

through debt and/or equity?4. Does the firm have sufficient working capital?5. Are capital budgeting procedures effective?6. Are dividend payout policies reasonable?7. Does the firm have good relations with its investors and

stockholders?8. Are the firm’s financial managers experienced and well

trained?9. Is the firm’s debt situation excellent?

The Resource-Based View (RBV)•The Resource-Based View (RBV) approach

▫contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage

•Proponents of the RBV contend that organizational performance will primarily be determined by internal resources that can be grouped into three all-encompassing categories: physical resources, human resources, and organizational resources

The Resource-Based View (RBV)

•For a resource to be valuable, it must be either (1) rare, or (2) hard to imitate, or (3) not easily substitutable

•These three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage

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