STRATEGIC MANAGEMENT

CHAPTER 3: INTERNAL OPERATIONAL ENVIRONMENT OF BUSINESS

ANALYSIS OF FIRMS INTERNAL OPERATION

The company is known for its product and services and the reputation is carried throughout the
industry and the clients that it serves. The internal business environment is defined as the evaluation in
terms of respect, awareness and knowledge, and the emotional and affective reactions of the various
stakeholders. It is an intangible resource upon which the firm can build capabilities and its core
competencies.

The firm can develop intangible distinctions between itself from its rivals within each reputational
category. These resource assets could be the jump-off point for the company to build perceptual
measures that provide signals to rivals and stakeholders for the competitive value of their image in the
industry. These value-creating distinctions help the firm develop new core competencies.

The development of sustainable internal advantage rest with the organization's top management
and the operating managers as strategic management is the working of all people in the firm. The
internal management resources are the foundation for strategic actions and these bundle of resources
generate competitive advantage that leads to wealth generation and profit. In the development of this
competitive advantage, the management must develop a new mindset to successfully accomplish the
desired objective. The rapid change in the conduct of business and the global economic opportunities
are challenges for a new system of work values and forward thinking strategy.

The company is made up of all people in the structural organizational set up. The manpower
resources are assets for competitive advantage. They must not focus only on their area of operation but
on the increasing demand to view the entire operation. Rapid decision making that was based on
sustainable research findings must be made to cope with new challenges for reforms, re-engineering and
changes in the skills for new technology. The firm must update its knowledge base as the foundation of
competitive advantage.

Strategic positioning is the utilization of the bundle of heterogeneous resources, capabilities and
core competencies that can be used to create an exclusive market position. The presence of firm's
resources is a source of capabilities that are the used by the firm to develop its competitive advantage
especially when such resources are not present in the competitor's disposals.

While productivity, quality control and total quality management have been used overtime to
increase production efficiency, they did not result in sustainable strategy to deliver the desired profit and
return of investments. The establishment of a sustainable strategic position is created when the firms
satisfy their operational efficiency with its competencies and resource capabilities.

CREATING CUSTOMER'S VALUE

The global standards for product and services create customer values that are measured by
product performance characteristics and the attributes for which customers are willing to pay for.
Creating value is the source of the firm's potential to earn the desired profit objective. Customer value is
created when they buy the product at reasonable price and based on quality standards or high product
differentiations. With the various products available in the market, customer value is difficult to gain but
continuous improvement and strategic value formation and forward planning will create new dimensions
in customer value.

During the last decades, strategic management process was concerned mainly with understanding
the competitor's strategy and trying to counteract the same. This emphasis on the competitor's strategy
underestimated the role of the firm's resources and capabilities in developing the firm's competitive
advantage. In the present business scenario, the core competencies are a combination of the market
positioning strategy that could create customer value.

Successful strategy needs to cultivate a deep understanding of the processes of competition and
the industry progress, together with the factors aligned to each corporate advantage. The old advantage
of the firm should not be taken as the crowning glory for as long as new advantage should be developed
as the corporate intelligence of the other firm may be able to penetrate the firm's old strategy. By
emphasizing core competencies in the formulation of strategic actions, firms must learn to compete
principally on the basis of its specific differences in products and service and they must keep the process
of change.

THE CHALLENGE OF INTERNAL ANALYSIS

The challenges to the implementation of strategic actions may appear to be easy in the surface.
Deeply the strategic action must be the result of careful analysis of the business conditions and the
competitor's strategy. The firm's success is not rooted mainly in identifying the problems, developing
alternative strategies, and protecting the corporate resources but on how effective the process of
analysis and cooperative thinking done by all managers in crafting the strategic action. Often times
managers are pressured to deliver the quarterly earnings and not on the underlying competitive
strategies to remain at the upper level in the years ahead.

There are lots of management decisions that fail obviously because they see only the surface of
the internal problems. Sometimes pointing fingers roll the heads of corporate managers. Failure to admit
mistakes would ruin more the corporate image and profitability. Decisions may be uncertain to make
results but the important thing is for decision makers to admit mistakes and learn from it. Learning is the
process of reforms and the development of new strategy. This learning process would avoid future
mistakes and careful the next time around to develop more strategic actions that will give the firm its
corporate advantage.

MANAGERIAL DECISION MAKING

Managerial Decision Making is affected by the following:

1. Uncertainty

Decisions are uncertain about the conditions of the general industry, environment as it keep
changing overtime. Any changes in the environment would need new approach and new strategy.
The competitor's actions are keeping on wrapped and intelligence network is needed to verify
 their market strategy. The consumer preference changes rapidly as new products and services
may be available in the market before the firm's new product could reach the customers.

2. Complexity

The universe of decision making process is complex as the interrelated environment is shaping
so rapidly. Information gathering needs time and effort and decisions needed sufficient data for
analysis. The perceptions of the business environment needs careful study to make valuable
decisions that will generate better return on investments.

3. Intra-Organizational Conflict

The structure of the organization is so designed that managers are task with specific duties and
responsibilities. Managers are working closely with their responsibilities and would like to protect
their own identity in the organization. While horizontal and vertical working relationships exist,
managers could not avoid protecting their own personal interest.

Managers face uncertainty in terms of new proprietary technologies, the rapid changing economic
and political trends, transformation in social values and shifts in customer demands.
Environmental uncertainty increases the complexity and range of issues to examine the internal
environment. Individual managers are oftentimes biassed and this affects the decision process
that could have developed the firm's foundation for competitive advantage. The
intra-organizational conflict arises when managers cannot nurture and accept some group's
decisions.

Judgment must be used in making decisions when affected by the factors discussed above. It is
the capacity to see through the possible consequences of the actions to be taken after a thorough
analysis of the business environment and those of the competitor's strategy. In the exercise of
judgment the decision maker must be willing to take intelligent risk in the timely manner as the
current competitive landscape can be very particular for the firm's competitive advantage. Timely
judgment allows the firm to build strong reputation and retain loyal stakeholders whose support is
linked to the above return on investments.

The rapid change in the global economy needed change in the value creating potential of the firm's
resources and capabilities. Changes in the world's economic structure affect the firm's power and social
structure. The inertia for change must be kept constant and the firm must remain focus on its competitive
advantage. Denial for change can be an unconscious coping mechanism. Management must initiate
change in order to survive in the changing world of business.

RESOURCES OF THE INTERNAL ENVIRONMENT

Resources are the internal capabilities of the firm which could in turn be the source of corporate
core competencies. It covers the wide spectrum of individuals, social structure and organizational system
that operate harmoniously in the direction of its intent and mission. Corporate resources could be
tangible and intangible as they are assets that can be used for competitive advantage.
1. Tangible Assets could be classified as

a. Financial Resources

This refers to the firm's cash flow assets that can be used in the operation of the business. It is
the capacity to barrow money from financial institutions and generates internal funds to sustain
the firm's growth potential. It refers also to the wise use of money to finance ongoing operation
and sustainable development.

b. Organizational Resources

It refers to the organizational structure that plans, organize, directs and control the operation of
the business. The formal and informal relationships are put in place to guide the corporate
operational dimensions.

c. Physical Resources

These are physical assets that are used in the operation of the business. This refers to plant
facilities, machinery and equipment and used to produce products. This may also refer to tangible
assets used in the delivery of goods and other assets which can be used in other operations.

d. Technological Resources

It refers to the technology such as system and procedures, patents, corporate trademarks,
copyrights and trade secrets. This may also refers to new inventions and innovation undertaken
by the company to improve its products and services to its clients.

2. Intangible Resources are classified into;

a. Human Resources

It is one of the most important assets that the company could depend on for competitive
advantage. It refers to the skills and knowledge base of the -workers to see and direct the
corporate activities towards the profit objective of the firm. It also refers to the managerial ability
to plan, organize, direct and control the organizational routine of the firm. The organizational
effectiveness of human resources could bring in the desire competitive advantage.

b. Innovation Resources

It is the capacity to bring in new ideas and innovative strategies that would be necessary in the
change process. It refers also to scientific innovations in terms of pollution control and wise use of
material resources. While these refer to talents and skills of the human resources, these tangible
assets can be used for competitive advantage.
 c. Reputational Resources

It refers to the reputation the firm has earned overtime with its customers and other stakeholders.
It refers to the perceptions about product quality, durability and reliability. Reputation is also built
with suppliers in terms of mutual and interactive relationships that are both beneficial to both
parties.

The management of the corporate resources is challenged to understand fully the strategic value
of their tangible and intangible resources. The strategic value of resources is measured in terms of the
degree by which they can contribute to the development of capabilities, core competencies and
eventually their competitive advantage. Intangible resources are less visible to competitors and difficult to
copy or imitate.

For greater competitive advantage, firms could rely heavily on intangible resources as the
foundation of their competitive advantage. The human resources as intangible assets are greater power
block that could be used effectively if the workers and managers share their talents and skills for the
benefit of the firm. The sharing of talents and skills multiply the core capabilities of the firm that contribute
to its profitability. Training and development interventions are avenues for the development of human
resources that will enhance their work values.

THE FIRM'S INTERNAL CAPABILITIES

Capabilities are the tangible and intangible resources that are purposely integrated to achieve the
desired results. This is critical to the pathways in the development of competitive advantage. It is
measured on its effectiveness in the utilization and integration in the deployment, carrying, exchange of
information and knowledge through its human capital. Knowledge base is grounded in organizational
interventions that enhance human capital to great advantage. Continued improvement and training will
develop the value of human resources as repetition and practice will develop leverage for competitive
strategy.

There is the adage that "the person who knows how will always have a job" and "a person who
knows why will always be the boss." Combining the two sayings, the firm that develops its human assets
will always be at the forefront of competition. These are capabilities that no competitors in the industry
could match as they are invisible to most firms. Their functional expertise is the foundation of strong
capabilities to the challenges of competition.

The knowledge possessed by the human capital is the most significant investment of the firm in its
operation and maybe the root of all competitive advantage. Knowledge must be harnessed effectively in
operational strategy and transfer its usefulness to the greater corporate advantage. Effective
management system of participative strategy would cultivate teamwork and efficiency at work. People
will participate effectively if they are involved.

Involvement is the motivational process that will enhance the people's talent and skills. The firm's
challenge is to create an environment that allows people to fit their individual pieces of knowledge in
ways that will support its effort to create value to all its stakeholders. It must be embedded in people that
working together will redound to their personal advantage as the growth of the firm is also their growth in
terms of benefits and stable income.
Corporate strategist recommended the creation of training department that will develop programs and
developmental interventions that would develop the knowledge and skills of people in the organization.
The advent of new technology and machineries in the production of goods need knowledgeable people
to operate with precession and expertise. As we developed the knowledge base of operation, we
develop simultaneously the values of work and ethical standards that are the foundation of better
organization. Talents, knowledge and skills must be supported by work values to be effective at work.

INTERNAL CORE COMPETENCIES

Core competencies are internal and external resources and capabilities that serve as the source of
competitive advantage over rivals in the industry. It reflects the firm's personality among its clients and
stakeholders and emerged overtime through an organizational process of accumulating and learning on
how to deploy its resources and capabilities. Core competencies are the corporate crowning glory
earned through concerted effort and actions. The firm is known by its client and stakeholders to perform
especially well compared to competitors as they add value to its products and service.

Corporate assets do not necessarily mean to have value and the potential for competitive
advantage. Some resources and capabilities may result in incompetence as they represent competitive
areas in which the firm operates weakly against its competitors. Some tangible and intangible resources
may stifle or prevent the development of core competencies, thereby losing its competitive advantage.
Some firms may have limited financial resources to buy facilities and equipment necessary to compete in
the development of new products. The firm must therefore scout for external opportunities rather than
compete in the areas where they are weak.

The development of internal competencies is developed through time and the concerted effort of
painstaking research and analysis. The strategic alliance of all involved in the process must work hand in
hand and effectively take actions that would create the firm's competitive advantage. It is not the
monopoly of top management but it must cascade down to the last employee in the organizational
ladder.

THE CRITERIA FOR SUSTAINABLE ADVANTAGE

The firm achieves a sustained competency when the competitors failed to duplicate the products or
services that the firm produced or failed in entering the firm's market niche. Competitors will always have
an eye to copy the products that sell in the market and will just be looking for the opportune time when
the firm slows down its operational strategy.

The length of time a firm can retain its competitive advantage is the function of how quickly
competitors can imitate the products of the firm and overtake its attribute in terms of quality and features.
This could be the case with the many electronic gadgets like cellular phones that was dominated first by
Nokia in the Philippine market. Some electronic gadgets were replaced in the market over a short period,
and innovation and imitation came into surface in a matter of weeks. The competitors made new and
better products available and these drive the first in the industry to either shift to other ventures.

Four Sustainable Criteria for Competitive Advantage

1. Valuable Capabilities

It refers to the state of how the firm can exploit opportunities and neutralize threats in the external
environment. It is also the creation of value among its customers and the development of loyalty and
patronage by sustaining the products' quality and innovative features. Customer needs and satisfaction
is an important dimension in sustaining market patronage.
Value capabilities are now challenged with the online purchasing through the internet. Many would
browse the web and look for product substitutes. It is therefore necessary for firms to also use this
medium to inform their clients that they still manifest superiority in the industry. Marketing products and
distributing the same to the customer have greatly changed the landscape of purchasing strategy. Value
capabilities in speed must be sustained to remain in the market.

2. Rare Capabilities

Rare products are difficult to imitate. Rare capabilities are possessed by few (if any) by the
competitors. Competitive advantage results only when firms develop and exploit capabilities that differ
from those shared with competitors. Manila Electric Company (MERALCO) has no competitor in the
distribution of electricity in most part of the Luzon grid. PLDT used to be the sole telephone company
until competitors came into existence but on a limited scale.

3. Imitation Cost Capabilities

Costly capabilities are corporate competencies that other firms cannot easily develop. Huge
investment in capital base could be one reason for other competitors to enter the venture if they are not
certain on their return of investments. Some firms are not certain on their capabilities and expertise to
enter a market where it is dominated by single players that acquire the necessary managerial and
operational stature.

The combination of one or four reasons for firms to costly imitate are:

a. Unique Historical Condition

It refers to the historical development of the firm that comes at the right time and place in history.
These are firms that were established in the early period of development where they acquired
rights and franchise, and developed organizational culture in the early stage of operation. An
example, the Manila Electric Company (MERALCO) was developed at the time energy power is
needed by the country in its development stage. Penetration of the delivery needs huge
investment and at the same time, the firm has developed the organizational culture that is quite
difficult to imitate.

b. The Firm is Casually Ambiguous

It refers to the condition when the competitors cannot clearly understand how a firm uses its
capabilities as the foundation for competitive advantage. The value creating strategy of the
existing firm is unique in nature and competitors are uncertain to duplicate its capabilities and
earn the desired profit objective.
 c. Social Complexity

Social complexity means that the firm's capabilities are the product of complex social
phenomenon. The internal personal relationship, trust and friendships among managers and
employees are the firm's reputation with suppliers and customers. Suppliers and customers have
competitive advantage when they are taken cared of by the firm.

d. Political Complexity and Government Regulations

Political connection in business operation is a competitive advantage as the power to elect

officials is also dictated by the business community. Political connections also play a great role for
competitors to enter the market or the industry. Government regulations are also factors in
competitive advantage as some industries are controlled by the government for efficient and
effective delivery of service. Example of this industry is in the power generation sector and the
transportation business.

4. Non-substitutable Capabilities

This refers to condition where there is no strategic equivalent to the firm's existing capabilities. The
existing firm has capabilities and resources where other firms cannot imitate due its uniqueness. The
firm's strategic value of competitiveness increases as they become more difficult to imitate or substitute.
The firm's specific knowledge and trust relationship among exerutives, managers and rank and file
personnel are capabilities that are hard to identify in which finding a substitute poses challenges to
competitors. This value creating strategy is the bundle of benefits generated by the firm through time with
the protection of the corporate knowledge base and the creation of a sustainable level of customer
relationships.

VALUE CHAIN ANALYSIS

It is the value analysis of the process of understanding the parts of operation creating value for the
firm and the analysis of cost position in creating products that gives the competitive advantage. It also
identifies the multiple means to implement the chosen business strategy. There are two important
segments that need analysis of the business situation.

1. The primary activities are those that are related to product creation and delivery which are the
following:

a. Inbound logistics is concerned with the internal cost related to the operation such as finance
and other overhead costs related to production.
b. Operation is related to the efficiency and effectiveness in the manufacturing of the product with
the use of systems and procedures that generate economy.
c. Outbound Logistics is related to the effectiveness and efficiency in product delivery to its
customers and clients at least cost to the firm.
d. Marketing and sales is concerned with the development of creating a greater share of the
market through advertising, sales promotion and effective client relations.
e. Service is concerned with after sales services undertaken by the firm to maintain a reputable
image and develop continuous customer patronage.
2. The support activities are activities that support the primary activities which are:

a. Procurement is the activity related to the purchasing, delivery, storage and inventory of the
products that will be used in the production of goods.
b. Technological development is concerned with the technology that is applied in the production
and the efficiency by which they are used.
c. Human resource management is the recruitment, selection and the process of making the
workers productive in the development of products through motivation and the development of
moral values and work ethics.
d. Firm infrastructure is related to the physical facilities like buildings, machineries and other
physical assets that are inherent in the firm's operation, and used with utmost economy.

The foregoing segments should be analyzed by the firm on how to move the products at the most
efficient and economical manner from the production line to the ultimate consumer. The idea of the value
analysis is for the firm to capture that value attached to production and delivery of goods, and to gain the
competitive advantage that generates the desired return on investments.

The focus of value generating analysis applies to all sectors in the firm's operation. The propensity
in the use of the internet in the delivery and marketing of goods should be included in the analysis as the
global and local marketing are linked to the computer age. The knowledge base on internet operation is
increasingly necessary to compensate for the value added and the marginal advantage that the internet
strips from the traditional distribution system.

MATERIAL OUTSOURCING

Outsourcing inputs to production is the process of getting materials from external sources and the
trend continues at the rapid pace in the new global economy. Effective outsourcing develops value as
few organizations possess the resources and capabilities required to achieve competitive superiority in
both primary and secondary support activities. Concentrating on the core business activities, the firm can
multiply its core competencies and develop better products as they do not have to invest in the
production of menial support supplies needed in their production. Outsourcing enriched the firm's
competitive capability as they do not overextend in areas that are not of their expertise and core values.
Outsourcing works effectively with the extensive internal capabilities as purchasing and procurement
needs extensive relations with external suppliers in acquiring inputs for production. Relations with
suppliers are developed with effective coordination in the delivery of materials on time for production.
Just-in-time/delivery system is currently practiced by most successful firms especially in the automotive
industry like Toyota, which first ventured and experimented on the system.

Outsourcing needs managers and external outsourcing executives the following characteristics:

1. Technical competence in evaluating the materials needed

2. Effective communication and human relations with intended suppliers
3. Coordination and effective control in inventory management
4. Honest and highly committed in following agreements with suppliers
5. Possess the expertise to assist technical improvements in materials development

Other companies ventured in outsourcing the production of their products with low labor cost
countries like China, Vietnam, Thailand, and the Philippines. While production cost in labor has been
achieved, the quality has been found to be less superior to those produced in the home country in terms
of design and workmanship due to the inferiority of materials and the technology used.