A P TE R IV T

CH RONM EN
EN V I
N TE R N AL
SIS OFI
ANALY
 Objectives of the chapter
• At the end of this chapter you should be able to:
 Point out the context and challenges of internal
environment analysis
 Identify the difference between resources, capabilities,
core competences and competitive advantage
 Discuss how a firm can build sustainable competitive
advantage
 Given a firm analyze competencies, strengths and
weaknesses that gives input for strategic decision making

12/30/2020 By Dr. Bogale A. 2

 THE NATURE OF INTERNAL ENVIRONMENT ANALYSIS

• All organizations have strengths and weaknesses in the

functional areas of business.
• No enterprise is equally strong or weak in all areas.
Maytag, for example, is known for excellent production and
product design, whereas Procter & Gamble is known for
superb marketing.
• Internal strengths/weaknesses, coupled with external
opportunities/threats and a clear statement of mission,
provide the basis for establishing objectives and
strategies.
• Objectives and strategies are established with the intention
of capitalizing upon internal strengths and overcoming
weaknesses.
12/30/2020 3
 Context of Internal Analysis
• Global mind-set: Analyzing firm’s internal
environment should use a global mind-set.
• Global mind-set is the ability to study an internal
environment in ways that do not depend on the
assumptions of a single country, culture, or
context.
• Firm’s Portfolio of resources: Analysis of the firm’s
internal environment requires that evaluators
examine the firm’s portfolio of resources and the
bundles of heterogeneous resources and
capabilities managers have created.
12/30/2020 4
 Continued…
• This perspective suggests that individual firms possess
at least some resources and capabilities that other
companies do not (at least not in same combination).
• Resources are the source of capabilities, some which
leads to the development of a firm’s core competencies
or its competitive advantages.
• Understanding how to leverage the firm’s unique
bundles of resources and capabilities is a key outcome
decision makers seek when analyzing the internal
environment.
• Generally, an organization uses its resources,
capabilities, and core competencies to create value to
its customers.
12/30/2020 5
 Value Creation
• Firms create value for their customers by
exploiting their core competencies or
competitive advantages to at least meet if not
exceed the demanding standards of global
competition.
• Value is measured by product’s performance,
characteristics and by its attributes for which
customers are willing to pay.
• In order to create a competitive advantage,
firms must provide value to customers that is
superiors to the value provided by competitors.
12/30/2020 6
 Competitive
Advantage

Discovering
Core
Competencies
Core
Competencies

Capabilities
Four Criteria of Value Chain
Sustainable
Analysis
Resources: Advantage
• Tangible
• Intangible

•Valuable
• Value •Rare Outsourcing
•Costly to Imitate
Creation •Non substitutable

Fig 4.1: Components of Internal Analysis Leading to Competitive Advantage and Strategic
Competitiveness
12/30/2020 7
THE CHALLENGE OF ANALYZING THE IO
 Strategic decisions are non-routine, have ethical
implications and influence the organization’s above-
average returns.
 Involves identifying, developing, deploying and
protecting firms’ resources, capabilities and core
competencies.
 Identifying the firm’s core competencies is essential
before important strategic decision can be made,
including those related to entering or exiting
markets, investing in new technologies, building new
or additional manufacturing capacity, or forming
strategic partnerships.
12/30/2020 8
 Continued…
• The challenge and difficulty of making effective
decisions are evidenced by failures of strategic
decisions made by managers in about 50
percent of organizations.
• Managers might, for example, identify
capabilities as core competencies that do not
create a competitive advantage.
• Moreover, firms can learn from the failure
resulting from a mistake-that is, what not to
do when seeking competitive advantage.
12/30/2020 9
 Continued…
• To facilitate developing and using core competencies,
managers must have;
 courage,
 self-confidence,
 integrity,
 the capacity to deal with uncertainty and complexity, and
 willingness to hold people accountable for their work and to
be held accountable themselves.
• Mangers decisions regarding resource, capabilities, and core
competencies are affected by three conditions:
a. uncertainty,
b. complexity and
c. intraorganizational conflict.
12/30/2020 10
Continued…
• Managers face uncertainty in terms of:
– Proprietary technologies
– Changes in economic and political trends,
transformation in societal values and shifts in
customer demands
• Complexity: Environment – increases
complexity and range of issues to examine
when studying the internal environment
• Intraorganizational conflict surfaces due to:
– decisions about core competencies and how to
nurture them.
12/30/2020 11
 RESOURCES, CAPABILITIES AND CORE COMPETENCIES
• Resources, capabilities, and core competencies provide
the foundation of competitive advantage.
• Resources are inputs into a firm’s production process,
such as capital equipments, the skills of individual
employees, patents, finance, and talented mangers.
• In general, a firm’s resources are classified into three
categories: physical, human and organization capital.
• Individual resources alone may not yield a competitive
advantage.
• In fact, resources have a greater likelihood of being a
source of competitive advantage when they are
formed into a capability.
12/30/2020 12
Continued…
• A capability is the capacity for a set of resources to perform
a task or an activity in an integrative manner.
• Capabilities evolve over time and must be managed
dynamically in pursuit of achieving organizational goals.
• Core competencies are resources and capabilities that serve
as a source of competitive advantage for a firm over its
rivals.
• Core competencies are often visible in the form of
organizational functions. For example, operation is a core
competency for Ethiopian Airline.
• Figure 4.1 depicts the relationships that exist between
resources, capabilities, core competencies and competitive
advantage.

12/30/2020 13
RESOURCES
• Resources cover a spectrum of individual,
social, and organizational dimensions.
• Resources alone don not yield a competitive
advantages.
• In fact, a competitive advantage is generally
based on the unique bundling of several
resources.
• Some of a firm’s resources are;
i. tangible while others are
ii. intangible.
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Continued…
i. Tangible Resources
– Assets that can be seen, touched and
quantified
– Examples include equipment, facilities,
distribution centers, formal reporting
structures
– Four specific types
a. Financial Resources
b. Organizational Resources
c. Physical Resources and
d. Technological Resources
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 Table 4.1: Typical Tangible Resources

 The firms borrowing capacity

Financial Resources  The firm’s ability to generate
internal funds

 The firm’s formal reporting structure

and its formal planning, controlling,
Organizational Resources
and coordinating systems

 Sophistication and location of firm’s

Physical Resources plant and equipment
 Access to raw materials

 Stock of technology, such as patents,

Technological Resources trades marks, copyrights, and trade
secret
12/30/2020 16
Continued…

ii. Intangible
– Assets rooted deeply in the firm’s history, accumulated
over time
– In comparison to ‘tangible’ resources, usually can’t be seen
or touched
– Examples include knowledge, trusts, organizational
routines, capabilities, innovation, brand name, reputation
– Three specific types:
a. human resources,
b. innovation resources, and
c. reputational resources

12/30/2020 17
 Table4.2: Typical Intangible Resources
 Knowledge, Trust,
Managerial capabilities,
Human Resources
Organizational routines

 Ideas, Scientific capabilities,

Innovation Resources Capacity to innovate
 Reputation with customers;
Brand name, Perceptions of
product quality, durability and
reliability; Reputation with
Reputational Resources suppliers; Efficient, effective,
and mutually beneficial
interactions and relationship

12/30/2020 18
CAPABILITIES
• Are the outcome of the organization’s knowledge base
(skills and knowledge of its employees)
• Often developed in specific functional areas (such as
marketing, R&D, and manufacturing)
• Source of a firm’s core competencies and basis for CA
• Purposely integrated to achieve a specific task/set of tasks
• Strategist is primarily interested in organizational
capability because it helps to know what capacity exists
within the organization to exploit opportunities or face
threats in its environment.
• Is measured and compared through the process of
organizational appraisal

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 Table 4.3: Examples of Firm’s Capabilities
Functional Areas Capabilities Example of firms
Distribution Effective use of logistics management Wall-Mart, Dell
techniques
Human Resources Motivation, empowering, and retaining employees Microsoft, Dell
Management Effective and efficient control of inventories through Wall-Mart, Dell
information system point-of-purchase data collection methods
Effective promotion of brand-name products Procter & Gamble,
McKinsey & Corporation
Marketing Effective customer service
Innovative merchandising
Ability to envision the future Gap Inc.,
Management
Effective organizational structure PepsiCo.
Komatsu
Design & production skills yielding reliable product
Manufacturing
Product and design quality Gap Inc.
Miniaturization of components and products Sony
Innovative technology Caterpillar
Rapid transformation of technology into new Chaparral Steel
R&D products and processes
12/30/2020
Digital technology Thomson Consumer
20
Electronics
CORE COMPETENCIES
• Capabilities that serve as a source of CA for a
firm over its rivals.
• Distinguish a company from its competitors –
the personality.
• How many core competencies are required?
• According to McKinsey &Co. there are three or
four core competencies that its clients identify.
• Supporting and nurturing more than four core
competencies may prevent a firm from
developing the focus it needs to fully exploit its
competencies in market place.
12/30/2020 21
 BUILDING CORE COMPETENCIES: Criteria and Value
Chain Analysis

• Two tools firms use to identify and build on

their core competencies;
1. Four specific criteria of Sustainable CA and
2. Value Chain Analysis

12/30/2020 22
FOUR SPECIFIC CRITERIA OF SUSTAINABLE CA
i. Valuable: Valuable capabilities allow the firm
to exploit opportunities or neutralize threats
in its external environment.
• By effectively using capabilities to exploit
opportunities, a firm creates value for
customers.
• Human capital is important in creating value
for customers.
• Right people at right place.

12/30/2020 23
continued…
ii. Rare: Rare capabilities are capabilities that few, if any,
competitors posses.
• A key question to be answered when evaluating this
criterion is, “How many rival firms possess these
valuable capabilities?”
• Capabilities possessed by many rivals are unlikely to
be sources of competitive advantage for any one of
them.
• Instead, valuable but common (i.e., not rare) resources
and capabilities are sources of competitive parity.
• Competitive advantage results only when firms
develop and exploit valuable capabilities that differ
from those shard with competitors.
12/30/2020 24
Continued…
iii. Costly-to-imitate: Costly to imitate capabilities are
capabilities that other firms cannot easily develop.
• Capabilities that are costly to imitate are created
because of one reason or a combination of three
reasons:
 Unique and valuable organizational culture,
 ambiguity to understand how firm use its capability,
and social complexity (interpersonal relationships,
trust, friendships among managers and between
managers and employees, and
 a firm’s reputation with suppliers and customers are
examples of socially complex capabilities).
12/30/2020 25
Continued…
iv. Non substitutable capabilities: are
capabilities that do not have strategic
equivalents.
• Two valuable firm resources (or two bundles
of firm resources) are strategically equivalent
when they each can be separately exploited to
implement the same strategies.

12/30/2020 26
Continued…

• Competitive consequences include

– Disadvantage, parity, temporary advantage and
sustainable advantage
• Performance implications include returns
– Above, below or average

12/30/2020 27
 Table 4.4: Outcomes from combinations of the criteria for sustainable competitive advantage

Is the Is the Is the Is the

resource or resource or resource or resource or
capability capability capability capability
Competitiv Performan
valuable? rare? costly to non-
e ce
imitate? substitutabl
consequenc implication
e?
e s
No No No No Competitive Below-
disadvantag average
e return
Yes No No Yes/no Competitive Average
parity return
Yes Yes No Yes/no Temporary AR to AAR
competitive
A
Yes Yes Yes Yes Sustainable AAR
12/30/2020 CA 28
VALUE CHAIN ANALYSIS
– Allow firms to understand the parts of its
operations that create value and those
that do not.
– Firm earns above average returns only
when the value it creates is greater than
the costs incurred to crate that value.
– Firms value chain is segmented into:
primary activities and
support activities

12/30/2020 29
Continued….
 Primary activities
– Involved with product’s physical creation, sales
and distribution to buyers, and service after the
sale
– Service, marketing/sales, outbound/inbound
logistics and operations are parts of primary
activities
 Support activities
• Provide assistance necessary for the primary activities
to take place
• Includes firm infrastructure, HRM, technologies
development and procurement
12/30/2020 30
 Table 4.5: Value creating potential of primary activities
Inbound logistics
Activities, such as materials handling, warehousing, and inventory control, used to receive, store
,and disseminate inputs to a product
Operations
Activities necessary to convert the inputs provided by inbound logistics into final products from.
Machining, packaging, assembly, and equipment maintenance are examples of operations activities
Outbound Logistics
Activities involved with collecting, storing, and physically distributing the final product to
customers. Examples of these activities include finished goods warehousing, materials
handling, and order processing
Marketing & Sales
Activities completed to provide means through which customers can purchase products and to
induce them to do. To effectively market and sell products, firms develop advertising and
promotional campaigns, select appropriate distribution channels, and select, develop, and support
their sales force
Service
Activities designed to enhance or maintain a product’s value. Firms engage in a range of service-
related activities, including installation, repair, training, and adjustment.
Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity
as superior,
12/30/2020 equivalent, or inferior 31
 Table 4.6: Examining Value Creating Potential of secondary activities
Procurement
Activities completed to purchase the inputs needed to produce a firm’s products. Purchased input
include items fully consumed during the manufacture of products e.g., raw materials and supplies, as
well as fixed assets –machinery, laboratory equipment, office equipment, and buildings)

Technological Development
Activities completed to improve a firm’s product and the processes used to manufacture it.
Technological development takes many forms, such as process equipment, basic research and product
design, and servicing procedures
Human Resource Management
Activities involved with recruiting, hiring, training, developing, and compensating all personel

Firm Infrastructure
Firm infrastructure includes activities such as general management, planning, finance, accounting,
legal support, and governmental relations that are required to support the work of the entire value
chain. Through its infrastructure, the firm strives to effectively and consistently identify external
opportunities and threats, identify resources and capabilities, and support core competencies
Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as
superior, equivalent, or inferior
12/30/2020 32
Continued…
• What should a firm do about primary
and support activities in which its
resources and capabilities are not a
source of core competences and,
hence, of competitive advantage?
• Outsourcing is one solution to
consider.

12/30/2020 33
 OUTSOURCING

• Definition: Purchase of a value-creating activity from

an external supplier
– Effective execution includes an increase in flexibility, risk
mitigation and capital investment reduction
– Trend continues at a rapid pace
– Firms must outsource activities where they cannot create
value or are at a substantial disadvantage compared to
competitors
• Can cause concerns
• Usually revolves around innovative ability and loss of
jobs

12/30/2020 34
 COMPETENCIES, STRENGTHS, WEAKNESS, AND STRATEGIC
DECISIONS
• At the conclusion of the internal analysis, firms must
identify their strengths and weaknesses in resources,
capabilities, and core competencies.
• If they have weakness in capabilities or do not have
core competencies in areas required to achieve a
competitive advantage, they must acquire those
resources and build the capabilities and
competencies needed.
• Alternatively, they could decide to outsource a
function or activity where they are weak in order to
improve the value that they provide to customers.

12/30/2020 35
Continued…
• Therefore, firms need to have the appropriate resources
and capabilities to develop the desired strategy and
create value for customers and shareholders as well.
• Having many resources does not necessarily lead to
success.
• Firms must have the right ones and the capabilities
needed to produce superior value to customers.
• The primary responsibility of top level manager is
having the appropriate and strong capabilities required
for achieving a competitive advantage.
• Therefore, top managers must focus on both the firm’s
strengths and weaknesses.
12/30/2020 36
Continued…
• Here below indicated in tables how firm can
summarize its strengths, weakness along its
resources and capabilities and summarize
strategic factors/opportunities and threats
posed from external environment.

12/30/2020 37
 Table 4.7 Prominent application of Internet in the Value Chain
Firm Infrastructure
·Web-based, distributed financial and ERP system
·Online investor relations (e.g. information dissemination, broadcast conference
calls)
Human Resource Management
·Self service personnel and benefits administration
·Web-based training
·Internet based sharing and dissemination of company information
·Electronic time and expense reporting
Technology Development
·Collaborative product design across locations and among multiple value-system
participants
·Knowledge directories accessible from all parts of the organization
·Real-time access by R&D to online sales and service information
Procurement
·Internet –enabled demand planning, real-time available-to-promise an d
fulfilment
· Other linkage of purchase, inventory, and forecasting, systems with suppliers
·Automated “requisition to pay”
12/30/2020 38
·Direct and indirect procurement via marketplaces, exchanges, auctions, and
 Continued…
Inbound Operations Outbound Logistics Marketing & Sale After-sales
·Real-time transaction ·Online sales
Logistics ·Integrated Service
of orders whether channels including
·Real-time information websites and ·Online support of
exchange, initiated by an end customer service
integrated marketplaces
scheduling and consumer, a sales ·Real-time inside representatives
scheduling,
decision making person, or a channel and outside access through e-mail
shipping, response
in in-house partner to customer
warehouse ·Automated customer management,
plants, contract information, product
management, specific agreements and catalogs, dynamic billing integration,
demand assemblers, and co-browse, chat,
contract terms pricing, inventory
management, and component availability, online “call me now,”
·Customer and channel
planning, and suppliers submission of voice over IP, and
access to product
advanced ·Real-time quotes, and order other use of video
development delivery streaming
planning and available-to- entry
status ·Online product ·Customer sell
scheduling across promise and
·Collaborative configrators service via-websites
the company and capable-to- and intelligent
integration with ·Customer tailored
its suppliers promise customer forecasting service request
marketing via
·Dissemination information systems customer profiling processing
throughout the available to the ·Integrated channel ·Push advertising including updates
company of real- sale force and management including ·Real-time to billing and
channels customer feedback shipping profiles
time inbound and information exchange, ·Real-time field
through Web
in-progress warranty claims and service access to
surveys opt-in/opt-
inventory data contract management out marketing and customer account
(process control) promotion responses review,
12/30/2020 39
tracking
SWOT ANALYSIS-STRATEGIC BALANCE SHEET
• Understanding the external and internal
environment involves evaluating the strengths,
weakness, opportunities, and threats and drawing
conclusions about;
1) how the company’s strategy can be matched to
both its resources, capabilities and its market
opportunities, and
2) how urgent it is for the company to correct which
particular resources weakness and guard against
which particular resource weaknesses and guard
against which particular external threats.

12/30/2020 40
 Table 4.7 indicates the kinds of factors to be considered in determining a
company’s resource strengths and weaknesses and potential opportunities and threats.

Potential Resources Strengths and Potential Resource Weaknesses and

Competitive Deficiencies
Competitive Capabilities

 A powerful strategy supported by  No clear strategic direction

competitively valuable skills and
expertise in key areas

 A strong financial condition, ample  Obsolete facilities

financial resources to grow the
business
 Strong brand name image/company  A weak balances sheet, burdened
reputation with too much debt

 A widely recognized market leader  Higher overall unit costs relative to

and an attractive customer base key competitors

12/30/2020 41
 Continued…

 Ability to take advantage of  Missing some key skills or

economies of scale and/ or learning competencies/lack of management
and experience curve effects depth/a deficiency of intellectual
capital relative o leading rivals

 Proprietary technology/superior  Subpar profitability

technological skill/important
patents
 Superior intellectual capital relative  Plagued with internal operating
to key rivals problems

 Cost advantage  Falling behind rivals in putting e-

commerce capabilities and
strategies in place

12/30/2020 42
 Continued…

 Strong advertising and  Too narrow a product line

promotion relative to rivals

 Product innovation skills  Weak brand image or

reputation
 Proven skills in improving  Weaker dealer network than
production processes key rivals and/or lack of
adequate global distribution
capability
 Sophisticated use of e-  Subpar e-commerce systems
commerce technologies and and capabilities relative to
processes rivals

12/30/2020 43
Continued…
 Superior skill in supply chain  Short on financial resources to
management fund promising strategic initiatives

 A reputation for good customer  Lot of underutilized plant capacity

service
 Better product quality relative to  Behind on product quality and/or
rivals R&D or technological know-how

 Wide geographic coverage and/or  Not attract new customers as

strong global distribution capability rapidly as rivals due to ho-hum
product attributes
 Alliances/joint ventures with other
firms that provide access to
valuable technology, competencies,
and/or attractive geographic
markets
12/30/2020 44
 Continued…
•Potential Company Potential External threats to
Opportunities Company’s Well-Being

 Serving additional customer Likely entry of potent new

groups or expanding into new competitors
geographic markets or
product segments

 Expanding the company’s  Loss of sales to substitute

product line to meet a broader products
range of customer needs

12/30/2020 45
 Continued…
 Utilizing existing company skills or  Mounting competition from new
technological knowhow to enter new Internet start-up companies pursuing e-
product lines or new businesses commerce strategies

 Using the Internet and e-commerce  Increasing intensity of competition

technologies to dramatically cut costs among industry rivals-may causes
and/or to pursue new sales growth squeeze on profit margins
opportunities

 Integrating forward or backward  Technological changes or product

innovations that undermine demand for
the firm’s product

 Falling trade barriers in attractive  Slowdowns in market growth

foreign market

12/30/2020 46
Continued…
 Openings to take market  Adverse shifts in foreign
share away from rivals exchange rates and trade
policies of foreign
governments

 Ability to grow rapidly  Adverse shifts in foreign

because of sharply rising excahange rates and trade
demand in one or more policies of foreign
market segments governments

 Acquisition of rival firms or  Costly new regulatory

companies with attractive requirements
technological expertise
12/30/2020 47
 Continued…
 Alliances or joint ventures that  Growing bargaining power of
expand the firm’s market coverage customers or suppliers industry’s
or boost its competitive capability product

 Openings to exploit emerging new  A shift in buyer needs and tastes

technologies away from the industry’s product

 Market openings to extend the  Adverse demographic changes that

company’s brand name or threatens to curtail demand for the
reputation to new geographic areas firm’s product

 Vulnerability to industry driving

forces
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 ! !
u p
i n d
W
12/30/2020 49