7/27/2019 BPSM Mod 5 Internal Analysis
1/27
BPSM: Module 5 Internal Analysis 1
Business Policy & Strategic ManagementModule 5
Internal Environmental Analysis
N.R.Govinda Sharma
7/27/2019 BPSM Mod 5 Internal Analysis
2/27
Internal Environmental Analysis
Above-average return of a firm is a
function of External &
Internal Environment To what do you attribute the success of
Cognizant to?
Is it the industry it is operating in (i.e., IT) Or, its capabilities and internal resources?
BPSM: Module 5 Internal Analysis 2
7/27/2019 BPSM Mod 5 Internal Analysis
3/27
I E A If the success is attributable to industry alone,
why is it that they are a number of IT start-upcompanies which fail?
Why, even a bellwether company like Infy is facing
rough wind? Research by Richard Rumelt & Associates,
industry structure explains only 10% of variance
in profit across companies (page 63 of text) This means, individual company difference
explains much of the success
BPSM: Module 5 Internal Analysis 3
7/27/2019 BPSM Mod 5 Internal Analysis
4/27
Great companies Only economic prosperity
can produce progress.
Prosperity arises out ofinnovation and enterprise,from the technological
ingenuity and the skillsthat are housed in thegreat companies
Indra Nooyi, PepsicoChairman and CEO
(As quoted on page 46 in Strategic Management byGovinda Bhat and Govinda Sharma)
BPSM: Module 5 Internal Analysis 4
7/27/2019 BPSM Mod 5 Internal Analysis
5/27
Value Chain Analysis &Competitive Advantage
In this module, we study internal sources
of competitive advantages
Let us look at Value Chain Analysis as a
tool for identifying sources of competitiveadvantage
BPSM: Module 5 Internal Analysis 5
7/27/2019 BPSM Mod 5 Internal Analysis
6/27
Value Chain Business is all about creating andcapturing value
Utility (to the consumer) is different
from price (See pages 77-81 of text)
Value = Utility (U) Cost (C)
The part of the value so created is
captured by the firm in the form of
profit Profit = Price (P) Cost (C)
The part that is available to theconsumer is the Consumer Surplus
Consumer Surplus = Utility (U) Price (P)
See pages 77-81 of text for a goodunderstanding of pricing options
BPSM: Module 5 Internal Analysis 6
Cost (C),Includingcost ofcapital
Profit Margin =(Price Cost)
Consumer Surplus= U - P
Utility(U)
Price
(P)
Cost(C)
Cost (C),Includingcost ofcapital
7/27/2019 BPSM Mod 5 Internal Analysis
7/27
Advertisement that cause desire
Utility is a matter of perception
Perception is the only reality
Everything else is an illusion
Al Ries and Jack Trout The utility can be increased by
advertisement
Equating the pleasure of drinking Pepsi toNirvana!
Analysis_of_Midterm_2012 7
7/27/2019 BPSM Mod 5 Internal Analysis
8/27
Value Chain Analysis
What is a company or a firm?
A company is a chain of activities forconverting inputs into outputs that thecustomers value
Create and capture a part of the value socreated
Consider a car for illustration
Analysis_of_Midterm_2012 8
7/27/2019 BPSM Mod 5 Internal Analysis
9/27
Value chain - Car
BPSM: Module 5 Internal Analysis 9
7/27/2019 BPSM Mod 5 Internal Analysis
10/27
Value chain
Value gets added at
Design
R&D
Material procurement Production
Distribution
After sales
BPSM: Module 5 Internal Analysis 10
7/27/2019 BPSM Mod 5 Internal Analysis
11/27
Generic Value Chain
Value Chain - Margin at eachactivity
11
Firm Infrastructure
Human Resources Management
Technology Development
Procurement
InboundLogistics
Margin
MarginOperations
OutboundLogistics
Marketing &Sales
Services
Su
pportActivities
Primary Activities
7/27/2019 BPSM Mod 5 Internal Analysis
12/27
Margin
Concept of margin
At each stage of value chain, a margin is created
Margin is the difference between the total value andcollective cost for performing an activity
BPSM: Module 5 Internal Analysis 12
7/27/2019 BPSM Mod 5 Internal Analysis
13/27
Value Chain
The purpose of value chain analysis is to
examine each activity and find out whetherit is adding value or just cost Do wholesalers add value or just a cost?
Is it possible to dispense with wholesalers anddistributors without affecting the value delivered?
BPSM: Module 5 Internal Analysis 13
7/27/2019 BPSM Mod 5 Internal Analysis
14/27
Dell Computers
Business model of Dell is based on the
premise that computers can built to orderand delivered directly to the customers
The cost saved by cutting out wholesalers& dealers gave Dell savings in cost
This gave Dell pricing options
Either he could have retained the savings withhimself or
Passed on the savings to customersBPSM: Module 5 Internal Analysis 14
7/27/2019 BPSM Mod 5 Internal Analysis
15/27
Dells strategy He chose to pass on the savings to
customers and grew business This was his strategy
Growth Strategy
Strategy is not necessarily always tomaximise the profit
Survival / Stability strategy
Growth strategy
Retrenchment strategy
Combination strategy or portfolio restructuringBPSM: Module 5 Internal Analysis 15
7/27/2019 BPSM Mod 5 Internal Analysis
16/27
Socio-cultural factors Dispensing wholesalers and retailers was
made possible by use of internet fordirectly selling
This type of direct selling was not possible inChina and India where customers want totouch and feel before purchase
So, the strategy depends on the socio-culturalenvironment prevailing in the market
BPSM: Module 5 Internal Analysis 16
7/27/2019 BPSM Mod 5 Internal Analysis
17/27
Importance of value chainanalysis
Purpose of the value chain analysis is to
examine each activity to find out whichone of the activity is adding value and
Which other activity can be outsourced
BPSM: Module 5 Internal Analysis 17
7/27/2019 BPSM Mod 5 Internal Analysis
18/27
Outsourcing Nike will perform many activities as part of
business Design the footwear
Manufacture the footwear
Market the footwear
Nike performs designing and marketing
much betterthan manufacturing
BPSM: Module 5 Internal Analysis 18
7/27/2019 BPSM Mod 5 Internal Analysis
19/27
Outsourcing Therefore, it chooses to outsource
manufacturing to China and develops designingand marketing as its core competence
Manufacturers in China can manufacture
footwear better and cheaper than Nike In doing that Nike has to protect its intellectual
property (design) through IPR
(So, legal and political systems play animportant role)
BPSM: Module 5 Internal Analysis 19
7/27/2019 BPSM Mod 5 Internal Analysis
20/27
Resources, Capabilities,Strategy and Competencies
BPSM: Module 5 Internal Analysis 20
Resources
Capabilities
DistinctiveCompetencies
Strategies CompetitiveAdvantage SuperiorProfitability
Shape
Figure 3.1, pp 76,77 of text
Build
7/27/2019 BPSM Mod 5 Internal Analysis
21/27
Building Blocks of
Competitive Advantage
BPSM: Module 5 Internal Analysis 21
SuperiorEfficiency
Superior
CustomerResponsiv
eness
Superior
Quality
SuperiorInnovation
Competitive
AdvantageLow Cost
Differentiation
Fig 3.6, pp 85-89 of text
7/27/2019 BPSM Mod 5 Internal Analysis
22/27
Analysing Competitive
Advantage
BPSM: Module 5 Internal Analysis 22
ROIC
Walmart: 14:1%Target: 10.6%
ROS
Walmart: 3.43%Target: 4.5%
Capital Turnover
Walmart: 3.82
Target: 2.08It is a ratio & not %
COGS / SalesWalmart: 76.5%Target: 66.1%
SG & A / SalesWalmart: 18.77%Target: 22.95%
Working Cap / SalesWalmart: (-) 2.9 %Target: 11.24%
Plnt, Prprty & Equp / SalesWalmart: 25.9 %Target: 38.02%Fig 3.10, pp 93-95 of text
7/27/2019 BPSM Mod 5 Internal Analysis
23/27
Durability of CA Given time and skill, no competitive advantage is
eternal
The essence of strategy lies in creating tomorrowscompetitive advantages faster than competitors mimicthe ones you possess today Gary Hamel and C K
Prahlad, as quoted in Crafting and Executing Strategy by Thompson, Strickland, Gamble and Jain
Durability depends on three factors (pp 95 oftext)
Barriers to imitation Capability of competitors
Dynamism of the industry environment
BPSM: Module 5 Internal Analysis 23
7/27/2019 BPSM Mod 5 Internal Analysis
24/27
Barriers to imitation Barriers depend on whether the competitor
is trying to imitate Resource or
Capability
BPSM: Module 5 Internal Analysis 24
7/27/2019 BPSM Mod 5 Internal Analysis
25/27
Summary of the module Research shows that industry structure explains only
10% of variance in profit across companies This means, individual company difference explains
much of the success
Thus the importance of internal analysis
Value chain analysis is an important tool for internalanalysis and helps us identify is adding value and whichis adding just cost
Activities that do not add significant value are candidatesfor outsourcing
Some one else specialises in that activity can perform it betterand cheaper
BPSM: Module 5 Internal Analysis 25
7/27/2019 BPSM Mod 5 Internal Analysis
26/27
Summary of the module Resources and capabilities help build the distinct
competencies which shape the strategies but the
relationship is not linear And hence new resources and competencies required by
the strategies are to be built and therefore, the cyclecontinues
Strategies lead to competitive advantages which lead tohigher profitability
Building blocks of competitive advantages are superior
quality, superior efficiency customer responsiveness andsuperior innovation
Innovation is central to all the building blocks
BPSM: Module 5 Internal Analysis 26
7/27/2019 BPSM Mod 5 Internal Analysis
27/27
Summary of the module A tool for analysing Competitive advantage and
profitability between the companies is the Du Pontanalysis
No competitive advantage is permanent
Durability of CA however, depends on barriers to
imitation, capability of competitors, industry dynamism
End of the module
BPSM: Module 5 Internal Analysis 27