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Internal Environment 3rd Lecture MSc Agricultural Economics and Management
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Internal Environment u shah

Nov 21, 2014

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Urvesh Shah

Internal Environment
3rd Lecture MSc Agricultural Economics and Management

External and Internal Analyses
Environment Sociocultural
Ge ne De ra m l og ra ph ic

Industry Environment

By studying the external environment, firms identify what they might choose to do

Competitor Environment
Technological General

Po lit ica En l/ v ir Le on ga m l en t

l l ra ra ne ne c ic G Ge mi om no on E Ec

Opportunities and threats

al al t nt ob ob en Gl Gl me m on on vir vir En En

External and Internal
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Page 1: Internal Environment u shah

Internal Environment

3rd LectureMSc Agricultural Economics and Management

Page 2: Internal Environment u shah

External and Internal Analyses

General

General

Envi

ronm

ent

Envi

ronm

ent

GeneralGeneral

EnvironmentEnvironment

Gene

ral

Gene

ral

Environment

Environment

SocioculturalSociocultural

GlobalGlobal

TechnologicalTechnological

Polit

ical

/Leg

al

Polit

ical

/Leg

al

Dem

ogra

phic

Dem

ogra

phic Econom

ic

Economic

IndustryEnvironment

CompetitorEnvironment

By studying the external By studying the external environment, firms identify environment, firms identify what they what they might choose to might choose to dodo

Opportunities and Opportunities and threatsthreats

Page 3: Internal Environment u shah

By studying the internal By studying the internal environment, firms identify environment, firms identify what they what they can docan do

Unique resources, Unique resources, capabilities, and core capabilities, and core competenciescompetencies(sustainable (sustainable competitive competitive advantage)advantage)

External and Internal Analyses

Page 4: Internal Environment u shah

Challenge of Internal Analysis

How do we effectively manage current How do we effectively manage current core competencies while simultaneously core competencies while simultaneously developing new ones?developing new ones?

How do we assemble bundles of How do we assemble bundles of resources, capabilities and core resources, capabilities and core competencies to create value for competencies to create value for customers?customers?

How do we learn to change rapidly?How do we learn to change rapidly?

Page 5: Internal Environment u shah

Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies

UncertaintyUncertainty regarding characteristics of the regarding characteristics of the general and the industry environments, general and the industry environments, competitors’ actions, and customers’ preferencescompetitors’ actions, and customers’ preferences

ComplexityComplexity regarding the interrelated causes regarding the interrelated causes shaping a firm’s environments and perceptions of shaping a firm’s environments and perceptions of the environmentsthe environments

Intraorganizational ConflictsIntraorganizational Conflicts among among people making managerial decisions and those people making managerial decisions and those affected by themaffected by them

Page 6: Internal Environment u shah

Choosing the right tools for internal analysis

Start with simple techniquesStart with simple techniques Consider all tools and identify those likely to be usefulConsider all tools and identify those likely to be useful Define the competitive capabilities the enterprise needsDefine the competitive capabilities the enterprise needs Identify the subsystems which support these capabilitiesIdentify the subsystems which support these capabilities Identify core competence relative to competitive capabilitiesIdentify core competence relative to competitive capabilities Determine changes to enhance/improve core competenceDetermine changes to enhance/improve core competence Take a systemic view Take a systemic view Adjust the methods of analysis in the light of what is foundAdjust the methods of analysis in the light of what is found

Page 7: Internal Environment u shah

Some commonly used techniques for internal analysis

Single BusinessesResource Audit Resource Audit Analysis of cost and profitAnalysis of cost and profitBenchmarking Benchmarking Value Chain AnalysisValue Chain AnalysisSupply Chain AnalysisSupply Chain Analysis

Multiple Businesses Portfolio AnalysisPortfolio Analysis

Both Single and Multiple BusinessesCore Competencies Core Competencies Shareholder Value Analysis Shareholder Value Analysis

Page 8: Internal Environment u shah

Resource Audit

ResourcesResources PhysicalPhysical Human Human Financial Financial OtherOther

Quality and QuantityQuality and Quantity Unique resourcesUnique resources A good initial analysisA good initial analysis

Page 9: Internal Environment u shah

Internal Audit

Information from: Management Marketing Finance/accounting Production/operations Research & Development Management information Systems

Parallels process of external audit

Page 10: Internal Environment u shah

MarketingMarketing Functions Customer analysis Selling products/services Product & service planning Pricing Distribution Marketing research Opportunity analysis

Page 11: Internal Environment u shah

Finance/AccountingFinance/Accounting Functions

Investment decision (Capital budgeting)

Financing decision Dividend decision

Page 12: Internal Environment u shah

Production/Operations

Production/Operations Functions

Process Capacity Inventory Workforce Quality

Page 13: Internal Environment u shah

Research & Development

Research & Development Functions

Development of new products before competitors

Improving product quality Improving manufacturing

processes to reduce costs

Page 14: Internal Environment u shah

Management Information Systems

Information Systems Security User-friendly E-commerce

Page 15: Internal Environment u shah

Analysis of Costs and Profit

Current sources of profits and trendsCurrent sources of profits and trends Recast standard reporting to give new insightsRecast standard reporting to give new insights Pragmatic approach to get value from time and Pragmatic approach to get value from time and

effort spenteffort spent A good initial analysisA good initial analysis

Single BusinessesResource Audit Resource Audit Analysis of cost and profitAnalysis of cost and profitBenchmarking Benchmarking Value Chain AnalysisValue Chain AnalysisSupply Chain AnalysisSupply Chain Analysis

Page 16: Internal Environment u shah

Benchmarking

Objective comparison with best in classObjective comparison with best in class Simple in theory - Hard in practiceSimple in theory - Hard in practice Observed differences in performance may be due Observed differences in performance may be due

to differences in parametersto differences in parameters Qualitative observations may be more valuable Qualitative observations may be more valuable

than quantitativethan quantitative

Page 17: Internal Environment u shah

Level ofbenchmarking

Through Examples of measures

Resources Resource audit Quantity of resources,e.g.· revenue/employee· capital intensity

Quality of resources,e.g.· qualifications of

employees· age of machinery· uniqueness (e.g.

patents)

Competences inseparate activities

Analysing activities Sales calls/sales personOutput/ employeeMaterials wastage

Competencesthroughmanaging linkages

Analysing overallperformance

Market shareProfitabilityProductivity

Benchmarking - at three levels

Page 18: Internal Environment u shah

Value Chain Analysis

Basic Value chainBasic Value chain Elegant in theoryElegant in theory Time-consuming in practiceTime-consuming in practice Revised value chain to reflect power of people Revised value chain to reflect power of people

and knowledgeand knowledge

Page 19: Internal Environment u shah

Value Creation

Page 20: Internal Environment u shah

ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFirm

Infra

stru

ctur

eFi

rm In

frast

ruct

ure

Hum

an R

esou

rce

Mgm

t.H

uman

Res

ourc

e M

gmt.

Tech

nolo

gica

l Dev

elop

men

tTe

chno

logi

cal D

evel

opm

ent

Pro

cure

men

tP

rocu

rem

ent

Margin Margin

Primary ActivitiesPrimary Activities

Supp

ort A

ctiv

ities

Supp

ort A

ctiv

ities

The BasicThe BasicValue ChainValue Chain

Page 21: Internal Environment u shah

To capitalize on the usefulness of the To capitalize on the usefulness of the Value ChainValue Chain concept...concept...

it is important to recognize that...it is important to recognize that...

Page 22: Internal Environment u shah

Value Chains are part of a Total Value System

Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain Buyer Value ChainBuyer Value Chain

Page 23: Internal Environment u shah

Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain Buyer Value ChainBuyer Value Chain

Supplier Value ChainSupplier Value Chain

Upstream ValueUpstream Value

Perform valuable activities that complementcomplement the firm’s activities

Value Chains are part of a Total Value System

Page 24: Internal Environment u shah

Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Buyer Value ChainBuyer Value Chain

Upstream ValuePerform valuable activities that complement the firm’s activities

Channel Value ChainChannel Value Chain

Each firm must eventually find a Each firm must eventually find a way to become a part of way to become a part of somesome buyer’s value chainbuyer’s value chain

Value Chains are part of a Total Value System

Page 25: Internal Environment u shah

Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain

Upstream Value

Perform valuable activities that complement the firm’s activities

Buyer Value ChainBuyer Value Chain

Ultimate basis for Ultimate basis for differentiationdifferentiation is is the ability to play a role in a the ability to play a role in a buyer’sbuyer’s value chainvalue chain

This createsThis creates VALUE!!VALUE!!

Each firm must eventually find a way to become a part of some buyer’s value chain

Value Chains are part of a Total Value System

Page 26: Internal Environment u shah

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream ValuePerform valuable activities that complement the firm’s activities

Buyer Value Chain

Each firm must eventually find a way to become a part of some buyer’s value chainUltimate basis for differentiation is the ability to play a role in a buyer’s value chainThis creates VALUE!!

Value chains vary for firms in an industry, Value chains vary for firms in an industry, reflecting each firm’s unique qualities:reflecting each firm’s unique qualities:

•HistoryHistory•StrategyStrategy•Success at ImplementationSuccess at Implementation

Value Chains are part of a Total Value System

Page 27: Internal Environment u shah

MarginMargin Margin

Margin

Primary ActivitiesPrimary Activities

Supp

ort A

ctiv

ities

Supp

ort A

ctiv

ities

Outsourcing

Outsourcing is the Outsourcing is the purchase of some purchase of some or all of a value-or all of a value-creating activity creating activity from an external from an external suppliersupplierUsually this is Usually this is because the because the specialty supplier specialty supplier can provide these can provide these functions more functions more efficientlyefficiently

ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFirm

Infra

stru

ctur

eFi

rm In

frast

ruct

ure

Hum

an R

esou

rce

Mgm

tH

uman

Res

ourc

e M

gmt ..

Tech

nolo

gica

l Dev

elop

men

tTe

chno

logi

cal D

evel

opm

ent

Pro

cure

men

tP

rocu

rem

ent

Page 28: Internal Environment u shah

Strategic Rationales for Outsourcing Improve Business FocusImprove Business Focus

lets company focus on broader business issues by lets company focus on broader business issues by having outside experts handle various operational having outside experts handle various operational detailsdetails

Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities the specialized resources of outsourcing providers the specialized resources of outsourcing providers

makes world-class capabilities available to firms in makes world-class capabilities available to firms in a wide range of applicationsa wide range of applications

Page 29: Internal Environment u shah

Strategic Rationales for Outsourcing Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits

achieves re-engineering benefits more quickly by achieves re-engineering benefits more quickly by having outsiders--who have already achieved having outsiders--who have already achieved world-class standards--take over processworld-class standards--take over process

Share RisksShare Risks reduces investment requirements and makes firm reduces investment requirements and makes firm

more flexible, dynamic and better able to adapt to more flexible, dynamic and better able to adapt to changing opportunitieschanging opportunities

Page 30: Internal Environment u shah

Strategic Rationales for Outsourcing Free Resources for Other PurposesFree Resources for Other Purposes

permits firm to redirect efforts from non-core permits firm to redirect efforts from non-core activities toward those that serve customers more activities toward those that serve customers more effectivelyeffectively

Page 31: Internal Environment u shah

Outsourcing Issues Greatest ValueGreatest Value

outsource only to firms possessing a core competence outsource only to firms possessing a core competence in terms of performing the primary or support activity in terms of performing the primary or support activity being outsourcedbeing outsourced

Evaluating Resources and CapabilitiesEvaluating Resources and Capabilities don’t outsource activities in which the firm itself can don’t outsource activities in which the firm itself can

create and capture valuecreate and capture value Environmental Threats and Ongoing TasksEnvironmental Threats and Ongoing Tasks

do not outsource primary and support activities that do not outsource primary and support activities that are used to neutralize environmental threats or are used to neutralize environmental threats or complete necessary ongoing organizational taskscomplete necessary ongoing organizational tasks

Page 32: Internal Environment u shah

Outsourcing Issues Nonstrategic Team of ResourcesNonstrategic Team of Resources

do not outsource capabilities that are critical to do not outsource capabilities that are critical to their success, even though the capabilities are their success, even though the capabilities are not actual sources of competitive advantagenot actual sources of competitive advantage

Firm’s Knowledge BaseFirm’s Knowledge Base do not outsource activities that stimulate the do not outsource activities that stimulate the

development of new capabilities and development of new capabilities and competenciescompetencies

Page 33: Internal Environment u shah

Revised Value Chain

PRIMARYACTIVITIES

revenue,profit,

market share,

Firm’s infrastructureTechnology trapping and commercialisation

Strategic Management

SUPPORTACTIVITIES

corecompetence

INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT

HUMAN RESOURCE MANAGEMENT

basic skills,know-how,

technologiesstrategic

assets

price,place,

promotionproductservice

technical,management,

marketing,sales,

production

customersatisfaction,

loyalty

PROCUREMENT AND SUPPLIER MANAGEMENT

Page 34: Internal Environment u shah

Stars Question marks

Cash cows Dogs

HighHigh

LowLow

HighHigh Low

RELATIVE MARKET SHARERELATIVE MARKET SHARE

MARKETMARKETGROWTHGROWTH

(a) The original Boston Consulting(a) The original Boston ConsultingGroup Matrix (BCG)Group Matrix (BCG)

INDUSTRYINDUSTRYATTRACTIVENESSATTRACTIVENESS

HighHigh

MedMed

LowLow

Strong Average WeakStrong Average WeakCOMPETITIVE POSITIONCOMPETITIVE POSITION

(b) Attractiveness matrix*(b) Attractiveness matrix*

Product portfolio matrices

Page 35: Internal Environment u shah

(c) Product/market evolution matrix(c) Product/market evolution matrix

COMPETITIVE POSITIONCOMPETITIVE POSITIONStrong Average WeakStrong Average Weak

DevelopmentDevelopment

GrowthGrowth

Shake-outShake-out

MaturityMaturity

STAGE OFSTAGE OFPRODUCT/PRODUCT/MARKETMARKET

EVOLUTIONEVOLUTION

DeclineDecline

(d) Public sector portfolio matrix(d) Public sector portfolio matrix

ABILITY TO SERVEABILITY TO SERVEEFFECTIVELYEFFECTIVELY

PUBLIC NEEDPUBLIC NEEDANDAND

SUPPORT +SUPPORT +FUNDINGFUNDING

ATTRACTIVENESSATTRACTIVENESSGoldenfleece

Back drawerissue

HighHighLowLow

HighHigh

LowLow

Public-sector

star

Politicalhot box

Product portfolio matrices

Page 36: Internal Environment u shah

Portfolio AnalysesOver-coming some pitfalls:Over-coming some pitfalls: Defining `high’ and `low’ (growth or share) can Defining `high’ and `low’ (growth or share) can

be difficultbe difficult `Plot’ SBU’s not products`Plot’ SBU’s not products Apply to market segments not whole marketsApply to market segments not whole markets Assess the `role’ of each SBUAssess the `role’ of each SBU Consider wider resource implications - not just Consider wider resource implications - not just

cashcash Dogs may have a positive roleDogs may have a positive role

Page 37: Internal Environment u shah

Components ofInternal Analysis

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources TangibleTangible IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

Value CreationValue Creation

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages

• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable

ValueValueChainChain

AnalysisAnalysis

• OutsourceOutsource

Page 38: Internal Environment u shah

Resources, Capabilities and Core Competencies

Capabilities Are the firm’s capacity to deploy

resources that have been purposely integrated to achieve a desired end state

Emerge over time through complex interactions among tangible and intangible resources

Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

Page 39: Internal Environment u shah

Resources, Capabilities and Core Competencies

Capabilities The foundation of many

capabilities lies in: The unique skills and

knowledge of a firm’s employees

The functional expertise of those employees

Capabilities are often developed in specific functional areas or as part of a functional area

Page 40: Internal Environment u shah

Resources, Capabilities and Core Competencies

Core Competencies Resources and capabilities that

serve as a source of a firm’s competitive advantage:

Distinguish a company competitively and reflect its personality

Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

Page 41: Internal Environment u shah

Resources, Capabilities and Core Competencies

Core Competencies Activities that a firm performs

especially well compared to competitors

Activities through which the firm adds unique value to its goods or services over a long period of time

Page 42: Internal Environment u shah

Building Sustainable Competitive Advantage

Four Criteria of Sustainable Competitive Advantage Valuable Rare Costly to imitate Nonsubstituable

Page 43: Internal Environment u shah

Building Sustainable Competitive Advantage

Valuable capabilities Help a firm neutralize

threats or exploit opportunities

Rare capabilities Are not possessed by

many others

Page 44: Internal Environment u shah

Building Sustainable Competitive Advantage

Costly-to-Imitate Capabilities Historical

A unique and a valuable organizational culture or brand name

Ambiguous cause The causes and uses of a

competence are unclear Social complexity

Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Page 45: Internal Environment u shah

Building Sustainable Competitive Advantage

Nonsubstitutable Capabilities No strategic equivalent

Page 46: Internal Environment u shah

Core Competence as a Strategic Capability

ResourcesResources Inputs to a firm’s Inputs to a firm’s

production processproduction process

CapabilityCapability A nonstrategicA nonstrategic

team or resourceteam or resource

Core CompetenceCore Competence A strategic A strategic capabilitycapability

The source ofThe source of

Does it satisfy the Does it satisfy the criteria of criteria of sustainable sustainable competitive competitive advantage?advantage?

YesYes

NoNo

CapabilityCapability An integration of aAn integration of a

team of resourcesteam of resources

Page 47: Internal Environment u shah

Sustainability of Competitive Advantage

Sustainability of competitive advantage is a Sustainability of competitive advantage is a function of:function of: the rate of core-competence obsolescence due to the rate of core-competence obsolescence due to

environmental changesenvironmental changes the availability of substitutes for the core competencethe availability of substitutes for the core competence the imitability of the core competencethe imitability of the core competence

Page 48: Internal Environment u shah

Performance Implications

Valuab

le?

Valuab

le?

Rare?

Rare?

Costly t

o

Costly t

o

Imita

te?

Imita

te?

Nonsub

stituta

ble

Nonsub

stituta

ble

CompetitiveCompetitiveConsequencesConsequences

PerformancePerformanceImplicationsImplications

NoNo NoNo NoNo NoNoCompetitiveCompetitiveDisadvantageDisadvantage

Below AverageBelow AverageReturnsReturns

YesYes NoNo NoNoYes/Yes/NoNo

CompetitiveCompetitiveParityParity Average ReturnsAverage Returns

YesYes YesYes NoNoYes/Yes/NoNo

Temporary Com-Temporary Com-petitive Advantagepetitive Advantage

Above Average to Above Average to Average ReturnsAverage Returns

YesYes YesYes YesYes YesYesSustainable Com-Sustainable Com-petitive Advantagepetitive Advantage

Above Average Above Average ReturnsReturns

Page 49: Internal Environment u shah

Core Competencies: Cautions and Reminders

Never take for granted that core competencies Never take for granted that core competencies will continue to provide a source of competitive will continue to provide a source of competitive advantageadvantage

All core competencies have the potential to All core competencies have the potential to become become core rigiditiescore rigidities

Core rigidities are former core competencies that Core rigidities are former core competencies that now generate inertia and stifle innovationnow generate inertia and stifle innovation

Page 50: Internal Environment u shah

The SWOT diagram may summarise the results of analyses

Strengths Weaknesses

OpportunitiesThreats

InternalAnalyses

ExternalAnalyses

Page 51: Internal Environment u shah

Strategic Assessment of a business as a whole

Questions Questions What business are we really in?What business are we really in? What real customer needs do we satisfy?What real customer needs do we satisfy? What problem do we solve for our What problem do we solve for our

customers?customers?