Internal Environment 3rd Lecture MSc Agricultural Economics and Management
Nov 21, 2014
Internal Environment
3rd LectureMSc Agricultural Economics and Management
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
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
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?
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
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
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
Resource Audit
ResourcesResources PhysicalPhysical Human Human Financial Financial OtherOther
Quality and QuantityQuality and Quantity Unique resourcesUnique resources A good initial analysisA good initial analysis
Internal Audit
Information from: Management Marketing Finance/accounting Production/operations Research & Development Management information Systems
Parallels process of external audit
MarketingMarketing Functions Customer analysis Selling products/services Product & service planning Pricing Distribution Marketing research Opportunity analysis
Finance/AccountingFinance/Accounting Functions
Investment decision (Capital budgeting)
Financing decision Dividend decision
Production/Operations
Production/Operations Functions
Process Capacity Inventory Workforce Quality
Research & Development
Research & Development Functions
Development of new products before competitors
Improving product quality Improving manufacturing
processes to reduce costs
Management Information Systems
Information Systems Security User-friendly E-commerce
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
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
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
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
Value Creation
ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirm
Infra
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eFi
rm In
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Hum
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Mgm
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Pro
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Margin Margin
Primary ActivitiesPrimary Activities
Supp
ort A
ctiv
ities
Supp
ort A
ctiv
ities
The BasicThe BasicValue ChainValue Chain
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...
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
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
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
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
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
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
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Mgm
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Res
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Tech
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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
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
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
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
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
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
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
(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
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
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
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
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
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
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
Building Sustainable Competitive Advantage
Four Criteria of Sustainable Competitive Advantage Valuable Rare Costly to imitate Nonsubstituable
Building Sustainable Competitive Advantage
Valuable capabilities Help a firm neutralize
threats or exploit opportunities
Rare capabilities Are not possessed by
many others
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
Building Sustainable Competitive Advantage
Nonsubstitutable Capabilities No strategic equivalent
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
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
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
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
The SWOT diagram may summarise the results of analyses
Strengths Weaknesses
OpportunitiesThreats
InternalAnalyses
ExternalAnalyses
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?