Internal Analysis

- Anmol Razdan Payal Desai Sajal Agrawal Sarvjeet Kaur (UM9302) (UM9304) (UM9309) (UM9311 )

Purpose of Internal Analysis

An organizations future success depends on its own internal conditions as well as external conditions

Managers need to be able to identify

Strengths that the company can relay on in order to compete Weaknesses that need to be corrected or minimized as competitive factors

Broad areas need to be considered for Internal Analysis

The organizations resources, capabilities The way in which the organization configures and co-ordinates its key value-adding activities The structure of the organization and the characteristics of its culture The performance of the organization as measured by the strength of its products.

Internal Analysis
Analysis of the global business

Global value chain analysis: configuration and co-ordination

Resources, capabilities and core competences

Cultural and structural analysis

Global products and performance

1. Resources
Resources are assets employed in the activities and processes of the organization. They can be tangible or intangible. They can be obtained externally (organizationaddressable) or internally generated (organizationspecific). They can be specific and non-specific:
Specific resources can only be used for highly specialized purposes and are very important to the organization in adding value to goods and services. Assets that are less specific are less important in adding value, but are more flexible.

1. Resources
Resources fall within several categories:
Human Financial Physical Technological Informational

An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and performance.

2. General Competencies/ Capabilities

They are assets like industry-specific skills, relationships and organizational knowledge which are largely intangible and invisible assets. Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations. Certain competences are likely common to competing businesses within a global industry or strategic group.

3. Core Competences/Distinctive Capabilities

Core competences or distinctive capabilities are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage. Kay (1993) identified four potential sources of Core competences:
Reputation Architecture (i.e., internal and external relationship) Innovation Strategic assets

Criteria to evaluate Core Competencies

Complexity: How elaborate is the bundle of resources and capabilities which comprise the core competence? Identifiability: How difficult is it to identify? Imitability: How difficult is it to imitate? Durability: How long does it be replaced by an alternative competences? Superiority: Is it clearly superior to the competences of other organizations? Adaptability: How easily can the competence be leveraged or adapted? Customer orientation: How is the competence perceived by customers and how far is it linked to their needs?

The relationships between resources, capabilities and core competence

Resources: Capabilities: Core competence human, financial, Industry-specific Distinctive and superior physical, skills, relationships, skills, technology technological, + organizational relationships, = legal, informational knowledge knowledge and Intangible reputation of the firm Tangible and and invisible Unique, and visible assets assets difficult to copy

Perceived customer benefits/value added

Inputs to the firms processes

Integration of resources into value-adding activities

Denotes feedback loop denotes core competence development

Not all capabilities are core competences only those that add greater value than those of competitors

Analyzing Capabilities by Functional Areas

Functional Area Corporate Management Capability Effective financial control systems Expertise in strategic control of diversified corporation Effectiveness in motivating and coordinating divisional and business-unit management Management of acquisitions Values-driven, in-touch corporate leadership Comprehensive and effective MIS network, with strong central coordination Capability in basic research Ability to develop innovative new products Speed of new product development

Information Management Research and Development

Analyzing Capabilities by Functional Areas

Functional Area Manufacturing Capability Efficiency in volume manufacturing Capacity for continual improvements in production processes Flexibility and speed of response Design capability

Product Design

Marketing

Brand management and brand promotion Promoting and exploiting reputation for quality Responsive to market trends

Sales and Distribution Effectiveness in promoting and executing sales Efficiency and speed of distribution Quality and effectiveness of customer service

Porters Value Chain Model

Value Chain Interpretation

Represents a company or any organization Simplified illustration of all activities that an organization must perform Framework for analyzing a companys strengths and weaknesses Margin represents profit- expand margin by
Being able to charge a higher price Operating at a lower cost within the Value Chain

Primary Activities in Value Chain

Activities directly involved in producing, selling, distributing, and servicing product for buyer. Inbound logistics: receiving, storing, and distributing inputs for production Operations: all activities involved in transforming inputs into final products Outbound logistics: collecting, storing, distributing product to final buyer Marketing and Sales: activities used to get customers to buy company products Service: installation, repair, support, training for using a product

Secondary Activities in Value Chain

Activities that enable the performance of primary activities
Firm infrastructure: companywide support of entire value chain; includes quality of management, financial performance, strategy, organizational culture Human resource management: recruiting, hiring, training, reward systems for employees Research and development: design of products and processes that enhance company performance; not limited to equipment Procurement: purchasing and managing inputs used in operations; developing and managing supplier relations

Applying Value Chain Analysis

Framework for identifying companys strengths and weaknesses Means to focus on where the companys core competencies exist and can be used to achieve competitive advantage and add value Comparison with competitors reveals opportunities for improving companys competitive position

Financial Analysis
Uses companys financial results to assess companys performance Requires comparisons of results over multiple years and against industry standards Important tool to identify companys strengths and weaknesses and potential problem areas.

Types of Ratios
Profitability Activity

Liquidity
Leverage Growth

Financial Ratios

Financial Ratios

Financial Ratios

Financial Ratios

Finance/Accounting Audit Checklist

1. Where is the firm financially strong and weak as 2. 3.
indicated by financial ratio analyses? Can the firm raise needed short-term capital? Can the firm raise needed long-term capital through debt and/or equity? Does the firm have sufficient working capital? Are capital budgeting procedures effective? Are dividend payout policies reasonable? Does the firm have good relations with its investors and stockholders? Are the firms financial managers experienced and well trained? Is the firms debt situation excellent?

4. 5. 6. 7.
8. 9.

The Resource-Based View (RBV)

The Resource-Based View (RBV) approach
contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage

Proponents of the RBV contend that organizational performance will primarily be determined by internal resources that can be grouped into three all-encompassing categories: physical resources, human resources, and organizational resources

The Resource-Based View (RBV)

For a resource to be valuable, it must be either (1) rare, or (2) hard to imitate, or (3) not easily substitutable These three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage