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INTERNAL ANALYSIS

Dr.L.Prakash Sai

Activity System is a less linear way of thinking about the internal fit that

supports strategy.

Activity Map crucially interrelated features and functions that define a

firm‟s unique skills and strategy.

It supports competitive advantage with reinforcing patterns or systems.

CORE COMPETENCE & ACTIVITY SYSTEM

A company‟s core competences can be defined as the activities for

which resources are deployed in such a way that they achieve a

differential and sustainable competitive advantage in the marketplace.

The core competences may be direct activities such as:

product design (e.g. the Dyson vacuum) or

customer service (e.g. John Lewis staff), or

they may be indirect (e.g. trust in the Shell brand).

Whether direct or indirect, the activities are usually broad in scale and

scope, thereby maximizing return.

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Limited

Customer

Service

Modular

Designs Low Mfg

Cost

Self-

service

Selection

Self-

transport

Limited

sales staff

Customer

loyalty

Self -

assembly

Suburban

Location

Most

items in

stock

Design

focused

on low

cost

Explanatory

labeling

Easy

transport

Flat

packing

kits

Wide

variety

Long-term

suppliers

Year-

round

stocking

On-site

inventory

Impulse

buying

High-

traffic

store

layout

Easy to

make

Ikea’s Activity System

Value-Chain Analysis

• Sequential process of value-creating activities

• The amount that buyers are willing to pay for what a firm

provides them

• Value is measured by total revenue

• Firm is profitable to the extent the value it receives

exceeds the total costs involved in creating its product or

service

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The Value Chain (Manufacturing)

General administration / Firm Infrastructure

Human resource management

Technology development

Procurement

Inbound

logistics Operations

Outbound

logistics

Marketing

and sales Service

Relationship with Suppliers Relationship with Buyers

Primary Activities

Associated with receiving, storing

and distributing inputs to the product

– Location of distribution facilities

– Material and inventory control systems

– Systems to reduce time to send “returns”

to suppliers

– Warehouse layout and designs

Inbound

Logistics

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Associated with transforming inputs

into the final product form

– Efficient plant operations

– Appropriate level of automation in

manufacturing

– Quality production control systems

– Efficient plant layout and workflow

design

Inbound

Logistics

Operations

Primary Activities

Primary Activities

Associated with collecting, storing,

and distributing the product or

service to buyers

– Effective shipping processes

– Efficient finished goods warehousing

processes

– Shipping of goods in large lot sizes

– Quality material handling equipment

Inbound

Logistics

Operations

Outbound

Logistics

5

Associated with purchases of products and services by end users and the inducements used to get them to make purchases – Highly motivated and competent sales

force

– Innovative approaches to promotion and advertising

– Selection of most appropriate distribution channels

– Proper identification of customer segments and needs

– Effective pricing strategies

Inbound

Logistics

Operations

Outbound

Logistics

Marketing and

Sales

Primary Activities

Associated with providing

service to enhance or maintain

the value of the product – Effective use of procedures to solicit

customer feedback and to act on

information

– Quick response to customer needs and

emergencies

– Ability to furnish replacement parts

– Effective management of parts and

equipment inventory

– Quality of service personnel and

ongoing training

– Warranty and guarantee policies

Inbound

Logistics

Operations

Outbound

Logistics

Marketing and

Sales

Service

Primary Activities

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Typically supports the entire value

chain and not individual activities

– Effective planning systems

– Ability of top management to anticipate

and act on key environmental trends

and events

– Ability to obtain low-cost funds for

capital expenditures and working capital

– Excellent relationships with diverse

stakeholder groups

– Ability to coordinate and integrate

activities across the value chain

– Highly visible to inculcate organizational

culture, reputation, and values

General

Administration

Support Activities

Support Activities

Activities involved in the

recruiting, hiring, training,

development, and compensation

of all types of personnel – Effective recruiting, development, and

retention mechanisms for employees

– Quality relations with trade unions

– Quality work environment to maximize

overall employee performance and

minimize absenteeism

– Reward and incentive programs to

motivate all employees

General

Administration

Human Resource

Management

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Related to a wide range of activities and those embodied in processes and equipment and the product itself – Effective R&D activities for process and

product initiatives

– Positive collaborative relationships between R&D and other departments

– State-of-the art facilities and equipment

– Culture to enhance creativity and innovation

– Excellent professional qualifications of personnel

– Ability to meet critical deadlines

General

Administration

Human Resource

Management

Technology Development

Support Activities

Function of purchasing inputs

used in the firm‟s value chain – Procurement of raw material inputs

– Development of collaborative “win-win”

relationships with suppliers

– Effective procedures to purchase

advertising and media services

– Analysis and selection of alternate

sources of inputs to minimize

dependence on one supplier

– Ability to make proper lease versus buy

decisions

General

Administration

Human Resource

Management

Technology

Development

Procurement

Support Activities

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Strategic decisions in the value chain

Firm Infrastructure: cost-effective management information

systems, few managerial layers, simplified planning practices.

Human Resources: consistent policies to reduce turnover,

intense focus on training employees to be efficient and multi-skilled.

Technology: Easy-to-use production technologies,

investment in technology that improves production efficiencies.

Procurement: procedures to find the lowest cost inputs, frequent

evaluation of suppliers‟ performances.

Inbound

Logistics

Efficient

systems

to link

supplier

products

with

production

processes.

Operations

Use of

Economies of

scale.

Construction of

efficient scale

facilities.

Outbound

Logistics

Delivery

schedule that

reduces costs.

Selection of

low-cost

carriers.

Marketing

& Sales

Small, highly

trained sales

force.

Products

priced to

generate sales

volume.

Service

Efficient quality

control to

reduce buyer

complaints.

The Value Chain for a Low Cost Strategy

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Firm Infrastructure: Highly developed MIS to capture

customer preferences, firm-wide focus on high-quality products.

Human Resources: Compensation encourages creativity,

subjective performance measures, superior training.

Technology: Strong capability in basic research, investment in

technologies that allow for production of highly differentiated products.

Procurement: Procedures to find the highest quality inputs, purchase of

highest quality replacement parts, strict standards for suppliers.

Inbound

Logistics

Superior

handling to

minimize

damage &

improve

quality.

Operations

Consistent

production of

attractive

products.

Rapid response

to customers‟

production

demands.

Outbound

Logistics

Accurate and

responsive

order

processing.

Rapid and

timely

deliveries.

Marketing

& Sales

Extensive

granting of

credit buying.

Extensive

personal

relationships

with buyers.

Service

Extensive buyer

training to

assure max.

value from

Product.

The Value Chain for a Differentiation Strategy

INBOUND

LOGISTICS

OPERATIONS OUTBOUND

LOGISTICS

MARKETING

AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY

DEVELOPMENT

HUMAN

RESOURCE

MANAGEMENT

FIRM

INFRASTRUCTURE Financial Policy – Accounting - Regulatory Compliance - Legal - Community Affairs

Pilot Training

Safety Training Agent Training In-flight

Training

Baggage Tracking

System

• Promotion

• Advertising

• Advantage

Program

• Travel Agent

Programs

• Group Sales

• Ticket Counter

Operations

• Gate

Operations

• Aircraft

Operations

• On-board

Service

• Baggage

Handling

• Ticket Offices

• Route Selection

• Passenger

Service System

• Yield Mgmt

System (Pricing)

• Fuel

• Flight and Crew

Scheduling

• Facilities

Planning

• Aircraft

Acquisition

Information Technology

Communications

Product

Development

Market Research

• Lost

Baggage

Service

• Complaint

Follow-up

• Baggage

System

• Flight

Connections

• Rental Car and

• Hotel

Reservation

System

Computer Reservation System, In-flight System,

Flight Scheduling System, Yield Management System

Baggage

Handling

Training

Flight, route and

yield analyst

training

Airline Industry: Value Chain

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Resource-Based View (RBV) of the Firm

• Two perspectives

– The internal analysis of phenomena within a company

– An external analysis of the industry and its

competitive environment

• Resources and Capabilities

– Tangible resources

– Intangible resources

– Organizational capabilities

Types of Resources

Relatively easy to identify, and

include physical and financial assets

used to create value for customers

– Financial resources

• Firm‟s cash accounts

• Firm‟s capacity to raise equity

• Firm‟s borrowing capacity

– Physical resources

• Modern plant and facilities

• Favorable manufacturing locations

• State-of-the-art machinery and

equipment

Tangible Resources

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– Technological resources

• Trade secrets

• Innovative production processes

• Patents, copyrights, trademarks

– Organizational resources

• Effective strategic planning

processes

• Excellent evaluation and control

systems

Types of Resources

Tangible Resources

Relatively easy to identify, and

include physical and financial assets

used to create value for customers

Types of Resources

Difficult for competitors (and the firm itself) to

account for or imitate, typically embedded in

unique routines and practices that have evolved

over time:

– Human

• Experience and capabilities of employees

• Trust

• Managerial skills

• Firm-specific practices and procedures

– Innovation and creativity

• Technical and scientific skills

• Innovation capacities

– Reputation

• Effective strategic planning processes

• Excellent evaluation and control systems

Tangible

Resources

Intangible Resources

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Capabilities

Competencies or skills that a firm

employs to transform inputs to

outputs, and capacity to combine

tangible and intangible resources to

attain desired end

– Outstanding customer service

– Excellent product development

capabilities

– Innovativeness of products and services

– Ability to hire, motivate, and retain

human capital

Tangible

Resources

Intangible

Resources

Organizational Capabilities

Capabilities

FUNCTION CAPABILITY EXAMPLE

Corporate HQ Expertise in management of

multi-business corporation

GE

ABB

R&D Speed of new product

development

Canon

Sony

Manufacturing Continual improvements in

production or assembly

process

Toyota

Komatsu

Dell

Marketing Brand management P&G

Coke

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The resource-based view (RBV)

• What explains differences in firms‟ profitability and

sustainable advantage?

– Decisions about products, markets, positioning are important –

but too easy to copy

– Environments affect profits – but performance differs between

firms in similar environments

• RBV: individual resources are basis of competitive

strength if properly exploited

– Developed over time (path dependent)

– Dependent on tacit knowledge

– Generate “economic rents”

The VRIO Framework

If a firm has resources that are:

• valuable,

• rare, and

• costly to imitate, and…

• the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustained

competitive advantage.

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Applying the VRIO Framework

The Question of Value

in theory: Does the resource enable the firm to

exploit an external opportunity or neutralize an

external threat?

the practical: Does the resource result in an

increase in revenues, a decrease in costs, or

some combination of the two?

(Levi’s reputation allows it to charge a

premium for its Docker’s pants)

Applying the VRIO Framework

The Question of Rarity

if a resource is not rare, then perfect competition

dynamics are likely to be observed (i.e., no

competitive advantage, no above normal profits)

a resource must be rare enough that perfect

competition has not set in

thus, there may be other firms that possess the

resource, but still few enough that there is scarcity

(several pharmaceuticals sell cholesterol-lowering drugs,

but the drugs are still scarce — look at prices)

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Applying the VRIO Framework

Valuable and Rare

If a firm‟s resources are: The firm can expect:

Not Valuable Competitive Disadvantage

Valuable, but Not Rare Competitive Parity

Valuable and Rare Competitive Advantage

(at least temporarily)

The Question of Imitability

• the temporary competitive advantage of valuable

and rare resources can be sustained only if

competitors face a cost disadvantage in imitating

the resource

» intangible resources are usually more

costly to imitate than tangible resources

and bundles of resources are more costly than

single resources

Applying the VRIO Framework

(Harley-Davidson’s bikes’ styles – bikes may be easily imitated,

but its reputation cannot be)

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Costs of Imitation

• Unique Historical Conditions – First mover advantages

– Path dependence

• Causal Ambiguity – Causal links between resources and competitive advantage may not be

understood

– Bundles of resources fog these causal links

• Social Complexity – The social relationships entailed in resources may be so complex that

managers cannot really manage or replicate them

• Patents – Offer a period of protection if the firms is able to defend its patent rights

– Can be a two-edged sword as firms disclosure may decrease costs of imitation by other firms

Applying the VRIO Framework

The Question of Organization

a firm‟s structure and control mechanisms must be

aligned so as to give people ability and incentive to

exploit the firm‟s resources

examples: formal and informal reporting structures,

management controls, compensation policies,

relationships, etc.

these structure and control mechanisms complement

other firm resources taken together, they can help a firm

achieve sustained competitive advantage

(3M Company – rewards innovation and risk-taking)

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The VRIO Framework

Valuable? Rare?

Costly to

Imitate?

Exploited by

Organization?

Competitive

Implications

No

Yes

Yes

Yes

Yes

Yes Yes Yes

No

No

No Disadvantage

Parity

Temporary

Advantage

Sustained

Advantage

Economic

Implications

Below

Normal

Normal

Above

Normal

Above

Normal

‘Strategic’ resources meet the VIRUS criteria

Valuable - makes appreciable difference to:

– cost and/or differentiation advantage

– capacity to adapt or innovate

– (otherwise, just represents wasted effort)

Inimitable (otherwise will be copied/bought)

Rare (= distinctive) in the industry

– (otherwise, it is only a threshold resource)

UnSubstitutable (or firms will use alternatives)

Few resources satisfy ALL these criteria

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Different types of resource

• Assets: things a firm has

– Reputation, infrastructure, database

– „Strategic assets‟ if it meets VIRUS test

• Things a firm does with assets are:

– Capabilities: contribute directly to competitiveness

– Competences: deeper understanding of specialist field

– Incorporate routines developed over time

– Distinctive capabilities or core competences if it meets

VIRUS criteria

Dynamic capabilities

Dynamic capabilities allow an organization to upgrade its

resources in response to environmental change

Include the ability to:

– detect and assess environmental change,

– Learn, exploit knowledge, innovate

– manage across multiple product development

schedules

– transcend technology cycles and integrate

technologies across disparate units

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Dell: Competitive Advantage

Competitive Dynamics of Resource Imitation

Competitive Dynamics:

• the strategic decisions and actions of firms in

response to the strategic decisions and actions

of other firms

Firm A

(strategy decisions

lead to competitive

advantage)

Firm B‟s Possible Responses

No Response

Change Tactics

Change Strategy

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Competitive Dynamics

the other firm is serving a different market

a response may hurt its own competitive

advantage

it does not have the resources and capabilities

to mount an effective response

it wants to reduce or manage rivalry in the market

through tacit collusion

A firm may decide to take no action because:

“No Action” Response (Rolex Casio)

Competitive Dynamics

“Change” Responses

Tactics (Tide) Strategy (Monsanto)

specific actions

tweaking product

characteristics

usually imitated so quickly that

there is no advantage

a „leapfrog‟ move may create

advantage

a fundamental change in a

firm‟s theory

may be necessary if current

strategy becomes obsolete

a mimetic change may

achieve parity, but not

advantage

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The Resource-Based View

Resources &

Capabilities

Competitive

Advantage

• Valuable

• Rare

• Costly to Imitate

• Organized to Exploit

CA will be sustained if:

• other firms‟ costs of

imitation are greater

than benefit of imitation

• the firm is organized

to exploit advantages

Managers‟ Job:

• bundle resources and capabilities to

achieve competitive advantage

Internal Analysis

Tells us:

• what the firm should do, given the relative

strengths and weaknesses of resources and

capabilities

VRIO Framework Helps Managers Recognize

Sources of Competitive Advantage