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THE INTERNAL ASSESSMENT & COMPETITIVE ADVANTAGE

THE INTERNAL ASSESSMENT


Internal strengths/weaknesses coupled with external opportunities/threats and a clear statement of mission provide the basis for establishing objectives and strategies. This is an enquiry to identify why with in all industry some companies out performe others. Earlier it was mostly by focusing their energies on optimising one of its principal function. Production/operation, R & D or marketing. Today due to growing complexities success depends on a judicious combination of several functions.

Resource Based View


Resource based view approach contents that internal resources are more important for a firm than external factors in achieving sustainable competitive advantage. Competitive advantage is the product of at least one of the following: Superior efficiency, superior quality, superior innovation and superior customer responsiveness.Superior efficiency enables a company to lower its cost. Superior quality allows it both to charge a higher price and to lower its costs; and superior customer service lets it charge a higher price. Superior innovation can lead to higher prices particularly in the case of product innovation or it can lead to lower units costs, particularly in the case of process innovation

Achieving superiority here requires that a company develop appropriate distinctive competencies which in turn are a product of the kind of resources and capabilities that a company possess (This is resource based view RBV) (for external = we have structurechange? conduct-performance model (SCP) competitive moves & center moves

Capabilities are a subset of a firms resources and defined as tangible and intangible assests (skills) that enable a firm to take full advantage of other resources it controls. eg; i) Marketing skills ii) Team work and cooperation among the managers

The internal resource of an organisation are Physical resources like plant and machinery, location, technology Possession of strategic assets-such as assess to raw materials, regulatory protection etc. Human resources-includes employees, training ,experience, knowledge skills etc Organisation resources- structure, planning process, information system patent, trade marks, copy rights, database and so on Net work of contacts with other organisation (suppliers, customer, Govt etc) Distribution networks Brand equity, reputation goodwill etc

Cocola:83.8 US $ Microsoft: 43.8 GE :33.5 Intel: 30 MCDonald: 24.2

A firms resources and capabilities can be classified in 7 broad categories 1) Financial resources and capabilities 2) Marketing resources & capabilities 3) Product operational capabilities 4) Management resource capabilities 5) R & D resource capabilities 6) Information management capabilities 7) Resume resources & capabilities

Management 1. Does the company use strategic management concepts? 2. Are company objectives and goals measurable & well communicated? 3. Do managers at all hierarchical levels plans effectively? 4. Do managers delegate authority well? 5. Is the organizations structure appropriate? 6. Are job descriptions and job specifications clear? 7. Is employees morale high? 8. Is employee turnover and absenteeism low? 9. Are organizational reward and control mechanisms effective?

MARKETING Resources & capabilities questions 1. Are markets segmented effectively? 2. Is the organization positioned well among competitors? 3. Has the companys market share be increasing? 4. Are present channels of distribution reliable and cost effective? 5. Does the company have an effective sales organization? 6. Does the company conduct market research? 7. Is product quality and customer service good? 8. Are the companys products and services priced appropriately? 9. Does the company have an effective promotion, advertising, and publicity strategy? 10.Is marketing planning and budgeting effective? 11.Do the companys marketing managers have adequate experience and training?

FINANCE Resources & capabilities questions 1. Is the company financially strong or weak as indicated by financial ratio analyses? 2. Can the company raise needed short-term capital? 3. Can the company raise needed short-term capital through depth and/or equity? 4. Does the company have sufficient working-capital? 5. Are capital budgeting procedures effective? 6. Are dividend payout policies reasonable? 7. Does the company have good relations with its investors and stockholders? 8. Are the companys financial mangers experienced and well trained?

PRODUCTION Resources & capabilities questions 1. Are suppliers of raw materials, parts, and subassemblies reliable and reasonable? 2. Are facilities, equipment, machinery, and offices in good condition? 3. Are inventory control policies and procedures effective? 4. Are quality control policies and procedures effective? 5. Are facilities, resources, and markets strategically located? 6. Does the company have technological competencies?

RESEARCH AND DEVELOPMENT Resources & capabilities questions 1. Does the company have R & D facilities? Are they adequate? 2. If outside R & D companies are used, are they cost-effective? 3. Are the organizations R&D personnel well qualified? 4. Are R&D resources allocated effectively? 5. Are management information and computer systems adequate? 6. Is communication between R & D and other organizational units effective? 7. Are present products technologically competitive?

COMPUTER INFORMATION SYSTEMS Resources & capabilities questions 1. Do all mangers in the company use the information system to make decisions? 2. Is there a chief information officer or director of information systems position in the company? 3. Are data in the information system updated regularly? 4. Do managers from all functional areas of the company contribute input to the information system ? 5. Are there effective passwords for entry into the companys information system? 6. Are strategies of the company familiar with the information system of rival companies? 7. Is the information system user friendly? 8. Do all users of the information system understand the competitive advantages that information can provide companies? 9. Are computer training workshops provided for users of the information system? 10. Is the companys information system continually being improved in content and user friendliness?

RBV theory asserts that resources are actually what helps a firm exploit opportunities and neutralise threats. The basic premise of RBV is that the mix, type and amount of a firms internal resources should be considered first and formost in designing strategies that can lead to sustainable competitive advantage. Managing strategically according to the RBV involves developing and exploiting a firms unique resources and capabilities and continually maintaining & strengthening these resources

The theory asserts that it is advantageous for a firm to pursue a strategy that is not currently being implemented by any competing firm ( which can result in sustainable competitive advantage). For a resource to be valuable it must be either 1) rare 2) hard to imitate (3) not easily 4) Obsolescence substitutable. These 4 characteristics of resources enable a firm to implement strategies to improve its efficiency and effectiveness in functional area and lead to a sustainable competitive advantage. (The more it is rare, non imitable or non substitutable)

Methods and techniques used for organizational appraisal


Broadly they are classified into 3. A) Internal Analysis 1) VRIO Framework 2) Value chain framework 3) Quantitative analysis a) Financial analysis b) Nonfinancial analysis 4) Qualitative Analysis B) Comparative Analysis 1) Historical analysis 2) Industry norms 3) Bench marking C) Comprehensive Analysis 1) Key factor rating 2) Business intelligence system 3) Balanced score card

Internal Analysis VRIO Frame work This is a resource based capability analysis V Valuable R - Rare I - Imitatable O Organized for use Valuable The organizational capability possessed by the firm that helps it to general revenues by capitalizing on opportunities and or it reduces cost by neutralizing threats Eg: amicable laison with government Rare - Mostly exclusive for the firm exclusive location, very dedicated workers (amicable & strong trade union) Imitatable Very difficult to imitate ability Organized for usage R & D system for continuous innovation Global competent partners willing to integrate their information system with that of the firm

How organizational capabilities contribute to SW based on such an analysis

Value chain Analysis


Another approach for internal analysis is Value chain analysis.

To understand how the resources deployed in production, distribution and other functional areas are used to add value and to create competitive advantages. It is essential to disaggregate the various tasks of the organisation into certain value creating activities and optimize and integrate it .

According to this approach called value chain analysis the activities of the firm are grouped into 1. Primary activities- consisting of inbound logistics, operations, outbound logistics,marketing,sales and service 2.support activities-consisting of firms infrastructure,technology development,HR management and procurement. and analyzed with the objective of 1) Finding things done in those activities that provides value to customers 2) Identifying how value contribution can be improved or increased (will be done later)

Non financial 1) Employee turn over 2) Absenteeism 3) Cycle time 4) Service call rate 5) No. of patents registered

Qualitative Analysis Corporate culture ability to absorb & assimilate technology Level of morale among officers, workers (to supplement qualitative analysis) Comparative analysis Historical areas which shows improvement (eg quality) Industry norms Cost structure comparison with other industry etc. Bench Marking Internal benchmarking Comparative benchmarking etc. Functional benchmarking . Comparison of processes or functions in same sector. Comprehensive analysis Key factor analysis (key factor rating) These can be based on capability factors or key success factors as annexed.

Common types of industry key success factors for future competitiveness

Technology Related (KSFs)

>expertise in a particular technology or in scientific research (important in pharmaceuticals, Internet applications, mobile communications >proven ability to improve production process

Manufacturing Related KSFs

>availability to achieve scale economics and capture learning Curve effects >Quality control know how (product reliability is important) >High utilization of fixed assets (important in capital intensive/high fixed cost industries) >Access to attractive supplies of skilled labor >High labour productivity ( important for items with high labour context) >Low cost product design and engineering >Ability to manufacture items to buyers specifications

Distribution related KSFS

>A strong net work of whole sale distributors/dealers >Strong direct sale capabilities via the internet or Company owned retail outlet >Ability to secure favorable display space on retailer Shelves >Breadth of product line and product selection >A well known and well respected brand name >Fast, accurate, technical assistance >Courteous, personalized customer service >Accurate filling of customer orders (few back order, mistakes etc) >Customer guarantee and warranties (important in mail Order or online retailing, big ticket purchase) >Clever advertising

Marketing Related KSFS

Skills and capability Related KSFs

>A talented workforce (superior talent is important in Professional services like accounting and investment Banking) >National or global distribution capabilities >Product innovation capabilities (rivals are raising to be first ) to market with new product attributes and performance features >Short delivery-time capability >Supply chain management capability >Strong e-commerce capabilities

Other type of KSFs

>Overall lower costs >Convenient location >Ability to provide fast and convenient after sales repair and services >A strong balance sheet and access to financial capital >Patent protection

Balance Score Card (purpose is little more than internal analysis. It is for focusing the strategy)
Balance score card is used for evaluating organization performance from 4 different perspectives 1) Customer perspective How do customers see us.(Market share, customer satisfactory, customer loyalty) 2) Internal business perspective What must we excel as (productivity, quality, efficiency) 3) Learning & grants perspective How we can sustain our ability to change & improve 4) Financial perspective How do we look to share holders (Earning, revenue, ROI, cash flow)

Structuring Organizational appraisal a) Internal factor evaluation (Capability evaluation) (How each of the capability factor is important to the industry & where the organization stands weight age and rating) b) Strategic advantage profile (SAP) Each capability factor whether it is a strength or ,weakness or neutral (-5 0 - + 5) is decided & written in the following grouping Finance Marketing production personal Information & management

Annexure Quantitative analysis Financial analysis Internal Audit =Functional analysis (RBV)
For example a financial analysis can be like this. Following are the relevant ratios. Profitability rations 1. Return on total assets (ROA) = profits after taxes total assets Interpretation: A measure of return on total investment in a firm. Larger is usually better.

2. Return on equity (ROE) = Profits after taxes total stockholders equity Interpretation: A measure of return on total equity investment in a firm. Larger is usually better. 3. Gross profit margin= sales cost of goods sold Sales Interpretation: A measure of sales available to cover operating expenses and still generate a profit. Larger is usually better.

4. Earnings per share (EPS) = profits (after taxes) preferred preferred stock dividends number of shares common stock outstanding holding

Interpretation: A measure of profit available to owners of common stock. Larger is usually better
5. Price earnings ratio (p/e) = current market price/ share after tax earnings/share Interpretation: A measure of anticipated firm performance high p/e ratio tends to indicate that the stock market anticipates strong future performance. Larger is usually better.

6. Cash flow per share = after tax profits + depreciation No. of common shares outstanding Interpretation: A measure of funds available to fund activities above current level of costs. Larger is usually better.

Liquidity Ratios
1)Current ratio= current assets current liabilities
Interpretation: A measure of the ability of a firm to meet its Current liabilities with assets that can be converted into cash in the short term. Recommended in the range if 2 to 3 2)Quick ratio= current assets- inventory current liabilities Interpretation: A measure of the ability of a firm to meet its Short term obligations without selling off its current inventory. A ratio of 1 is thought to be acceptable in many industries.

Leverage ratios 1. Debt to assets = total debt total assets Interpretation: A measure of the extent to which the debt has been used to finance a firms business activities. The higher, the greater the risk of bankruptcy 2. Debt to equity = total debt total equity A measure of the use of debt versus equity to finance a firms business activities. Generally less than 1

3. Times interest earned = profits before interest and taxes total interest charges Interpretation: A measure of how much a firms profits can decline and still meet its interest obligations. Should be well above 1

Activity ratios
1.Inventory turnover = sales inventory A measure of the speed with which a firms inventory is turing over 2. Accounts receivable turnover = annual credit sales accounts receivable A Measure of the average time it takes a firm to collect on credit sales 3. Average collection Period= accounts receivable average daily sales Measure of the time it takes a firm to receive payment after a sale has been made

Analysis 1)How has each ratios changed overtime 2)How does each ratios compare to industry norms 3)How does each ratios compare with each competitors

. Competitive advantage

Key concepts guiding strategy development


What is competitive advantage ? A competence is something an organization is good at doing . It is nearly always a product of learning and exposure. A core competence is competitively important activity that the company performs better than other internal activities.

Competitive advantage and key factors for future competitive success ( A fundamental to strategy). The primary objectives of a strategy is to achieve competitive advantage. Attaining this goal demands a two pronged effort. A company needs to pursue strategies that build on its existing resources and capabilities (its competencies) as well as strategies that build additional resources and capabilities (that is develop new competencies) and thus enhance the companys long run competitive position. Fig shown illustrates the relationship between forms strategies and its resources and capabilities. The strategies please note all types of strategies functional level, business level, corporate level or international level or some combination of them.

shape

Resource and capabilities (competencies)

strategies

build

A competitive advantage is characterised by the following: I) it favorably distinguishes a firm or its product from those of its competitors. ii) It resides in the minds of customers and not in the mind of organisation. iii) there can be multiple potential bases for competitive advantages,typically a combination of bases.

iv) It changes overtime due to a) actions of the firm b) actions of competitions c) changes in customer needs. A firm can have competitive advantage along one of the Following: 1.Cost (across value chain) 2.Quality(across value chain) 3.customer service 4.Speed 5.Variety 6.New product introduction

7.skills 8.brand 9.Distribution network 10.Business system & process that add value to customers 11.Network of relation that exist between suppliers/Distributors/customers/employees 12.Reputation and responsiveness. In order to achieve competitive advantage companies need to pursue strategies that build on the existing resources and capabilities of an organisation (its competencies) and they need to formulate strategies that build additional resources and capabilities (develop new competencies)

Competitive advantage can be sustained if >Customer perceives as well as experience difference in the important attributes and product and services between the firm and the competitors. >The difference is due to a gap in competencies of the firms and its competitors >The difference in attributes and competencies is expected to be lasting

To achieve competitive advantage a company must lower its cost, differentiate its products so that it can charge a higher price or do both simultaneously. Gross profit margin =(TR-TC)/TC

The focus given a building costs of competitive advantage are efficiency, quality, innovations and customer responsiveness.
Superior efficiency enables a company to lower its costs; superior quality allows it to change a higher price (due to increased reliability) and to lower its costs (increased productivity) and superior customer service (let it charge a higher price). Superior innovation can lead to higher prices particularly in the case of product innovations or it can lead to lower unit costs, particularly in the case of process innovations. Distinctive competencies arte the unique strengths of a company. A competitively valuable activity that a company performs better than the rivals Valuable competencies enable a company to earn a profit rate that is above the industry average. The distinctive competencies of an organization arise form its resources (physical , human to technological and organizations capabilities (skills at coordinating resources and putting them to productive use) A core competence becomes a basis for competitive advantage only when it rises to the level of distinctive competence

The durability of a companys competitive advantage depends on the height of barriers to imitation (bill gates-DOS operating system of Seattle computer and IBM PC) and ford, GM, Toyota in auto capabilities if companies (Volks wagon and 40 GM manager) capability of competitors of their strategic commitment (invasion of US auto industry by Japanese with small cars) and Industry environmental dynamism (innovation-shortest life cycle of productanother product)

Failing companies earn low or negative profits. Three factors seems to contribute to failure. Organizational inertia in the face of environmental change (allergy of IBM over personnel computer (apple) in early 1980 due to organizational set up. The nature of companys prior strategic commitment and the Icarus paradox (over confidence in one capability and not responding to changes properly)

Avoiding failure require a constant focus on the basic building blocks of competitive advantage, identification and adoption of best industrial practices and overcoming inertia.

3.Strategic intent: An strategic intent is more than just a dramatic ambition. The concept helps in achieving the following: I) drawing the organization attention to the essence of winning. ii) Encouraging employees to perform better by communicating the value of stretched targets. iii) Providing scope for individual and team contribution. iv) Using the concept of strategic intent to guide resource allocation decision with in the organisation.

To achieve strategic intent the top management will need to


a.Create a sense of urgency b.inculcate a competitive spirit at every level through an extensive use of competitive intelligence. c.train employees to develop skills they need to work efficiently. d.give the organization time to execute one challenge before launching another. e.set clear milestones and install review mechanisms

Following approaches are suggested (Hamel & Prachalad)


Create layers of advantages Search for weakness in competitors strategy and build position in undefended territories. Change terms of business transaction Compete through collaboration and strategic alliance

4.Core Competence-for leadership and strength


Core competence is defined as collective learning in an organisation especially on how to co ordinate diverse production skills and integrate multiple streams of technologies. To facilitate coordination and harmonization there must be communication,involvement and deep commitment to working across organisational boundaries.

5.Strategy as stretch and leverage


Stretch- competiveness is created by the gap between its

resources and the goals of its managers.

Benefits of stretch are:


1.rapid development of product 2.well coordinated cross functional team 3.Thrust on a select no. of core competencies 4. Strategic alliance with suppliers for desired output. 5.organisation wide employee involvement and consensus.

Leveraging is a key to gaining competitive advantage: 1.Concentrating-resources on key strategic goals


2. Accumulating-resources to achieve higher efficiency 3. Complementing-one kind of resource with another to ensure higher value addition. 4. Conserving-resources. 4.Recovering-resources from market place in the shortest possible time.

Learning effects:
Learning effects are cost saving that come from learning by doing labour, for example learns by repetition how best to carry out a task. On other words labour productivity increases overtime and unit cost falls as individuals learn most efficient way to perform a task. Equally important in new manufacturing facilities, management typically learns how best to run the new operations. Hence product cost decline because of increasing labour productivity and management efficiency.

Learning effect tend to be more significant where technologically complex task is repeated since there is more to learn (with more steps more significant will be the learning effect.) learning effect typically die out after a limited period of time

Unit cost

Mini efficient scale

volume

The experience curve


The experience curve refers to systematic unit cost reductions that have been observed to occur over the life of a product. According to the experience curve concept unit manufacturing cost of a product typically decline by a characteristic amount each time accumulated output of the product is doubled. This was first observed in aircraft industry where it was found that each time accumulated output of air frame as doubled unit cost decline to 80% of their previous level. The strategic significance of experience curve is that increasing companies product volume and market share will also bring cost advantage over the competitor.