MARSHAL HAROUN G 12HM22

INTERNAL ANALYSIS

OBJECTIVES

Understand the following approaches to Internal Analysis

SWOT analysis Value chain analysis Financial Analysis Key Factor Rating Functional Area Profile and Resource Deployment Matrix Strategic Advantage Profile

SWOT ANALYSIS
A traditional approach to internal analysis:

SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the environmental Opportunities and Threats facing that firm

SWOT analysis is a historically popular technique through which managers create a quick overview of a companys strategic situation.

SWOT COMPONENTS

An opportunity is a major favorable situation in a firms environment A threat is a major unfavorable situation in a firms environment

A strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting the needs of the customers it serves
A weakness is a limitation or deficiency in one or more of a firms resources or capabilities relative to its competitors that create a disadvantage in effectively meeting customer needs

EX. 6.2

SWOT ANALYSIS DIAGRAM

LIMITATIONS OF SWOT ANALYSIS

A SWOT analysis can overemphasize internal strengths and downplay external threats A SWOT analysis can be static and can risk ignoring changing circumstances

A SWOT analysis can overemphasize a single strength or element of strategy

A strength is not necessarily a source of competitive advantage

VALUE CHAIN ANALYSIS (VCA)

The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value Value chain analysis (VCA) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value VCA takes a process point of view

THE VALUE CHAIN

Service

PRIMARY ACTIVITIES IN THE VALUE CHAIN

Activities directly involved in producing, selling, distributing, and servicing product for buyer.
Inbound

logistics: Receiving, Storing, and Distributing inputs for production

All activities involved in transforming inputs into final

Operations:

products
Outbound

logistics: Collecting, Storing, Distributing product to final

buyer
Marketing

and Sales: company products

Activities used to get customers to buy

Service:

Installation, Repair, Support, Training for using a product

SUPPORT ACTIVITIES IN THE 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

CONDUCTING A VCA
1. 2. 3.

Identify activities Allocate costs VCA proponents hold that the activity-based VCA approach would provide a more meaningful analysis of the procurement functions costs and consequent value added than the traditional cost accounting approach

EX. 6.5 TRADITIONAL

COST ACCOUNTING VS ACTIVITY BASED COST ACCOUNTING

DIFFICULTY IN ACTIVITY-BASED COST ACCOUNTING

It is important to note that existing financial management and accounting systems in many firms are not set up to easily provide activity-based cost breakdowns The information requirements to support activity-based cost accounting can create redundant work The time and energy to change to an activity-based approach can be formidable

FINANCIAL ANALYSIS

Uses companys financial companys performance

results

to

assess

Requires comparisons of results over multiple years and against industry standards

Important tool to identify companys strengths and weaknesses and potential problem areas.

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TYPES OF RATIOS

Profitability
Activity Liquidity Leverage
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ANALYZING COMPETITIVE ADVANTAGE AND PROFITABILITY

Benchmarking company performance against that of competitors and the companys own historic performance Return on invested capital

ROIC

Net profit Invested capital

Net profit = Total revenues Total costs

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WAYS TO INCREASE ROIC

Increase the companys return on sales Reduce cost of goods sold Reduce spending on sales force, marketing, general, and administrative expenses Reduce R&D spending Increase sales revenue more than costs Increase sales revenues from invested capital Reduce the amount of working capital Reduce amount of fixed capital
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WHY COMPANIES FAIL

Inertia

Companies find it difficult to change their strategies and structures

Limit a companys ability to imitate and cause competitive disadvantage A company can become so specialized based on past success that it loses sight of market realities Craftsmen, builders, pioneers, salesmen

Prior strategic commitments

The Icarus paradox

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KEY SUCCESS FACTORS

Structure of the Industry Competitive Strategy, industry position and geographic location Environment Factors Temporal Factors

VARIOUS AREAS

Functional Areas Management Areas The Human Side

FUNCTIONAL AREAS
Marketing Finance & Accounting Production Engineering R&D Human Resources Logistics

MANAGEMENT AREAS
Planning Organizing Directing Staffing Motivating Communication Controlling

ANALYSIS OF MANAGEMENT AREAS

Function Planning Description Forecasting, devising strategies, developing policies and setting goals Resource allocation and priority determination Job specification, job description ,unity of command , span of control Leadership, communication, job satisfaction, employee and managers morals Informing, motivating, securing participation, feedback Wages , hiring, firing, training, management development Quality control, financial control, inventory control, expense control Important at stage Strategy Formulation

Directing Organizing Motivating

Strategy formulation Strategy Implementation Strategy Implementation

Communicatin g Staffing Controlling

Strategy Implementation Strategy implementation Strategy Evaluation

HUMAN SIDE

Individuals Personalities Values , ambitions and motivation

INTERNAL RESOURCE ANALYSIS

Functional Area Analysis

Management Area Analysis

Human Side Analysis

Interrelationship between 2 & 3

Comprehe nsive Internal Analysis

FUNCTIONAL AREA PROFILE & RESOURCE DEPLOYMENT MATRIX

Matrix of function areas with common characteristics

Indicates how the key function areas stand in relation to each other.

MATRIX
Functiona Resource l Area deployment & Focus Marketing Development outlay ( % ) Amount Focus of effort 2008 2009 2009-10 2010-2011 Next year

Production Development outlay ( % ) Amount Focus of effort Finance Development outlay ( % ) Amount Focus of effort

STRATEGIC ADVANTAGE PROFILE

Summary statement which provides an overview of advantages and disadvantages in key areas likely to affect future operations of the firm

SAP OF A COMPANY
Internal Area Strength / Weakness

Marketing
R&D

Capable sales force (+) Shrinking market (-)

No R & D breakthrough (-) Patents from the company which was acquired (+) Heavy reliance of bank loans (-) Public issue over subscribed ( +)

Finance