Video Transcript: Internal Analysis

This course discusses the techniques of evaluating a company's internal  situation, including its collection of resources and capabilities, its cost structure  and customer value proposition, and its competitive strength. The internal  environment includes elements within the organization's boundaries, such as  employees, management and organizational culture. The analytical spotlight will  be trained on five questions, how well is the company strategy working? What  are the company's competitively important resources and capabilities are the  company's cost structure and customer value proposition. Competitive is the  company's competitively stronger or weaker than key rivals, and what strategic  issues and problems merit front burner managerial attention? The answers to  these five questions complete management's understanding of the company's  overall situation and position the company for a good strategy situation fit. The  reality is, most organizations don't have a strategy that works. The two best  indicators of how well an organization's strategy is working are, one, whether the company is recording gains in financial strength and profitability and two,  whether the company's competitive strength and market standing are improving, persistent shortfalls in meeting company performance targets and weak  performance relative to rivals are reliable warning signs that a company suffers  from poor strategy making less than competent strategy execution, or both other indicators of how well a company's strategy is working include trends in the  company's sales and earnings growth, the company's overall financial strength,  the company's customer retention rate, the rate at which new customers are  acquired, and changes in the company's image and reputation with customers.  The stronger a company's current overall performance, the less likely the need  for radical changes in strategy. A resource is a competitive asset that's owned or controlled by a company, and a capability is the capacity of a company to  completely perform some internal activity. Capabilities are developed and  enabled through the deployment of company resources. Long Term competitive  advantage requires the ongoing development and expansion of resources and  capabilities to pursue emerging market opportunities and defend against future  threats to its market standing and profitability. Organizational capabilities are  developed and enabled through the deployment of a company's resources, or  some combination of its resources. Some capabilities rely heavily on a  company's intangible resources, such as human assets and intellectual capital.  What is most telling about a company's aggregation of resources and  capabilities is how powerful they are in the marketplace. The competitive power  of a resource or capability is measured by how many of the four tests for  sustainable competitive advantage it can pass. The tests are often referred to as the VRIN tests for sustainable competitive advantage, an acronym for valuable,  rare, imitatable and non substitutable. The first two tests determine whether the  resource or capability may contribute to the competitive advantage. The last two  determine the degree to which the competitive advantage potential can be 

sustained. Is the resource or capability competitively valuable? All companies  possess a collection of resources and capabilities, some have the potential to  contribute to competitive advantage, while others do not. Is the resource or  capability rare, or is it something that rivals lack resources and capabilities that  are common among firms and widely available cannot be the source of  competitive advantage? Is the resource or capability inimitatable or hard to  copy? The more difficult and the more expensive it is to imitate a company's  resource or capability, the more likely that it can also provide a sustainable  competitive advantage. And finally, is the resource or capability non  substitutable, or is it vulnerable to the threat of substitution from different types  of resources and capabilities? Resources that are competitively valuable, rare  and costly to imitate, may lose much of their ability to offer competitive  advantage if rivals possess equivalent substitute resources, if management  determines that the company doesn't possess a resource that independently  passes all four tests with high marks. It may have a bundle of resources that can pass all of the tests. Resources and capabilities must be continually  strengthened and nurtured to sustain their competitive power, and at times, they  may need to be broadened and deepened to allow the company. To position  itself to pursue emerging market opportunities. Organizational resources and  capabilities that grow stale can impair competitiveness unless they're refreshed,  modified, or even phased out and replaced in response to ongoing market  changes and shifts in the company's strategy. In addition, disruptive  environmental change may destroy values of key strategic assets, turning static  resources and capabilities from diamonds to rust. Management's organizational  Building Challenge has two elements, attending to ongoing recalibration of  existing capabilities and resources, and two, casting a watchful eye for  opportunities to develop totally new capabilities for delivering better customer  value and out competing rivals. Companies that know the importance of  recalibrating and upgrading resources and capabilities make it routine  management functions to build new resource configurations and capabilities a  company requires a dynamically evolving portfolio of resources and capabilities  in order to sustain its competitiveness and position itself to pursue future market  opportunities. A dynamic capability is the ability to modify, deepen or reconfigure the company's existing resources and capabilities in response to its changing  environment or market opportunities. A value proposition is an innovation  service or feature intended to make a company or product attractive to  customers. Every company's business consists of a collection of activities  undertaken in the course of designing, producing, marketing, delivering and  supporting its product or service. All of the various activities that a company  performs internally combined to form a value chain, so called because the  underlying intent of a company's activities is to do things that ultimately create  value for buyers. A company's value chain consists of two broad categories of 

activities that drive costs and create customer value, the primary activities that  are the foremost in creating value for customers and the requisite support  activities that facilitate and enhance the performance of the primary activities.  Primary activities include Supply Chain Management, which are the activities  associated with purchasing inputs from suppliers. Operations, which are the  activities associated with converting inputs into final product forms, distribution,  which are activities dealing with physically distributing the product to buyers,  sales and marketing, which are related to Salesforce efforts, advertising and  promotion and finally service, those activities associated with providing  assistance to buyers, the requisite support activities include product  development, activities relating to product research and development, as well as human resource management, which is associated with the recruitment, hiring,  training, development and compensation of all types of personnel, And General  Administration, which are the activities relating to general management,  accounting and finance, legal and regulatory affairs and other overhead  functions. Benchmarking entails comparing how different companies perform  various value chain activities, how materials are purchased, how inventories are  managed, how products are assembled, how customer orders are filled and  shipped and how maintenance is performed, and then making cross company  comparisons of the costs and effectiveness of these activities. Benchmarking is  a potent tool for learning which companies are best at performing particular  activities and using their techniques or best practices to improve the cost and  effectiveness of a company's own internal activities. The tough part of  benchmarking is not whether to do it, but rather how to gain access to  information about other companies, practices and costs. However, a fairly  reliable source of benchmarking information has emerged. The explosive  interest of companies in benchmarking costs and identifying best practices has  promoted consulting organizations and several councils and associations to  gather benchmarking data. Having an independent group gather the information  lessens the potential for unethical behavior on the part of company personnel  and gathering their own data about competitors a company's customer value  proposition and cost competitiveness depend not only on internally performed  activities its own company value chain, but also the value chain activities of its  suppliers and forward channel allies. Making this determination requires  answers to two questions, how does the company rank relative to competitors,  on each of the important factors that determine market success and all things  considered, does the company have a net competitive advantage or  disadvantage versus major competitors? Competitive Advantage is the leverage  that a business has over its competitors. Competitive strength assessments  provide useful conclusions about a company's competitive situation. The ratings  show how a company compares against rivals, factor by factor or capability by  capability, thus revealing where its strongest and weakest. Moreover, the overall 

competitive strength scores indicate whether a company is at a net competitive  advantage or disadvantage against each rival. Step one in doing a competitive  strength assessment is to list the industry's key success factors and other telling measures of competitive strength or weakness. Six to 10 measures usually  suffice. Step two is to assign a weight to each measure of competitive strength  based on its perceived importance of shaping competitive success, the sum of  the weights for each measure must add up to one. Step three is to calculate  weighted strength ratings by scoring each competitor on each strength measure  using a one to 10 rating scale, where one is very weak and 10 is very strong,  and multiplying the assigned rating by the assigned weight. Step four is to sum  the weighted strengths on each factor to get the overall measure of competitive  strength for each company being rated. And finally, Step five is to use the overall strength ratings to draw conclusions about the size and extent of the company's  net competitive advantage or disadvantage, and to take specific note of areas of strength and weakness a company's competitive strength scores pinpoint its  strengths and weaknesses against rivals and point to offense and defense  strategies capable of producing first rate results. Strategic issues are found by  pinpointing the precise things that management needs to worry about and sets  the agenda for deciding what actions to take next to improve the company's  performance and business outlook, managers need to zero in exactly on what  strategic issues company managers need to address. This step involves  drawing on the results of both industry and competitive analysis and the  evaluations of the company's internal situation. The task here is to get a clear fix on exactly what industry and competitive challenges confront the company,  which of the company's internal weaknesses need fixing and what specific  problems merit front burner attention by company managers, if the items on  management's worry list are relatively minor, which suggests the company's  strategy is mostly on track and reasonably well matched to the overall situation.  Company managers seldom need to go much further than fine tuning the  present strategy. If, however, the issues and problems confronting the company  are serious and indicate the present strategy is not well suited for the road  ahead, the task of crafting a better strategy has to go on the top of  management's action agenda. Compiling a management worry list of problems  and issues creates an agenda for managerial strategy, making.