Chapter 4: Internal Analysis Flashcards
A FIRM’S INTERNAL DIAGNOSIS
Purpose of internal diagnosis: identify a firm’s strengths and weaknesses.
A FIRM’S INDENTITY
= what kind of firm we are
- It determines a firm’s nature and its fundamental characteristics.
- To understand traits and gives supplementary information
- Better understanding of the basic strategic support for its competitive strategy
- Essential features include:
- Age: start-up, adolescent, developed, mature, old
- Size: small, medium, large. Measured through turnover, total assets, headcount.
- Scope of firm: functions/needs it seeks to meet
- Type of ownership
- Geographic scope: concentrated (family owned) or not. Local, national, global.
- Legal structure: legal status of company.
A FIRM’S STRATEGIC PROFILE
= internal analytical technique
- It’s used to identify weak and strong points through analysis of its functional areas.
Drafting of the profile consists of 2 points:
- List of variables
- Evaluation of variables: Likert scale
- Limitations to Likert: relative, subjective, static.
THE VALUE CHAIN
= breakdown of the firm into key operations that need to be undertaken in order to sell a product or service.
Purpose: identify the sources of competitive advantage à what contributes to the generation of the overall value?
VALUE CHAIN ACTIVITIES
- Primary activities: those that are directly part of the operation process
- Inbound logistics
- Operations or production
- Outbound logistics
- Mk and sales
- After-sales service
- Support activities
- Procurement
- Technology development
- HR management
- Firm infrastructure (administration)
VALUE CHAIN INTERRELATIONS
There may exist a competitive advantage when relating activities: these are called links.
To make link happen, 2 criteria: Optimisation and Coordination.
2 examples of interrelations:
- Between a firm’s activities: when 2 or more activities interact. àHorizontal links
- With the value system: relation between value chain and suppliers/customers àVertical links.
ANALYSIS OF RESOURCES AND CAPABILITIES
method used: Resource-Based View
- Identifies a firm’s potential for establishing competitive advantages through the identification and strategic evaluation of the resources and capabilities it possesses.
- Based on 2 key premises:
- Firms are all different: cause different resources and capabilities à heterogeneity
- Resources and capabilities aren’t available to all firms à imperfect mobility
- 3 fundamental activities:
- Identify and measure R&C -> 4.3.1.
- Strategically evaluate R&C -> 4.3.2.
- Obtain and exploit R&C -> 4.3.3.
IDENTIFY AND MEASURE R&C
- Resources and assets
- Capability
Identifying resources
=sum of factors or assets a firm has for pursuing its strategy.
First step: identification of resources. 2 kinds:
-
Tangible resources: physically exist.
- Physical/material assets
- Financial assets
-
Intangible resources: based on information and knowledge. Do not physically exist.
- Human: knowledge, skills, motivation, training…
- Non-human: technological, organisational (brand, reputation)
Absence of intangible assets means on financial statement means difference between a firm’s book value (value of its material assets) and its market value (value economic agents make of the firm).
Identifying capabilities: organisational routines
= combination and coordination of resources/activities
Capabilities are intangible. So to distinguish between capabilities and resources:
- Resources are things that are possessed or controlled. Capabilities are ways of performing activities.
- Capabilities are of collective nature v resources that are individual.
Capabilities can be distinguished between:
- Functional capabilities: designed to resolve technical or management issues.
- Cultural capabilities: more to do with people’s attitude and values.
To integrate resources:
- Formal coordination mechanisms: tasks must be organised, managed, etc.
- Organisational routines: make tasks regular, predictable, into patterns, etc.
To sum up:
Capability= ways of performing activities.
Resources= elements that are possessed or controlled.
Competitive advantage= creating more value than another firm.
STRATEGICALLY EVALUATING RESOURCES AND CAPABILITIES
Evaluation criteria:
a.Obtaining value/competitive advantage
- Scarcity
- Relevance
b.Sustaining value/competitive advantage
- Durability: simultaneous use or unlimited application (for intangibles)
-
Transferability: if transferability is easy, then competitive advantage decreases.
- May be of intangible nature, or
- Specific assets
- Imitability: best protection is lack of knowledge.
- Substitutability: if you can’t buy it, can’t imitate it, then find a substitute
- Complementarity: resources + capabilities together = enhanced value.
c.Appropriating value/competitive advantage
Appropriation depends on control rights.
Control rights: tangible resources – financial and material.
- Cannot have control rights over human resources (except through contract)
- The greater people’s negotiating power, the lower the appropriation of rents by the firm. And vice versa.
MANAGING RESOURCES AND CAPABILITIES: 2 things
a.Improving the provision of resources and capability
By identifying and evaluating resources and capabilities, results would give:
- Nature of resources and capabilities
- Firm’s positioning compared to competition
- Firm’s deficit
- Firm’s future requirements
From this, firm can then decide on:
- External acquisition
- Internal development: investing in human capital – most important
b.Strategically exploiting the current resources and capabilities
- Internal exploitation:
- Competitive strategy
- Corporate strategy: through diversification/internationalisation processes.
- External exploitation: marketing of resources
