Business Strategy Internal Analysis of the Company

Prepeared By Debashish Bramha.

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What do we mean by strategy?

Strategy refers to the plans made and action taken to enable an organization to fulfill its indented objectives Strategy is managements game plan for strengthening the organizations position, pleasing customers, and achieving performance targets.
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Without a strategy, managers have:

No thought-out course to follow

No roadmap to manage by
No action program to produce the intended result http://debashishbramha.blogspot.com

Good strategy and good strategy execution are the most trustworthy signs of good management.
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Components of Strategic Management Process

Vision Company Mission Company Profile Recognizing and evaluating external and internal environment. Strategic Analysis and Choice Strategy Formulation Strategy Implementation Evaluation of performance
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The Strategic Management Process

Involves the full set of:

Commitments

Decisions

Actions

which are required for firms to achieve:

Strategic Competitiveness
Sustained Competitive Advantage Above-Average Returns
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Strategic Competitiveness
Achieved when a firm successfully formulates and implements a value-creating strategy

Sustained Competitive Advantage

Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate

Above-Average Returns
Returns in excess of what an investor expects to earn from other investments with similar risk
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What does a companys strategy consist of?

Company strategies concern:

How to satisfy customers

Broad or narrow product line? Amount of customer service provided? Concentrate on a single business strategy? Diversify into related or unrelated industries? Expand globally?
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How to grow the business

What does a companys strategy consist of?

How to respond to changing industry and market conditions How best to capitalize on new opportunities How to manage each functional piece of the business How to achieve strategic and financial objectives

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What is an Internal Analysis?

Internal Analysis Identifies and evaluates resources, capabilities, and core competencies Looks at the organizations
o o o o

Current vision Mission Strategic objectives Strategies

Why Do an Internal Analysis?

1.

It is the only way to identify an organizations strengths and weaknesses Its needed for making good strategic decisions
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1.

Value Chain Analysis

The premise behind value chain analysis is that customers demand value from goods and services they obtain Customer value

Product is unique and different Product is low priced Quick response to specific or distinctive customer needs

A value chain is a systematic way of examining organizations functional activities

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The Value Chain

General administration
Human resource management Technology development Procurement

Inbound logistics

Operations

Outbound logistics

Marketing and sales

Service

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Value Chain Analysis

Inbound Logistics
Materials control system Inventory control system Raw material handling and warehousing

Operations
Equipment comparison to competitors Plant layout Production control system Level of automation in production processes

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Value Chain Analysis

Outbound Logistics
Timeliness and efficiency of finished products delivery Warehousing of finished products

Marketing and Sales

Marketing research Sales promotions and advertising Alternative distribution channels Competency and motivation of sales force Organizations image of quality Organizations reputation Brand loyalty of customers Domination of various market segments
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Value Chain Analysis

Customer Service
Customer input for product improvements Handling of customer complaints Warranty and guarantee policies Employee training in customer education & service issues Replacement parts and services

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Value Chain Analysis

Procurement
Alternate sources for obtaining needed resources Timeliness of resources procurement Procurement of large capital expenditure resources Lease-versus-purchase decisions Long-term relationships with reliable suppliers

Technological Development
R&D activities in product and process innovations Relationship between R&D and other departments Meeting deadlines in technological development activities Quality of labs and other research facilities Qualifications of lab technicians and scientists Creativity and innovation in organizational culture
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Value Chain Analysis

Human Resource Management
Recruiting, selecting, orienting, and training employees Employee promotion policies Reward systems to motivate and challenge employees Absenteeism and turnover Union-organization relations Employee participation in professional organizations Employee motivation, job commitment, and satisfaction

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Value Chain Analysis

Firm Infrastructure
Identification of external opportunities and threats Accomplishing goals with strategic planning system Coordination and integration of value chain activities Low-cost capital expenditures & working capital funds IS support for strategic and operational decisions Relationships with stakeholders Public image as a responsible corporate citizen

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The Analysis Process

Within the organization's strategic context specify the decisions to be made, Select, gather and analysis the most relevant data about the organization, its environment, operations and people. Based on these data, formulate conclusions about the organization its environment, operations and people. Determine and appraise feasible alternatives, weighing risks and opportunities. Select the most appropriate alternative. Implement the selected alternative and monitor results.

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Interrelationships among Value-Chain Activities within and across Organizations

Interrelationships among activities within the firm Relationships among activities within the firm and with other organizations (e.g., customers and suppliers)

INTERRELATIONSHIPS AMONG FUNCTIONAL AREAS

ENVIRONMENT
F

P/ O ENVIRONMENTAL INPUTS
R an d MD

HR ENVIRONMENTAL OUTPUT

MI S

ENVIRONMENT

STRATEGIC INTERNAL FACTORS

Tangible Resources
Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources
Firms

cash accounts Firms capacity to raise equity Firms borrowing capacity

Physical resources
Modern

plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment

Tangible Resources

Technological resources
Trade

secrets Innovative production processes Patents, copyrights, trademarks

Organizational resources
Effective

strategic planning processes Excellent evaluation and control systems

Intangible 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

Innovation and creativity

Technical

and scientific skills Innovation capacities

Reputation
Effective

strategic planning processes Excellent evaluation and control systems

Intangible Resources

Human
Experience Trust Managerial

and capabilities of employees

skills Firm-specific practices and procedures

Organizational 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

Core Competencies
For a strategic capability to be a Core Competency, it must be:

What a firm Does that ... is Strategically Valuable

Valuable
Rare Costly to Imitate No substitutable

Is the Resource Valuable?

Organizational resources can be a source of competitive advantage only when they are valuable

Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

Is the Resource Rare?

Organizational resources also possessed by competitors are not sources of competitive advantage
Common strategies based on similar resources give no one firm an advantage Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors

Can the Resource be Imitated?

Difficulty in imitating resources is key to value creation because it constrains competition

Profits generated from inimitable resources are more likely to be sustainable

Physical

uniqueness Path dependency Causal ambiguity Social complexity

Are Substitutes Readily Available?

There must be no strategically equivalent valuable resources that are themselves not rare or inimitable

Substitutability may take at least two forms

Competitor

may be able to substitute a similar resource that enables it to develop and implement the same strategy Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

Criteria for Sustainable Competitive Advantage and Strategic Implications

Is a resource or capability Valuable No Yes Rare Difficult Without Implications to Imitate Substitutes for Competitiveness No No No No No No Competitive disadvantage Competitive parity

Yes
Yes

Yes
Yes

No
Yes

No
Yes

Temporary competitive advantage

Sustainable competitive advantage

Source; Adapted from J. Barney, Firm Resources a Sustained Competitive Advantage, Journal of Management 17 (1991), pp. 99-120.

Challenge of Internal Analysis

How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?

Capabilitie Capabilities Represent: s

What a firm Does...

The firms capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firms tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

Human Resource Development Initiations

Measures :- Employee Motivation For Strategic Effectiveness
Developed in-built appraisal system like (a) Productivity Honorarium Scheme (b) Quarterly Incentive Scheme (c ) Group Incentives for cohesive team working & (d) Reward and Reconviction Scheme.

Coverage and Evaluation of Ratios

The different types of financial ratios in Financial Strategic Management includes:

Liquidity Activity Debt Profitability

Liquidity Ratio Analysis

Liquidity ratios measure a firms ability to meet its current financial obligations. Liquidity Ratios include:

Net working capital Current Ratio Quick Ratio

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Net Working Capital

While not technically a ratio, Net Working Capital (NWC) is a key element for internal control. The higher this number the better. NWC is found by subtracting current liabilities from current assets. This is a sign of growing assets while keeping their liabilities stable.
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Current Ratio

The Current Ratio is a direct evaluation of a companys liquidity. The higher this value, the more liquid a firms resources are. Current Ratio is found by dividing current assets by current liabilities. This could be improved by lowering the reliance on debt financing.
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Quick Ratio

The Quick Ratio is comparable to the Current Ratio except that it takes inventory levels into consideration. This is found by subtracting inventories from current assets and then dividing by current assets.

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Activity Ratio Analysis

Activity Ratios are used to measure the speed with which accounts are converted into cash. Activity Ratios include:

Inventory Turnover Average Collection Period Total Asset Turnover

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Inventory Turnover

Inventory Turnover is measurement of a firms inventory liquidity. This is found by cost of goods sold(COGS) by inventory. Generally a lower number is better.

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Total Asset Turnover

Total Asset Turnover illustrates the firms ability and proficiency in using its assets to generated sales. It is found by dividing sales by total assets, and is measured in times per year When using cross-sectional analysis, a company must take special care in comparing Total Asset Turnover because new assets tend to have lower turnover.

Debt Ratio Analysis

A companys debt position is a measure of how much of the firms profits are generated using money borrowed from other companies or individuals. Debt Ratios include:

Financial Leverage Multiplier Debt Ratio Interest Coverage Ratio

Financial Leverage Multiplier

The Financial Leverage Multiplier (FLM) is used to convert the companys Return On Assets to its Return on Equity. This reflects the impact of leverage, or use of debt, on owners return. It is the ratio of total assets to stockholders equity.

Profitability Ratio Analysis

Profitability Ratios evaluate a companys earnings with respect to sales, assets, owners investments and share values. Profitability Ratios include

Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets Return on Equity

Gross Profit Margin

The Gross Profit Margin(GPR) is the percentage of each sales dollar that remains after the firm has paid for the goods sold. It is found by subtracting COGS from sales and dividing by sales.

Net Profit Margin

Net Profit Margin(NPR), one of the most popular indicators of company health, measures the percentage of sales revenue remaining after ALL expenses are paid. NPR is found by dividing net profits by sales

Return on Total Assets

Return of Total Assets(ROA), also known as return on investment, measures a firms effectiveness at generating profits with its assets. ROA is found by dividing the net profits after taxes by total assets.

Return on Equity

The Return on Equity(ROE) is extremely important to potential investors. ROE is found by dividing net profit by owners equity.