Internal Analysis Distinctive Competencies, Competitive Advantage and Profitability free essay sample

Internal Analysis: Distinctive Competencies, Competitive Advantage and  Profitability Posted on November 8, 2010 by Domingo Salazar, MBA The Roots of Competitive Advantage The Internal analysis is concerned  with the identifying the strengths and weaknesses of the company. The main implications on the read material about strategy formulation are as follows:   Starting on distinctive competencies, we can differentiate its products from its rivals, in order to  determine  our/them strengths, including two complementary sources: tangible resources and intangible resources, which in turn are referred  to the assets of a company; following this complementary sources, are the capabilities of the company, which coordinates the company’s skills, the resources, capabilities and competencies, which in turn generates the true distinctive competency. Now, all this distinctive competencies shapes the strategies that the company pursues; however, is critical to realize that the strategies a company adopts can build brand new resources. There are three main reasons for failure over time, which are inertia, prior strategic commitments, and the Icarus paradox: The first one is related  to the problematic situation changing their strategies for new and fresh ones, even more, to adapt the whole  company or vision of the company, to the new competitive and environmental conditions; the second one is referring to the actual  market’ limitations of the company to compete with its rivals is the main cause of competitive disadvantage, so the main point on this is timming; and the last one, is referring to the paradox of the greatest company assets, are the main cause of failure, if is not updated over time. Danny Miller, author of this statement, refers that many companies can become overwhelmed by their early success, as a result, they become so specialized that mislead the time-changing markets, leading to failure in most cases. Talking now about the lower-cost producers, I would like to add the Toyota case, not because is referred  on the text book, but mainly due that I am currently  involved on automotive market, so this case of success, is a great example of how a company can be  a lower cost producer and at the same time can have an output for the final  client, the customers. Offering customers value they cannot get elsewhere, this advantage can be economic or psychological such as better customer services, better after sale services, also, subsequent purchasing parts, maintenance and services by calling to remind customers for follow-up (the Chrysler is doing it now). The drivers of profitability have to be  well known  by all the managers who leads its departments or operations, managers needs to be  able to compare, benchmark and performance the company against its competitors, and internally against the own historic performance itself; thus, will help to determine  where and how the deterioration is, how the strategies are managed  and/or maximized, how the cost structure is, and so on. According to the chapter, and other related articles, profitability it can be  resumed as the net result of a number of policies and decisions made by the management; and to obtain  a narrow ratio of profits we have to exclude the discontinued operations and the extraordinary items, because these does not represent the daily operations of a company. The insights provided by Du Pont model are valuable, and it can be used for â€Å"quick and dirt† estimates of the impact that operating changes have on returns. The Return on Investment, helps to evaluate  companies’ performances, and measures the ability of  the companies to reward funding-providers and to attract new ones for future funding; also, it evaluates the performance of the company and how is the company using its assets. Definitely strategizing is more important to explain the success or failure of a company, because the whole operation of the company, the whole philosophy, mission, vision, and so on, rely on the company strategies, luck, as Einstein said, is for losers. * Resource Library * Blog * Bookstore * Glossary * Newsletters * Training * Videos * Articles Guides * More Tools * Press Center Browse by Topic - Top of Form Bottom of Form Internal and External Analysis Internal | External | SWOT Matrix | Competitive Analysis | Market Analysis Create a Plan. Track Progress. Get Better Results. Try the leading strategic planning software free for 10 days. Starting at $49 a month. Start PlanSignup takes 60 seconds| SWOT Analysis SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT analysis should not only result in the identification of a corporation’s core competencies, but also in the identification of opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources. (Wheelen, Hunger pg 107) The SWOT analysis framework has gained widespread acceptance because it is both simple and powerful for strategy development. However, like any planning tool, SWOT is only as good as the information it contains. Thorough market research and accurate information systems are essential for the SWOT analysis to identify key issues in the environment. Marketing and Its Environment, pg 44) Assess your market: * What is happening externally and internally that will affect our company? * Who are our customers? * What are the strengths and weaknesses of each competitor? (T hink Competitive Advantage) * What are the driving forces behind sales trends? * What are important and potentially important markets? * What is happening in the world that might affect our company? * What does it take to be successful in this market? (List the strengths all companies need to compete successfully in this market. ) Assess your company: * What do we do best? * What are our company resources – assets, intellectual property, and people? What are our company capabilities (functions)? Assess your competition: * How are we different from the competition? * What are the general market conditions of our business? * What needs are there for our products and services? * What are the customer-market-technology opportunities? * What are the customer’s problems and complains with the current products and services in the industry? * What â€Å"If only†¦. † Statements does a customer make? Opportunity an area of â€Å"need† in which a company can pe rform profitably. Threat challenge posed by an unfavorable trend or development that would lead (in absence of a defensive marketing action) to deterioration in profits/sales. An evaluation needs to be completed drawing conclusions about how the opportunities and threats may affect the firm. EXTERNAL: MACRO- demographic/economic, technological, social/cultural, political/legal MICRO- customers, competitors, channels, suppliers, publics INTERNAL RESOURCES: the firm Competitor analysis is a critical aspect of this step. * Identify the actual competitors as well as substitutes. * Assess competitors’ objectives, strategies, strengths weaknesses, and reaction patterns. * Select which competitors to attack or avoid. The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of company strengths should be market oriented/customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy (? ). Weaknesses should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see. Being market focused when analyzing strengths and weaknesses does not mean that non-market oriented strengths and weaknesses should be forgotten. Rather, it suggests that all firms should tie their strengths and weaknesses to customer requirements. Only those strengths that relate to satisfying a customer need should be considered true core competencies. (Marketing and Its Environment, pg 44) The following area analyses are used to look at all internal factors effecting a company: * Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis * Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties The External Analysis examines opportunities and threats that exist in the environment. Both opportunities and threats exist independently of the firm. The way to differentiate between a strength or weakness from an opportunity or threat is to ask: Would this issue exist if the company did not exist? If the answer is yes, it should be considered external to the firm. Opportunities refer to favorable conditions in the environment that could produce rewards for the organization if acted upon properly. That is, opportunities are situations that exist but must be acted on if the firm is to benefit from them. Threats refer to conditions or barriers that may prevent the firms from reaching its objectives. (Marketing and Its Environment, pg 44) The following area analyses are used to look at all external factors effecting a company: * Customer analysis: Segments, motivations, unmet needs Competitive analysis: Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, weakness * Market analysis: Overall size, projected growth, profitability, entry barriers, co st structure, distribution system, trends, key success factors * Environmental analysis: Technological, governmental, economic, cultural, demographic, scenarios, information-need areas Goal: To identify external opportunities, threats, trends, and strategic uncertainties The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is important to understand how these element work together. When an organization matched internal strengths to external opportunities, it creates core competencies in meeting the needs of its customers. In addition, an organization should act to convert internal weaknesses into strengths and external threats into opportunities. SWOT Focus on your strengths. Shore up your weaknesses. Capitalize on your opportunities. Recognize your threats. Identify * Against whom do we compete? * Who are our most intense competitors? Less intense? * Makers of substitute products? * Can these competitors be grouped into strategic groups on the basis of assets, competencies, or strategies? * Who are potential competitive entrants? What are their barriers to entry? Evaluate * What are their objectives and strategies? * What is their cost structure? Do they have a cost advantage or disadvantage? * What is their image and positioning strategy? * Which are the most successful/unsuccessful competitors over time? Why? What are the strengths and weaknesses of each competitor? * Evaluate competitors with respect to their assets and competencies. Size and Growth What are important and potentially important markets? What are their size and growth characteristics? What markets are declining? What are the driving forces behind sales trends? P rofitability For each major market consider the following: Is this a business are in which the average firm will make money? How intense is the competition among existing firms? Evaluate the threats from potential entrants and substitute products. What is the bargaining power of suppliers and customers? How attractive/profitable are the market now and in the future? Cost Structure What are the major cost and value-added components for various types of competitors? Distribution Systems What are the alternative channels of distribution? How are they changing? Market Trends What are the trends in the market? Key Success Factors What are the key success factors, assets and competencies needed to compete successfully? How will these change in the future? Environmental Analysis An environmental analysis is the four dimension of the External Analysis. The interest is in environmental trends and events that have the potential to affect strategy. This analysis should identify such trends and events and the estimate their likelihood and impact. When onducting this type of analysis, it is easy to get bogged down in an extensive, broad survey of trends. It is necessary to restrict the analysis to those areas relevant enough to have significant impact on strategy. This analysis is divided into five areas: economic, technological, political-legal, sociocultur al, and future. Economic What economic trends might have an impact on business activity? (Interest rates, inflation, unemployment levels, energy availability, disposable income, etc) Technological To what extent are existing technologies maturing? What technological developments or trends are affecting or could affect our industry? Government What changes in regulation are possible? What will their impact be on our industry? What tax or other incentives are being developed that might affect strategy development? Are there political or government stability risks? Sociocultural What are the current or emerging trends in lifestyle, fashions, and other components of culture? What are there implications? What demographic trends will affect the market size of the industry? (growth rate, income, population shifts) Do these trends represent an opportunity or a threat? Future What are significant trends and future events? What are the key areas of uncertainty as to trends or events that have the potential to impact strategy? Internal Analysis Understanding a business in depth is the goal of internal analysis. This analysis is based resources and capabilities of the firm. Resources A good starting point to identify company resources is to look at tangible, intangible and human resources. Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm’s financial statements. Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc. ) and technological assets (proprietary technology and know-how). Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities. Competitive advantage Competitive Advantage Definition A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitive Strategies Following on from his work analysing the competitive forces in an industry, Michael Porter suggested four generic business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses activities are narrow versus broad and the extent to which a business seeks to differentiate its products. The four strategies are summarised in the figure below: The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. Strategy Differentiation This strategy involves selecting one or more criteria used by buyers in a market and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products. Examples of Differentiation Strategy: Mercedes cars; Bang ; Olufsen Strategy Cost Leadership With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering standard products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. Examples of Cost Leadership: Nissan; Tesco; Dell Computers Strategy Differentiation Focus In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants in other words that there is a valid basis for differentiation and that existing competitor products are not meeting those needs and wants. Examples of Differentiation Focus: any successful niche retailers; (e. g. The Perfume Shop); or specialist holiday operator (e. g. Carrier) Strategy Cost Focus Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called me-toos. Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products. Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment. Contents[hide] * 1 Resource-based view perspective * 2 See also * 3 References * 4 Further reading * 5 External links| [edit] Resource-based view perspective Competitive advantage is based on theory that seeks to address some of the criticisms of comparative advantage. Michael Porter proposed the theory in 1985. Competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. Competitive advantage attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices (Stutz and Warf 2009). Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources. New technologies such as robotics and information technology either to be included as a part of the product, or to assist making it. Information technology has become such a prominent part of the modern business world that it can also contribute to competitive advantage by outperforming competitors with regard to internet presence. From the very beginning, i. e. Adam Smiths Wealth of Nations, the central problem of information transmittal, leading to the rise of middle-men in the marketplace, has been a significant impediment in gaining competitive advantage. By using the internet as the middle-man, the purveyor of information to the final consumer, businesses can gain a competitive advantage through creation of an effective website, which in the past required extensive effort finding the right middle-man and cultivating the relationship. The term competitive advantage is the ability gained through attributes and resources to perform at a higher level than others in the same industry or market (Christensen and Fahey 1984, Kay 1994, Porter 1980 cited by Chacarbaghi and Lynch 1999, p. 45). The study of such advantage has attracted profound research interest due to contemporary issues regarding superior performance levels of firms in the present competitive market conditions. â€Å"A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential player† (Barney 1991 cited by Clulow et al. 2003, p. 221). Successfully implemented strategies will lift a firm to superior performance by facilitating the firm with competitive advantage to outperform current or potential players (Passemard and Calantone 2000, p. 18). To gain competitive advantage a business strategy of a firm manipulates the various resources over which it has direct control and these resources have the ability to generate competitive advantage (Reed and Fillippi 1990 cited by Rijamampianina 2003, p. 362). Superior performance outcomes and superiority in production resources reflects competitive advantage (Day and Wesley 1988 cited by Lau 2002, p. 125). Above writings signify competitive advantage as the ability to stay ahead of present or potential competition, thus superior performance reached through competitive advantage will ensure market leadership. Also it provides the understanding that resources held by a firm and the business strategy will have a profound impact on generating competitive advantage. Powell (2001, p. 132) views business strategy as the tool that manipulates the resources and create competitive advantage, hence, viable business strategy may not be adequate unless it possess control over unique resources that has the ability to create such a unique advantage. Summarizing the view points, competitive advantage is a key determinant of superior performance and it will ensure survival and prominent placing in the market. Superior performance being the ultimate desired goal of a firm, competitive advantage becomes the foundation highlighting the significant importance to develop same. What are strategic capabilities? The concept of capabilities in strategic management is appealing because it suggests that a company’s competitiveness depends on how it does what it does, not only what market it is in. To me and most others with an engineering background this is totally obvious. Any theory that suggests otherwise seems highly implausible and is also rejected by numerous examples of companies with strong and unique engineering skills that manage to create a market for themselves based on their own capabilities. That is not to say that choice of market is unimportant, but a brilliant plan can easily be ruined if the necessary capabilities are lacking. Similarly, a plan which may appear mediocre on paper may become highly successful if conducted by a team with excellent capabilities. Operations matter, and developing apabilities that make operations successful is a highly strategic issue. A key element of the capabilities framework is identification of the foundations on which distinctive and di fficult–to–replicate advantages can be built, maintained and enhanced (Teece et al. 1997). To my satisfaction, the cited authors also found that â€Å"The balance sheet is a poor shadow of a firm’s distinctive competences. † Instead, it is necessary to develop capabilities that help the company to create competitive advantage. This process takes time, and unique and deeply rooted capabilities cannot be bought off–the–shelf. I would like to offer the following definitions: Strategic capabilities: High–level routines, resources and competences that are recognised as important in order to create and sustain a competitive advantage. Operational capabilities: High–level routines, resources and competences that yield the firms operational functions. Dynamic capabilities: High–level routines, resources and competences that allows a firm to modify its existing operational capabilities. I’m not taking these definitions out of thin air, please check out chapter 3 of my thesis (PDF, 931kB) if you’re interested in reading more. However, you should not take these definitions as carved in stone. My view, and others’ too I think, of this subject is constantly evolving. Essentially, strategic capabilities express what a firm wants to be able to do, while operational capabilities determine what it is actually able to do. Dynamic capabilities express the capability to close the gap between existing operational capabilities and desired strategic capabilities. Assessing and enhancing strategic capability: a value-driven approach. (value chain analysis in corporate finance) Management Accounting (British) See all results for this publication Browse back issues of this publication by date June 1, 1994 | Partridge, Mike; Perren, Lew | Copyright COPYRIGHT 1999 Chartered Institute of Management Accountants (CIMA). This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights or concerns about this content should be directed to Customer Service. Share Mike Partridge and Lew Perren of the University of Brighton continue the theme that they introduced in the November issuethat firms should maintain an external strategic perspective. They move on this month to examine the strategic capability of the firm through the use of Porters value chain analysis. [1] They introduce the fundamentals of they value chain, examine some emergent issues and explore its practical application. Readers unfamiliar with the five forces model, the competitive arena, generic strategies or the Porter approach to strategy development are directed to their earlier articles in the series. 2] Strengths and weaknesses analysis is a useful way of appraising a firms resources and competencies relative to industry norms and also to the opportunities and threats perceived in the competitive environment. Historically, the SWOT approach to strategic analysis has, when used thoughtfully, offered useful signals for strategic change. What it has lacked is an explicit focus on strategic capability, differentiation and strategic advantage. This the value chain seeks to remedy. Activities and the value chain Porter suggests that firms can be viewed as a flow of activities performed to provide products or services to customers. [1] These activities can be organised into a value chain that portrays how the firm creates value (see Figure 1, which describes the †¦