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Chapter 6
INTERNAL ANALYSIS

1. Introduction
Assessing the strategic position of an organisation involves not only assessing the external
environment (as has been done in the previous chapter) but also assessing the internal resources
and competences of the organisation.

Organisations where external and internal factors match have a much greater chance of success
than when there are mismatches.

This chapter covers:

๏ Resources and competences

๏ Product life cycle

Porter’s value chain can also give important insights into the internal workings of an organisation
but this is covered in Chapter 6 along with supply chains

2. Resources and competences

2.1. Introduction

When analysing an organisation’s position we have to analysis its strategic capability. This is an
internal quality of the organisation, and capability depends on:

๏ Resources (things you have like manufacturing resources, patents, people), and
๏ Competences (how you use the things you have).

Strategic capability (that is capability which gives sustained competitive advantage so that you do
better than others in the long-term) depends on:

๏ Threshold capabilities, which are the minimum capabilities needed for the organisation to
exist at all so that the company just survives; and then on.
๏ Additional capabilities, which give the organisation competitive advantage.

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The additional capabilities can arise from:

๏ Unique resources, or
๏ Core competences.

Unique resources are resources which one organisation has but which others don’t.

It could, for example, be the right to use a particular technique or patent. However, unique
resources are usually hard to find. Many resources, such as production equipment, can be bought
easily and this allows rivals to copy what is being achieved.

Core competences are ways in which an organisation uses its resources better than its competitors
do and in ways that other organisations cannot easily imitate or obtain. Core competences are
generally harder to identify and define, and they are therefore more difficult for other organisations
to copy. Core competences will therefore usually provide a more permanent way in which an
organisation can achieve and retain competitive advantage. For example, Apple has core
competences in designing and developing new hardware and services such as iTunes. Other
companies find Apple’s competences difficult to replicate.

2.2. Position-based or resource-based strategies

To a large extent, traditional strategic planning has been position-based. In this approach a
strategist focuses on the environment (for example using PESTEL analysis or Porter’s five forces),
discovers and analyses what’s happening in the environment, and then reacts to that, often
changing what the organisation is doing.

A more recent approach (Prahalad and Hamel) is resource-based strategy. This maintains that a
strategist should focus on resources and competences. Successful combinations of resources and
competences, particularly unique resources and core competences, take years to develop and can
be hard for others to copy. These resources and competences are the secret of the organisation’s
success: they are likely to be the organisation’s ‘crown jewels’.

A position-based strategic planning approach can lure organisations into areas where they haven’t
got the appropriate resources and competences, and it makes them abandon the resources and
competence which hitherto have made them successful. Why should they throw away the
resources and competences in the hope of discovering others? There is no reason to think that an
organisation which has been successful in one area of business through employing specific
resources and competences should automatically expect to be successful in another area where
entirely different resources and competences are required.

Organisations, therefore, should perhaps not abandon their resources and competences too easily.
The organisation should view the future as not just something it happens to them and which
renders its resources and competences irrelevant. Perhaps they can create and mould the future to
make use of their resources and competences. Of course as in so many matters dealing with
strategic planning, a balance is needed. There is no point in an organisation clinging to existing
resources and competences when technology or public taste has advanced, and their older
products and services have become unpopular. However, it is very salutary for organisations to
remind themselves where their strengths lie, and not to give those up without a reasonable
struggle.

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3. Typical resources
Many resources can be remembered by the ‘M words’:

๏ Money
๏ Men and women (human resources)
๏ Manufacturing/machinery Material
๏ Methods (knowhow)
๏ Management
๏ Management information systems (IT)
๏ Marque/make (brand)
๏ Markets
๏ Marketing
๏ Material

4. Product life cycle

Again you will have met this in Paper E2 and it is described here again to refresh your memory. It
can be important to recognise the stage products are in their life cycle to ensure that the
company’s revenue is secure. Many pharmaceutical companies face sharp fall-off in revenue when
a valuable drug loses its patent protection. Some companies have been in danger of several of their
income streams ending almost simultaneously - a so-called patent cliff.

The diagram which purports to show how the sales revenue and net cash flows of a product
change as it moves from the introductory phase through growth to maturity and then decline.

Sales

Cash flows

Introduction Growth Maturity Decline time

Although this diagram is very well known the real problem is that no product is guaranteed to
follow this pattern and even if it does the lengths of the various phases on the diagram will show
tremendous variation. For example, the mature phase of some products can last for decades, but
for others may last only a few years. What we would really like to know for strategic planning

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purposes is when irrevocable decline sets in. This diagram doesn’t predict that. What it does do is
provide us with a set of labels which can be used as a kind of shorthand. Therefore:

๏ Introductory phase.

If we know that a product is in the introductory phase we know that we should want to watch
sales very carefully to see whether the product is likely to succeed or not. If sales are poor
emergency action is needed to try to rescue the new product. Marketing spend will be high
and profits low.

๏ Growth phase.

Here, many competitors will start coming into the market, encouraged by our success. We
might therefore want to keep advertising the product strongly so that we can stay ahead of
the field.

๏ Mature phase.

At the mature phase there are likely to be many suppliers, and buyers of this established
product are likely to be well-informed and demanding. The market is not growing, so the only
way to improve market share is by stealing from competitors. Generally at this phase there is
price pressure and buyers demand more for their money as they are more aware of the
different features of the product. In extreme cases, there may be over- capacity in the industry
and this will cause very extreme price pressure indeed.

๏ Decline phase.

Businesses must be careful not to misinterpret a temporary dip in the sales as the start of the
decline phase. Relatively cheap upgrades and facelifts can extend product life for a few years
and that is important because usually development costs will have been already covered, as
will depreciation of machinery bought for the production of that product. The additional
years can be very profitable despite the product being in decline. Decline phases can last for
very long times for some businesses and plenty of money can still be made there. A strategic
decision has to be made about whether to get out of the product quickly or whether to be
the last player remaining standing, effectively becoming a monopoly player in a declining
market

Ideally the company would arrange to have a series of products progressing through the life
cycle as follows:

A pattern like this can result in relatively stable revenue, but it can be difficult to achieve such
a neat pattern in practice because:
‣ There are often delays in the development and launch of new products.
‣ The decline of a product can be sooner and more rapid than expected.

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