Internal Analysis

Ms.N.Jasintha
 Learning outcomes
• After learning this section, you should be able to:
• Explain Michael Porter’s five forces model
• Describe industry life cycle
• Apply Porter's Diamond
• Describe the purpose of internal analysis
• Outline the areas to be covered in an internal analysis
• Identify the core competencies and capabilities of an organization
• Explain the tools of internal analysis
 Internal Analysis
• Internal Analysis begins with identification of the organization’s
resource allocations.
• This analysis should produce an enumeration of organizational
strengths.
• It is also necessary to identify areas of weakness and to determine
whether these weaknesses make the organization vulnerable.
• To exploit opportunities and minimize threats in the external
environment, managers must carefully analyze a firm’s strengths and
weaknesses.
• A strength is something a company is good at doing or a characteristic
that gives an important capability.
• Strength can be a skill, important expertise, a valuable organizational
resource or competitive capability.
• Eg: superior technology, quality product, better customer service,
higher profitability
• A weakness is something a company lacks or does poorly or a
condition that puts the company at a disadvantage.
• Once managers identify a company’s internal strengths and
weaknesses the two complications need to be carefully evaluated from
a strategy making perspective.
• Some strengths are more important than others in determining
performance, in competing successfully and in forming a powerful
strategy. Likewise, some weaknesses can prove fatal.
• Strengths represent competitive assets and weaknesses represent
competitive liabilities when constructing a strategic balance sheet (but
50-50 balance is definitely not the desired condition)
• The internal analysis is part of the strategic planning process, which
examines the current state of the entity. Wide range of factors are
examined. Particularly;
• Resources of tangible and intangible assets.
• Core competencies
• Capabilities
• Products, brands and markets.
• Operating systems such as production and distribution.
• Internal organization.
• Current results
• Financial resources.
 (a) Resources
• A resource audit is a review of all aspects of the resources the
organization uses Resource.
• Example
• Material inputs : source, suppliers, waste, new materials, cost,
availability, future position
• Human resources : number, skills, wage, costs, proportion of
total costs, efficiency, labour turnover, industrial relations
• Management : size, skills, loyalty, career progression
• Fixed assets : age of assets, condition, utilization rate, value,
replacement, technologically up-to-date?, cost.
• Working capital : Credit and turn over periods, cash surpluses or deficit.
• Finance : Short term and long term finance, gearing levels.
• Intangible assets : patents, goodwill, brands.
• Organization : culture and structure.
• Knowledge : ability to generate and disseminate ideas, innovation.
 (b) Capabilities
• Organizational capabilities are the intangible assets of an organization to
get work done, execute its business strategy and satisfy its customers.
• for example;
• Outstanding customer service
• Product development capabilities
• Innovation
• Talent
• Speed
• Leadership, etc
 (c) Core competencies
• Not all resources and capabilities are core competencies. It is
suggested that the firms should identify and concentrate on only 3 or 4
core competencies.
• For a capability to be a core competency, it must be:
• Valuable
• Rare
• Costly to imitate
• Non-substitutable
 (d) Products, brands and markets
• To be successful, an organization must be aware of its product or service
position in the market. For this, managers need to first determine the
following.
• Product/ service quality
• Current market share
• Brand loyalty
• Is the market share increasing or decreasing?
• Competitors market share?
• Relative prices of products/ services?
• Is the company a price leader or price follower?
 (e) Operating systems
• Production & distribution
• Research and development capability
• Distribution channels
• Advertising and promotions
 (f) Internal organization
• Structure – decision making, delegation, etc.
• Culture
• Cooperation among different organizational units
 (g) Current results
• What are the major objectives of the organization?
• Has organization achieved these objectives?
• What strategies has it employed?
• Are these strategies successful?
 (h) Financial resources
• Availability of adequate fund
• Access to sources of fund
• Working capital The most useful financial analysis tools for
managers are:
– Ratio analysis
– Working capital analysis
– Capital budgeting
• Economic theory defines an industry as ‘a group of firms producing the
same principal product’ or, more broadly, ‘a group of firms producing
products that are close substitutes for each other. That is, a group of
firms producing products and services that are essentially the same.
• In the course of competition, these firms influence one another.
• Typically, industries include a rich mix of competitive strategies that
companies use in pursing strategic competitiveness and above average
returns.
• Compared to the general environment, the industry environment has a
more direct effect on the firm’s strategic competitiveness.
• The intensity of industry competition and an industry’s profit potential
(as measured by the long-run return on invested capital) are a function of
five forces of competition.
• Michael Porter’s five forces framework was originally
developed as a way of assessing the attractiveness (profit
potential) of different industries.
• Although initially developed with businesses in mind, industry
structure analysis with the five forces framework is of value to
most organisations.
Michael Porter’s five forces model
• Porter’s well defined analytic framework helps strategic managers to
link remote factors to their effects on a firm’s operating environment.
• The five forces model of competition includes the threat of entry, the
power of suppliers, the power of buyers, product substitute, and the
intensity of rivalry among competitors.
• By studying these forces, firm finds a position in an industry where it
can buffer itself from the power of the forces in order to increase its
ability to earn above –average returns.
• Threat of Entry
• Threat of entry depends on the extent and height of barriers to
entry.
• Barriers to entry are factors that need to be overcome by new
entrants if they are to compete successfully.
• Barriers to Entry
• Economies of scale- the marginal improvements in efficiency that a firm
experiences as it incrementally increases its size. Therefore, as the quantity
of a product produced during a given period increases the cost of
manufacturing each unit declines. For example, a firm may choose to
reduce its price and capture a greater share of the market.
• Product differentiation- customers may come to believe that a firm’s
product is unique (Brand identity). Typically new entrants must allocate
many resources over time to overcome existing customer loyalties. To
combat the perception of uniqueness, new entrants frequently offer
products at lower prices. This decision, however, may result in lower
profits or even losses.
• Capital requirements- competing in a new industry requires the firm to
have resources to invest.
• Switching cost- Switching cost are the one- time costs customers incur
when they buy from a different supplier.
• Access to Distribution channel- over the time, industry participants
typically develop effective means of distributing products.
• Cost advantages – sometime, established competitors have cost
advantages that new entrants cannot duplicate. Product technology,
favorable access to raw materials, desirable locations, and government
subsidies are examples.
• Government Policy- through licensing and permit requirements
government can also control entry into an industry.
• The threat of new entrants in the airline industry can be considered as low
to medium. It takes quite some upfront investments to start an airline
company (e.g. purchasing aircrafts).
• Moreover, new entrants need licenses, insurances, distribution channels
and other qualifications that are not easy to obtain when you are new to the
industry (e.g. access to flight routes).
• Furthermore, it can be expected that existing players have built up a large
base of experience over the years to cut costs and increase service levels. A
new entrant is likely to not have this kind of expertise, therefore creating a
competitive disadvantage right from the start.
• However, due to the liberalization of market access and the availability
of leasing options and external finance from banks, investors, and
aircraft manufacturers, new doors are opening for potential entrants.
• Even though it doesn’t sound very attractive for companies to enter the
airline industry, it is NOT impossible.
• Many low-cost carriers like Southwest Airlines, RyanAir and EasyJet
have successfully entered the industry over the years by introducing
innovative cost-cutting business models, thereby shaking up
original players like American Airlines, Delta Air Lines and KLM.
• Bargaining Power of Suppliers
• Increasing prices and reducing the quality of its products are potential
means used by suppliers to exert power over firms competing within an
industry. If unable to recover cost increases by its suppliers through its
price structure, its profitability is reduced by its suppliers’ actions. A
supplier group is powerful when
– It is dominated by a few large companies and is more concentrated than industry it
sells.
– Satisfactory substitute products are not available to industry firms
– Suppliers’ goods are critical to buyers’ marketplace success.
– The effectiveness of suppliers’ product has created high switching cost for industry
firms.
• In the airline industry, only two significant suppliers exist. Airbus and
Boeing control the fuel prices. Thus, the bargaining power of suppliers in
the airline industry is very high. A strong supplier may affect the
profitability and quality of products.
• In the real estate sector, customers or investors have the power to drive the
prices up or down.
• The bargaining power of buyers gives them the opportunity to compare
prices across websites and brokers. They don't have to restrict themselves to
one price.
• The bargaining power of suppliers in the airline industry can be considered
very high. When looking at the major inputs that airline companies need,
we see that they are especially dependent on fuel and aircrafts.
• These inputs however are very much affected by the external environment
over which the airline companies themselves have little control.
• The price of aviation fuel is subject to the fluctuations in the global market
for oil, which can change wildly because of geopolitical and other factors.
In terms of aircrafts for example, only two major suppliers exist: Boeing
and Airbus.
• Boeing and Airbus therefore have substantial bargaining power on the
prices they charge.
• Bargaining Power of Buyers
• Firms seek to maximize the return on their invested capital. Alternatively,
buyers (customers of an industry or firm) want to buy products at lowest
possible price. To reduce their cost, buyers bargain for higher quality,
greater levels of service, and lower prices. Customers (buyers) are powerful
when
– They purchase large portion of an industry’s total output
– The sales of the product being purchased account for a significant portion of the
seller’s annual revenue
– They could switch to another product at little, if any, cost
– The industry’s products are undifferentiated or standardized (the buyers sure that
they always can find alternative suppliers)
– Buyer information
• It is the mirror image of the bargaining power of buyers and refers
to the pressure that suppliers can put on companies by raising their
prices, lowering their quality, or reducing the availability of their
products.
• Bargaining power of buyers in the airline industry is high.
• Customers are able to check prices of different airline companies fast
through the many online price comparisons websites such as Skyscanner
and Expedia.
• In addition, there aren’t any switching costs involved in the process.
Customers nowadays are likely to fly with different carriers to and from
their destination if that would lower the costs.
• Brand loyalty therefore doesn’t seem to be that high. Some airline
companies are trying to change this with frequent flyer programs aimed at
rewarding customers that come back to them from time to time.
• Threat of Substitution
• Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but by a different process. For example,
coffee is a substitute for tea; trains are a substitute for cars.
• In general, Product substitutes present a strong threat to a firm when
customers face few, if any, switching costs and when the substitute
product’s price is lower or its quality and performance capabilities are
equal to or greater than those of competing products.
• Differentiating a product along dimensions that customers value (such as
price, quality, service after the sale, and location) reduces a substitute's
attractiveness
• In terms of the airline industry, it can be said that the general need of its
customers is traveling. It may be clear that there are many alternatives
for traveling besides going by airplane. Depending on the urgency and
distance, customers could take the train or go by car. Especially in Asia,
more and more people make use of highspeed trains such as Bullet
Trains and Maglev Trains. Furthermore, the airline industry might get
some serious future competition from Elon Musk’s Hyperloop concept in
which passengers will be traveling in capsules through a vacuum tube
reaching speed limits of 1200 km/h. Taken this altogether, the threat of
substitutes in the airline industry can be considered at least medium to
high.
• Intensity of Rivalry among competitors
• Because an industry’s firms are mutually dependent, actions taken by one
company usually invite competitive responses. Thus, in many industries,
firms actively compete against one another.
• Competitive rivalry intensifies when a firm is challenged by a competitors
actions or when an opportunity to improve its market position is
recognized.
• Intensive competition can be seen among the existing operators and most of
them are try to compete with the price reduction and new package
introduction (Price and Package war).
• The rivalry between competitors , such as Fuji, and Kodak, Airbus and
Boeing, is intense
• Degree of Rivalry
• Slow Industry growth- Markets become more intense as firms battle to
increase their market shares by attracting competitors’ customers -High
rivalry
• Lack of Product differences or Low switching cost- High rivalry
(Industries with many companies that have successfully differentiated their
product have less rivalry and lower the buyer’s switching cost, the easier it
is for competitors to attract buyers through pricing and service offerings).
• Exit barriers-Specialized assets, fixed cost of exit ( such as labour
agreement) and government and social restrictions -High rivalry
• When looking at the airline industry in the United States, we see that the
industry is extremely competitive because of a number of reasons which
include the entry of low cost carriers, the tight regulation of the industry
wherein safety become paramount leading to high fixed costs and high
barriers to exit, and the fact that the industry is very stagnant in terms of
growth at the moment. The switching costs for customers are also very
low and many players in the industry are similar in size (see graph
below) leading to extra fierce competition between those firms. Taken
altogether, it can be said that rivalry among existing competitors in the
airline industry is high.
The industry life cycle
• The power of the five forces typically varies with the stages of
the industry life cycle. The industry life-cycle concept proposes
that industries start small in their development stage, then go
through a period of rapid growth (the equivalent to
‘adolescence’ in the human life cycle), culminating in a period
of ‘shake-out’.
Product Life Cycle
 Introduction Growth Maturity Decline

Sales Low Rapidly rising Peak Declining

Costs per customer High cost Average Low Low

Profits Negative Rising High Falling

Customers Innovators Early adopters Middle majority Laggards

Competitors Few Growing number Stable number beginning Declining number

to decline

Objectives Create product awareness & Maximise market Maximise profit whilst Reduce expenditure & 'milk the
trial share defending market share brand'
 Introduction
StrategiesGrowth Maturity Decline

Product Offer basic product Offer product extensions, Diversify brands & models Phase out weak items
service & warranty

Price Cost plus Price penetration Price matching Price cutting

Promotion Build product awareness amongst Build awareness & interest in Stress brand differences & Reduce to level to
early adopters & dealers mass market benefits maintain hard core loyalty

Place Limited Growing Maximum Limited

 International Strategy
• It focuses on a specific but important kind of market
development, operating in different geographical markets.
• This kind of internationalisation raises choices about which
countries to compete in, how far to modify the organisation’s
range of products or services and how to manage across
borders.
• International strategy, however, depends ultimately on both the
external environment and organisational capabilities.
Internationalisation Drivers
Porter's Diamond
• The Porter’s model suggests reasons why some nations are more
competitive than others and why some industries within nations are more
competitive than others. This can be used in a number of ways
– The organisation can understand what, if any, factors have caused it to be
successful in its current country or countries of operation.
– Assess whether a particular country is suitable for expansion into
– Governments can identify how to adjust their policies in order to attract or
strengthen certain industries.
Porter identified four key factors (or dimensions) that determine the relative
attractiveness of different countries to a particular industry.
Internal Analysis
• VRIO
• Four key criteria by which capabilities can be assessed in terms
of their providing a basis for achieving such competitive
advantage: Value, Rarity, Inimitability and Organisational
support.
 Value Chain
• Value chain describes the activities within and around in an
organization which together create a product or service.
• Primary activities are directly concerned with the creation or
delivery of a product or service.
• Support activities help to improve the effectiveness or
efficiency of the primary activities.
 Primary Activities
• Inbound logistics – Are the activities concerned with receiving,
storing or distributing the inputs to the product or service ( Activities,
costs, and assets associated with obtaining fuel, energy, raw
materials., parts components, merchandise, and consumable items
from vendors; receiving , storing , and disseminating inputs from
suppliers; inspection, and inventory management
• Operations – Transform these various inputs into the final product or
service (production, assembly Packaging, equipment maintenance,
quality assurance).
• Outbound logistics – Collect, store and distribute product to customers
(finished goods warehousing, order processing, order picking and
packing, shipping, delivery operations).
• Marketing and sales – provide the means whereby consumers/users are
made aware of the product or service and are able to purchase it
(advertising and promotion, market research and planning, distributor
support).
• Service- All activities that are enhance or maintain the value of a product
or service.
•
• Support Activities
• Procurement – Process for acquiring the various resource inputs to the
primary activities( Activities, costs, and assets associated with purchasing
and providing raw materials, supplies, services, and outsourcing necessary
to support the firms and its activities)
• Technology development – All value activities have technology such as
technical know-how, R&D or product design.
• Human Resources Management – This transcends all primary activities.
Recruiting, managing, training, developing and rewarding people in
organization.
• Firm Infrastructure- The system of planning, finance, quality control,
information management etc.
 SWOT Analysis
• SWOT summarises the key issues from the business environment and the
strategic capability of an organisation that are most likely to impact on
strategy development.
• SWOT analysis is grounded in the basic principal that strategy-making
efforts must aim at producing a good fit between a company’s resource
capability (as reflected by its balance of resource strengths and
weaknesses) and its external situation (as reflected by Industry and
competitive conditions, the company’s own market opportunities, and
specific external threats to company’s profitability and market standing.
• SWOT analysis is an important tool for auditing the overall
strategic position of a business and its environment.
• SWOT stands for strengths, weaknesses, opportunities, and
threats. Strength weaknesses are internal.
• Opportunities and threats are external. Once key strategic issues
have been identified, they feed into business objectives,
particularly marketing objectives.
• SWOT analysis can be used in conjunction with other tools for
audit and analysis, such as analysis’s Five-Force analysis.
• Strengths
• Strength is something that a firm truly does well, something
that truly differentiates the business, a key metric that is
improving, etc.
• Most companies do surprisingly bad job of identifying what
they are really good at doing. Every company has strengths.
Some of the key general areas to consider when identifying
and evaluating Strengths: Technological skills; Leading
brands; Distribution channels; Customer Loyalty; Production
quality; Scale; Management and innovative product or service.
Company specific areas to consider
when identifying and evaluating
Strengths:
• A powerful strategy supported by competitively valuable skills and
expertise in key areas
• A strong financial condition; ample financial resources to grow the business
• Strong brand-name image, company reputation
• A widely recognized market leader and an attractive customer base
• Ability to take advantage of economies of scale and/or learning and
experience curve effects
• Proprietary technology/superior technological skills/ important patents
• Superior intellectual capital relative to key rivals
• Cost advantages
• Strong advertising and promotion
• Product innovation skills
• Proven skills in improving production processes
• Sophisticated use of e-commerce technologies and processes
• Superior skills in supply chain management
• A reputation for good customer service
• Better product quality relative to rivals
• Wide geographic coverage and/ or strong global distribution capability
• Alliances/ joint ventures with other firms that provide access to valuable
technology, competencies, and/ or attractive geographic markets
• Weaknesses
• A Weakness is a real gap, or a problem, or a key metric that is going bad in
the company; something firm is not doing very well; something important
that firm really don’t know or aren’t sure about.
• In fact, one good outcome of a SWOT is to discover what firm really
doesn’t know and then do something about it.
• Some of the key general areas to consider when identifying and
evaluating Weakness: Absence of important skills; Weak Brands; Poor
access to distribution; Low customer retention; Unreliable products or
services; and Management.
Company specific areas to consider
when identifying and evaluating
weakness:
• No clear strategic direction
• Obsolete facilities
• A weak balance sheet; burdened with too much debt
• Higher overall unit costs relative to key competitors.
• Missing some key skills or competencies/lack of management depth/a
deficiency of intellectual capital relative to leading rivals
• Plagued with internal operating problems
• Falling behind rivals in putting e-commerce capabilities and strategies in
place
• Too narrow a product line relative to rivals
• Weak brand image or reputation
• Weaker dealer network than key rivals and /or lack of adequate global
distribution capability
• Short on financial resources to fund promising strategic initiatives
• Lots of underutilized plant capacity
• Behind on product quality and/or R&D and /or technological know-how
• Not attracting new customers as rapidly as rivals due to ho-hum product
attributes
• Opportunities
• An opportunity is a favorable external condition; something (that firm
hasn’t acted on or taken advantage yet) that could impact it positively.
• A condition in the general environment that if exploited, helps a company
achieve strategic competitiveness. Opportunities are new ways that firm can
exploit the STRENGTHS, WEAKNESSES & THREATS, new things that
the firm can do to potentially improve the business—that turn into
recommendations and actions.
• This list becomes the most important part of the SWOT for prioritizing and
determining what next steps to take.
• Some of the key general areas to consider when identifying
and evaluating Opportunities: Changing customer tastes;
Technological advances; Changes in government Policies
(Favor to the firm); Change in population; New distribution
channels; Mergers, joint ventures or strategic alliances and A
new international market
Company specific areas to consider
when identifying and evaluating
Opportunities:
• Serving additional customer groups or expanding into new geographic
markets to product segments
• Expanding the company’s product line to meet a broader range of customer
needs
• Utilizing existing company skills or technological know-how to enter new
product lines or new businesses
• Using the internet and e-commerce technologies to dramatically cut costs
and/or to pursue new sales growth opportunities
• Integrating forward or backward
• Falling trade barriers in attractive foreign markets
• Opening to take market share away from rivals
• Ability to grow rapidly because of sharply rising demand in one or more
market segments
• Acquisition of rivals firm’s or companies with attractive technological
expertise
• Alliances or joint ventures that expand the firm’s market coverage or boost
its competitive capability
• Openings to exploit emerging new technologies
• Market openings to extend the company’s brand name or reputation to new
geographic areas
• Threats
• A threat is a condition in the general environment that may hinder a
company’s efforts to achieve strategic competitiveness. A threat is
something external to the business that can potentially impact the firm
negatively: competitors (actually doing specific things vs. just being there),
changing conditions in the particular marketplace, the overall economy,
government regulations, etc. Threats are part of the playing field that firm
can’t ignore. They are part of the context of the business.
 Company specific areas to consider
when identifying and evaluating Threats
• Likely entry of potent new competitors
• Loss of sales to substitute products
• Mounting competition from new internet start-up companies pursuing e-
commerce strategies
• Increasing intensity of competition among industry rivals –may cause
squeeze on profit margins
• Technological changes or product innovations that undermine demand for
the firm’s product
• Slowdowns in market growth
• Adverse shifts in foreign exchange rates and trade policies of
foreign governments
• Costly new regulatory requirements
• Growing bargaining power of customers or suppliers
• A shift in buyer needs and tastes away from the industry’s
product
• Adverse demographic changes that threaten to curtail demand
for the firm’s product
• Vulnerability to industry driving forces
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