ABA Unit Three
ABA Unit Three
ABA Unit Three
1 Introduction
This chapter looks at the internal position of an organization. This will help
determine how well the organization can cope with the external and
competitive environment which was analyzed in the previous chapter. This
internal analysis focuses on identifying the strengths and weaknesses that
are particular to an organization.
The chapter ends by looking at SWOT analysis, which brings together
internal (strengths and weakness) and external (opportunities and threats)
factors to allow organizations to assess their strategic position.
2 Critical success factors
An important strength for any organization will be the achievement of
critical success factors. This should allow the organization to cope better
than rivals with any changes in its competitive environment.
What are critical success factors?
Critical success factors (CSFs) are performance requirements that are
fundamental to an organization’s success. In this context CSFs should thus
be viewed as those product features that are particularly valued by
customers. This is where the organization must outperform competition.
Examples of CSFs for major industries include:
in the automobile industry styling, an efficient dealer network,
organization, performance
in the food processing industry new product development, good
distribution channels, health aspects (e.g. low fat)
in the life insurance industry reputation, innovative new policies
in the supermarket industry the right product mix available in each
store, having it actually available on the shelves, pricing it correctly.
Measured targets for CSFs are called key performance indicators (KPIs).
Note that if the unique resource is people-based, the people can move to
competitors or start their own business.
Core competences are the activities, processes and methods through
which an organization uses its resources effectively, in ways that
others cannot imitate or obtain. Examples of core competences are:
o sophisticated IT that, for example, enables complex and
accurate demand forecasting
o a corporate culture that fosters innovation
o the ability to share and lever knowledge throughout the
organization.
Typical characteristics of these stages are set out in the following table:
Illustration 3 The life cycle model
PCs
Initially, there were relatively few significant producers. The product was
innovative, non-standardized, of inconsistent quality and expensive.
Once it looked as though it would be a successful product many producers
were attracted into the market. Mass production lowered prices. The range
of technologies used narrowed. Intense competition developed as firms
fought for dominance and market share.
Maturity means that the product has become a commodity. The industry
will be left with just a few large players (Dell, Hewlett-Packard, etc.).
Efficiency is very important to maintain margins. New entrants will be rare
as there is little point in entering an old market.
Decline. Some companies will find that their exit costs are high and will be
willing to manufacture so long as marginal revenue exceeds marginal
costs. Price wars are likely.
6 Quantitative analyses
It is very likely in the exam that the examiner will provide tables and
data in order to provide some of the information that is needed in order to
properly perform the strategic analysis (both external and internal). It will be
vital that students can both interpret and use this information in their
answers.
This information might be provided using various methods and some of the
key methods will be:
Tables of data
In order to reduce the amount of text in a scenario the examiner will often
provide tables of data to provide part of the story. It will be important that a
student can understand what the table is trying to explain, and that this part
of the story is used in the answer to this part of the examination.
Explain what the table tells us and how it might be used in a Five Forces
analysis of the industry's competitive environment.
Financial statements
The examiner might provide sets of financial statements and a student
must use this to pull out the key messages and issues. There will be some
important technique points to this:
choose three or four key ratios
there is no need to illustrate the formula or the calculation
only one comparator should be needed
focus on the cause of any changes and what this might tell us about
the organization’s position
Ratio analysis
Ratios
The mechanics of ratio analysis are repeated here for revision purposes.
Profitability ratios
Efficiency ratios
Liquidity ratios
Gearing ratios
Investor ratios
Inter-firm comparisons
Inter-firm comparisons
Inter-firm Comparisons (IFCs) as previously noted, it is possible (through
use of financial ratios) to compare and contrast the performance of one
entity within an industry with that of another within the same industry. It is
also possible to compare and contrast the performance of one firm with that
of the whole industry, or a large sample or particular segment of that
industry. However, these comparisons may suffer from one or more of the
following limitations.
Different accounting methods may be used by individual firms making
up the industry sample, or by the firm being compared.
The industry figures may be biased by one or a few very large firms
within the sample.
Conversely, an industry mean may be misleading for a small or large
firm being compared with the mean. Ratios may vary for different
sizes of firms.
The companies within the industry sample may span across more
than one industry classification.
The industry figures may be relevant for a different financial period,
and could possibly be out-of-date.
The examination will feature scenarios detailing the history and current
position of an organization and possible future states. Candidates will
probably have to analyses the organization’s strategic position, i.e., to carry
out a corporate appraisal. It is possible to arrive at a reasonable analysis
merely by producing a SWOT analysis, but it is likely to be more productive
and impressive to use one or more of the other analysis tools, such as
PESTEL, to help generate ideas for the SWOT analysis.
Using a SWOT analysis
The first step is to rank in order of importance the findings of the SWOT
analysis.
Strengths that match no opportunity are of little use without an
opportunity.
A distinctive competence is a strength that can be exploited.
Strategies can be developed which:
neutralize weaknesses or convert them into strengths
convert threats into opportunities
match strengths with opportunities.
These are discussed in later chapters.
8 Chapter summary
This chapter has covered the following areas:
defined and described strategic capability, threshold resources,
threshold competences, unique resources and core competences
explained why cost efficiency is important in all organizations
described the capabilities needed to sustain competitive advantage
explained, for a range of organizations, the importance of innovation
in supporting business strategy
explained the importance of knowledge management for both profit-
seeking and not-for-profit organizations
described the use of SWOT analysis.