301-Strategic Management Unit 2 Analyzing Company’s Internal Environment

301-Strategic Management

Unit II

2.1 Analyzing Company’s Internal Environment: Resource based view of a firm,

meaning, types & sources of competitive advantage, analyzing Company’s Resources and
Competitive Position, VRIO Framework, competitive advantage, competitive parity &
competitive disadvantage, Core Competence, characteristics of core competencies,
Distinctive competitiveness, Benchmarking as a method of comparative analysis.

2.2Value Chain Analysis Using Porter’s Model: primary & secondary activities.

2.3Organizational Capability Profile: Strategic Advantage Profile, Concepts of stretch,

leverage & fit, ways of resource leveraging –concentrating, accumulating, complementing,
conserving, recovering.

2.4Portfolio Analysis: Business Portfolio Analysis - BCG Matrix – GE 9 Cell Model

Introduction

An internal environmental analysis is an extensive review of all aspects of a company's operations,

internal guidance and mission.

Aspects of operations typically reviewed are marketing strategy, production capacity, and the
company's vision and leadership.

Nonprofit organizations may also conduct a similar analysis.

The value chain analysis describes the activities the organization performs and links them to the
organizations competitive position.

Organizational Capability focuses on internal processes and systems for meeting customer needs
and creates organization-specific competencies that provide competitive advantage since they are
unique.

Portfolio analysis is a systematic way to analyze the products and services that make up an
association's business portfolio.

2.1 Analyzing Company’s Internal Environment

Internal environments refer to the quantity and quality of an organization's physical and human
resources including finances, managerial talents and expertise in marketing production, research
and development. If a company possesses competitive advantage to compete in its markets and
industries it would be imperative to scan its internal environment. Scanning and analyzing the
external and competitive environment does not throw light on competitive advantage of the
company. Contrary to the assertions of Michael Porter, Rumelt argues that the defining factor in
differential firm performance is not the industry structure within which the company finds itself
rather it is more with factors at the individual company level such as its resources that determine if
the company will be able to take mileage of opportunities while avoiding threats.

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301-Strategic Management Unit 2 Analyzing Company’s Internal Environment
A) Meaning:

Scanning internal environment, also known as organisational analysis, internal capability analysis,
profiling the organisation or resource audit, is the process of assessing at company`s posture
relative to its current position, competition within and outside the industry, overall performance
and its capability in terms of strengths and weaknesses.

The Resource Based View framework combines the internal (core competence) and external
(industry structure) perspectives on strategy. Competitive advantage is ultimately attributed to the
ownership of a valuable resource. Resources are more broadly defined to be physical (e.g. property
rights, capital), intangible (e.g. brand names, technological knowhow), or organizational (e.g.
routines or processes like lean manufacturing).

B) Types of Resources:

Resources refer to the assets of a company. A company`s resources can be divided into two types:
tangible and intangible resources. Tangible resources are physical entities, such as land, buildings,
manufacturing plants, equipment, inventory, and money. Intangible resources are nonphysical
entities that are created by managers and other employees, such as brand names, the reputation of
the company, the knowledge that employees have gained through experience, and the intellectual
property of the company, including patents, copyrights, and trademarks. Resources are of two
types. They are as follows:

1) Tangible Resources :

Tangible resources are assets that can be seen and qualified. Production equipment,
manufacturing plants and formal reporting structures are examples of tangible resources. There are
four types of tangible resources. They are as follows:

a) Financial Resources :

i) The firm’s borrowing capacity

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301-Strategic Management Unit 2 Analyzing Company’s Internal Environment
ii) The firm’s ability to generate internal funds

b) Organisational Resources :

The firm’s formal reporting structure and its formal planning, controlling coordinating systems.

c) Physical Resources :

i) Sophistication and location of a firm’s plant and equipment

ii) Access to raw material

d) Technological Resources :

Stock of technology, such as patents, trademarks, copyrights and trade secrets. As tangible
resources, a firm’s borrowing capacity and the status of its plant and equipment are visible to all.
The value of many tangible resources can be established through financial statements.

2) Intangible Resources :

Intangible resources include assets that are rooted deeply in the firm’s history and that have
accumulated over time. There are three types of intangible resources. They are as follows:

a) Human Resources :

i) Knowledge

ii) Trust

iii) Managerial Capabilities

iv) Organisational Routines

b) Innovation Resources :

i) Ideas

ii) Scientific Capabilities

iii) Innovation Capacity

c) Reputational Resources :

i) Reputation with Customers:

Brand Names, Perception of Product Quality, Durability and Reliability

ii)Reputation with Suppliers:

For efficient, effective, supportive and mutually beneficial interactions and relationships

C) Analyzing Company’s Resources and Competitive Position:

Resources are inputs into a firm’s production process. Capital equipment, the skills of individual
employees, patents, finances and talented managers are all resources. In broad sense, resources

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301-Strategic Management Unit 2 Analyzing Company’s Internal Environment
cover a spectrum of individual, social and organisational phenomena. Analysis of company’s
resources is important in formulation of strategy. When effective brand names inform customers
about a product’s performance, characteristics, attributes and value then Resources are the source
of a firm’s capabilities. A firm's competitive advantage is a function of (a) the company resources
and capabilities. (b) Its ability to mobilize these resources and capabilities in creating strategic
assets, and(c) sustained market performance. It can be explained with the following figure:

2.2 Resource Based View of a Frame

Strategic
Competitiveness

Competitive
Advantage

Outsource
Valuable Rare Costly to Imitate
Non-substitable

1) Firm’s Capabilities:

Compared to tangible resources intangible resources are a superior and more potent source of core
competencies. As a source of capabilities tangible and intangible resources are a critical part of the
pathway to the development of competitive advantage.

2) Analysis of Company’s Competitive Position:

Although companies regularly confirm that customers and competitors have the biggest influence
on their profitability, they do not undertake any systematic analysis of their activities; consequently
information about them is rarely collected and documented. Such study is essential before taking
strategic decisions.

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301-Strategic Management Unit 2 Analyzing Company’s Internal Environment
Types of Forces that Affect Competitive Strength:

Relative
Market
Share
Profit Margins Ability to
Relative to Compete
Competitors on Cost

Match the Ability to

Company’s Match
Resources Rivals

Influence
Branded and
Image Bargaining
Power
Technology
and
Innovation

a) Relative Market Share:

This is the ratio of a company’s market share by volume to its nearest rival. E.g. if a company has a
25 percent share and its nearest rival has 50 percent the relative market share is 0.5. If the relative
market share is higher, then the competitive strength is greater compare to its rivals. Such an
analysis is helpful in deciding the strategy with respect to marketing of the products of the
company.

b) Ability to Compete on Cost :

This provides a strong competitive advantage over rivals. If companies can achieve cost parity, then
the time involved in achieving cost parity must be allowed for.

c) Ability to Match Rivals :

Ability to match rivals on key product and/or service attributes is another force which affects the
strategy formulation. Quality, technology, reputation, etc. can affect customer demand and
competitive advantage.

d) Influence and Bargaining Power :

Influence and bargaining power over buyers and suppliers affect the strategic decisions of the
company. This can lower competition in the market place and provide competitive advantage.

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e) Technology and Innovation:

Being first to market with technologically advanced and innovative products can lead to
competitive advantage.

f) Branded Image :

Strong brand names can command premium prices.

g) Match the Company’s Resources :

The important competitive force is matching the company’s resources to key success factors in the
industry. When a company’s strengths match industry key success factors a competitive advantage
can be gained.

h) Profit Margins Relative to Competitors :

It is normally a direct result of successful cost competition; this is also an important competitive
force of company’s strength.

D) Competitive Advantage:

1) Sources of Competitive Advantages:

Differentiation

Low Costs

Niche Marketing
High Performance or
Technology
Sources Quality

Service

Vertical Integration

Synergy
Culture, Leadership and Style
of an Organization

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1) Sources of Competitive Advantages:

In seeking the advantages that competitors cannot easily copy; it is appropriate to identify some
possible sources of advantage:

a) Differentiation:

Differentiation enables the firm to gain competitive advantage. This is the development of unique
features or attributes in a product or service to appeal especially to a part of the total market.
Branding is an example of this source.

b) Low Costs:

The development of low-cost products enables the firm to advantage over its competitors. For
example, the labor costs in some South East Asian countries like India and China cannot be matched
in the West.

c) Niche Marketing:

A company may select a small market segment and concentrate all its efforts on achieving
advantages in that segment. Such a focus on a small segment of the market enables the firm to gain
advantage over competitors Dunhill is an example.

d) High Performance or Technology:

A company may develop special levels of performance or service that simply cannot be matched by
other companies. Patented products or recruitment of specially talented individuals are examples.

e) Quality:

Some companies offer a high level of quality that others are unable to match. For example, some
Japanese cars have provided levels of reliability that Western companies have had difficulty in
reaching.

f) Service:

Some companies provide superior levels of service that others are unable or unwilling to match. For
example, Mc DonaId`s has set new levels of service in its fast food restaurants that have been
unmatched by others for many years.

g) Vertical Integration:

The backward acquisition of raw material suppliers and/or forward acquisition of distributors may
provide advantages that others cannot match. The purchase of iron ore mines by some steel
companies has given them an advantage over others who lack raw materials.

h) Synergy:

Some multi-business organizations achieve synergy by sharing fixed overheads, transferring

technology or sharing the sales three, among its businesses, so that the whole is greater than the
sum of the parts.

i) Culture, Leadership and Style of an Organization:

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The way that an organization leads trains and supports its members may be a source of advantage
that others cannot match. It will lead to innovative products, exceptional levels of service, and fast
responses to new market developments and so on.

E) VRIO Framework:

The VRIO framework, in a wider scope, is part of a much larger strategic scheme of a firm. The basic
strategic process that any firm goes through begins with a vision statement, and continues on
through objectives, internal & external analysis, strategic choices (both business-level and
corporate-level), and strategic implementation

E) VRIO Framework:

1) Value:

The first question the VRIO analysis asks about a resource or capability is if it is valuable. A
valuable resource enables a company to adequately react to risks and chances provided by the
environment, exploiting opportunities and neutralizing threats the VRIO framework parallels the
SWOT analysis here, connecting the value of internal resources to external risks and opportunities.
Furthermore, a valuable resource or capability is defined as being able to contribute to the
costumer’s needs, at a price the customer is willing to pay. Again, external factors such as available
alternatives on the market, industry structure or customer preferences, contribute to determining
the value of a resource.

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2) Rareness:

The second question the VRIO framework tries to answer about a resource or capability is whether
it is rare. The question of rareness is a question of possession of resources and capabilities in
competing firms. While it is important that resources and capabilities are valuable, a company
should also aim at obtaining rare resources in order to achieve a competitive advantage. In spite of
that, valuable but non-rare (common) resources are important, too. These resources and
capabilities can be used to create competitive parity, thus ensuring the survival of the company.

3) Imatibility:

Imitability refers to the degree to which a company’s product, brand, resource or capability can be
copied by competitors. Imitability is a very important aspect in strategic management. When it is
difficult and/or expensive for competitors to copy a certain resource, the company has gained a
significant competitive advantage. The extent to which a resource can be copied plays a role in the
market performance of the firm’s product and influences the brand value. Scientist identified four
important factors capable of generating inimitability for a resource: Unique historical conditions,
causal ambiguity, social complexity and institutional condition.

4) Organisation:

The final characteristic of the VRIO framework, organisation, is defined as the company’s skill at
keeping and using their resources and capabilities in a value-adding way and describes how well a
firm exploits the resource in question. A resource might be valuable, rare and inimitable, but in
order to turn this resource into a competitive advantage, it also needs to be identified and exploited
in the right way otherwise, it might not benefit the company, or even become a weakness. The
organisational structure and the attached control systems and compensation policies are crucial in
supporting the correct exploitation of the company’s resources.

F) Competitive Parity & Competitive Disadvantage:

Most studies of responses to change in competitive environments focus on competitor-specific

adaptations. However, rivals are often acutely aware of one another, and this awareness should
influence their competitive behavior. The firm/company resources and capability is it rare, if it
very rare then the firm/company will have a competitive advantage, but if the rarity is not that
significant, then the firm/company resources and capability is more towards competitive parity. In
combination with a firm’s other resources and capabilities, it can result in sustained competitive
advantage. Without the correct organization, even firms with valuable, rare and costly to imitate
resources and capabilities can suffer competitive disadvantage. Following are the concept of
comparative parity and disadvantage.

1) Competitive
Parity 2) Competitive
Disadvantage

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F) Competitive Parity & Competitive Disadvantage:

1) Competitive Parity:

This criterion uses the action of successful competitors or potential competitors. The premise is
that the firm at the minimum must meet the actions of its competitors. For example if 60 days credit
is the industry norm and the firm does not follow it, it may be considered as a weakness. It has to be
borne in mind that all practices may not be optimum and cannot be generalized for all firms e.g.
product. market scope. Therefore it may be advisable to identify the dimensions of uniqueness and
use other criteria besides competitive criterion, to classify strength or weakness.

2) Competitive Disadvantage:

If a resource or capability controlled by a firm is not valuable, that resource will not enable a firm to
choose or implement strategies that exploit environmental opportunities or neutralize
environmental threats. Organizing to exploit this resource will increase a firm`s costs or decrease
its revenues. These types of resources are weaknesses. Firms will either have to fix these
weaknesses or avoid using them when choosing and implementing strategies. In this sense
Valuable-but-not-rare resources can be thought of as organizational strengths.

F) Core Competence:

Core competencies are those capabilities that are critical to a business achieving competitive
advantage. The concept of core competencies was developed in the management field. C. K.
Prahalad and Gary Hamel introduced the concept in a 1990 Harward Business Review article
According to them; a core competency is an area of specialized expertise that is the result of
harmonizing complex streams of technology and work activity.

1) Development of Concept:

Many researchers have tried to highlight and further illuminate the meaning of core competency. In
other words, a core competency guides a firm recombining its competencies in response to
demands from the environment. Thus, core competency is something that a firm can do well and
that meets the following three conditions:

a) It provides consumer benefits.

b) It is not easy for competitors to imitate.

c) It can be leveraged widely too many products and markets.

2) Forms of Core Competencies:

A core competency can take various forms. They can be given as follows:

a) Technical/ subject matter know how.

b) A reliable process.

c) Close relationships with customers and suppliers.

d) Product development or cultures, such as employee dedication.

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3) Core Competency versus Competitive Advantage:

Core competencies are capabilities that serve as a source of competitive advantage for a firm over
its rivals. Core competencies emerge through an organisational process of accumulating and
learning how to deploy different resources and capabilities. Examples of capabilities can be given as
follows:

Examples of Capabilities:

i) Management:

Ability to envision the future of their industry and effective organisational structure.

Examples of Capabilities:

ii) Marketing :

Effective promotion of brand-name products, effective customer service, innovative

merchandising are the capabilities of marketing.

iii) Human Resources :

Motivating, empowering and retaining employees.

iv) Manufacturing :

In manufacturing capabilities is use of advanced technologies and skilled labor.

v) Distribution :

Selection of effective distribution channels, proper and timely delivery of goods and services.

vi) Management Information Systems :

In management information system developing effective management information system is

capability.

vii) Research and Development:

To determine whether a capability is a core competency, its capability of producing sustainable

competitive advantage is judged. It is done on certain criteria.

4) Model of Sustainable Competitive Advantage:

Hanson uses an updated model with four criteria of sustainable competitive advantages:

a) Rare :

Capabilities that few, if any, of its competitors possess.

b) Valuable :

The capacity allows the firm to exploit opportunities or neutralize threats in its competitors
possess.

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c) Costly to Imitate :

Capabilities that other firms cannot easily develop, It is to be noted here that it does not simply
mean it is expensive to imitate, it means it is difficult to imitate.

d) Non- Substitutable :

The capacity does not have a strategic equivalent. One example is research and developments, the
objective of which is obtaining new technology by developing internally or by monitoring the
external environment for development them as strategic equivalents.

5) Characteristics of Core Competence:

Core competencies are fundamental, unique strengths of the firm. It is therefore incumbent upon
management to identify the organizations core competencies. The following common
characteristics of core competencies may help an organization to distinguish areas of competencies
from the multitude of other activities:

a) Core competencies provide the distinctive advantage for the firm.

b) They are difficult for the competitors to imitate.

c) They make a significant contribution to customer value and the end products offered by the firm.

d) They provide access to a wide variety of markets.

G) Distinctive Competitiveness:

Organization's competitive ability is determined by net result of its strengths and weaknesses.
When organisation possesses exclusive or relatively large ability to compete, it is called a
‘distinctive competence’. Distinctive competence means, an advantage a company has over its
competitors. It is because it can do something which they cannot. All organizations do not possess
distinctive competence, but which organisation possess, use them for strategic purposes.
Distinctive competence of an organisation is very useful in strategy formulation, because it gives a
company. The competitive age in the market place.

For some organisation becomes a success factor. For example - superior quality of a product on a
particular attribute say a two wheelers more fuel efficient than its competitors. Sometimes firm
achieves differential advantage because of its research and developments programmers which may
not possess by its competitors. Distinctive competencies are helpful for organisation in many ways.
So they try to build up distinctive competencies.

H) Benchmarking as a Method of Comparative Analysis:

If a company is to be successful, it needs to evaluate its performance in a consistent manner. In

order to do so, businesses need to set standards for themselves, and measure their processes and
performance against recognized, industry leaders.

1) Meaning and Purpose:

An organization's ability to compare itself to others is of prime importance. Some companies use
benchmarking to find out the best practices in class and compare those to their own. Benchmark is

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a reference point for the purpose of measuring. Benchmarking involves the creation of a continuous
process of measuring an organizations products and services, procedures and process against
successful competitors and leading companies in other industries. This may involve measurement
against many different organizations in order to fully cover all the functions.

2) Definitions of Benchmarking:

a) CEO of Xerox -D.T. Kearns:

Benchmarking is the continuous process of measuring the products, the services, and practices against
the best competitors or the leader in their industry.”

b) Freytag and Hollensen :

“Benchmarking involves measurement of business performance against the best and makes continuous
effort in reviewing process practice and method”.

3) Methodology of Benchmarking:

Identify other
Industries
that have
Similar
Processes
Identify
Identify Organisations
Problem that are
Areas: Leaders in
these Areas

Methods of
Benchmarking
Visit the "Best
Practice" Survey
Companies to Companies for
Identify Measures and
Leading Edge Practices
Practices Implement
New and
Improved
Business
Practices

3) Methodology of Benchmarking:

The following is an example of a typical benchmarking methodology:

a) Identify Problem Areas:

Before embarking on comparison with other organizations it is essential to know the

organization's function and processes provides a point against which improvement effort can be
measured.

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b) Identify other Industries that have Similar Processes:

For instance, if one is interested in improving hand-offs in addiction treatment one would identify
other fields that also have hand-off challenges. These could include air traffic control, cell -phone
switching between towers, transfer of patients from surgery to recovery rooms.

c) Identify Organizations that are Leaders in these Areas:

Look best in any industry and in any country. Consult customers , suppliers, financial analysts,
trade associations and magazines to determine which companies are worthy of study.

d) Visit the "Best Practice" Companies to Identify Leading Edge Practices:

Companies typically agree to mutually exchange information beneficial to all parties in a

benchmarking group and share the results within the group.

e) Implement New and Improved Business Practices:

Take the leading edge practices and develop implementation plans which include identification of
specific opportunities, funding the project and selling the ideas to the organization for the purpose
of gaining demonstrated value from the process.

4) Advantages of Benchmarking:

Lowerin
g Labor
Costs Improvi
Awaren ng
ess Product
Quality
Advantages
of Increasi
Immedia Benchmark ng Sales
te ing and
Profits

Objectivi
Clarity
ty

Following are the advantage of benchmarking.

a) Lowering Labor Costs:

One advantage of benchmarking may be lower labor costs. They may also identify the company that
sold the competitor the robots. Subsequently, the company using benchmarking may call the robot
manufacturer to help set up its own system.

b) Improving Product Quality:

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Companies may also use benchmarking to improve product quality. Engineers sometimes purchase
leading competitors products. They may then take them apart, study them and determine how the
competitors' products outlast or outperform others in the industry.

c) Increasing Sales and Profits:

A company that uses benchmarking to improve its functions, operations, products and services may
enjoy increases in sales and profits. Customers are likely to notice these improvements.

d) Clarity:

One of the biggest advantages of benchmarking is its clarity. By benchmarking or comparing

performance markers, such as revenue or number of pieces produced per minute, the company's
relative performance is very clear.

e) Objectivity:

A large benefit is that benchmarks tend to be quantified (i.e., a number) rather than qualitative, and
as such are more objective.

f) Immediate:

Benchmarking also carries the advantage of being immediate comparing one company's
performance to another is fairly straight forward and can be accomplished fairly and quickly.

g) Awareness:

This can help company to form better strategies, make more informed decisions, develop policy,
determine best investments and improve quality at individual, team, or company level.

5) Disadvantages of Benchmarking:

Inadequate To
Measure

Require Large
Investment:

Danger of
Complacency
and Arrogance

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a) Inadequate To Measure:

A major limitation of benchmarking is that while it helps organisations in measuring the efficiency
of their operational metrics. It remains inadequate to measure the overall effectiveness of such
metrics. Benchmarking reveals the standards attained by competitors but does not consider the
circumstances under which the competitors attained such standards.

b) Require Large Investment:

Benchmarking can require a large investment in time, labour, and capital. Costs for a large project
can easily reach into the hundreds of thousands of dollars. These can be minimized through careful,
thoughtful, and deliberate planning.

c) Danger of Complacency and Arrogance:

A bigger disadvantage of benchmarking is the danger of complacency and arrogance. Many

organisations tend to relax after excelling beyond competitors' standards, allowing complacency to
develop

H) 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.

a) SWOT as a Technique of Environmental Analysis:

SWOT analysis is an analysis undertaken by business firms to understand their external and
internal environment. The term SWOT consists of four words;

S = Strengths

W = Weaknesses

O = Opportunities

T = Threats

SWOT analysis is applied to formulate effective organisational strategic. Through SWOT analysis,
the business firm can match the strengths (S) and weaknesses (W) existing within an organisation
with the opportunities (O) and threats (T) existing in the external environment It enables a
business firm to use its strengths to exploit the opportunities provided by the environment.

A company can be strong or weak in respect of technology, finance, human resources, marketing
capabilities and production facilities. The task is to make best use of its strengths.

Opportunities and Threats ate related to external environment The environment might present
many opportunities but the company might not have the strength to avail these opportunities;
white some other companies may be strong enough to avail the opportunities provided by

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environment, Similarly the environment might pose a threat in the form of growing competition
and the company may or may not have the strength to meet the threats.

Strengths Opportunities

Internal External
Environment Environment

Weaknesses Threats

b) Components of SWOT:

Weaknes
Strength Opportunities Threats
s

1) Strength:

The strength of a business organisation refers to the capacity by which an organisation can gain
advantage over its competitors. For example, consider superior research facilities and presence of
development skills or the strengths of a business organisation. These can be used for development
of new products enabling the business organisation to have competitive advantage over his
competitors.

2) Weakness:

The weakness of a firm refers to limitation of a business firm. It results in significant disadvantage
for a firm in comparison to its competitors, For example, overdependence of a firm on a single

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product line, outdated technology, lack of financial resources etc. can be weaknesses of a business
unit. It can result in losses in times of crisis.

3) Opportunity :

The availability of opportunity is a favorable condition in the organisation's environment. If a

company has enough strength to avail the opportunity, it can generate extra profits. For example,
government has made it mandatory for two-wheeler’s drivers to wear helmet while driving the
vehicle. This has created opportunity for helmet industry.

4) Threat:

It is unfavorable condition in the organisation's environment. It creates a risk for the organisation.
Threat can be in the form of growing competition, change in fashion, unfavorable changes in
government policy, raw-material shortages etc. For example, Zen car is facing threat in the form of
increased competition from Hyundai's Santro and Tata's Indica. Similarly, entry of Reliance and
Tata in telecommunication sector has posed threat to existing companies, Honda Activa scooter has
created a threat to the Kinetic scooter-After the identification of environmental threats and
opportunities and the organisational strengths and weaknesses, the management should consider
various strategic alternative and choose the most appropriate strategy.

2.3The Value Chain Analysis Using Porter’s Model

Value chain analysis allows the firm to understand the parts of its operations that create value and
those that do not. The idea of a value chain was first suggested by Michael Porter (1985) to depict
how customer value accumulates along a chain of activities that lead to an end product or service.
Porter describes the value chain as the internal processes or activities a company perform “to
design, produce, market, deliver and support its product.”

A) Porter’s Model:

Porter describes two major categories of business activities: primary activities and secondary
/support activities.P orter’s value chain consists of a “set of activities that are performed to design,
produce and market, deliver and support its product”. The idea of the value chain is based on the
process view of organisations, the idea of seeing a manufacturing (or service) organisation as a
system, made up of subsystems each with inputs, transformation processes and outputs.

a) The Primary Activities:

1) Inbound Logistics:

Involve relationships with suppliers and include all the activities required to receive, store, and
disseminate inputs.

2)Operations:

Operations are all the activities required to transform inputs into outputs (products and services).

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3)Outbound Logistics

It includes all the activities required to collect, store, and distribute the output.

4) Marketing and Sales:

Marketing and Sales activities inform buyers about products and services induce buyers to
purchase them, and facilitate their purchase.

5)Service:

Service includes all the activities required to keep the product or service working effectively for the
buyer after it is sold and delivered.

b) Secondary Activities :

Human
Procurement Resource
management

Technological
Infrastructure
Development

1) Procurement:

It is the acquisition of inputs, or resources, for the firm.

2) Human Resource management:

It consists of all activities involved in recruiting, hiring, training, developing, compensating and (if
necessary) dismissing or laying off personnel.

3) Technological Development:

It pertains to the equipment, hardware, software, procedures and technical knowledge brought to
bear in the firm's transformation of inputs into outputs.

4) Infrastructure:

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Infrastructure serves the company's needs and ties it’s various parts together; it consists of
functions or departments such as accounting, legal, finance, planning, public affairs, government
relations, quality assurance and general management.

2.4 Organisational Capability Profile Factors:

Important factors that support capability in that area.

Finance
Capabilities

Marketing Personnel
Capabilities Capabilities

Factors

General
Operations
Management
Capabilities
Capabilities

1) Finance Capabilities:

Strategists have to observe capital structure, sources of funds, reserves and surplus. He also has to
study assets, dividends and relationship with shareholders. Budgeting systems, financial health and
tax planning, should also be examined to find out strengths and weakness in a financial areas.

2) Marketing Capabilities :

Strategist has to understand product related marketing factors as well as price related marketing
factors. He should also look through promotion policies, advertising, public relation and
distribution system. Sometimes, marketing capability affects the existence of the firm.

3) Operations Capabilities :

A strategist has to study about location, layout, operation capacity, degree of automation,
production planning system, quality control, product development, inventory, technical
collaboration level of capacity utilisation, availability of skilled personnel and R & D personnel.

4) Personnel Capabilities :

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Existence and use of human resources, communication, development, working conditions, union-
management relations, safety, welfare and security of employees, affect the personnel capability.
Good personnel policies make the workers to settle with their job.

5) General Management Capabilities :

Management capability is influenced by mission, purpose, objective setting system, strategy

implementation mechanism, evaluation system, management information system, rewards given
and incentives provided.

Thus, strengths and weaknesses in various departments and functional areas have an impact on
total organisation.

A) Strategic Advantage Profile:

Strategic Advantage Profile can be prepared with the help of organisational capability profile. SAP
provides a picture of the more critical areas. This profile can show the strengths and weaknesses in
terms of degree, either in quantity or definition like very strong to average.

Internal Capability Competitive Strength and Weakness

Far

Excellent sourcing for raw material facilities are Outdated. Parts and
Operations
components available.

Fierce competition in industry, product line extensive.

Marketing
Excellent service, weak distribution network in north.
Ability to obtain needed capital, unsatisfactory reserves and surplus, low
Finance debt - equity ratio.

Quality of management and skilled workers are available Compared to

Personnel
competitors.

R&D No R & D performed.

Resources Average size of company in the Industry.

B) Concept of Stretch, Leverage & Fit:

Subsequent to the idea of strategic intent, Hamel and Prahalad added the concept of ‘stretch’ and
‘leverage’. Stretch is a misfit between resources and aspirations.

The strategic fit is central to the strategy school of positioning where techniques like SWOT analysis
can be used to analyze and assess the organizational capabilities and environmental opportunities.

“Leverage can be defined as the process or act of concentrating, accumulating, complimenting,

conserving, and recovering resources in such a manner that meagre (less or insufficient in amount)
resource base is stretched to meet the aspirations that an organization dares to have.”

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“This is exactly opposite to the idea of fit and deals with positioning the firm by matching its
organizational resources to its environment.”

Ways of Resource Leveraging:

‘Leveraging’ resources means using the resources that a company already has in new and
innovative ways in order to reach new ‘stretching’ goals which require a company to use resources
to the full. It can be argued that organisational success arises from an organisation-wide ‘strategic
intent’ based on a shared vision of the future of the organisation. These are skills and intentions
which enable the company to lever resources and stretch towards new goals as the environment
changes.

Concentrat
ing

Recovering
Accumulating
Resources

Complemen
Conserving
ting

1) Concentrating:

Leveraging through concentration demands convergence and focus. The organisation should
confine deployment of its limited resources in a few strategic areas identified by the management
to realise the vision. NEC is the only company in the world that is one of the top five producers of
both computer and communication equipment.

2) Accumulating:

Routes to leveraging through accumulation of resources are extraction and borrowing. The thrust
of extraction is on making maximum use of reservoir of experiences and insights gained by
organisational people in the past about customers, competitors, suppliers, and technologists for
developing new products at reduced cost,

3) Complementing:

Leveraging through complementing is done by way of blending and balancing. Blending demands
integration of diverse functional skills like R&D, production, marketing and sales. GM or Ford could

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not beat Honda in the field of all round engine performance because the former were less capable of
harmonization of their diverse technologies than Honda.

4) Conserving:

Conserving resource is another device of leveraging. Two major ways of conserving resources are
recycling and coopting. More often a given skill is used the greater the scope for the resource
leverage. The common saying in Japan is that ‘no technology is ever abandoned; it is reserved for
future use`.

5) Recovering Resources:

Expediting returns by which the time between the expenditure of resources and the recovery of
those resources ("return") is minimized. A rapid recovery process acts as a resource multiplier. An
enterprise that can do anything twice as fast as its competitors, with a similar resource
commitment, enjoys a twofold leverage advantage.

2.5 Portfolio Analysis

A) Meaning:

Business Portfolio Analysis is an organizational strategy formulation technique that is based on the
philosophy that Organizations should develop strategy much as they handle investment portfolios.
Portfolio analysis is a systematic way to analyze the products and services that make up an
association's business portfolio. In the way, in which the sound financial investments should be
supported and unsound ones discarded, sound organizational activities should be emphasized and
unsound ones deemphasized.

B) Purpose of Portfolio Analysis:

A viable strategy need for product-market scopes in determining how strategic objectives will be
attained. In a diversified company, one well-accepted concept of product-market scope is the
portfolio approach to an organisation's overall strategy.

The optimal business portfolio is one that fits perfectly to the company's strengths and helps to
exploit the most attractive industries or markets. An SBU can either be an entire mid-size company
or a division of a large corporation. It normally formulates its own business level strategy and often
has separate objectives from the parent company. The aim of a portfolio analysis is:

1) To Analyse:

Analyse its current business portfolio and decide which SBUs should receive more or less
investment.

2) To Develop Growth Strategies:

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Develop growth strategies for adding new products and business to the portfolio.

3) To Take Decisions Regarding Product Retention:

Decide which business or products should no longer be retained.

The basis for many of these matrix analyses grew out of work carried out in the 1960s by the
Boston Consulting Group (BCG). BCG observed in many of their studies that producers tend to
become increasingly efficient as they gain experience in making their product and costs usually
declined with cumulative production.

C) Portfolio Analysis Techniques:

1) BCG Matrix:

The growth-share matrix (aka the product portfolio, BCG-matrix, Boston matrix, Boston Consulting
Group analysis, and portfolio diagram) is a chart that had been created by Bruce D. Henderson for
the Boston Consulting Group in 1970 to help corporations with analyzing their business units or
product lines.

High
Fledglings
Stars or
question
marks
Growth

Cash Cows Dogs

Low
High Low
Relative Market Share

1) BCG Matrix:

a) Dogs : Low Market Share and Low Market Growth :

Dogs are business units or products that have low market share in a low-growth market. They often
don't make much profit, but they don't need much investment either. Much of the time, you'll need
to offer a price discount to sell Dog products.

b) Cash Cows: High Market Share and Low Market Growth :

These businesses or products are well established. They're likely to be popular with customers,
which makes it easier for you to exploit new opportunities. However, you should avoid spending

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too much effort on these, because the market is only growing slowly, and opportunities are likely to
be limited.

c) Stars: High Market Share and High Market Growth :

Businesses and products in this quadrant are seeing rapid growth. There should be some good
opportunities here, and you should work hard to realize them.

d) Question Marks (Problem Children): Low Market Share and High Market Growth :

These are the opportunities that no one knows how to handle. They aren't generating much
revenue right now, because you don't have a large market share.

2 )GE Nine Cell Matrix:

GE Matrix also called McKinsey Matrix is a strategic management tool for conducting portfolio
analysis. The portfolio which is analyzed with the matrix may include products, services or entire
SBUs (strategic business units) owned by the company. This tool is very similar to the BCG Matrix
and you can actually view the GE or McKinsey Matrix is a kind of extension of the BCG Matrix (the
multifactor portfolio analysis tool).

Competitive strength
Strong Medium Weak
Industry attractiveness

High A C

Medium D

Low E B

a )The Vertical Axis: Industry Attractiveness

It represents industry attractiveness which weighs composite rating based on eight different
factors. These factors are:

1) Market size and growth rate.

2) Industry profit margin.

3) Competitive intensity.

4) Seasonability.

5) Cyclicality.

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6) Economics of scale

7) Technology and

8) Social, environmental, legal and human impacts.

b) The Horizontal Axis: Business Strength:

It represents business strength competitive position which is again a weighed composite rating
based on seven factors. They are:

1) Relative market share

2) Profit margins

3) Ability to compete on price and quality

4) Knowledge of customer

5) Competitive strengths and weaknesses

6) Technological capability and

7) Caliber of management.

The nine cells in the matrix can be grouped into three major segments:

C )GE Matrix Positions and Strategy:

The GE / McKinsey Matrix are actually divided into nine cells. These 9 cells represent the nine
alternatives for positioning of any SBU or product / service offering. Based on clear understanding
of all of these factors decision makers are able to develop effective strategies.

Segment 1

This is mostly the best segment. The business in this position is strong and the market is attractive.
In this case the company should allocate resources in this business and focus on growing the
business and increase its current market share.

Segment 2:

The business is either strong but the market is not attractive or the market is strong and the
business is not strong enough to pursue potential opportunities. Decision makers should make
judgment on how to further deal with these SBUs or products. Some of them may consume toomuch

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resource and are not really promising any strong potential while others may need additional
resources and better strategy for growth

Segment 3:

This is the worst positioning segment. Businesses or products and services in this segment are very
weak and their market is not attractive. Decision makers should consider either repositioning these
SBUs into a different market segment, develop better cost-effective offering, or get rid of these SBUs
and invest the resources into more promising and attractive SBUs.

d) Advantages of GE Matrix:

1)It offers an intermediate classification of medium and average ratings.

2)It incorporates a larger variety of strategic variable like the market share and industry size.

3)It is a powerful analytical tool to channel corporate resources to businesses that combine
medium to high industry attractiveness with an average to strong business competitive position.

e) Disadvantages:

The major drawback of the GE matrix is that it only provides broad strategic prescriptions rather
than the specifics of business strategy.

D) Advantages and Disadvantages of Portfolio Analysis:

a) Advantages

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Encourages
Management
for Evaluation Stimulates
Flexible Use of
Comparison Externally
s Oriented
Data

Diverse
Perspectiv Key Areas
e

Balance
Cash Flow
Portfolio

Portfolio analysis offers the following advantages:

1) Encourages Management for Evaluation:

It encourages management to evaluate each of the organization's businesses individually and to set
objectives and allocate resources for each.

2) Stimulates Use of Externally Oriented Data:

It stimulates the use of externally oriented data to supplement management's intuitive judgment.

3) Key Areas:

These models highlight certain aspects of business that are considered essential to success or
failure.

4) Cash Flows :

They focus on cash flow requirements of the SBU's and help identify the different cash flow
implications and requirements of different business activities. This helps management to carry out
its resource allocation function.

5) Balance Portfolio :

They help identify strengths and weaknesses in the portfolio, the gaps that to be filled; when a new
SBU needs to be added or when one needs to be removed; and the duplicative businesses in the
portfolio.

6) Diverse Perspective :

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The diverse activities of a multi-business company are analyzed in a systematic manner and
enterprise diversity highlighted.

7) Flexible Comparisons :

Some matrices, like the McKinsey Matrix, are highly flexible in being able to select different factors
for different industries. This kind of analysis can provide coverage of a wide number of strategically
relevant variables.

b) Disadvantages:

Portfolio analysis does, however, have some limitations.

Subjective Numbers

Market Share and

Cost Savings Static Pictures
Mismatch

Market Share and

Multiple SBUs
Cash Flow Mismatch

Conflict of
Market Share
Interests

Disadvantages
Inappropriate
To Simple
divesting

b) Disadvantages:

Portfolio analysis does, however, have some limitations.

1) Too Simple:

Matrix models are simplistic. The important factors are reduced to only two dimensions (e.g.
market share and business attractiveness) other factors are necessarily excluded or lose their
distinctiveness in the collapsed dimensions.

2) Market Share:

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Market share, though used widely, may not be the best measure of a company's success. For
example, product differentiation for a particular market segment may have low market share but
produce high success within a market segment

3) Market Share and Cash Flow Mismatch :

High market share in a low-growth industry does not necessarily result in large positive cash flow
characteristics of a "cash cow" business

4)Market Share and Cost Savings Mismatch :

The connection between relative market share and economics of scale may also not be a direct
relationship.

5) Subjective Numbers :

The numerical format of some matrices may lead the user to place greater confidence in them than
is warranted. The numbers from most ratings are subjectively derived, subject to personal biases,
political pressure, and budgetary needs.

6) Static Pictures :

The analyses most often provide a static picture of SBUs. They are not projective, they do not
account adequately for changes due industry evolution, technological change, and other
environmental forces, etc.

7) Multiple SBUs :

There is a limit to the number of SBUs that can be examined; otherwise the resulting analysis
becomes increasingly superficial. Such problems can occur when the volume exceeds 40-50 SBUs.

8) Conflict of Interests :

When a SBU contains several different but related business conflicts of interest can occur between
the cash flow priorities of a SBU and the priorities of the company as a whole.

9) Inappropriate divesting :

Improper application of portfolio techniques may result in inappropriate divesting of useful

between the cash flow priorities of a SBU and the priorities of the company as a whole.

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