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INTERNAL ANALYSIS:

Organizational Appraisals

Dr.L.Prakash Sai

Financial Analysis - Ratio Analysis, EVA, ABC

Value Chain Analysis

Business Process Analysis

VRIO framework (Resource Based View)

Organizational Capability Analysis

Organizational Appraisal: Methods & Techniques Used

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Financial Capability

(a) Sources of funds

(b) Usage of funds

(c) Management of funds

Marketing Capability

(a) Product related

(b) Price related

(c) Promotion related

(d) Integrative & Systematic

Information Management

(a) Acquisition & retention of info

(b) Processing & synthesis of info

(c) Retrieval& usage of info

(d) Transmission & dissemination

(e) Integrative, systemic & supportive

Operations Capability

(a) Production system

(b) Operation & Control system

(c) R&D system

Personnel Capability

(a) Personnel system

(b) Organization/employee characteristics

(c) Industrial Relations

General Management

(a) General Management Systems

(b) External Relations

(c) Organization climate

Organizational Capability Profile (OCP)

Capability Factor Values:

Weakness(-5), Normal (0), Strength (+5)

Strategic Advantage Profile (SAP)

Capability Factor Competitive Strength/Weakness

Finance High cost of capital, reserves & surplus unsatisfactory

Marketing Fierce competition, company position secure at present

Operations Plant & m/c; captive sources of parts & components

Personnel Management & staff on par with competition

General Highly experienced top management - proactive stance

Management

[Example of a Bicycle Company]

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Strategy: the plan devised to maintain and build competitive advantage

over the competition.

Structure: the way the organization is structured and who reports to

whom.

Systems: the daily activities and procedures that staff members engage in

to get the job done.

McKinsey’s 7S Framework

Style: the style of leadership adopted.

Staff: the employees and their general capabilities.

Skills: the actual skills and competencies of the

employees working for the company.

Shared Values: (called "superordinate goals“) the

core values evidenced in the corporate culture

and the general work ethic.

McKinsey’s 7S Framework

Structure

Shared

Values

Strategy

Skills

System

Style

Staff

To diagnose causes of

organizational problems

& formulate programs

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Generating Alternative Strategies

From SWOT

SWOT analysis is a tool for helping assess the

current situation for the firm.

However, we need to be able to combine the

information in the SWOT analysis in a meaningful

way to generate alternative strategies that we

might pursue.

The TOWS matrix is a tool designed to match

external opportunities and threats with our

internal strengths and weaknesses

SWOT Analysis

Opportunities

1.

2.

3.

Strengths

1.

2.

3.

Threats

1.

2.

3.

Weaknesses

1.

2.

3.

Internal

Environment

External

Environment

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Strengths

Advantages of proposition?

Capabilities?

Competitive advantages?

USP's (unique selling points)?

Resources, Assets, People?

Experience, knowledge, data?

Financial reserves, likely returns?

Marketing – reach/distribution/awareness?

Innovative aspects?

Location and geographical?

Price, value, quality?

Accreditations, qualifications, certifications?

Processes, systems, IT, communications?

Cultural, attitudinal, behavioural?

Management cover, succession?

Philosophy and values?

Disadvantages of proposition?

Gaps in capabilities?

Lack of competitive strength?

Reputation, presence and reach?

Financials?

Own known vulnerabilities?

Timescales, deadlines and pressures?

Cashflow, start-up cash-drain?

Continuity, supply chain robustness?

Effects on core activities, distraction?

Reliability of data, plan predictability?

Morale, commitment, leadership?

Accreditations, etc.?

Processes and systems, etc?

Management cover, succession?

Weaknesses

Opportunities Market developments?

Competitors' vulnerabilities?

Industry or lifestyle trends?

Technology development & innovation?

Global influences?

New markets, vertical, horizontal?

Niche target markets?

Geographical, export, import?

New USP's?

Tactics: e.g., surprise, major contracts?

Business and product development?

Information and research?

Partnerships, agencies, distribution?

Volumes, production, economies?

Seasonal, weather, fashion influences?

Political effects?

Legislative effects?

Environmental effects?

IT developments?

Competitor intentions - various?

Market demand?

New technologies, services, ideas?

Vital contracts and partners?

Sustaining internal capabilities?

Obstacles faced?

Insurmountable weaknesses?

Loss of key staff?

Sustainable financial backing?

Economy - home, abroad?

Seasonality, weather effects?

Threats

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TOWS Matrix

Technique used in strategy formulation

for combining

– External analysis

• Opportunities

• Threats

– Internal analysis

• Strengths

• Weaknesses

TOWS Matrix

Threats:

1.

2.

3.

Opportunities:

1.

2.

3.

ST Strategies

Take advantage of

Strengths to

avoid Threats

SO Strategies

Use Strengths to

take advantage

of Opportunities

Strengths:

1.

2.

3.

WT Strategies

Defensive strategies

to minimize

weaknesses and

avoid threats

WO Strategies

Use Opportunities to

overcome

Weaknesses

Weaknesses:

1.

2.

3.

From

External Analysis

From Internal Analysis

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Str

ate

gic

An

aly

sis

:

TO

WS

Matr

ix

TO

WS

matr

ix:

Vo

lksw

ag

en

(1973-7

5)

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SPACE Matrix

[Strategic Position & Action Evaluation Matrix]

Aggressive

Conservative

Defensive

Competitive

Two Internal Dimensions

Financial Strength (FS)

Competitive Advantage (CA)

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

Strategic Posture

Dimension

Aggressive Competitive Conservative Defensive

ENVIRONMENT Stable Unstable Stable Unstable

INDUSTRY Attractive Attractive Unattractive Unattractive

COMPETITIVENESS Strong Strong Weak Weak

FINANCIAL

STRENGTH

High Weak High Weak

APPROPRIATE

STRATEGIES

• Growth- possibly

by acquisition

• Capitalize on

opportunities

• Innovative to

sustain comp. adv.

• Cost reduction;

Productivity

improvement;

Raising more

capital to follow

opportunities

and strengthen

competiveness

• Possible merge

with a less

competitive but

cash-rich

organization.

• Cost reduction

and

product/service

rationalization

• Invest in search

for new

products,

services and

competitive

opportunities

• Rationalization

• Divestment as

appropriate

Strategic Postures

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Internal Strategic

Position

External Strategic

Position

Internal Strategic

Position

External Strategic

Position

Financial Strength

(FS)

Environmental

Stability (ES)

Competitive

Advantage (CA)

Industry Strength

(IS)

Return on

investment

Leverage

Liquidity

Working capital

Cash flow

Technological

changes

Rate of inflation

Demand

variability

Price range of

competing

products

Barriers to entry

Competitive

pressure

Price elasticity of

demand

Ease of exit from

market

Risk involved in

business

Market share

Product quality

Product life cycle

Customer loyalty

Competition’s

capacity

utilization

Technological

know-how

Control over

suppliers &

distributors

Growth potential

Profit potential

Financial stability

Technological

know-how

Resource

utilization

Ease of entry into

market

Productivity,

capacity

utilization

SPACE Factors

Steps to Developing a SPACE Matrix

1. Select a set of variables to define FS, CA, ES, & IS

2. Assign a numerical value:

From +1 to +6 to each FS & IS dimension

From -1 to -6 to each ES & CA dimension

3. Compute an average score for each FS, CA, ES, & IS

4. Plot the average score on the appropriate axis

5. Add the two scores on the x-axis and plot the point. Add the two

scores on the y-axis and plot the point. Plot the intersection of the

new xy point

6. Draw a directional vector from the origin through the new

intersection point.

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SPACE Matrix: Example

SPACE Matrix: Example

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Corporate Strategy Business Portfolio Analysis

Market Growth rate of the industry:

Expressed in % increase in sales

Relative market share of a firm:

Market share in industry / market share of the largest other competitor

Assumptions:

Other things being equal - growing market is attractive

Market leader influences the average costs

BCG (Boston Consulting Group) Matrix

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Hig

h

Lo

w

High

Low

Market

Growth Rate

Relative Market

Share

BCG (Boston Consulting Group) Matrix

[10%]

< 1 > 1 > 1 indicates market leader

BCG Matrix: Question Marks (Problem Children: Low Market Share / High Market Growth)

Investment:

heavy initial capacity expenditures and high R&D

costs

Earnings: negative to low

Cash-flow: negative (net cash user)

Strategy Implications:

if possible to dominate segment, go after share.

If not, redefine the business or withdraw.

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BCG Matrix: Stars (High Market Share / High Market Growth)

Investment:

continue to invest for capacity expansion

Earnings: low to high earnings

Cash-flow: negative (net cash user)

Strategy Implications:

continue to increase market share - even at the

expense of short-term earnings

Petrochemicals

Telecom

BCG Matrix: Cash Cows (High Market Share / Low Market Growth)

Investment

capacity maintenance

Earnings: high

Cash-flow: positive (net cash contributor)

Strategy Implications:

maintain market share and cost leadership until

further investment becomes marginal

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BCG Matrix: Dogs (Low Market Share / Low Market Growth)

Investment:

gradually reduce capacity

Earnings: high to low

Cash-flow:

positive (net cash contributor) if deliberately

reducing capacity

Strategy Implications:

plan an orderly withdrawal to maximize

cash flow

Indian Cotton Textiles

Anchoring

Systems

Powder Actuated

Tools

Cable Tray

Systems

Electric Power

Tools

Concrete Lifting

Systems

Lo

w

High

Low

Market

Growth Rate

Relative Market

Share

BCG Matrix: Example of a Fastener Supplier

Note that the Anchoring System SBU is forecasted to move to a new position

Hig

h

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GE Portfolio Matrix

Originally developed by GE’s planners drawing on McKinsey’s approaches

Market attractiveness is based on as many relevant factors as are appropriate in a given context

Business-position assessment also made on a many factors

SBU needs to be rated on each factor

Industry Attractiveness:

Market size & growth rate, industry profit margin, competitive intensity, pricing

practices, opportunities / threats

[Scale 1 – 5: “Very unattractive” to “Very attractive”]

Company’s Business Strengths or Competitive Position:

Market share, technological position, profitability, size, strengths & weakness,

management calibre

[Scale 1-5: “Very weak” to “Very strong”]

Industry Attractiveness

High

High

Medium

Medium

Low

Low

Invest / Grow

Select / Earn

Harvest / Divest

Protect

Position

Invest to

Build Build

selectively

Build

selectively

Selectively

manage for

earnings

Limited

expansion or

harvest

Protect &

refocus Divest

Manage for

earnings

GE

Portfolio

Matrix

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Industry Attractiveness

High

High

Medium

Medium

Low

Low

GE

Portfolio

Matrix

Invest / Grow

Select / Earn

Harvest / Divest

Quadrant IV

1. Concentric diversification

2. Horizontal diversification

3. Conglomerate diversification

4. Joint ventures

Quadrant III

1. Retrenchment

2. Concentric diversification

3. Horizontal diversification

4. Conglomerate diversification

5. Liquidation

Quadrant I

1. Market development

2. Market penetration

3. Product development

4. Forward integration

5. Backward integration

6. Horizontal integration

7. Concentric diversification

Quadrant II

1. Market development

2. Market penetration

3. Product development

4. Horizontal integration

5. Divestiture

6. Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK

COMPETITIVE

POSITION

STRONG

COMPETITIVE

POSITION

Grand Strategy Matrix

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Quadrant IV

1. Strong competitive position

2. Slow-growth industry

3. Diversification to more

promising growth areas

Quadrant III

1. Compete in slow-growth

industries

2. Weak competitive position

3. Drastic changes quickly

4. Cost & asset reduction

(retrenchment)

Quadrant I

1. Excellent strategic position

2. Concentration on current

markets/products

3. Take risks aggressively

when necessary

Quadrant II

1. Evaluate present approach

2. How to improve

competitiveness

3. Rapid market growth

requires intensive strategy

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK

COMPETITIVE

POSITION

STRONG

COMPETITIVE

POSITION

Grand Strategy Matrix

Key Internal Factors

Management

Marketing

Finance/Accounting

Production/Operations

Research and Development

Computer Information

Systems

Strategy 3 Strategy 2 Strategy 1 Weight Key External Factors

Economy

Political/Legal/Governmental

Social/Cultural/Demographic/

Environmental

Technological

Competitive

Strategic Alternatives

Quantitative Strategic Planning Matrix (QSPM)

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PIMS Program (Profit Impact of Market Strategy)

PIMS holds 6 areas of info on each biz:

1. characteristics of the biz environment

2. competitive position of the business

3. structure of the production process

4. how the budget is allocated

5. strategic movement

6. operating results.

The PIMS project was started by Sidney Schoeffler with GE in the 1960s

Administered by the Strategic Planning Institute since 1975

Uses multi dimensional cross-

sectional regression studies of

profitability of over 3000 businesses.

Provides industry characteristics,

average profitability, and compares it

with performance of the company

concerned.

The key strategic factors

influencing business performance

Market Environment

Marketing/Sales

Customer Concentration

Customer Purchase Amount

Industry Concentration

Capital and Operating Structure

Investment / Sales

Investment / Value Added

Gross Book Value of P&E / Total Investment

Operating Effectiveness

Receivables / Investment

Capacity Utilization

Value Added / Sales

Stage of Lifecycle

New Products/Sales

R & D/Sales

Real Market Growth

Competitive Position

Market Share

Relative Market Share

Relative Quality

Relative Price

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PIMS: Strategic Benchmarks

The experience of PIMS businesses, situationally comparable

to a business under study, is used to establish strategy and

performance benchmarks.

www.pimsonline.com includes:

Profitability (Return on Sales, and ROI)

Change in market share

Marketing budget (Sales force, Advertising, Promotion

and Other Marketing Expenses)

Market attractiveness / competitive strength

PIMSONLINE.COM

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Corporate Governance Issues

1. No more than 2 directors current or former company executives

2. No directors do business with the company

3. Audit, compensation, and nominating committees made up

of outside directors

4. Each director attends at least 75% of all meetings

5. Audit committee meets at least four times a year

6. CEO is not also the Chairperson of the Board

7. Shareholders have considerable power and information to

choose & replace directors

8. Stock options are considered a corporate expense

9. No interlocking directorships

Business Week’s “principles of good governance”