Lesson 5Internal Environment and

Value Chain Analysis

The internal environment is the final stepin gathering information for the EnvironmentalAnalysis. It consists of identifying resources andcapabilities (in the form of the value chain),finding competencies, and determining whatcompetitive advantages (hopefully sustainable)the organization has.

Resources and Competences

Perhaps the most basic concept under strategiccapability is that of resources. Tangible resourcesare the physical assets of an organisation such asplant, people and finance. Intangible resources

arenon-physical assets such as information,

reputationand knowledge.

An Organisational Resource Could Be Classifiedas: 1. Physical Plants Equipment PeopleFinance Natural resources …

2. Human Managerial Know-how Talented key employees Friendly staff …

3. Intellectual Specialized knowledge Collective learning Business systemsCustomer databasesCutting edge technology knowledge …

4. Intangible Patent and copyrights Brand name Customer loyalty …

5. Skills Proven ability to introduce new products Experts at providing consistently good customerservice Able to create “lean” value chain

• 6. Organizational Proprietary technology Cash Strong network of suppliers Well organized, effective, efficient

management structure

7. Alliances, partnerships, cooperative or joint ventures

The efficiency and effectiveness of physical orfinancial resources, or the people in anorganisation, depends not only on theirexistence but also on how they are managed ,the cooperation between people, theiradaptability, their experience and learning aboutwhat works well and what does not. These

are all competences, by which it meantthe skills and abilities by which resources aredeployed effectively through an organisation’sactivities and processes. Threshold capabilities are those capabilitiesneeded for an organisation to meet thenecessary requirements to compete in a givenmarket.

These could be threshold resources requiredto meet minimum customer requirements,for example, to deploy resources so as tomeet customers’ requirements and alsosupport particular strategies. Retailers donot simply expect suppliers to have the ITinfrastructure,

but to be able to use it effectively so as toguarantee the required level of service.

Identifying and managing threshold capabilitiesraises at least one significant challenges:Threshold levels of capacity will change as

critical success factors change or

through the activities of competitors and newentrants (critical success factors, CSFs, are thoseproduct features that are particularly valued bya group of customers and, therefore, where theorganisation must excel to outperformcompetition).

This could be because the organisationhas unique resources that critically underpincompetitive advantage and that others cannotimitate or obtain – a long established brand, forexample. It is, however more likely that anorganisation achieves competitive advantagebecause it has distinctive, or core competence.

Unique Resources and Core Competences

The concept of core competences wasdeveloped, most notably by Gary Hamel andC.K. Prahalad. While various definitions exist,here core competences are taken to mean theskills and abilities by which resources aredeployed through an organisation’s activitiesand processes such as to achieve competitiveadvantage in ways that others cannot imitate orobtain.

For example, a supplier that achieves acompetitive advantage in a retail market mighthave done so on the basis of a unique resourcesuch as a powerful brand, or by finding ways ofproviding service or building relationships withthat retailer in ways that its competitors finddifficult to imitate – core competence.

Value Chain Analysis

The term ‘Value Chain’ was used by Michael Porter in hisbook "Competitive Advantage: Creating andSustaining superior Performance" (1985). The value chainanalysis describes the activities the organizationperforms and links them to the organizations competitiveposition.Value chain analysis describes the activities within andaround an organization, and relates them to ananalysis of the competitive strength of the organization

Value Chain Analysis describes the activities thattake place in a business and relates them to ananalysis of the competitive strength of thebusiness. Influential work by Michael Portersuggested that the activities of a business couldbe grouped under two headings:

Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and

Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management).

Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").

• Inbound logistics are the activities concerned with receiving, storing and distributing the inputs to the product or service. They include materials handling, stock control, transport, etc.

• Operations transform these various inputs into the final product or service: machining, packaging, assembly, testing, etc.

• Outbound logistics collect, store and distribute the product to customers. For tangible products this would be warehousing, materials handling, transport, etc. In the case of services, they may be more concerned with arrangements for bringing customers to the service if it is a fixed location (e.g. Sports event)

• Sales and Marketing is considered everything associated with marketing the product or service. The sales force, personal selling, advertising, promotion, market research, web site, and dealer or distributor support are a few examples of Sales and Marketing.

• Service is associated with providing assistance to the customer. Some Service examples are installation, warranty work, maintenance, complaints, questions, repair, and technical assistance.

Each of these groups of primary activities islinked to support activities. Support activities help to improve theeffectiveness or efficiency of primary activities.They can be divided into four areas:

Procurement refers to the processes for acquiring the various resource inputs to the primary activities. As such, it occurs in many parts of the organisation.

Technology development . All value activities have a ‘technology’, even if it is just know-how. The key technologies may be concerned directly with the product (e.g. R&D, product design) or with processes (e.g. process development) or

with a particular resource (e.g. raw materialsimprovements). This area is fundamental to theinnovative capacity of the organisation.

Human resource management is particularly important area which transcends all primary activities. It is concerned with those activities involved in recruiting, managing, training, developing and rewarding people within the organisation.

Infrastructure. The systems of planning, finance, quality control, information management, etc. are crucially important to an organisation’s performance in its primary activities. Infrastructure also consists of the structures and routines of the organisation which sustain its culture.

Week 8Business Strategies in Different Industry Context