Strategic Management - Lesson 3

STRATEGIC MANAGEMENT – LESSON 3 Internal analysis In performing internal analysis a strategist’s main goal is to identify the truthful strengths and weaknesses the company possesses. This main task is achieved through assessing competitive advantage and distinctive competencies the company has. •

Competitive advantage

Competitive advantage grows out of positioning a firm in its competitive and industry environment so that it has an edge in coping with competitive forces. Many different competitive advantage exist: offering the highest quality product, providing the best customer service, being the biggest firm in the market having the lowest prices, dominating a particular geographic region, having the best product to meet the needs of a narrowly targeted group of buyers, guarantying the highest degree of performance and reliability, and offering the most value for the money (a combination of good quality, good service, and acceptable price) – to mention some of the frequently used competitive edge possibilities. Therefore, the strategist must look inside the company and find truthful answers to the following two questions: 1. How has the company achieved this competitive advantage? Efficiency Quality Innovation Customer responsiveness 2. What is the durability of the competitive advantage – are there barriers to imitation? •

Distinctive competencies

The term distinctive competence refers to a skill or activity that the company does especially well in comparison with rival firms. Distinctive competencies can be identify in the way in which the company uses its: Resources – financial, physical, human, technological, and organizational and Capabilities – company’s skills at coordinating its resources and putting them to productive use. Distinctive competencies in some competitively important aspect of creating, producing, or marketing the company’s product or service can be vehicle for establishing competitive advantage and then leveraging this advantage into better-than-otherwise business performance. Based upon assessing the competitive advantage and distinctive competencies the strategist will come up with strengths and weaknesses the company has. 1

SWOT technique SWOT is an acronym for a firm’s internal Strengths and Weaknesses and its external Opportunities and Threats. SWOT consists of a candid appraisal of a firm and is a quick, easy-to-use tool for sizing up a firm’s overall situation. Table below summarizes what to look for in performing the SWOT analysis. Potential Internal Strengths

Potential Internal Weaknesses

A distinctive competence? Adequate financial resources? Good competitive skills? Well thought of by buyers? An acknowledged market leader? Well-conceived functional area strategies? Access to economies of scale? Insulated (at least somewhat) from competitive pressures? Proprietary technology? Cost advantages? Competitive advantages? Product innovation abilities? Proven management? Ahead on experience curve? Other?

No clear strategic direction? A deteriorating competitive position? Obsolete facilities? Low profitability because…? Lack of managerial depth and talent? Missing any key skills or competencies? Poor track record in implementing strategy? Plagued with internal operating problems? Vulnerable to competitive pressures? Falling behind in R&D? Too narrow a product line? Weak market image? Competitive disadvantages? Below-average marketing skills? Unable to finance needed changes in strategy? Higher overall unit costs relative to competitors? Other?

strong

Potential External Opportunities

Potential External Threats

Serve additional customer groups? Enter new markets or segments? Expand product line to meet broader range of customer needs? Diversify into related products? Add complementary products? Vertical integration? Ability to move to better strategic group? Complacency among rival firms? Faster market growth? Other?

Likely entry of new competitors? Rising sales of substitute products? Slower market growth? Adverse government policies? Growing competitive pressures? Vulnerability to recession and business cycle? Growing bargaining power of customers suppliers? Changing buyer needs and tastes? Adverse demographic changes? Other?

key

or

However, the SWOT needs to be more than an exercise in making four lists. Some strategy-related strengths are more important than others because they count for more in the marketplace and in executing an effective strategy. Some strategy-related weaknesses can be fatal, while others might not matter much or can be easily remedied. Some opportunities may be more attractive to pursue than others. And a firm may find itself much more vulnerable to some threats than to others. Hence it is essential to draw conclusions from the SWOT listing about the firm’s overall situation and assess the implications these have for selecting a strategy.

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The Internal Factor Evaluation (IFE) Matrix An Internal Factor Evaluation (IFE) Matrix allows strategists to summarize and evaluate the major strengths and weaknesses in the functional areas of a business. Similar to EFE Matrix, an IFE Matrix can be developed in five steps: 1. List internal strengths and weaknesses as identified in the internal-audit process. List the strengths first and then the weaknesses. 2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm’s industry. Regardless of whether a factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights The summation of all weights assigned to the factors must equal 1.0. 3. Assign a 1-to-4 rating to each factor to indicate how whether that factor represents a major weakness (rating = 1), a minor weakness (rating =2), a minor strength (rating = 3), or major strength (rating = 4). Ratings are thus company-based, whereas the weights in Step 2 are industry-based. 4. Multiply each factor’s weight by its rating to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization. Regardless of how many factors are included in IFE Matrix, the total wighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak internally, whereas scores significantly above 2.5 indicate a strong internal position. An example of an IFE Matrix is provided in next Table. Note that the firm’s major strengths are its current ratio, profit margin, and employee morale as indicated by the 4 ratings. The major weaknesses are lack of a strategic-management system, rising R&D expenses, and ineffective dealer incentives. The total weighted score of 2.80 indicates that the firm is above average in its overall internal strategic position.

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Factor

Weight

Rating

Weighted Score

1. Current ratio increased to 2.52

.06

4

.24

2. Profit margin increased to 6.94

.16

4

.64

3. Employee morale is high

.18

4

.72

4. New computer information system

.08

3

.24

5. Market share has increased to 24 %

.12

3

.36

1. Legal suits have not been resolved

.05

2

.10

2. Plant capacity has fallen to 74 %

.15

2

.30

3. Lack of strategic management syst.

.06

1

.06

4. R&D expenses have been increased 31 percent

.08

1

.08

5. Dealer incentives have not been effective

.06

1

.06

TOTAL

1.00

STRENGTHS

WEAKNESSES

2.80

4