Module 3 - Background

One of the criticisms of Porter's Five Forces Model (and external analyses in general) is that while Five Forces can certainly help in the identification of problems and difficulties that firms are likely to encounter in a given industry, the model does not provide insight into what a particular company can do to manipulate those forces in its favor, thus gaining a competitive advantage.

In Module 3, we will focus on an analysis of the internal environment, or the internal company. At the conclusion of this process, we will have what is sometimes referred to as a "company profile" or an "internal profile." Two useful frameworks that will help us to focus on the essential factors for analysis of the internal environment are Porter's Value Chain and the Resource Based View framework (RBV).

After conducting an analysis of an organization’s internal environment, you will be in a position to complete the last two elements of the SWOT analysis: identification of the strengths and weaknesses of a company.

Internal Analysis Components

Before we introduce the analytical models we will be using in this module, some background information will be helpful. A company has (A) primary activities and (B) support activities.

A company’s primary activities are:

• Research and Development (R&D)
• Production (manufacturing)
• Marketing and Sales
• Customer Service

A company’s support activities include:

• Materials Management
• Human Resources
• Information Systems
• Infrastructure

A. Primary Activities

• Research and Development (R&D) includes development and design of products and production processes. Many manufacturing companies have separate R&D departments. For highly innovative companies (such as 3M), this may be one of the most important departments in the organization. Some service companies may include R&D activities as a part of marketing or customer service functions. For instance, banks introduce new products to attract customers.
• Production is in charge of creating goods or services. Some companies manufacture products. Banks make loans. Retail companies sell products. These are instances of production.
• Marketing and Sales plays several roles. It advertises and positions the brand, identifies marketing needs, and sets pricing.
• Customer Service provides after-sale service.

B. Support Activities

• Materials Management manages the logistics of moving materials from procurement of inputs to production and then moving outputs through distribution to customers. Inventory management is part of the Materials Management support activity.
• Human Resources is focused on employing the necessary skills mix to carry out the organization's mission, and to motivate, train, and compensate the workforce.
• Information Systems refers to computer support in processing functions and supporting company operations, as well as Internet.
• Infrastructure refers to organizational structure, controls, and culture. The infrastructure must be capable of supporting the primary activities of the organization and must also be compatible with its strategy.

Presentation on the Internal Environment

Review the following presentation by Dr. Connelley. For Part Two of the narrated slide presentation on strategic situation analysis, click on the title below. This slide presentation focuses on the importance of optimizing the internal functions of an organization to create added value to the firm's products or services: Strategy for the Internal Environment

Porter's Value Chain

Porter's Value Chain is a widely used framework for organizing and interpreting an internal analysis. It is pictured below and is also discussed in the previous PowerPoint presentation. You can see that the Value Chain considers both primary and support activities, although it may use slightly different labels and definitions. By managing the various components of the value chain, companies can achieve a cost advantage over competitors, or distinguish themselves from competitors by offering a distinctively better product or service. Read more about Value Chain analysis at:

The Value Chain. (2007). Retrieved on November 6, 2012, from: http://www.netmba.com/strategy/value-chain/

While the Value Chain can be a valuable tool for breaking down and streamlining costs and creating maximum value, it is a complicated process that typically involves considerable quantitative analysis. Refer back to the reading for Module 2 for a review of the various types of financial ratios that are used to determine the value of various components of the chain.

The Resource Based View

The Resource Based View (RBV) arose in direct response to the criticism mentioned previously, that is, the external analysis is much less useful to a company seeking to attain a competitive advantage than are its internal capabilities and resources.

“Instead of focusing on the accumulation of resources necessary to implement the strategy dictated by conditions and constraints in the external environment (I/O model), the resource-based view suggests that a firm's unique resources and capabilities provide the basis for a strategy. The business strategy chosen should allow the firm to best exploit its core competencies relative to opportunities in the external environment.”

Source: "Strategic Management - Competitiveness and Globalization", M. A. Hitt, R. D. Ireland, R. E. Hoskisson

Central to this analytical view is the notion that a firm's core competencies and resources are more critical to the development of a strategy than the external environment. In reality, the truth probably lies somewhere in between, with a balance between external demands and internal capacities leading to the most successful competitive position. This is the essence of a SWOT analysis, and RBV can certainly inform an analysis of strengths and weaknesses.

For an excellent review of the basics of the Resource Based View, read the following chapter:

https://mytlc.trident.edu/efiles/ITSupport/st45-19614.pdf

Required Reading

Connelley, D. Strategy for the internal environment. PowerPoint presentation.

The Internal Environment: A Resource-Based View of Strategy (in the Presentations folder)

The Value Chain. (2007). Retrieved on November 6, 2012, from: http://www.netmba.com/strategy/value-chain/

The following presentation is a good overview of internal analysis:

Bramha, D. (2011). Internal Analysis in Strategic Management. Retrieved on November 6, 2012, from: http://www.slideshare.net/guestd507e7/internal-analysys-of-strategic-management-presentation

Case Reading

SWOT analysis: Lesson. (2009). Retrieved on November 6, 2012, from: http://marketingteacher.com/Lessons/lesson_swot.htm

Zahorsky, D. (2009). A business owner's secret weapon: SWOT analysis. Retrieved on November 6, 2012, from: http://sbinformation.about.com/cs/bestpractices/a/swot.htm