Analysis of Internal Environment of Firm | Strategic Management

In this article we will discuss about:- 1. Resource Base of a Firm 2. Value Chain Analysis of a Firm 3. Efficiency and Effectiveness of Resource Utilisation 4. Comparative Analysis of Strategic Capabilities 5. Appropriateness of Organisation and Human Resource Management.    

Resource Base of a Firm:

The resources of any company can be classified into the following broad categories:

(a) Physical resources like plant and machinery, technology, etc.;

(b) Financial resources;

(c) Distribution network;

(d) Possession of strategic assets, such as access to raw material, locational advantage, regulatory protection, etc.;

(e) Network/contacts with outside organisations (suppliers, customers, government, distributors, etc.);

(f) Intangibles, like brand equity, goodwill, reputation, etc.;

(g) Human resources-profile, skill, managerial competencies; and organisational structure and administrative system, culture and values, and employee motivation/relationship.

However, what is important to note is that the resource base consisting of the above should be audited not just from the point of view of how these resources (individually and collec­tively) have been instrumental in achieving performance till date, but also from its adequacy to meet future strategic requirements. One also needs to check whether the competencies developed over the years, sufficient to protect the firm from future threats and to exploit emerging opportunities.

Needless to say, a resource which has been useful in the past may not be equally useful in the future (one example is a large, trained manpower which may turn out to be a hindrance under the new competition, even though it may have given important support in the past when operations used to be mostly manual and productivity was not a key concern).

In view of this, it is necessary that analysts remain objective while doing the resource audit. Also, the scope of study should include not only the internal resources but the external ones as well (such as network or contacts, and possession of strategic assets) which give the firm certain competitive advantages.

It must be stressed that the ownership of resources itself will not provide any competitive advantage. Rather, the way these resources are deployed and managed will determine the extent of success. While carrying out this assessment, it will be useful to measure resource utilisation under two distinct heads, viz., efficiency and effectiveness. Efficiency in resource utilisation is the key to competing on the basic of cost advantages; while effectiveness in using resources will help in creating differ­entiation with regard to products and services, vis-a-vis the competition.

Value Chain Analysis of a Firm:

To understand how the resources deployed in production, distribution and other functional areas are used to add value and to create competitive advantages, it is essential to disaggregate the various tasks of the organisation into certain value-creating activities.

According to this approach-called ‘value chain analysis’ the set of activities of a firm consists of two broad categories, viz.:

(a) Primary activities, consisting of inbound logistics, operations, outbound logistics, marketing and sales and services; and

(b) Support activities, consisting of the firm’s infrastructure, technology development, human resource management and procurement.

Primary activities are distinct in terms of scope, scale, technology and investment requirements, and are normally cost or revenue centres. Support activities provide support to the primary activities for creating the desired value. The quality of support so given and the excellence in each of the primary activities, as well as coordination across the same, determine the overall capability of an organisation to create the value the customers truly desire. Even if individual activities (support as well as primary) are performed at the highest level of their respective efficiencies, the firm will not be able to leverage the same if the coordination between various activities is not optimum.

It should be remembered that an organisation need not undertake on its own activities from design through manufacturing and distribution to the ultimate consumer. To understand how value is created and then decide which value-creating activities are to be done in-house, the firm must take a look at the entire value chain and not just that part which is directly under its control. For example, successful companies also examine the value chains of their suppliers, distributors and customers in order to maximise the collective value creation across the entire value chain.

This is needed to ensure that values are also being created, particularly by suppliers and distributors. When this happens, a firm is able to enhance both its own value and its competitive advantages. There is, thus, a case for the firm to link effectively its various value-creating activities with those of suppliers, distributors and customers. While establishing this linkage, the emphasis has to be on enhancing the competitiveness of the customer’s business. If this is achieved, competitors will find it extremely difficult to imitate the overall strategy.

Once the value chain has been defined clearly and the value activities identified, it is important to find out the strategic cost or value drivers in case of each specific activity. Strategic cost drivers are factors which determine the cost or value of each activity. For instance, a low cost advantage may accrue to a firm due to the physical proximity of its production centre to a particular supply source which shall not be available to any other unit located in a faraway place.

Similarly, a low response time to supply products to customers may enhance value so far as customers are concerned, but it may probably lead to holding a higher finished goods inventory at a substantial cost. What may be needed is to identify the strategic cost or value driver carefully and then decide how best to optimise value creation without hampering efficiency.

The decision on which value activities should be performed in-house depends on:

(i) The overall strategy of the firm-including the positioning it is aiming for,

(ii) The strategic cost ;and

(iii) The capabilities available in-house (or planned to be developed).

The aim will be to create those values for customers which are unique and sustainable, and which can be created by the firm in the most efficient manner.

Efficiency and Effectiveness of Resource Utilisation:

The twin combination of efficiency and effectiveness in resource utilisation can help a firm provide the highest perceived value at the lowest delivered cost. When a firm achieves this state, it establishes superior performance, be it with regard to maximising market share or profitability.

Cost Efficiency can be achieved by a firm in a variety of ways, such as:

(i) Economies of scale,

(ii) Control of input prices,

(iii) Designing and installing the right business processes that help in achiev­ing higher efficiency (in such areas as labour and machine productivity, material yield and working capital management), and

(iv) Experience curve effect. Experience curve effect is an important contributor to cost efficiency.

Firms-whether operating in mature or high growth industries-must make efforts to achieve a lower cost position, as compared to the previous year, on a continuing basis if they are to hold on to their competitive position. It should, however, be remembered that the cost base are also influenced by other factors (such as introduction of a new product design altering the cost of manufacture, a change in technology, or rise in labour or energy costs), and hence, the utility of experience should be examined carefully, particularly those relating to value activities.

Effectiveness in resource utilisation by a firm gets reflected in the way it creates those values that are important to customers. The focus here is on creating differentiation vis-a-vis the competition. Whether a firm is achieving the required effectiveness can be found out by assessing customer percep­tion of the tangible and intangible values offered by the firm through its products and associated services (such as pre- and after-sales service, speed of delivery, cycle time, the systems and processes for business transaction, credit, etc.).

When customers appreciate the value delivered by the firm, the same gets reflected in such areas as higher consumption, better prices, favourable word-of-mouth recom­mendations to other prospects, and also, the lowering of costs incurred to create value. Once the value-creating activities that help in developing unique and sustainable differentiation have been identified, the value drivers as well as the underlying resources for each such activity (whether within or outside the firm) should be established so that the required attention is provided to create the desired value.

To ensure that the desired efficiency and effectiveness in managing resources are achieved, it is essential to find out the state of the internal control systems and their suitability to monitor the quality of management of such resources. The need is to identify the key performance indicators for each value-creating activity, set the right benchmarks against each, and ensure that managers are informed regularly about actual performance vis-a-vis the benchmarks set so that they can initiate corrective actions in time.

A failure to have an appropriate information and feedback system shall undermine the efficiency and effectiveness of resource management, and hence, the value creation process-even in situations where the resources possessed are of the best quality in the industry. The processes of control have to extend beyond the organisational boundary since the value created by the firm is also dependent on the value created by its suppliers and distributors.

However, the ap­proach to be adopted need not be in the form of detailed procedures. Rather, control should be exercised through such means as Total Quality Management (TQM), joint workshops, incentives, training, etc. Strong working linkages with suppliers and distributors provide a firm with a strategic capability that is difficult to imitate and thus acts as a source of competitive advantage. This being so, controls-in the way described here-must encompass ‘both internal and external value-creating activities.

Comparative Analysis of Strategic Capabilities:

Value chain analysis helps a firm understand how it should create value by managing the resources available within the organisation efficiently and effectively, as well as through building a network of relationships with its suppliers and distributors. An interesting exercise would be to find out how the firm has been performing over the years in such value-creating activities, and whether it has been able to alter its resource base along with the requirements of the business.

A comparison of current performance in various financial and operating areas vis-a-vis the previous years as well as the domestic and global standards helps in identifying areas of weakness (such as declining efficiency in cost management, or longer cycle time to serve customers). It also indicates whether any shift in priority or a greater emphasis on certain areas is needed.

Evaluation of a firm’s performance against industry norms will be of particular importance. Since the historical approach has a number of shortcomings, organisations that are aiming to im­prove their performance significantly above the current level, must target at least those financial and operating norms which have already been achieved by some firms of the industry. A comparison in this regard can bring to light the relative performance of the organisation and its managers in managing its resources.

Such an analysis will, however, be useful if the performance already achieved by one or the other firms along various financial and operating parameters compares favourably with the internationally accepted norms or those achieved by similar industries. The ideal approach would be to draw a profile of the best competitor (domestic or global), particularly with regard to the key value-creating activities, and benchmark the same. This will enable the analyst to identify clearly the performance measures that are crucial to achieve long term competitive advantages.

Leading organi­sations use benchmarking exercises to assess the international competitiveness of their firms (both in financial and operating areas), and, depending on the trends in actual performance vis-a-vis such benchmarks, they take decisions, such as overhauling part or whole of the value-creating activities or even discontinuing a certain part of the same.

A comparative analysis of performance in both the financial and operating areas against the set benchmarks should also be carried out at the strategic business unit (SBU) level and not just for the company as a whole. This is needed in order to find out if there are certain synergies across the activities of various SBUs within the portfolio of the company and whether they are the sources of the company’s strategic capabilities.

The Boston Consulting Group (BCG) had developed a method­ology for assessing the competitive positioning of a firm vis-a-vis its other competitors. This model, provides key insights for assessing the relative balance of resources within an organisation and the resulting capabilities that flow out of the same.

Appropriateness of Organisation and Human Resource Management:

An organisation and its people are the most important determinants of the strategic capability of a firm. It is well known that the strategy, of an organisation is really the strategy of its managers. Whether the management team as a whole would be able to chalk out the right strategy, set stretched targets and milestones, and subsequently, implement the same (leading to achievement of the overall objectives and goals and also enhancement of the competitive advantages of the firm) depends to a large extent on the nature of the structure and systems the organisation possesses, the values and culture it inculcates, and the skills and expertise of the people it employs.

The importance of organi­sation and its people for the effective strategic management of a firm. It is, however, important at this point to stress that a firm needs appropriate organisation and the right mix of people (defined in terms of skills, personalities, attitudes and behaviour) in order to manage its value-creating activities efficiently and effectively, and also to gain strategic capabilities vis-a-vis its competitors.

When an optimum mix of organisation and people is achieved, in line with the requirements of the strategy being pursued, extensive value creation takes place across the value chain of the firm which cannot be imitated easily by the competitors even by making major investments.