Internal Analysis: Your Competitive Advantage
Internal analysis is the process of identifying and evaluating an organization’s specific characteristics, including its:
- Core competencies
An internal analysis is comprised of looking at the following elements:
- Organization’s current vision
- Strategic objectives
Resources are the assets that an organization has for carrying out whatever work activities and processes relative to its business definition, business mission, and goals and objectives.
Commonly, these resources are as follows:
- Financial resources
- Physical assets
- Human resources
- Intangible resources
- Structural-cultural resources
Organizational resources must be processed or used in some way to get value out of them. The various resources are the inputs for organizational capabilities. Organizational capabilities are the complex and coordinated network of organizational routines and processes that determine how efficiently and effectively the organization transforms its inputs (resources) into outputs (products and/or services).
Sustainable competitive advantage is the prolonged maintenance of competitive advantage. Capabilities that lead to a competitive advantage today may not continue to do so as market conditions and competitors change. Dynamic (flexible) capabilities are an organization’s ability to build, integrate, and reconfigure capabilities to address rapidly environmental changes (shifts).
Distinctive organizational capabilities are the extraordinary and unique capabilities that distinguish the organization from its competitors. They allow the organization to develop a sustainable competitive advantage to outperform its competition.
Three characteristics that make a capability distinctive are as follows:
- It contributes to superior customer value and offers real (measurable) benefits to customers.
- It is difficult for competitors to imitate or duplicate.
- It allows the organization to use the capability in a variety of ways.
Core competencies are the organization’s major value-creating skills and capabilities that are shared across multiple product lines or multiple businesses. This internal sharing process is what distinguishes core competencies from distinctive capabilities.
The relationship between organizational capabilities, distinctive organizational capabilities, and core competencies are as follows:
- Organizational capabilities are the fundamental building blocks for developing core competencies. Every organization has organizational processes and routines to get work done.
- The major value-creating skills and capabilities are created from the organization’s many capabilities.
- If these core competencies are established, they can improve and enhance organizational capabilities while contributing to the development of certain distinctive organizational capabilities.
Competitive advantage is what sets an organization apart. Without a sustainable competitive advantage, the organization’s long-run success and survival are uncertain.
The aggregate reason for doing an internal analysis is to assess what the organization has or does not have and what it can and cannot do—in other words, its strengths and its weaknesses.
Strengths are resources that the organization possesses and capabilities that the organization has developed, both of which can be exploited and developed into sustainable competitive advantage. Not all strengths have the potential to be a sustainable competitive advantage.
Weaknesses are resources and capabilities that are lacking or deficient and that prevent the organization from developing a sustainable competitive advantage. They need to be corrected if they are in important areas that are preventing the organization from developing sustainable competitive advantage.
Value Chain Analysis
Customers demand some type of value from the goods and services they purchase.
Customer value emerges from the following three broad categories:
- The product is unique and different.
- The product is low-priced.
- The providing organization has the ability to quickly respond to specific or distinctive customer needs.
Value chain analysis is a systematic way of examining all of the organization’s functional activities and how well they create customer value. It assesses the organization’s ability to create customer value through its activities. In other words, what are the organization’s strengths and weaknesses in these areas?
There are nine areas of value assessment, made up of five primary activities and four support activities. Primary activities are those that actually create customer value.
These activities include:
- Inbound logistics
- Outbound logistics
- Marketing and sales
- Customer service
Support activities provide support for the primary activities as well as for each other.
These activities include:
- Technological development
- Human resource management
- Firm infrastructure
If an organization can perform any of these activities more effectively or efficiently than its competitors, it should be able to achieve a competitive advantage. The advantage of the value chain analysis technique is that it emphasizes the importance of customer value and how well an organization performs the primary and support activities to create customer value. However, this technique may be somewhat confusing and complex to use in assessing organizational strengths and weaknesses. Organizational work activities do not always align efficiently into the primary and support activities framework.
The internal audit approach starts with the premise that every organization has certain functions that it must perform. An internal audit is a thorough assessment of an organization’s various internal functional areas. Strategic decision makers use the internal audit to assess the organization’s resources and capabilities from the perspective of its different functions.
The following are six primary functional areas:
- Research and development
- Financial and accounting
- Management, including human resources management (HRM)
- Information systems
Depending on products, markets, and industries, individual organizational structures may vary. Therefore, they may emphasize different sets of functional areas.
The internal environmental analysis process proposes assessing an organization’s internal activities by doing the following:
- Surveying strengths and weaknesses.
- Categorizing these strengths and weaknesses in terms of resources and capabilities.
- Investigating the potential of these strengths to lead to competitive advantage.
- Evaluating the ability of these competitively relevant resources and capabilities to serve as the basis for an appropriate competitive strategy.
The main aspect is its emphasis on linking the identification of organizational strengths and weaknesses with the development of an appropriate competitive advantage.
The capabilities assessment profile resembles the internal environmental analysis process. The similarity is that it focuses on deeper evaluation of an organization’s strengths and weaknesses. The difference is that it focuses only on an organization’s capabilities.
The analysis of capabilities is complex because it is not as easily identifiable as organizational functions or even the value-creating primary and support activities. Additionally, the complex nature of capabilities makes it hard for competitors to imitate. This is a basis for sustained competitive advantage.
Assessment consists of the following two phases:
- Phase I: Identify distinctive capabilities—an internal analysis activity.
- Phase II: Develop and leverage these distinctive capabilities—a strategy development activity
The steps involved in phase I, identifying distinctive organizational capabilities, include the following:
- Prepare a current product-market profile that emphasizes organization–customer interactions, states what the organization is selling, whom it is selling to, and whether or not it is providing superior customer value and desirable benefits.
- Identify sources of competitive advantage and disadvantage in the main product-market segments. This step determines why customers choose the organization’s products rather than those of competitors, and involves information on cost; product; and service attributes, such as when customers purchase and what they are actually purchasing.
- Describe all of the organizational capabilities and competencies. In this step, the organization examines the resources, skills, and abilities of the various divisions and determines which of them lead to a competitive advantage.
- Sort the core capabilities and competencies according to strategic importance. In this stage, you must judge the strategic importance according to the capability’s availability, its tangible benefits, and its level of difficulty to imitate.
- Identify and agree on the key capabilities and competencies. Key capabilities and competencies provide the basis for resource allocation. There are several criteria that can be used to determine whether resources and capabilities are strengths or weaknesses.
Past performance trends include any organizational performance measures, such as financial ratios, operations efficiency statistics, employee productivity statistics, or data on adherence to quality control standards. Any internal organizational performance area that is measurable could be assessed by looking at the trends.
Comparing specific performance goals or targets with actual performance provides clues to how well the various internal areas are performing. Comparing your organization’s performance with the performance of competitors helps to determine whether these strengths and weaknesses can be used to influence the development of potential sustainable competitive advantage.
Qualitative opinions or assessments of organizational members can be useful in determining areas of strength or weakness. For example, if outside consultants are working with any of the organization’s divisions or units, what opinions do they have? What do they see as strengths or weaknesses?
Why should you do an internal analysis?
An internal analysis is a process of identifying and evaluating an organization’s specific characteristics, including its resources, capabilities, and core competencies.
The following are two basic reasons why conducting an internal analysis is essential:
- It is the only way to identify an organization’s strengths and weaknesses.
- It is needed for making good strategic decisions.
The outcome of the process yields valuable information about an organization’s specific assets, skills, work routines, and processes. Information that is developed from an internal analysis, coupled with the information that is gathered from the external analysis, provides the basis for developing strategic alternatives.