1

INTERNAL ANALYSIS:

Organizational Appraisals
Dr.L.Prakash Sai
- Financial Analysis - Ratio Analysis, EVA, ABC
- Value Chain Analysis
- Business Process Analysis
- VRIO framework (Resource Based View)
- Organizational Capability Analysis
Organizational Appraisal:
Methods & Techniques Used
2
Financial Capability
(a) Sources of funds
(b) Usage of funds
(c) Management of funds
Marketing Capability
(a) Product related
(b) Price related
(c) Promotion related
(d) Integrative & Systematic
Information Management
(a) Acquisition & retention of info
(b) Processing & synthesis of info
(c) Retrieval& usage of info
(d) Transmission & dissemination
(e) Integrative, systemic & supportive
Operations Capability
(a) Production system
(b) Operation & Control system
(c) R&D system
Personnel Capability
(a) Personnel system
(b) Organization/employee characteristics
(c) Industrial Relations
General Management
(a) General Management Systems
(b) External Relations
(c) Organization climate
Organizational Capability Profile (OCP)
Capability Factor Values:
Weakness(-5), Normal (0), Strength (+5)
Strategic Advantage Profile (SAP)
Capability Factor Competitive Strength/Weakness
Finance - High cost of capital, reserves & surplus unsatisfactory
Marketing Fierce competition, company position secure at present
Operations ^ Plant & m/c; captive sources of parts & components
Personnel Management & staff on par with competition
General ^ Highly experienced top management - proactive stance
Management
[Example of a Bicycle Company]
3
Strategy: the plan devised to maintain and build competitive advantage
over the competition.
Structure: the way the organization is structured and who reports to
whom.
Systems: the daily activities and procedures that staff members engage in
to get the job done.
McKinseys 7S Framework
Style: the style of leadership adopted.
Staff: the employees and their general capabilities.
Skills: the actual skills and competencies of the
employees working for the company.
Shared Values: (called "superordinate goals) the
core values evidenced in the corporate culture
and the general work ethic.
McKinseys 7S Framework
Structure
Shared
Values
Strategy
Skills
System
Style
Staff
To diagnose causes of
organizational problems
& formulate programs
4
Generating Alternative Strategies
From SWOT
O SWOT analysis is a tool for helping assess the
current situation for the firm.
O However, we need to be able to combine the
information in the SWOT analysis in a meaningful
way to generate alternative strategies that we
might pursue.
O The TOWS matrix is a tool designed to match
external opportunities and threats with our
internal strengths and weaknesses
SWOT Analysis
Opportunities
1.
2.
3.

Strengths
1.
2.
3.

Threats
1.
2.
3.

Weaknesses
1.
2.
3.

Internal
Environment
External
Environment
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Strengths
Advantages of proposition?
Capabilities?
Competitive advantages?
USP's (unique selling points)?
Resources, Assets, People?
Experience, knowledge, data?
Financial reserves, likely returns?
Marketing reach/distribution/awareness?
Innovative aspects?
Location and geographical?
Price, value, quality?
Accreditations, qualifications, certifications?
Processes, systems, IT, communications?
Cultural, attitudinal, behavioural?
Management cover, succession?
Philosophy and values?
Disadvantages of proposition?
Gaps in capabilities?
Lack of competitive strength?
Reputation, presence and reach?
Financials?
Own known vulnerabilities?
Timescales, deadlines and pressures?
Cashflow, start-up cash-drain?
Continuity, supply chain robustness?
Effects on core activities, distraction?
Reliability of data, plan predictability?
Morale, commitment, leadership?
Accreditations, etc.?
Processes and systems, etc?
Management cover, succession?
Weaknesses
Opportunities
Market developments?
Competitors' vulnerabilities?
Industry or lifestyle trends?
Technology development & innovation?
Global influences?
New markets, vertical, horizontal?
Niche target markets?
Geographical, export, import?
New USP's?
Tactics: e.g., surprise, major contracts?
Business and product development?
Information and research?
Partnerships, agencies, distribution?
Volumes, production, economies?
Seasonal, weather, fashion influences?
Political effects?
Legislative effects?
Environmental effects?
IT developments?
Competitor intentions - various?
Market demand?
New technologies, services, ideas?
Vital contracts and partners?
Sustaining internal capabilities?
Obstacles faced?
Insurmountable weaknesses?
Loss of key staff?
Sustainable financial backing?
Economy - home, abroad?
Seasonality, weather effects?
Threats
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TOWS Matrix
OTechnique used in strategy formulation
for combining
External analysis
Opportunities
Threats
Internal analysis
Strengths
Weaknesses
TOWS Matrix
Threats:
1.
2.
3.
Opportunities:
1.
2.
3.
ST Strategies
Take advantage of
Strengths to
avoid Threats
SO Strategies
Use Strengths to
take advantage
of Opportunities
Strengths:
1.
2.
3.
WT Strategies
Defensive strategies
to minimize
weaknesses and
avoid threats
WO Strategies
Use Opportunities to
overcome
Weaknesses
Weaknesses:
1.
2.
3.
From
External Analysis
From Internal Analysis
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-
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SPACE Matrix
[Strategic Position & Action Evaluation Matrix]
Aggressive
Conservative
Defensive
Competitive
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)
Strategic Posture =
Dimension -
Aggressive Competitive Conservative Defensive
ENVIRONMENT
Stable Unstable Stable Unstable
INDUSTRY
Attractive Attractive Unattractive Unattractive
COMPETITIVENESS
Strong Strong Weak Weak
FINANCIAL
STRENGTH
High Weak High Weak
APPROPRIATE
STRATEGIES
Growth- possibly
by acquisition
Capitalize on
opportunities
Innovative to
sustain comp. adv.
Cost reduction;
Productivity
improvement;
Raising more
capital to follow
opportunities
and strengthen
competiveness
Possible merge
with a less
competitive but
cash-rich
organization.
Cost reduction
and
product/service
rationalization
Invest in search
for new
products,
services and
competitive
opportunities
Rationalization
Divestment as
appropriate
Strategic Postures
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Internal Strategic
Position
External Strategic
Position
Internal Strategic
Position
External Strategic
Position
Financial Strength
(FS)
Environmental
Stability (ES)
Competitive
Advantage (CA)
Industry Strength
(IS)
O Return on
investment
O Leverage
O Liquidity
O Working capital
O Cash flow
O Technological
changes
O Rate of inflation
O Demand
variability
O Price range of
competing
products
O Barriers to entry
O Competitive
pressure
O Price elasticity of
demand
O Ease of exit from
market
O Risk involved in
business
O Market share
O Product quality
O Product life cycle
O Customer loyalty
O Competitions
capacity
utilization
O Technological
know-how
O Control over
suppliers &
distributors
O Growth potential
O Profit potential
O Financial stability
O Technological
know-how
O Resource
utilization
O Ease of entry into
market
O Productivity,
capacity
utilization

SPACE Factors
Steps to Developing a SPACE Matrix
1. Select a set of variables to define FS, CA, ES, & IS
2. Assign a numerical value:
From +1 to +6 to each FS & IS dimension
From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS, CA, ES, & IS
4. Plot the average score on the appropriate axis
5. Add the two scores on the x-axis and plot the point. Add the two
scores on the y-axis and plot the point. Plot the intersection of the
new xy point
6. Draw a directional vector from the origin through the new
intersection point.
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SPACE Matrix: Example
SPACE Matrix: Example
11
Corporate Strategy
Business Portfolio Analysis
Market Growth rate of the industry:
Expressed in % increase in sales

Relative market share of a firm:
Market share in industry / market share of the largest other competitor

Assumptions:
+ Other things being equal - growing market is attractive
+ Market leader influences the average costs
BCG (Boston Consulting Group) Matrix
12
H
i
g
h

L
o
w

High
Low
Market
Growth Rate
Relative Market
Share
BCG (Boston Consulting Group) Matrix
[10%]
< 1 > 1
> 1 indicates market leader
BCG Matrix: Question Marks
(Problem Children: Low Market Share / High Market Growth)
O Investment:
heavy initial capacity expenditures and high R&D
costs
O Earnings: negative to low
O Cash-flow: negative (net cash user)
O Strategy Implications:
if possible to dominate segment, go after share.
If not, redefine the business or withdraw.
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BCG Matrix: Stars
(High Market Share / High Market Growth)
O Investment:
continue to invest for capacity expansion
O Earnings: low to high earnings
O Cash-flow: negative (net cash user)
O Strategy Implications:
continue to increase market share - even at the
expense of short-term earnings
Petrochemicals
Telecom
BCG Matrix: Cash Cows
(High Market Share / Low Market Growth)
O Investment
capacity maintenance
O Earnings: high
O Cash-flow: positive (net cash contributor)
O Strategy Implications:
maintain market share and cost leadership until
further investment becomes marginal
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BCG Matrix: Dogs
(Low Market Share / Low Market Growth)
O Investment:
gradually reduce capacity
O Earnings: high to low
O Cash-flow:
positive (net cash contributor) if deliberately
reducing capacity
O Strategy Implications:
plan an orderly withdrawal to maximize
cash flow
Indian Cotton Textiles
Anchoring
Systems
Powder Actuated
Tools
Cable Tray
Systems
Electric Power
Tools
Concrete Lifting
Systems
L
o
w

High
Low
Market
Growth Rate
Relative Market
Share
BCG Matrix: Example of a Fastener Supplier
Note that the Anchoring
System SBU is forecasted
to move to a new position
H
i
g
h


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GE Portfolio Matrix
- Originally developed by GEs planners drawing on McKinseys
approaches
- Market attractiveness is based on as many relevant factors as are
appropriate in a given context
- Business-position assessment also made on a many factors
SBU needs to be rated on each factor
Industry Attractiveness:
Market size & growth rate, industry profit margin, competitive intensity, pricing
practices, opportunities / threats
[Scale 1 5: Very unattractive to Very attractive]
Companys Business Strengths or Competitive Position:
Market share, technological position, profitability, size, strengths & weakness,
management calibre
[Scale 1-5: Very weak to Very strong]
Industry Attractiveness
High
High
Medium
Medium
Low
Low
Invest / Grow
Select / Earn
Harvest / Divest
Protect
Position
Invest to
Build
Build
selectively
Build
selectively
Selectively
manage for
earnings
Limited
expansion or
harvest
Protect &
refocus Divest
Manage for
earnings
GE
Portfolio
Matrix
16
Industry Attractiveness
High
High
Medium
Medium
Low
Low
GE
Portfolio
Matrix
Invest / Grow
Select / Earn
Harvest / Divest
Quadrant IV
1. Concentric diversification
2. Horizontal diversification
3. Conglomerate diversification
4. Joint ventures
Quadrant III
1. Retrenchment
2. Concentric diversification
3. Horizontal diversification
4. Conglomerate diversification
5. Liquidation

Quadrant I
1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Concentric diversification
Quadrant II
1. Market development
2. Market penetration
3. Product development
4. Horizontal integration
5. Divestiture
6. Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION
Grand Strategy Matrix
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Quadrant IV
1. Strong competitive position
2. Slow-growth industry
3. Diversification to more
promising growth areas
Quadrant III
1. Compete in slow-growth
industries
2. Weak competitive position
3. Drastic changes quickly
4. Cost & asset reduction
(retrenchment)
Quadrant I
1. Excellent strategic position
2. Concentration on current
markets/products
3. Take risks aggressively
when necessary
Quadrant II
1. Evaluate present approach
2. How to improve
competitiveness
3. Rapid market growth
requires intensive strategy
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION
Grand Strategy Matrix
Key Internal Factors
- Management
- Marketing
- Finance/Accounting
- Production/Operations
- Research and Development
- Computer Information
Systems
Strategy 3 Strategy 2 Strategy 1 Weight Key External Factors
- Economy
- Political/Legal/Governmental
- Social/Cultural/Demographic/
Environmental
- Technological
- Competitive
Strategic Alternatives
Quantitative Strategic Planning Matrix (QSPM)
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PIMS Program
(Profit Impact of Market Strategy)
PIMS holds 6 areas of info on each biz:
1. characteristics of the biz environment
2. competitive position of the business
3. structure of the production process
4. how the budget is allocated
5. strategic movement
6. operating results.
O The PIMS project was started by Sidney Schoeffler with GE in the 1960s
O Administered by the Strategic Planning Institute since 1975
Uses multi dimensional cross-
sectional regression studies of
profitability of over 3000 businesses.
Provides industry characteristics,
average profitability, and compares it
with performance of the company
concerned.
The key strategic factors
influencing business performance
Market Environment
Marketing/Sales
Customer Concentration
Customer Purchase Amount
Industry Concentration
Capital and Operating Structure
Investment / Sales
Investment / Value Added
Gross Book Value of P&E / Total Investment
Operating Effectiveness
Receivables / Investment
Capacity Utilization
Value Added / Sales
Stage of Lifecycle
New Products/Sales
R & D/Sales
Real Market Growth
Competitive Position
Market Share
Relative Market Share
Relative Quality
Relative Price
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PIMS: Strategic Benchmarks
The experience of PIMS businesses, situationally comparable
to a business under study, is used to establish strategy and
performance benchmarks.
www.pimsonline.com includes:
O Profitability (Return on Sales, and ROI)
O Change in market share
O Marketing budget (Sales force, Advertising, Promotion
and Other Marketing Expenses)
O Market attractiveness / competitive strength
PIMSONLINE.COM
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Corporate Governance Issues
1. No more than 2 directors current or former company executives
2. No directors do business with the company
3. Audit, compensation, and nominating committees made up
of outside directors
4. Each director attends at least 75% of all meetings
5. Audit committee meets at least four times a year
6. CEO is not also the Chairperson of the Board
7. Shareholders have considerable power and information to
choose & replace directors
8. Stock options are considered a corporate expense
9. No interlocking directorships
Business Weeks principles of good governance