CHAPTER 4: THE INTERNAL ENVIRONMENT

MGMT 488 STRATEGY AND POLICY

OVERVIEW
The internal environment is the final step in gathering information for the Environmental Analysis. It consists of identifying resources and capabilities (in the form of the value chain), finding competencies, and determining what competitive advantages (hopefully sustainable) the organization has. The internal environmental assessment, along with the external evaluation (macro and micro environment) already completed will provide all the information needed for the final SWOT Analysis.

RESOURCES, CAPABILITIES, AND COMPETENCIES

Resources, capabilities, and competencies should be evaluated with respect to goals, strategy, and the vision statement of the organization. Not every RC&C needs to be included in the evaluation only those that will eventually lead to a competitive advantage. For example, you have a top-notch janitorial staff, but unless you have a cleaning service, it really does not help your competitive position. The following lists will help identify what types of RC&C items that need to be considered. A FEW examples are listed this is NOT an exhaustive list! Write down all the important RC&C items, and then narrow the list to the ones that may lead to a competitive advantage. If anything is missing from the organizations list be sure to note that as well! DO NOT CLASSIFY BY THIS LIST It is ONLY to get you jump started!

RESOURCES
1. Physical a. Plants b. Equipment c. Natural resources 2. Human a. Managerial Know-how b. Talented key employees c. Friendly staff 3. Intellectual a. Specialized knowledge b. Collective learning c. Cutting edge technology knowledge

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4. Intangible a. Patents and copyrights b. Brand name c. Customer loyalty 5. Skills a. Proven ability to introduce new products b. Experts at providing consistently good customer service c. Able to create lean value chain 6. Organizational a. Proprietary technology b. Cash c. Strong network of suppliers d. Well organized, effective, efficient management structure 7. Alliances, partnerships, cooperative or joint ventures

CAPABILITIES
Capabilities are generally assessed through the value chain and. Again, this is NOT an exhaustive list! Only include the items that actually add value not just are done because they need to be done (e.g., Accounts Payable). Remember that value may be in the form of cost efficiencies. If anything is missing from the organizations list be sure to note that as well! DO NOT CLASSIFY BY THESE HEADINGS! They are just to get you started!

INBOUND LOGISTICS
Inbound logistics covers everything that has to do with the obtaining, purchasing, storing, distributing (internally), and managing raw inputs, components, materials, and services. Some examples would be JIT systems, inspection processes, advanced receiving systems, EDI (electronic data interchange) systems, inventory control, and SCM (supply chain management).

OPERATIONS
Operations consist of all the processes, assets, and costs of turning raw materials into a final product or service. Facilities (and maintenance), workers, designers, quality assurance, environmental protection, equipment, and assembly processes would be included in the evaluation of Operations.

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OUTBOUND LOGISTICS
Outbound logistics encompasses all of the resources, capabilities, and processes required to distribute the final product or service. Examples of outbound logistic items are warehousing, packaging, shipping, delivery vehicles (and maintenance), order picking, finished goods inventory control, distributor and customer supply chain management (CRM customer relationship management).

SALES AND MARKETING

Sales and Marketing is considered everything associated with marketing the product or service. The sales force, personal selling, advertising, promotion, market research, web site, and dealer or distributor support are a few examples of Sales and Marketing.

SERVICE
Service is associated with providing assistance to the customer. Some Service examples are installation, warranty work, maintenance, complaints, questions, repair, and technical assistance.

COMPETENCIES
Competencies are accomplished by evaluating the organizations resources and capabilities and benchmarking. Benchmarking may be done on several levels: industry, primary competition, and prior performance. Although the book focuses primarily on cost, benchmarking may also be accessed through efficiency and effectiveness. Some examples of efficiency benchmarking might be number of defective widgets produced; hours of downtime for machine X; or number of days from sale to delivery. Efficiency types of measures should be used in conjunction with standard financial measures of benchmarking such as days in inventory or asset turnover ratios. Finally, compare the organizations RC&Cs (especially the competencies) to the competition or industry. Make a note of those competencies in which the organization has an advantage over the industry or competition these are most likely the core competencies and competitive advantage. As a part of benchmarking capabilities against the competition, create a chart of weighted key success factors (KSF). KSFs are those competencies that are 1) needed to survive in the industry and 2) needed to create a profitable position within the industry. Determine what is the KEY factors (competencies) are and list them in the chart. A weighted chart is used, as not all competencies are as important as others are. (An example for the pet store is given below in the presentation section.)

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COMPETITIVE AND SUSTAINABLE COMPETITIVE ADVANTAGE(S)

The benchmarking chart will provide information about what competitive advantages the organization has the items that rank highest against the competition or industry. However, the ultimate goal is to create a SUSTAINABLE competitive advantage. In order to assess whether a competitive advantage is sustainable or not, the inputs (resources and capabilities) must be examined. In order for a resource and/or capability to provide the basis for a sustainable competitive advantage, four questions must be answered in the positive: 1. Is the resource or capability valuable? Does the resource or capability add value to the consumer? Does it provide a core competence? Does it provide or support a competitive advantage? 2. Is the resource or capability rare? Do rival firms have the resource or capability? If not, would it be easy for rivals to obtain? 3. Is the resource or capability hard to imitate? Is the resource or capability unique? Is the resource or capability protected by law (copyright or patent)? Was the resource or capability built over a relatively long period? Does the resource or capability have extreme capital requirements? 4. Can the resource or capability be trumped by a substitute resource or capability? Is it possible to use another resource or capability to take the place of the one being used by the firm? For example, can technology be replaced by outsourcing to gain a cost advantage? Can outstanding engineering be replaced by high quality design? If the answer to ALL FOUR questions is yes then a sustainable competitive advantage is present.

SOME SPECIFICS
Strategy o Core competencies o Competitive advantage(s) o RC&C matched to the KSF Financial position o Cost advantages o Unit costs o Balance sheet o Debt Product or service differentiation

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o Brand and/or reputation o Product and/or service quality Market and Marketing issues o Advertising and promotion o Product line breadth vis--vis market needs o R&D vis--vis market needs o Market share o Customer service management capabilities o Geographic coverage o Attractiveness of customer base o E-commerce Learning or experience curve o Technology and/or technology skills and/or intellectual property o Intellectual capital Internal operating issues o Economies of scale o Management depth o Plant capacity o Product and/or service innovation capabilities o Supply chain management capabilities Alliances and/or joint ventures

PRESENTATION
The analysis of the internal environment is presented throughout the business plan. The KSF analysis is presented in the Environmental Analysis section, as are the Competitive and Sustainable Competitive Advantages. Benchmarking is discussed in the operations plan; a competitor analysis (KSF) that focuses on marketing goes in the Marketing Plan section, while a KFS focusing on operations will be presented in the Operations portion of the plan. Additional analysis of the internal environment is put in an appendix. For the case, I would like to see some benchmarking information and a KSF chart as applied specifically to the applicable question(s).

RESOURCES AND CAPABILITIES RECAP

This is an example of the recourses and capabilities information that should be presented in the internal analysis. ABC Pet Company has the following resources and capabilities that may lead to a competitive advantage:

MGMT 488 Resource/Capability Owner's knowledge Financial resources Location Marketing skills Hiring skills Customer Service Rare Yes No Yes No Somewhat Yes

Chapter 4 - Internal Environment Valuable Yes Somewhat Yes Yes Yes Yes Non-substitutable Non-imitable Exploitable Yes Yes No Somewhat Yes No Yes Yes Somewhat Yes Yes No Yes Somewhat Somewhat Somewhat Yes Yes

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On the other hand, ABC Pet Company needs to develop resources and capabilities in the following areas: Management skills (particularly in the area of delegation) Technology Ability to train employees

KEY SUCCESS FACTORS

Here is an example of how the KSF analysis should be presented for a mythical pet store that sells pets and supplies in rural Montana. (The same format may be followed for the competitor analysis in the Marketing Plan section.)
As can be seen in Table A below, ABC Pet Stores strength scores are slightly above average overall when compared to the industry. Additionally, ABC has very strong scores against its local competitor, Mom & Pop Shop, but does not compare favorably against the leading industry competitor, Pets R Us.
Scale: 1 = Very Weak to 10 = Very Strong ABC Pet Store Key Success Factor or Strength Quality of products Reputation Financial resources Knowledgeable sales staff Location Product selection general Product selection designer Quality of live pets Weight 5% 10% 10% 5% 10% 10% 20% 30% 100% Rating 6 8 4 7 2 5 5 8 Weighted Score 0.30 0.80 0.40 0.35 0.20 0.50 1.00 2.40 5.95 Industry Rating 7 5 5 6 6 8 5 6 Weighted Score 0.35 0.50 0.50 0.30 0.60 0.80 1.00 1.80 5.85 Mom & Pop Shop Rating 6 4 5 4 8 5 5 4 Weighted Score 0.30 0.40 0.50 0.20 0.80 0.50 1.00 1.20 4.90 Pets R Us Rating 8 8 10 6 9 8 8 7 Weighted Score 0.40 0.80 1.00 0.30 0.90 0.80 1.60 2.10 7.90

Table A: Key Success Factor Strength Assessment

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At this time, the comparison of ABC to Pets R Us is relatively unimportant as Pets R Us only locates in cities with populations in excess of 100,000 and ABC is located in a town of 35,000 people. However, it is always important to benchmark against the industry leader, as some best practices used by that leader may be adaptable to small organizations such as ABC. The major competitive advantages that ABC has compared to the industry and it primary rival (Mom & Pop Shop) are its reputation and the quality of the live pets it carries. As ABC Pet Store has several exclusive contracts with 5-star AKC breeders, highly reputable CFA breeders, and a USDA approved bird breeder, a sustainable competitive advantage in the area of quality of live pets has been established.

BENCHMARKING
Here is an example of how the operations portion benchmarking analysis should be presented for a mythical pet store that sells pets and supplies in rural Montana.
As can be seen in the table below, ABC Pet Store is performing well in the financial benchmarking analysis. ABC is near industry and industry leader (Pets R Us) levels in most areas and well above its nearest competitor (Mom & Pop Shop) in all financial comparisons. Blah blah blah.

ABC Pet Store Return on Sales Return on Assets Gross Profit Margin Net Profit Margin Inventory Turnover Current Ratio Quick Ratio 7.04% 19.26% 33.08% 5.21% 6.53 2.05 0.92

Industry 5.98% 13.05% 34.95% 5.73% 7.90 1.55 0.67

Mom & Pop Shop 5.21% 12.52% 30.20% 4.76% 4.91 1.23 0.08

Pets R Us 5.75% 13.93% 38.03% 5.98% 5.02 1.72 0.84

Table X: Comparison of Selected Financial Ratios

Other benchmarking issues have also been examined. As can be seen in Table Y, below, ABC Pet Store is comparable in most areas to the industry-wide figures. Blah blah blah.

ABC Pet Store Average Customer Transaction Dog Owner Average Transaction Cat Owners Average Transaction Percent of Sales from Dog Food Average Markup Average Markup Live Animals Full time employees
(not including manager/owner)

Industry $38.34 $41.07 $23.75 18% 27% 112% 4.60 4.80 $47,593.26 $11.24 $8.64

$41.89 $44.05 $21.08 20% 30% 120% 3.00 3.00 $41,256.14 $10.90 $8.00

Part time employees Owner/Manager Salary Full time employee per hour Part time employee per hour

Table Y: Comparison of Selected Key Factors

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Finally, 32% of pet stores do not offer any services beyond retail sales. The services provided by ABC pets are provided by a large number of competitors in the industry: Grooming (30%) Obedience training (19%) Self-service dog wash (12%)

MARKETING
Marketing should be done as a KSF in weighted form (as the one in Internal Environment) and as a comparison of key numbers (example, Table Y). The discussion will be in the same format. The Marketing Plan also requires a conceptual map, as shown below. (You may also do one of these based on the strategy the company is following, but it would go in the appendices, so I would not bother.) The X- and Y- axes are chosen from the most important KSF or the organizations top core competencies; the size of the balls can be determined by market share, sales, or whatever other information you think is pertinent. Notice the target firm is a different color, which draws the readers attention.

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You may also create a KSF chart specific to the marketing area and present it in the appendix for the marketing plan.