Internal Report

Introduction

This week, we’ll be looking at a company’s internal resources to see how well its current strategy is working. When deciding whether a strategy is working, we look at whether the company is recording gains in financial strength and profitability, and whether the company’s competitive strength and market standing are improving. Indicators of how well a company’s strategy is working include

· Trends in the company’s sales and earnings growth and stock price

· The company’s overall financial strength

· The company’s customer retention rate and the rate at which new customers are acquired

· Changes in the company’s image and reputation with customers

· Improvement in internal processes

Resource and Capability Analysis

The company’s business model and strategy must match its resources and capabilities. Therefore, any evaluation of the company’s internal factors must include resource and capability analysis. Such an analysis involves first identifying the available resources and capabilities (its core competencies) and then deciding whether they support a competitive advantage over rival firms (“Developing strategy through internal analysis,” 2010). A resource is “An economic or productive factor required to accomplish an activity, or as means to undertake an enterprise and achieve desired outcome” (“Resource,” 2016). A capability is the capacity of a firm to competently perform some internal activity. “A firm's resources and capabilities include all of the financial, physical, human, and organizational assets used by a firm to develop, manufacture, and deliver products or services to its customers” (Barney, 1995, p. 50). 

Tangible resources are assets that can be seen and quantified. Production equipment, manufacturing plants, and formal reporting structures are examples of tangible resources. Intangible resources typically include assets that are rooted deeply in the firm’s history and have accumulated over time. Because they are embedded in unique patterns of routines, intangible resources are relatively difficult for competitors to analyze and imitate. Knowledge, trust between managers and employees, ideas, the capacity for innovation, managerial capabilities, organizational routines (the unique ways people work together), scientific capabilities, and the firm’s reputation for its goods or services and how it interacts with people (such as employees, customers, and suppliers) are all examples of intangible resources. (“Developing strategy through internal analysis,” 2010)

Resource-Based View

The resource-based view (RBV) is a model that sees resources as key to superior firm performance. The RBV “of strategy holds company assets as the primary input for overall strategic planning, emphasizing the way in which competitive advantage can be derived via rare resource combinations” (“The resource-based view,” 2016). If a resource exhibits VRIO (valuable, rare, imitatable, organization) attributes, the resource enables the firm to gain and sustain competitive advantage. Use the VRIO test(Barney, 1995; Jurevicius, 2013) by asking these four questions:

1. “Do a firm's resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats?” (Barney, 1995, p. 50).

2. “How many competing firms already possess these valuable resources and capabilities?” (Barney, 1995, p. 52), Or, how rare are they?

3. “Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?” (Barney, 1995, p. 53). Or, how easily is the resource imitated?

4. “Is a firm organized to exploit the full competitive potential of its resources and capabilities?” (Barney, 1995, p. 56).

SWOT ANALYSIS

One of the most effective way to assess a firm’s capabilities is to do a SWOT analysis—an analysis of a firm’s strengths, weaknesses, opportunities, and threats. “Executives using SWOT analysis compare these internal and external factors to generate ideas about how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect itself against threats” (“SWOT analysis,” 2012). For this week, we’ll be concentrating on the internal aspects of the SWOT: the strengths and weaknesses. Internal factors include your resources and experiences (“SWOT analysis: strengths, weaknesses, opportunities, and threats,” 2016). Strengths are positive factors over which the company has control; weaknesses are negative factors over which the company has control. This table can help you figure out how to analyze your company:

VALUE CHAIN ANALYSIS

Value chain analysis is another strategy tool used to analyze internal firm activities. The value chain is “the activities within and around a firm that together create a product or service” (Seidl, 2008, p. 1600). Michael Porter distinguishes between primary and support activities. “While primary activities contribute directly to the creation of the final product or service, the support activities merely increase the effectiveness or efficiency of those primary activities” (Seidl, 2008, p. 1601).

There are two ways in which to conduct a value chain analysis, depending on what type of competitive advantage a company wants to create (cost or differentiation advantage).

“Value chain analysis is not easy to apply. The framework has extensive data requirements, many of which relate to parts of the firm in which data collection is likely to be minimal (e.g. outbound logistics” (Hergert & Morris, 1989, pp. 178-179). This is where accounting data can help. “While organizations capture and record accounting data once, it subsequently serves two entirely different purposes. One is to satisfy the requirements of legal entity accounting, the other is to provide management with the relevant data for decision making and control” (Hergert & Morris, 1989, p. 177). “By controlling and reconfiguring the value chain, successful firms gain sustainable competitive advantage for the future” (Hergert & Morris, 1989, p. 184).

Performing a complete analysis of the internal factors of a company is essential to the strategic management process.