Strategic analysis is the scope of a company over the long term and through which a company configures its resources against challenging environment. By conducting strategic analysis companies try to meet the needs of the market and fulfill their expectations for the long run. Johnson, G. (2005,p 61) In order to evaluate companies’ performances and position in the industry, environmental scanning is conducted as the tool for identifying and tracking the institutions and forces external to the company that can provide business opportunities or lead to threats. Accurately perceiving the external environment is difficult but this can be done systematically using a classification of the environment
McDonald, M, (2002) asserts that scanning the external and internal environment is a significant strategic planning process. The internal environmental factors are classified as(S) Strengths and Weaknesses (W) and the external factors are classified as Opportunity (O) and (T) Threat and the entire analysis is commonly called (SWOT)
The internal environment of an organization is concerned with identifying the resources internal to the business (Hambrick and Fredrickson, 2001). This involves an understanding of:
The major strengths and distinctive competencies of an organization;
Particularly significant organizational shortcomings; and,
The internal performance of an organization.
Porter’s Competitive Forces Model
Porter’s competitive forces model contends that much of the success or failure of a business depends on its ability to respond to its external environment. Figure 1 shows four external forces that every business must contend with at one time or another.
Figure 3-1: Porter’s Competitive Forces Model.
It’s important to understand from this model that a firm’s success is not predicated on how well it does internally. It must also pay attention to:
Traditional competitors: always nipping at your heals with new products and services trying to steal your customers.
New market entrants: not constrained by traditional ways of producing goods and services, they can easily jump into your markets and lure customers away with cheaper or better products and services.
Substitute products and services: customers may be willing to try substitute products and services if they decide your price is too high or the quality of your products and services is too low.
Customers: fickle to say the least, they are now armed with new information resources that make it easier for them to jump to your competitors, new market entrants, or substitute products.
Suppliers: the number of suppliers used may determine how easy or difficult your business will have in controlling the supply chain. Too few suppliers and you lose a lot of control.
Core competency is something that an organization can do well and provides consumer benefits. A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers. Capabilities are very significant to the organizations because they enable the firm performs its duties and tasks. It is the power that enables firms conduct their tasks in an effective and agile manner. However, research has shown that organization-specific factors generally influence profitability more than industry factors (Hambrick and Fredrickson, 2001). To reflect this, most researchers focus on internal analysis based on the resource-based view (RBV) of the firm, which can be used to assess the organization’s assets and capabilities (Collis and Montgomery, 1995). According to RBV, the basis for an organization’s competitive advantage lies mainly in the application of the bundle of valuable resources at its disposal (Barney, 1986). For an organization to have sustained competitive advantage, these resources must be heterogeneous in nature and not perfectly mobile, meaning that the organization needs valuable resources that are inimitable and non-substitutable (Barney, 1991).
These distinctive capabilities, such as patents, licenses, brands, or tacit knowledge, thus become the basis of organizations” competitive advantage and sustainable competitive advantage is achieved by constantly developing these resources and capabilities and creating new ones (Piercy, 2001). Using this framework it can be seen when businesses have several distinctive competencies, such as:
(1) Strong research and development capabilities,
(2) Managerial autonomy, unlike other state-owned enterprises or institution-run firms,
(3) Far-reaching distribution, sales, and support network, coupled with its highly efficient, loyal supply chain network,
(4) Established manufacturing base with efficient management of cost such as labour and raw materials, leading to higher margins,
(5) Valuable brand names, with quality products and services,
When these strategies are successful in leveraging the organization’s rare, valuable, inimitable and non-substitutable resources, the organization is likely to gain an advantage over its competitors and therefore earn superior profits (Thompson and Strickland, 2003).
Hamel and Prahalad (1993) also discuss distinctive competencies under the tile of core competencies, which they argue are the result of a specific unique set of skills or production techniques that deliver value to the customer. There are three tests of core competence: they have to provide potential access to a variety of markets, make an important contribution to the perceived customer benefits of the final product, and be inimitatable by competitors
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The Business Value Chain Model
Organizations seek to be better than one another. That’s the prime focus of most companies that are serious about winning the game in an industry. Areas of the organization most affected by leveraging technology are in producing the product, getting it to the stores, and making the customer happy. There are primary activities. Just as important are support activities: human resources, accounting, and finance. These functions support the primary functions of production, shipping, and sales and marketing. The value chain model shown below will help an organization focus on these activities and determine which are critical to its success.
Figure 3-2: The Value Chain Model.
By effectively using an information system in a strategic role at any, or preferably all, levels of the organization, a digital firm can provide more value in their products than the competition. If they can’t provide more value, then the strategic information system should help them provide the same value but at a lower price.
Benchmarking provides a way for businesses to determine how they stand up against their competitors within the same industry. For instance, if the industry standard in producing golf clubs is ten days, Ping can benchmark their production schedule of five days and determine that they are successful. They can also research the best practices of other golf club manufacturers and decide if they should fine tune their business processes to wring even more resources from the production process.
Information to formulate benchmarks and best practices can come from internal sources, other companies within the same industry, external industries, university research units, or the government.
According to Porter (1985), strategy is the creation of a unique and valuable position, where an organization can differentiate itself for the targeted customer and add value by an asset of activities different than those of rivals. He argues that the essence of strategy is choosing to perform activities differently or performing different activities from rivals (Porter, 1996). There are two basic types of competitive advantage: lower cost and differentiation. Another important concern is competitive scope, which is important in that organizations can sometimes gain competitive advantage from breadth by competing either globally or from exploiting interrelationships by competing in related fields. For example, Lenovo ( third in PC Industry) re-organized and integrated its domestic and overseas operations to take advantage of the complementary capabilities across borders in the late 1980s as the firm expanded internationally. This new structure allowed the management to allocate resources and co-ordinate various activities much more effectively with a global perspective (Biediger et al., 2005). Combining the type of advantage and the scope advantage, the notion of generic strategies is generated or different approaches to superior performance in an industry. Competitive advantage can thus be achieved through differentiation leadership, cost leadership, or focus leadership.
“The internal analysis concerns the internal environment of the business like weaknesses, strengths, strategies, planning while external analysis focuses on the opportunities and threats of the business and its competitors, and outer performances”. Internal scanning is about understanding organizational analysis and core competitive competencies, competitive advantages, value chain analysis and strategic issues. By analyzing internal factors of businesses, business planners can focus on the reasons behind businesses development and overcome business problems. An overall glance at the internal factors that formulate strategic businesses, managers can understand the consequences of businesses initiatives and recruit the best and most powerful plans to implement successful strategies and put them in place to achieve remarkable success.
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