Management Strategy: Internal Analysis

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Management strategy – internal analysis
Yossi Spiegel Recanati Graduate School of Business Administration

Purpose of the class
Cover step 2b in the formulation of strategy - internal analysis Determine what the organization can do: Structure Performance Abilities Incentives

Determines the boundaries of the firm:
Horizontal Vertical

Determine whether goals and strategies are feasible If not, what does it take to make them feasible? – organizations are not human beings! Analyze the firm’s organizational structure and performance Consider the firm’s ability and resources (what does it mean firm’s “ability?”)

Internal analysis

2

Structure, performance, abilities, and incentives
Determine the Strengths and Weaknesses in SWOT
Structure:
What’s the current structure? How does it match up with the firm’s goals? What’s the optimal structure?

Performance:
How does the firm perform relative to benchmarks? How well can the firm do? How should it be evaluated?

Abilities:
What are the firm’s assets? What are its unique skills? How does the firm match up with rivals? Which new abilities should the firm develop?

Incentives:
What are the firm’s incentive mechanisms? How should the incentive mechanisms be adjusted? Internal analysis 3

The firm’s boundaries
Horizontal boundaries:
Products Types of customers served by the firm Geographic basis

Vertical boundaries (the set of functional activities the firm performs): Purchasing and sales Manufacturing Assembly operations Marketing Aftermarket services Internal analysis 4

Value chain

Value chain
Definition: the sequence of functional tasks performed by the organization Viewing the production process as a value chain is helpful for analyzing value creation and for determining the vertical boundaries of the organization The organization should focus on value creating activities and buy the rest from outsiders

Internal analysis

6

The Indian machine tools industry
The machine tools industry produces machines to cut and shape metals (300K-400k USD per machine) Cost breakdown (according to John Sutton’s study): Wages – 15% Purchased components – 15% Energy cost – 15% Computerized Lathes – 55%

What’s the key to success in that industry? Productivity in Taiwan is 6 times that in India – is this a problem for Indian firms? Internal analysis 7

Primary and support activities
Primary functions (according to Porter) in the value chain:
Inbound logistics Outbound logistics Marketing Sales

Operations

Service

Support activities:
Procurement Technology development HRM Firm infrastructure
Internal analysis 8

Economies of scale, scope, span, and density
Economies of scale, scope, and span exist if

C(X+Y) < C(X) + C(Y)
Scale: X and Y are quantities of the same product Scope: X and Y are two different products Span: X and Y are two different activities along the value chain

Economies of density:
it’s cheaper to serve a densely populated area than sparsely populated area

Economies justify integration and lead to bigger and fewer firms: Scale and density: horizontal integration Scope: multiproduct firms Span: vertical integration

Internal analysis

9

Sources of economies of scale
Indivisibilities and the spreading of fixed costs across many units of output: A refrigerator truck shipping food products A FedEx airplane

Indivisibilities occur when production is more capital intensive Bottling facility or a packing house

Increased productivity due to specialization
Journalists, lawyers, accountants, consultants, researchers, etc who specialize in one area

But, specialization also:
Makes work less challenging and boring Discourages initiative (i.e., problem solving) Raises the cost of communication and coordination

Managing inventories and spreading it across different stores Walgreens

Internal analysis

10

Sources of economies of scale
Engineering principles
The cube-square rule (e.g.,...
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