Internal Analysis
STM 6, August 13, 2025
Dr. C. Shambu Prasad
Contents
• Cola wars continued
• Understanding internal environment
• Components of IE
• Value Chain
• VROI Framework
Cola Wars
1. Understanding the Firm’s Internal Environment
• Firms (organizations) achieve strategic competitiveness by acquiring,
bundling, and leveraging their resources for taking advantage of
opportunities in the external environment creating value for customers.
• Competitors will eventually learn how to duplicate the benefits of any
firm’s value-creating strategy.
• Thus, all competitive advantages have a limited life.
• SCA function of three factors:
• The rate of core competence obsolescence because of environmental changes
• The availability of substitutes for the core competence
• The imitability of the core competence
Understanding the Firm’s Internal Environment
• For all firms, the challenge is to effectively manage current core competencies while
simultaneously developing new ones.
• By analyzing its internal organization, a firm determines what it can do.
• Matching what a firm can do with what it might do yields insights for the firm
to select its strategies.
• Can do—a function of its resources, capabilities, and core competencies in the
internal organization
• Might do—a function of opportunities and threats in the external environment
2. Competing on Resources
• Armies of Strategic planning (too static, too slow) disappeared, strategy under fire
• Large business organisations struggling to justify existence
strategy as the match between
what a company can do
(organizational strengths and
weaknesses) within the universe
of what it might do
(environmental opportunities and
threats). Andrews (1971)
1980 the structure of an industry determines the state of
competition
Why Understand the Internal Organization?
• In global economy, some resources traditionally critical to firms’ efforts
(to produce, sell & distribute goods/services) less likely to be source of
CA.
• Firms use their resources to form core competencies through which they
successfully implement an international strategy.
• Firms analyzing internal organization should use a global mind-set.
• The ability to analyze, understand, and manage an internal organization in
ways not dependent on the assumptions of a single country, culture, or
context.
3. Components of an Internal Analysis
The foundations of competitive advantage are:
Resources are bundled to create organizational capabilities.
Capabilities are the source of a firm’s core competencies, which are the basis of establishing competitive advantages.
Internal Analysis
• Resource-Based View
• R&C primary drivers of competitive advantage;
• Value Chain Analysis
• How a business creates customer value through different activities within a
business to drive value (process viewpoint – identify activities, allocate costs
Activity Based Costing)
• VRIO Framework
• SWOT – “Environmental analysis is only half the story” Barney
Internal Analysis of the Firm
• All organizations have strengths and weaknesses in functional areas. No enterprise equally strong or weak in
all areas.
• Performing an internal audit thus is an excellent vehicle or forum for improving the process of
communication in the organization.
Smart Two 1997 Dialmer AG
1 million before it entered US
Sold 24,600 in Year 1. Only 20,000 in next three
correctly identified trends in external market, (increase
in urbanization and traffic congestion, higher gas prices,
consumers desire for smaller ecological impact).
Quite pricey for its size (about $13,000), could not
create sustainable value….major problems in value
chain – R&D, sales etc.
Looking Inside for Competitive Advantage –
Barney (1995)
• What makes Wal Mart have sustained profit over industry average (ROS
20% higher) or South West or Nucor do well?
• Do a firm’s resources and capabilities add value by enabling it to exploit
opportunities and threats?
• Answering question of value enables linking external and internal analysis
• How many firms already possess these valuable R&C? Is it rare?
• Walmart’s point-of-purchase data control of inventory unlike K Mart
• Imitability and role of history and betting on ‘small decisions’
• Caterpillar, war and worldwide supplier, post war can supply any part in 2 days
(Komatsu chose manufacturing where breakage is less)
• Tata Steel vs SAIL….
• small unnoticed and difficult to imitate….quality, capabilities
Resource Based View (RBV)
"structure is not organization“, 8 characteristics of excellent
companies
• capabilities and resources as the heart of a company’s competitive
position, subject to the interplay of three fundamental market
forces:
• demand (does it meet customers’ needs, and is it competitively
superior?),
• scarcity (is it imitable or substitutable, and is it durable?), and
• appropriability (who owns the profits?).
(In)Tangible Resources
• RBV sees companies as very different collections of
physical and intangible assets and capabilities.
• No two companies alike –experiences, assets and skills,
or built the same organizational cultures. A&C how
efficiently and effectively a company performs its
functional activities.
• Tangible and intangible resources (Disney’s or
Mickey Mouse brand, Amul girl; Sharp’s knowledge
of LCD)
• Organizational capability embedded in a company’s
routines, processes, and culture.
• Firm competencies or skills the firm employs to transfer
inputs to outputs.
• Capacity to combine tangible and intangible resources,
using organizational processes to attain desired end.
Tangible Resources
Financial • The firm’s capacity to borrow
Resources • The firm’s ability to generate funds through internal operations
Organizational • Formal reporting structures
Resources
Physical • The sophistication of a firm’s plant and equipment and the
Resources attractiveness of its location
• Distribution facilities
• Product inventory
Technological • Availability of technology-related resources such as copyrights,
Resources patents, trademarks, and trade secrets
Intangible Resources
• Intangible resources assets rooted deeply in the firm’s history, accumulate over
time, relatively difficult for competitors to analyze and imitate.
Human • Knowledge
Resources • Trust
• Skills
• Abilities to collaborate with others
Innovation • Ideas
Resources • Scientific capabilities
• Capacity to innovate
Reputational • Brand name
Resources • Perceptions of product quality, durability, and reliability
• Positive reputation with stakeholders such as suppliers and
customers
4. The Value Chain
• A strategic analysis of an
organization that uses value-
creating activities.
• Value amount buyers willing to pay for
what a firm provides them (measured by
total revenue), reflection of the price a
firm’s product commands and the
quantity it can sell.
• A firm is profitable when the value it
receives exceeds the total costs involved
in creating its product or service.
The Firm as a bundle of resources (Penrose, 1959)
Just-in-time (JIT), designed to achieve efficient inbound logistics. Toyota in just 5 days
Amazon’s logistics
Primary activities
Product’s design, creation, delivery, marketing, support, and after-sales service.
• Research and development
• Design of products and production processes.
• Superior product design increases a product’s functionality and add value.
• Production
• Creation process of a good or service.
• Helps lower cost structure and leads to differentiation.
• Marketing and sales
• Brand positioning and advertising - increase customers’ perceived value of a product.
• Help create value by discovering customers’ needs.
• Customer service
• Provide after-sales service and support.
• Create superior utility by solving customer problems and supporting customers after a
purchase.
Support activities
Provide inputs that allow the primary activities to take place.
• Materials management
• Controls the transmission of physical materials through the value chain.
• Lowers cost and creates more profit .
• Human resources
• Ensures value creation the company has right combination of skilled people.
• Information systems
• systems to improve efficiency & effectiveness value creation activities.
• Company infrastructure
• Companywide context within which all other value creation activities occur.
• Organizational structure, control system and company culture
Value Chain: Primary and Support Activities
Honda & Value Chain
SM Dr CSP 21
Source: Jan Rivkin (2006) British industry at crossroads, Honda A&B
Value Chains in Service Industries
managing and
Partnering Purchasing Operating Marketing
distributing
with Vendors Goods stores and Selling
inventory
Primary value chain in retail
Design & Marketing &
R&D Engineering Services
Solutions Sales
Primary value chain in Engineering Services
VRIO framework
• Is a firm organized to exploit the full competitive potential of its
resources and capabilities?
• Caterpillar global organizational structure – reporting, inventory,
compensation policies aligned
• Xerox and PARC – unable to align with strategic move, bureaucratic product
development process, reporting structures, compensation etc.
Combinations and criteria for SCA
Is the Is the Is the Capability Is the Capability Competitive Performance
Capability Capability Costly to Nonsubstitutable? Consequences Implications
Valuable? Rare? Imitate?
No No No No Competitive Below-average
disadvantage returns
Yes No No Yes/No Competitive parity Average returns
Yes Yes No Yes/No Temporary Average returns
competitive to above-average
advantage returns
Yes Yes Yes Yes/No Sustainable Above-average
competitive returns
advantage
VRIO Framework in UBI
• VALUABLE: Will a strategy increase a
firm’s revenues/reduce its costs
compared to what would be the
case if this strategy were not
pursued?
• RARE: Does a firm possess unusual
skills needed to execute a strategy?
• IMITABLE: How long will it take
other firms to imitate this strategy?
• ORGANIZATION: Is a firm efficiently
organized to implement a strategy?
R Das, 2016
Dell’s Tangible Resources, Intangible Resources, and
Organizational Capabilities
1984, Dell Inc. with $1000.
revenues of $56 billion & net
income of $3.6 billion in 2006.
direct sales approach, user
configurable products
McKinsey over the years
Year Event
1926 McKinsey founded by James 'Mac' McKinsey in Chicago as 'accounting and engineering advisors'.
1932 Marvin Bower recruited; becomes manager of New York office in 1934.
1937 Bower issues memo outlining vision for professionalism and top-management focus.
1945 New Engagement Guide issued, stating assignments should bring more than revenue.
1950 Bower elected Managing Partner; implements One Firm policy and grows U.S. business.
1959 First European office opens in London, followed by Geneva, Amsterdam, Dusseldorf, Paris.
1967 Bower steps down as Managing Director; McKinsey firmly established in Europe and North America.
1971 Commission on Firm Aims and Goals recommends slowing growth and developing 'T-shaped' consultants.
1976 Ron Daniel elected MD; creates industry-based Clientele Sectors and functional expertise initiatives.
1977 Fred Gluck leads 'Super Group' strategy meeting to advance strategic practice.
Daniel appoints Gluck to Firm Office to institutionalize knowledge development; 15 Centers of Competence
1980 created.
1982 Peters and Waterman publish 'In Search of Excellence'; Ohmae publishes 'The Mind of the Strategist'.
1987 Knowledge Management Project launched; recommendations for FPIS, PDNet, and specialist career path.
1988 Fred Gluck elected MD; focus shifts to client impact, CST model introduced.
1991 CPDC formed; Ted Hall integrates 72 knowledge 'islands' into 7 sectors and 7 functional capability groups.
1992 Professional Personnel Committee creates two career paths for client service support and admin staff.
1994 Rajat Gupta elected MD; launches Practice Olympics and special initiatives on emerging CEO issues.
1995 Change Centre established; Operations Centre planned as part of new research-oriented pools.
1996 Second annual Practice Olympics held; ongoing debates on growth, specialization, and technology's impact.
McKinsey: Managing knowledge & Learning
1. How was an obscure little firm of “accounting and engineering advisors” able to grow into the world’s most
prestigious consulting firm fifty years later? (G10)
2. How does Mckinsey’s mission and guiding principles translate into action? (G9)
3. Why is McKinsey consistently the number one employer of preference for MBA graduates worldwide
despite the high up-or-out attrition rate? (G1)
4. What was the unique source of competitive advantage developed by James O. McKinsey and later Marvin
Bower? (G8)
5. How effective was Ron Daniel in leading McKinsey to respond to challenges identified in the Commission
on Firm Aims and Goals? (G7)
6. What is different about the focus of Gluck’s actions compared with Daniel’s emphasis? (G6)
7. Why is embedding knowledge so critical in McKinsey? (G5)
8. Comparing and contrasting the three mini-cases of front-line activities in the mid-1990s, how effective has
the firm been in its two-decade long change process? (G4 & G3)
9. What is your evaluation of Rajat Gupta’s “four-pronged” approach to knowledge development and
application within McKinsey? If you were a senior partner, what specific advice would you give him? (G2)
McKinsey: Managing knowledge & Learning
1. How was an obscure little firm of “accounting and engineering advisors” able to grow into the world’s most
prestigious consulting firm fifty years later? (G10)
2. How does Mckinsey’s mission and guiding principles translate into action? (G9)
3. Why is McKinsey consistently the number one employer of preference for MBA graduates worldwide
despite the high up-or-out attrition rate? (G1)
4. What was the unique source of competitive advantage developed by James O. McKinsey and later Marvin
Bower? (G8)
5. How effective was Ron Daniel in leading McKinsey to respond to challenges identified in the Commission
on Firm Aims and Goals? (G7)
6. What is different about the focus of Gluck’s actions compared with Daniel’s emphasis? (G6)
7. Why is embedding knowledge so critical in McKinsey? (G5)
8. Comparing and contrasting the three mini-cases of front-line activities in the mid-1990s, how effective has
the firm been in its two-decade long change process? (G4 & G3)
9. What is your evaluation of Rajat Gupta’s “four-pronged” approach to knowledge development and
application within McKinsey? If you were a senior partner, what specific advice would you give him? (G2)
McKinsey case
• Reframing competence “client relationship” to “thought leadership”
• Developing intellectual capital as a strategic asset
• How core organizational processes (KD and Cross-unit learning) are
built
• Role of an organizational leader, not only in building a viable business,
but also in creating a self-renewing institution
McKinsey in Client Relationship Mode
Business Concept Organizational Capability
• Focus on important management issues – first mover • Recruit and develop superior people – training in
in strategy and organizational consulting general problem solving
• Serve top management of prestigious clients • Professionalism, self-governance
• Unique customized solutions – not standard tools, • Strong embedded “One-Firm” policies and culture –
formulas relates to clients, consultants, profits
Single profit pool, no internal competition, free flow of expertise and unified culture
Embedding learning
Dimension “Discover–Codify–Disseminate” “Engage–Explore–Apply–Share”
Who develops Everyone is responsible for knowledge
A few experts/gurus at the core
knowledge development
Practices fragmented; run as Teams of practice leaders in a
Practice structure
fiefdoms stewardship role
Build a network of
Priority on integrated Client Service
How ideas spread sectors/centers/offices to push
Teams (CSTs) that learn-by-doing
ideas
Industry/functional practices Practices support and leverage
Link to offices &
isolated from (even competing integrated CSTs (building on McKinsey’s
teams
with) offices & engagement teams client-service strength)
Learning Organisation: Three mini cases
Peters/Sydney Office Bray/Telecom Europe Dull/B-to-B
Access to talent, expertise Bray’s mobility Dull’s alternative career track
• 5 consulting directors • Transfer expertise • Generating PD documents
• 60 associates Documented learning • Wide usage
• 170 PD documents Building networks Building networks
One-firm culture • Silo as coordinator • Conference
• Norm of helping Team leadership of practice • CD to teams
– Inexperienced associates – Insularity of telecom practice – Difficulties of specialist careers
– Info transfer only—not a creative
• Intranet
solution
– No external expertise • Internal expertise
– Superiority of industry sectors over
competence centres
Rajat Gupta’s Knowledge Strategy
• Practice Olympics – Engaged junior associates directly in knowledge
creation; built cross-office peer networks; reinforced “everyone is a
snowball maker.”
• Six Special Initiatives – Senior partner–led, cross-cutting topics to break
silos; drew in external academics and experts.
• Research Centres – Hired PhDs and full-time researchers; legitimized
specialist career paths; deepened firm intellectual capital.
• Dual Philosophy – Supported both “engage–explore–apply–share” (front-
line learning) and “discover–codify–disseminate” (expert codification)
models.
• Significant investment: +$90–180M annually (~5–10% less client work).
Distinctive Leadership Styles at McKinsey
Managing Director Leadership Style New Elements Introduced
Ethical professionalism, generalist “One-Firm” culture,
Marvin Bower 1950–1967
talent recruitment from top schools
Industry/functional centers,
Ron Daniel 1976–1988 Specialist + quality structures
early KM systems
Formal sectors, team
Fred Gluck 1988–1994 Knowledge institutionalization leadership, embedded
expertise
Rapid global expansion, equity-
Rajat Gupta 1994–2003 Global scale & inclusive leadership
focused leadership norms
