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Chapter 06 - Internal Analysis
6-1
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 6
Internal Analysis
Chapter Summary
Two techniques for internal analysis have emerged that overcome some of the limitations of
SWOT analysis, offering more comprehensive approaches that can help managers identify and
assess their firm’s internal resources and capabilities in a more systematic, objective, and
The third approach covered in this chapter is the resource-based view (RBV). RBV is based on the
Finally, the chapter covers four ways objectivity and realism are enhanced when managers use
Learning Objectives
1. Understand how to conduct a SWOT analysis, and be able to summarize its limitations.
2. Understand value chain analysis and how to use it to disaggregate a firm’s activities and
determine which are most critical to generating competitive advantage.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Lecture Outline
I. SWOT Analysis: A Traditional Approach to Internal Analysis
A. Consider Exhibit 6.1, Top Strategist, which describes John W. Henry, CEO of the 2004
and 2007 World Series-winning Boston Red Sox.
B. SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the
1. It is based on the assumption that an effective strategy derives from a sound “fit”
2. A good fit maximizes a firm’s strengths and opportunities and minimizes its
weaknesses and threats.
3. Environmental and industry analysis in Chapters 3 and 4 provides the information
fundamental focus in SWOT analysis.
4. Opportunities
competitive or regulatory circumstances, technological changes, and
for the firm.
5. Threats
a) A threat is a major unfavorable situation in a firm’s environment.
(1) Threats are key impediments to the firm’s current or desired position.
b) The move by Nokia to bundle free, unlimited music downloads for one year
(1) Nokia is one of the few global companies with the device capability and
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whole or part.
(2) This move by Nokia must be considered a serious “threat” by Apple
c) Once managers agree on key opportunities and threats facing their firm, they
(1) And vice versa: Once managers agree on their firm’s core strengths and
6. Strengths
a) A strength is a resource or capability controlled by or available to a firm that
gives it an advantage relative to its competitors in meeting the needs of the
(1) Strengths arise from the resources and competencies available to the
firm.
7. Weaknesses
effectively meeting customer needs.
C. Using SWOT Analysis in Strategic Analysis
1. The most common use of SWOT analysis is as a logical framework guiding
discussion and reflection about a firm’s situation and basic alternatives.
a) This often takes place as a series of managerial group discussions.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
f) A brief SWOT analysis of their situation might have identified:
(1) Strengths
Sizable miniature storage expertise
User-friendly engineering skill
(2) Weaknesses
Economies of scale versus computer rivals
(3) Opportunities
Confused online music situation
(4) Threats
2. Exhibit 6.2, SWOT Analysis Diagram, illustrates how SWOT analysis might
take managerial planning discussions into a slightly more structured approach to
aid strategic analysis.
a) The objective is identification of one of four distinct patterns in the match
b) Cell 1 is the most favorable situation; the firm faces several environmental
opportunities.
(1) This situation suggests growth-oriented strategies to exploit the
3. Cell 4 is the least favorable situation, with the firm facing major environmental
threats from a weak resource position.
a) This position clearly calls for strategies that reduce or redirect involvement
b) Texas Instruments is a good example of a cell 4 firm.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
4. In cell 2, a firm that has identified several key strengths faces an unfavorable
environment.
a) In this situation, strategies would seek to redeploy those strong resources and
5. A firm in cell 3 faces impressive market opportunity but is constrained by weak
internal resources.
a) The focus of strategy for such a firm is eliminating the internal weaknesses
D. Limitations of SWOT Analysis
1. A SWOT analysis can overemphasize internal strengths and downplay external
threats.
a) Strategists in every company have to remain vigilant against building
b) Apple’s success with the iPod and its iTunes dowloadable music Web site
2. A SWOT analysis can be static and can risk ignoring changing circumstances.
a) A frequent admonition about the downfall of planning processes says that
b) So, it is not surprising that critics of SWOT analysis, with good reason, warn
c) SWOT analysis, along with most planning techniques, must avoid being
3. A SWOT analysis can overemphasize a single strength or element of strategy.
a) Dell Computer’s major strength was its direct sales model which gave a
b) Unfortunately for Dell, it’s reliance on that key strength proved to be an
4. A strength is not necessarily a source of competitive advantage.
a) Cisco Systems Inc. has been a dominant player in providing switching
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whole or part.
b) It has substantial financial, technological, and branding expertise.
c) Cisco Systems twice attempted to use its vast strengths in these areas as the
d) It failed both times and lost hundreds of millions of dollars in the process,
5. In summary, SWOT analysis is a longtime, traditional approach to internal
analysis among many strategists.
a) It offers a generalized effort to examine internal capabilities in light of
b) It has limitations that must be considered if SWOT analysis is to be the basis
c) Another approach to internal analysis that emerge, in part, to add more rigor
II. Value Chain Analysis
A. The term value chain describes a way of looking at a business as a chain of activities
that transform inputs into outputs that customer’s value.
1. Customer value derives from three basic sources: activities that differentiate the
a) Value chain analysis (VCA) attempts to understand how a business creates
2. VCA takes a process point of view.
a) It divides (sometimes called disaggregates) the business into sets of activities
b) VCA attempts to look at its costs across the series of activities the business
c) It looks at the attributes of each of these different activities to determine in
d) Proponents of VCA believe it allows managers to better identify their firm’s
accounting protocol.
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whole or part.
3. Exhibit 6.3, The Value Chain, shows a typical value chain framework.
a) Primary activities (sometimes called line functions) are those involved in
b) Support activities (sometimes called staff or overhead functions) assist the
c) The value chain includes a profit margin because a markup above the cost of
4. Judgment is required across individual firms and different industries because what
may be seen as a support activity in one firm or industry may be a primary activity
in another.
a) Computer operations might typically be seen as infrastructure support, for
b) Exhibit 6.4, Global Strategy in Action, describes how Federal Express
B. Conducting a Value Chain Analysis
1. Identify Activities
a) The initial step in value chain analysis is to divide a company’s operations
b) Within each category, a firm typically performs a number of discrete
c) Service activities, for example, may include such discrete activities as
d) The manager’s challenge at this point is to be very detailed attempting to
2. Allocate Costs
a) The next step is to attempt to attach costs to each discrete activity.
(1) Each activity in the value chain incurs costs and ties up time and assets.
(2) Value chain analysis requires managers to assign costs and assets to
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whole or part.
b) VCA proponents hold that the activity-based VCA approach would provide a
(1) The activity-based side of the exhibit shows that approximately 21
(2) A rather sizable cost, 20 percent, involves internal administration, with
(3) VCA advocates see this information as being much more useful than
