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Internal Environmental Analysis

Internal Environmental Analysis. HCAD 5390. Assessing Organizational Ability to Make Strategy. Analyze historical and current financial performance Review strategic assets – resources and competencies Breakdown and evaluate the internal value chain. Historical Financial Performance.

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Internal Environmental Analysis

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  1. Internal Environmental Analysis HCAD 5390

  2. Assessing Organizational Ability to Make Strategy • Analyze historical and current financial performance • Review strategic assets – resources and competencies • Breakdown and evaluate the internal value chain

  3. Historical Financial Performance • Sales, market share, and profits • Free cash flow • External capital sources • Capital project hurdle rate • Other capital demands • Shareholder value

  4. Increasing Shareholder Value • Achieve existing profits with less capital • Increase profits with no additional capital • Decrease the cost of equity capital • Invest more capital in strategic projects that earn above average rates of return

  5. Current Financial Performance • Balance sheet • Operating or income statement • Cash flow statement • Statement of changes in owners’ equity (for-profit) or net assets (not-for-profit)

  6. Ratio Analysis of Financial Statements - Liquidity • Current ratio • Average collection period • Days cash-on-hand, short-term sources • Average payment period

  7. Ratio Analysis of Financial Statements - Profitability • Operating margin • Total margin • Return on net assets

  8. Ratio Analysis of Financial Statements – Operating Efficiency • Total asset turnover • Fixed asset turnover • Inventory turnover

  9. Ratio Analysis of Financial Statements – Capital Structure • Net assets (or equity) to total assets • Long-term debt to net assets (or equity) • Debt service coverage

  10. Non-Financial Operating Indicators for a Hospital Organization • Average length of stay • Occupancy rate • Outpatient revenue as % of total revenue • FTE employees per occupied bed

  11. External and Internal Analyses Economic Sociocultural Environment Demographic General Industry Environment General Global Competitor Environment Environment Environment Political/Legal General Technological By studying the external environment, firms identify what they might choose to do Opportunities and threats 11

  12. The Organization External and Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage) 12

  13. Value Creation V-P V P-C V=Value to Consumer P=Price C=Costs of Production V-P=Consumer Surplus P-C=Profit Margin P C C 13

  14. Components ofInternal Analysis Discovering Core Competencies Value Creation Value Chain Analysis Four Criteria of Sustainable Advantages Core Competencies Competitive Advantage Capabilities • Valuable • Rare • Costly to Imitate • Nonsubstitutable • Resources • Tangible • Intangible • Outsource 14

  15. Challenge of Internal Analysis How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly? 15

  16. Discovering Core Competencies • Resources • Tangible • Intangible Resources represent inputs into an organization’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Resources are what an organization has to work with--its assets--including its people and the value of its brand name 16

  17. Discovering Core Competencies • Resources • Tangible • Intangible • Tangible Resources • Financial • Organizational • Physical • Technological • Intangible Resources • Human • Innovation • Reputation 17

  18. Discovering Core Competencies Capabilities Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage 18

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  20. Discovering Core Competencies Capabilities Capabilities are what an organization does, and represent the organization’s capacity to deploy resources that have been purposely integrated to achieve a desired end state 20

  21. Discovering Core Competencies Core Competencies Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive McKinsey and Co. recommends using three to four competencies when framing strategic actions 21

  22. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable Valuable: Capabilities that help an organization neutralize threats or exploit opportunities 22

  23. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable Rare: Capabilities that are not possessed by many others 23

  24. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable • Costly to imitate: capabilities that other organizations cannot develop easily, usually due to • Unique historical conditions • Causal ambiguity • Social complexity 24

  25. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable • Nonsubstitutable: capabilities that do not have strategic equivalents • Invisible to competitors • Firm specific knowledge • Trust-based working relationships between managers and nonmanagerial personnel 25

  26. Categories of Strategic Resources Tangible (visible, touchable, measurable) • Financial • Organizational • Physical • Technological Intangible (unseen, amorphous) • Human • Creative • Perceptual

  27. Competencies Leading to Sustainable Competitive Advantage • Valuable to the organization • Unique among competitors • Difficult or impossible to imitate • No substitute competencies

  28. Strategic Uses of Resources and Competencies • Discovery (did not know we had them) • Creation (make or acquire new ones) • Combination (use them together) • Preservation (maintain them) • Concentration (use them for the right purpose)

  29. Porter’s Generic Internal Value Chain A C T I V I T I E S S U P P O R T Procurement Human Resource Management Profit Technology Development Procurement Inbound Logistics Outbound Logistics Marketing & Sales Service Margin Operations Primary Activities

  30. Internal Value Chain for a Hospital

  31. Hospital Value Chain Margin Margin After-Service Technological Development Human Resource Mgmt. Point-of-Service Support Activities Firm Infrastructure Procurement Pre-Service Service Activities 31

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  34. How Resources and Competencies Become Competitive advantage Resources and Competencies ↓ are the basis of ↓ Individual Activities ↓ that can be managed to ↓ Reduce Costs or Provide Additional Value ↓ in order to gain ↓ Competitive Advantage

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