Analytical Methods of Business Environment
Analytical Methods of Internal Environment
8. lecture
Ing. Šárka Zapletalová, Ph.D.
Department of Business Economics and Management
BUSINESS ENVIRONMENT

Outline of the lecture
1.Value chain analysis
2.
2.VRIO analysis
3.
3.McKinsey 7S model
4.
4.Stakeholders analysis
5.
5.Portfolio analysis
6.
6.SWOT analysis
7.

Introduction
•Internal business environment is constituted by the organization itself.
•
•The analysis of internal business environment refers to the analysis of the business internal
environment to assist business strategy and performance, the internal strengths and weaknesses of
the organization.
•
•Among the analyses of internal business environment the following methods can be ranked:
•Porter Model of Value Chain Analysis;
•McKinsey 7S;
•VRIO method;
•Stakeholders analysis;
•Portfolio analyses – ABC method, BCG matrix, GE matrix.
•
•

Value Chain Analysis
•A value chain is a linked set of value-creating activities that begin with basic raw materials
coming from suppliers, moving on to a series of value-added activities involved in producing and
marketing a product or service, and ending with distributors getting the final goods into the hands
of the ultimate consumer.
•
•The focus of value-chain analysis is to examine the corporation in the context of the overall
chain of value-creating activities, of which the firm may be only a small part.
Typical Value Chain for a Manufactured Product
•

Porter´s Model of Value Chain Analysis
•Value chain analysis proposes a system view of the organization composed of stages in a
transformation process with inputs and outputs to each of the distinct stages.
•
•Value, according to Michael Porter, is the price that a costumer is prepared to pay for an
offering. Profit is the difference between this value and total costs to the enterprise of
providing that offering.
•
•Value chain analysis divides an enterprise into a chain of activities and each element in the
value chain delivers a part of the total value to the customer and contributes part of the total
profit.
•
•The purpose of value chain analysis is to measure the value delivered and the profit contributed
by each link of the chain.
•

Porter´s Model of Value Chain Analysis
•


Porter´s Model of Value Chain Analysis
•Porter´s value chain model describes five values that are generating primary activities and
support activities.
•
•Primary activities:
•Inbound logistics;
•Operations;
•Outbound logistics;
•Marketing and sales;
•Service.
•
•Support activities:
•Procurement;
•Technology development;
•Human resource management;
•Firm infrastructure.
•

Porter´s Model of Value Chain Analysis
•Value chain analysis involves the following three steps:
1.Examine each product line’s value chain in terms of the various activities involved in producing
that product or service.
2.Examine the “linkages” within each product line’s value chain: Linkages are the connections
between the way one value activity (for example, marketing) is performed and the cost of
performance of another activity (for example, quality control).
3.Examine the potential synergies among the value chains of different product lines or business
units: Each value element, such as advertising or manufacturing, has an inherent economy of scale
in which activities are conducted at their lowest possible cost per unit of output. If a particular
product is not being produced at a high enough level to reach economies of scale in distribution,
another product could be used to share the same distribution channel.
•

VRIO Analysis
•VRIO analysis was developed by Barney (1995) to identify strategically valuable resources. The
analysis builds on the basic ideas of the resource-based view RBV.
•
•Resources that are subjects of VRIO analysis are:
•Tangible (physical) and intangible;
•Human;
•Financial.
•
•The term VRIO stands for the initials of four questions that can be asked whether the resource is:
•Valuable?
•Rare?
•Imitable?
•Organised for usage?
•

•
Prostor pro doplňující informace, poznámky
Applying the VRIO
V
R
I
O
Sustainable Competitive Advantage
Competitive Disadvantage
Competitive Parity
Temporary Competitive Advantage
Temporary Competitive Advantage

McKinsey 7S Model
•The McKinsey 7S framework was first published by Waterman and others in 1980. The McKinsey
consultants argue that in looking at an organization as a whole, seven variables are important, but
the essential thing about them is that they are inter-linked.
•
•The model can be used in a wide variety of situations where an alignment perspective is useful to
help organizations:
•Improve the performance of a organization;
•Examine the likely effects of future changes within a organization;
•Align departments and processes during a merger or acquisition;
•Determine how best to implement a proposed strategy.
•

McKinsey 7S Model
•
mckinsey1.jpg

McKinsey 7S Model
•The McKinsey 7S model involves seven interdependent factors which are categorized as either hard
or soft elements.
•
•Hard elements – are easier to define or identify and management can directly influence them. These
are:
•Strategy;
•Structure;
•Systems.
•Soft elements – can be more difficult to describe and are less tangible and more influenced by
culture. These are:
•Shared values;
•Skills;
•Style;
•Staff.
•

Stakeholders Analysis
•Stakeholder is any individual or group that is affected by business decision. Stakeholders have
the capacity to affect business performance through their decisions and behavior.
•
•Internal stakeholders are all internal members of a organization:
•Employees;
•Directors;
•Shareholders.
•External stakeholders include:
•Customers;
•Suppliers;
•Competitors;
•Politicians;
•Policy-makers;
•Community;
•General public
•

Stakeholders Analysis
•In terms of environmental analysis, organizations need to have an understanding of steps in
analysis:
•
•Who are stakeholders of the organization;
•
•Identification nature of interests of stakeholders;
•
•Nature and level of their interest in the organization;
•
•Consider whether there are any conflicts between the interests of different stakeholders;
•
•Power of stakeholders to exert influence – consider in what way and to what extent, each
stakeholder exercises power of influence.
•

Portfolio Analysis
•Portfolio analysis could be defined as a set of techniques that help strategists in taking
strategic decisions with regard to individual products or business in a organization´s portfolio.
•
•The objective of the analysis is to determine how to allocate resources to each of the product or
business in the organization´s portfolio.
•
•It is primarily used for competitive analysis and corporate strategic planning in multiproduct and
multi-business organizations.
•
•The analysis of products or business can be performed by using these methods:
•Boston Consulting Group Matrix BCG matrix;
•General Electric Matrix GE matrix.
•

Portfolio Analysis
BCG matrix
•
•Boston Consulting Group matrix BCG matrix provides a graphic representation for a organization to
examine the different businesses in a organization´s portfolio on the basis of their relative
market shares and industry growth rates.
•
•Vertical axis denotes the rate of growth in sales, in percentage, for a particular industry.
•
•Horizontal axis represents the relative market share, which is the ratio of organization´s sales
to the sales of the industry´s largest competitor or market leader.
•
•The result of combining the industry growth rate and the relative market share in a four-cell
matrix.
•

Portfolio Analysis
BCG matrix
•
•
BCG.jpg
Market growth is expressed in percentage terms.

Portfolio Analysis
BCG matrix
•
•Question marks (problem children) – businesses with high industry growth but low market share for
a organization. They are usually new products which have a good commercial potential.
•
•Stars – are businesses with high industry growth and high market share for a organization. A
organization generally pursues an expansion strategy to establish a strong competitive position
with regard to a star business.
•
•Cash cows – are businesses which generate high market share but their rate of market growth is
slow as cash cow businesses lose their attractiveness and tend towards a decline.
•
•Dogs – are businesses with related slow industry growth and have a low relative market share. They
neither generate nor require large amount of cash.
•

Portfolio Analysis
GE McKinsey matrix
•
•General Electric McKinsey matrix is very similar to BCG matrix. GE matrix is used to analyze
organization´s product or business unit portfolio and facilitate the investment decisions.
•
•GE matrix is a nine cell matrix. It is a more sophisticated business portfolio framework than the
BCG matrix – the matrix has multicriterial character.
•
•The organization´s products or business units are evaluated on two axes:
•Industry attractiveness;
•Competitive strength.
•
•There are three groups of boxes (three fields) in GE matrix:
•Investment/growth;
•Selectivity/earnings;
•Harvest/divest boxes.
•

Portfolio Analysis
GE McKinsey matrix
•
•
GE.png

Portfolio Analysis
GE McKinsey matrix
•
•Industry attractiveness indicates how hard or easy it will be for a organization to compete in the
market and earn profit.
•Industry attractiveness consists of many factors that collectively determine the competition level
in it. There´s no definite list of which factors should be included to determine industry
attractiveness, but the following are the most common:
•Long run growth rate;
•Industry size;
•Industry profitability (entry barriers, exit barriers etc.);
•Industry structure;
•Product life cycle changes;
•Changes in demand;
•Trend of prices;
•Macro environment factors;
•Seasonality;
•Availability of labor;
•Market segmentation.
•

Portfolio Analysis
GE McKinsey matrix
•
•Competitive strength measures how strong, in terms of competition, a particular business unit (or
product) is against its rivals. Managers try to determine whether a business unit has a sustainable
competitive advantage.
•
•The following factors determine the competitive strength of a business unit:
•Total market share;
•Market share growth compared to rivals;
•Brand strength;
•Profitability of the organization;
•Customer loyalty;
•Resources or capabilities;
•Business unit strength in meeting industry´s critical success factors;
•Strength of a value chain;
•Level of product differentiation;
•Production flexibility.
•

Portfolio Analysis
GE McKinsey matrix: Steps for performing of GE matrix
•
•Determine industry attractiveness of each business unit
•Make a list of factors, assign weights, rate the factors, calculate the total scores.
•Determine the competitive strength of each business unit
•Make a list of factors, assign weights, rate the factors, calculate the total scores.
•Plot the business units on a matrix
•Analyze the information
•Invest/grow box – organizations should invest into the business units that fall into these boxes.
•Selectivity/earning box – manager should invest into these business units only if manager has the
money left over the investments in invest/grow business units group.
•Harvest/divest box – business unit that are operating in unattractive industries.
•Identify the future direction of each business unit
•Prioritize investments
•

Portfolio Analysis
GE McKinsey matrix: Advantages and diasadvantages of GE matrix
•
•Advantages
•Helps to prioritize the limited resources in order to achieve the best returns.
•Managers become more aware of how their products or business units perform.
•Identifies the strategic steps the organization needs to make to improve the performance of its
business portfolio.
•
•Disadvantages
•Requires a consultant or a highly experienced person to determine industry´s attractiveness and
business unit strength as accurately as possible.
•It is costly to conduct.
•It doesn´t take into account the synergies that could exist between two or more business units.
•

SWOT Analysis
•SWOT analysis combines internal and external analyses – the Strengths and Weaknesses of the
organizations coupled with the Opportunities and Threats in the external business environment.
•
•Benefits of SWOT analysis
•Simplicity;
•Lower costs;
•Flexibility;
•Integration and synthesis;
•Collaboration.
•
•Criticisms against SWOT analysis:
•It allows companies to create lists without serious consideration of the issues;
•It often becomes a sterile academic exercise of classifying data and information.
•

SWOT Analysis
•
Strengths
Weaknesses
Opportunities
S-O strategy
maxi – maxi
Aggressive strategy
W-O strategy
mini – maxi
Turnaround strategy
Threates
S-T strategy
maxi – mini
Diversification strategy
W-T strategy
mini – mini
Defensive strategy