ACCA P3 Business Analysis - 2010 - Study text

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Chapter 5: Internal resources, capabilities and competences

Knowledge gives a company a competitive advantage. Another important

characteristic of corporate knowledge is therefore that it cannot be easily replicated

by a competitor. It is something unique to the company that owns it.

Another way of making this point is to say that the premium value of knowledge

comes from the fact that it cannot be digitised, codified and easily distributed or

easily acquired.

A capability in knowledge management comes from a combination of unique

resources and core competences:

 experience in an industry or market, and acquiring knowledge through

experience

 the knowledge that employees have or acquire, for example through training

 the management of people, and success in encouraging creativity and new ideas

 the management of IS/IT systems.

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Analysing strengths and weaknesses

 Assessing resources and competences

 Techniques for assessing resources and competences

 Resource audit

 SWOT analysis and strengths and weaknesses

 Preparing a SWOT analysis

 Interpretation of a SWOT analysis

4 Analysing strengths and weaknesses

4.1 Assessing resources and competences

In addition to assessing the external environment, including markets and

competitors, strategic managers should also assess the internal resources of the

entity, its competences and its capabilities.

The following assessment is required:

 What are the resources of the entity?

 Which of these resources are unique or special? What value do they provide?

(What competitive advantage do they provide?)

 Will requirements for resources change, as a result of changes in the business

environment?

 How are the resources used? Are they used effectively and efficiently? What

core competences does the entity have?

4.2 Techniques for assessing resources and competences

There are several techniques that might be used to assess the resources and

competences of an entity.

 Management need to understand how value is created, and how value might be

lost. An assessment of the value that is created or lost by the entity can be made

using value chain analysis or value network analysis. These were described in

the previous chapter.

 Management can prepare a capability profile of the entity. This is an assessment

of the key strategic processes that are needed to provide consistently superior

value to customers. This is an assessment of capabilities and competitive

advantage.

 A capability profile might be prepared together with a SWOT analysis.

In order to prepare a capability profile or a SWOT analysis, management need a

thorough understanding of the resources that the entity has, the value of those

resources, and the competences that the entity has acquired in using those

resources.

Chapter 5: Internal resources, capabilities and competences

This can be provided by a resource audit.

4.3 Resource audit

A resource audit is an initial assessment of the resources of an entity. It is carried

out to establish what resources there are, which are unique and how efficiently and

effectively they are being used.

A resource audit should identify all the significant resources that are used by an

entity. These will vary according to the nature of the entity. In general, however, a

resource audit should provide data about the following resources.

Human resources

(Part-time and full-

time employees,

consultants, sub-

contractors etc)

 Size and composition of the workforce

 Efficiency of the workforce

 Flexibility of the workforce

 Rate of labour wastage/turnover

 Labour relations between management and workers

 Skills, experience, qualifications

 Any particular expertise?

 Labour costs: salaries and wages

Management

 Size of the management team

 Historical performance

 Skills of the managers

 Nature of management structure, the division of

authority and responsibility

Raw materials

 Costs as a percentage of total costs

 Sources, suppliers

 Availability

 Future provision. Scarcity?

 Wastage rates

 Alternative materials and alternative sources of supply

Non-current assets

 What are they?

 How old are they? What

is their expected useful life?

 What is their current value?

 What is the amount of sales and profit per $1 invested

in non-current assets?

 Are they technologically advanced or out-of-date?

 What condition are they in? How well are they

repaired and maintained?

 What is the utilisation rate for each group of non-

current assets?

Intangible resources

 Are there any intellectual rights, such as patent rights

and copyrights?

 Are there valuable brand names?

 Does the organisation have any identifiable goodwill?

 What is the reputation of the entity with its customers?

How well does it know them?

 Is the work force well-motivated?

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Financial resources

 What is the capital of the entity?

 What are its sources of new capital?

 What are the cash flows of the entity?

 What are its sources of liquidity?

 How well does it control trade receivables?

 How well does it control other elements of working

capital?

Internal controls and

organisation

 How well does the entity control the use of its

resources?

 How effective are its controls over the efficient and

effective use of assets?

 How effective are its controls over accounting and

financial reporting?

 How effective are its controls over compliance with

regulations?

 How effective are its risk management systems?

 Is the entity organised in an efficient way?

Evaluating resources

Having identified its key resources, management can evaluate them and the entity’s

ability to use them efficiently and effectively to create value (competences).

A simple framework for evaluating resources is the VIRO framework:

 V: Value. Does the resource provide competitive advantage?

 R: Rarity. Do competitors own similar resources, or are the resources unique?

 I: Imitability. Would it be costly for competitors to imitate the resource or

acquire it?

 O: Organisation. Is the entity organised to exploit its resources to best

advantage?

4.4 SWOT analysis and strengths and weaknesses

SWOT analysis was described in an earlier chapter as a technique for analysing

strategic position and identifying key factors that might affect business strategy.

These factors are both internal and external to the entity.

In the previous chapter, SWOT analysis was explained in the context of identifying

opportunities and threats in the environment. It is also used to identify strengths

and weaknesses in the resources, competences and capabilities of the entity.

 Strengths. Strengths are resources and competences that an organisation has,

and the capabilities it has developed. Strengths in resources, competences and

capabilities can be exploited and developed to create sustainable competitive

advantage.

 Weaknesses. Weaknesses are resources, competences and capabilities that are

deficient or lacking. These weaknesses are preventing the entity from

developing or sustaining competitive advantage.

Chapter 5: Internal resources, capabilities and competences

Identifying strengths and weaknesses

In your examination, you might be given a question that contains a case study or

scenario, and asked to identify the strengths and weaknesses of the entity and the

opportunities and threats that it faces.

To identify strengths and weaknesses, you should consider the following:

 Resources

- Consider all the resources of the entity, and identify those that are significant

and unique. Include the skills of management and other employees in your

assessment. You should also consider the knowledge that the entity has

acquired, and its intellectual capital.

- Consider whether there are key resources that the entity lacks, but a

competitor might have.

 Competences

- Consider all the activities and processes of the entity and how it uses its

resources. Identify the competences of the entity and consider whether any of

these are core competences that provide competitive advantage.

- Consider the competences that the entity lacks.

 Capabilities

- Consider the capabilities of the entity, and its relative success or failure in

delivering value to the customer or in creating cost efficiency.

4.5 Preparing a SWOT analysis

If you are required to use SWOT analysis in your examination, you will probably be

required to analyse opportunities and threats as well as strengths and weaknesses in

the strategic position.

Strengths and weaknesses are concerned with the internal capabilities and core

competencies of an entity. Threats and opportunities are concerned with factors and

developments in the environment.

A SWOT analysis might be presented as four lists, in a cruciform chart, as follows.

Illustrative items have been inserted, for a small company producing

pharmaceuticals.

Note that strengths and weaknesses should include competences and capabilities as

well as resources. In this example, the strengths relate to resources and the

weaknesses relate to competences and capabilities, suggesting that the entity might

not be making the best use of its resources.

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Strengths

Extensive research knowledge

Highly-skilled scientists in the workforce

High investment in advanced equipment

Patents on six products

High profit margins

Weaknesses

Slow progress with research projects

Poor record of converting research projects into

new product development

Recent increase in labour turnover

Opportunities

Strong growth in total market demand

New scientific discoveries have not yet been

fully exploited

Threats

Recent merger of two major competitors

Risk of stricter regulation of new products

In order to prepare a SWOT analysis, it is necessary to:

 analyse the internal resources of the entity, and try to identify strong points and

weak points

 analyse the external environment, and try to identify opportunities and threats.

An analysis might be prepared by a team of managers, a think tank, a risk

management committee or another group of individuals within the entity.

Using the technique

If you are required to use SWOT analysis in your examination, you may be expected

to do so to answer a case study question. The technique is fairly simple to use. You

can prepare four lists as ‘workings’ for your answer, one for each of the SWOT

categories (strengths, weaknesses, opportunities and threats). Read through the

question carefully, and add to each of the lists as ideas come to your mind. You will

need to think ‘strategically’. You will also be required to interpret the results of your

analysis and consider their strategic implications.

4.6 Interpretation of a SWOT analysis

An initial SWOT analysis is simply a list of strengths, weaknesses, opportunities

and threats. The significance or potential value/cost of each item is not considered

in the initial analysis, and the items are not ranked in any order of importance.

A problem with SWOT analysis is that it can encourage very long lists of strengths,

weaknesses, opportunities and threats, without any differentiation between those

that are significant and those that are fairly immaterial.

Having prepared an initial SWOT analysis, the next step is to interpret it.

Interpretation involves identifying those strengths, weaknesses, opportunities and

threats (SWOTs) that might be significant, and what their implications might be for

the future. The process of interpretation therefore involves ranking the SWOTs in

some order of priority or importance.

Another problem with SWOT analysis is that it can be used to identify significant

issues, but it cannot be used for evaluation. It cannot be a substitute for a more

rigorous strategic analysis.

Chapter 5: Internal resources, capabilities and competences

Having identified the most significant issues facing the organisation, strategic

management should then consider:

 how major strengths (for example, core competencies) and opportunities might

be exploited, to obtain competitive advantage

 how major weaknesses and threats should be dealt with, in order to reduce the

strategic risks for the entity.

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Paper P3

Business analysis

CHAPTER

Stakeholder expectations.

Ethics and culture

Contents

1 Organisational purpose and strategy

2 Implications of corporate governance

3 Stakeholders and stakeholder expectations

4 Ethical influences and corporate social

responsibility

5 Corporate culture and business strategy

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Organisational purpose and strategy

 A hierarchy of objectives and plans

 Mission and mission statement

 The relevance of the mission statement

 Goals and objectives

 Who decides mission, goals and objectives?

1 Organisational purpose and strategy

1.1 A hierarchy of objectives and plans

As a part of a strategic review, management should always re-consider the purpose

of the entity that they manage – what it is trying to achieve. In the strategic planning

process, goals, objectives and strategies should be decided with the aim of fulfilling

the entity’s purpose. A business entity should have a hierarchy of aims and plans. A

useful way of presenting this is shown below.

1.2 Mission and mission statement

A mission is the purpose of an organisation and the reason for its existence. Many

entities give a formal expression to their mission in a mission statement.

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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