Is value chain analysis internal or external

Harley-Davidson: External And Internal Analysis

Instructions for this assignment: Perform all of the elements listed below.

This assignment has you complete two parts of a strategic business plan. To see how those parts fit into a full business plan, click here for a strategic business plan outline.

Part I – Analysis of the External Environment

As part of the Strategic Business Plan, you have been asked to:

Identify and analyze the major driving forces for change in the external environment of the motorcycle industry.
Analyze the dynamics of competition using Porter's Five Forces Model of Competition. Correctly assess the dynamics of competition.
Provide at least three statistics about the size of the motorcycle industry such as revenue, growth rate, number of units sold by manufacturer/country, etc.
Summarize the strategic issues firms in this industry face and identify their biggest threats.
This section should be titled "The Analysis of H-D's External Environment."

Part II – Internal Environment Analysis

Financial

Gather the financial information necessary to do a complete ratio analysis and the Balance Score Card (BSC) key metrics information.

If you were going to create a BSC, what would be the key metrics you would measure in each of the four BSC areas:

Financial
Customer
Internal Business Process
Learning and Growth
Perform a ratio analysis using H-D's five-year financial performance. Interpret the meaning of the ratios and financial performance.

This section should be titled "The Analysis of H-D's Current Strategy: Two Views." Be sure to include the ratio analysis. You may also include other graphics to support your narrative.

Competitors

Based on your analysis, you must decide which two competitors present the biggest competitive threat to H-D.

Perform a financial ratio analysis for the competitors after looking at trends in financial performance over five years, and compare the trends to industry averages.

Be sure you have a clear ranking of the industries' competitors.

This section should be titled "Competitor Analysis." Be sure to include the financial ratio analysis. You may also include other graphics to support your narrative.
This assignment should be 4 to 8 pages in length.

Submit your Word document to the Submissions Area by the due date assigned.

Assignment 3 Grading Criteria Maximum Points

External environment analysis: driving forces, dynamics of competition, and at least three statistics about the size of the industry. (15 points)

Summarized strategic issues faced by the industry and identified their biggest threats.(20 points)

Performed a financial ratio analysis using H-D's five-year financial performance and interpreted the ratios—see the text for which ratios to perform. Concluded how well the firm's strategy is working.(20 points)

Created a hypothetical BSC for H-D after selecting which measures you believe are important in the four areas: serving customers, improving processes, learning, and growth and financial performance.(15 Points)

Performed a ratio analysis of the financial performance of two competitors and compared them to H-D. Developed a Word document entitled "The Analysis of H-Ds Current Strategy: Two Views," which includes analysis of your findings.(15 points)

Developed the documents that include analysis of your findings. Justified ideas and responses by using appropriate examples and references from texts, Web sites, and other references or personal experience. Followed APA rules for attributing sources.(15 points)

· Module 2 online lectures: Retrieved from https://myclass.argosy.edu/d2l/le/content/25667/viewContent/1273971/View

Analyzing Strategic Groups

What does analyzing strategic groups tell strategists?

The analysis helps strategists identify several important decisions:

· Barriers to Mobility or Entry: Mobility barriers are factors that deter entry into a group.

For example, in Big Pharma mobility barriers exist in the form of high research and development, and marketing expenses coupled with the requirement to employ expensive talent to create new drugs. These protect Big Pharma from encroachment by generic organizations.

The business models of generic organizations rely on manufacturing drugs, originally developed by Big Pharma, after the patent protection expires. Therefore, organizations such as Merck, Pfizer, GlaxoSmithKline, and Johnson & Johnson view one another as direct rivals and monitor one another closely.

In addition, they monitor any potential changes in the general environment that could lower the mobility barriers.

· The Way Trends Affect Strategic Groups: Trends in the external environment affect strategic groups differently.

Let's consider retail. During a recession, when layoffs and unemployment are on the rise, which retail group benefits?

The obvious answer would be the discount retailers. When there is uncertainty about the future, middle-income shoppers slow their purchases at department stores and shop at discounters in greater numbers.

Another interesting result is that high-end retailers, such as Neiman Marcus, increase sales and profits throughout this difficult period because of their target market segment of luxury shoppers with significant discretionary income.

During a recession, wealthy consumers continue to spend despite slower economic growth, confirming that trends and changes in the external environment do not affect all strategic groups equally.

· The Direction Organizations in the Industry Move: Creating a strategic group map may show the convergence of strategies within an industry.

It is clear that success breeds success, and organizations within an industry copy the successful strategies in an industry.

Strategic Challenges and Issues

Every industry faces challenges and issues, yet every organization within an industry varies in its capabilities to address the issues and deal with them.

The U.S. airlines industry is a good example of an industry under siege.

Its strategic issues include:

· threats of terrorism

· a drop-off in business travel

· serious price competition since deregulation

· rising fuel costs

· an aging fleet

Only one major carrier, Southwest Airlines (SWA), demonstrates a consistent ability to be profitable. SWA's low-cost carrier strategy coupled with its unique culture based on fun, friendliness, and operational efficiency enabled it to hedge fuel costs when other airlines in the industry lacked the financial wherewithal to do this. The challenge of rising fuel costs affected SWA less than it did SWA's rivals. This fuel-hedging strategy helped SWA manage its cost structure during challenging times.

Because the strategy—a low-cost provider—was successful for SWA, imitators launched new airlines using a similar business model. These airlines included JetBlue Airways; Ted, which is part of United Airlines; Song, which is part of Delta Airlines; and Air Tran. JetBlue especially seems to be making inroads into SWA's market share.

Therefore, the success of an organization's strategy is based on a number of factors, including its ability to anticipate shocks and surprises, and put in place tactics and strategies that effectively address the issues. Not all organizations, however, are equally adept.

Summary, Part 1

In the first part of this module you analyzed the external environment, which includes:

· General Environment: The general environment segments include demographics, sociocultural trends, values, change, legal, political or regulatory, technological advancements, economic metrics, cycles, business conditions, and globalization of markets and services.

You also learned about environmental scanning, environmental monitoring, and environmental forecasting and their role in effective planning and strategic decision-making.

· Competitive Environment: The competitive environment represents important factors relevant to an organization's strategy, including customers, suppliers, and competitors.

You discussed Porter's Five Forces Model, Downes' three additional driving forces toward effective strategic planning, value net analysis, and the dynamics of competition.

You also discussed strategic analysis and planning along with the considerations toward making important decisions in the business world.

In Module 2, Part 2 you will continue with strategy analysis, but instead of focusing on the external environment, you will focus on the internal environment and how organizations add value by managing their primary and secondary value chains.

The readings this module will help you assess the success of a current strategy by looking at the organizational performance over time, using financial analysis and a balanced scorecard.

In addition, you will learn how to determine if an organization has the resources and capabilities to develop sustainable competitive advantage. Sustainable competitive advantage separates highly successful organizations from the "also-rans"—organizations that are not true competitors because they are weak.

Module 2 Overview, Part 2

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· Work individually to gather information to assess the effectiveness of a firm's current strategy and current situation using a variety of analytical tools.

· Determine the effectiveness of the current strategy by identifying its key elements and how the firm is performing vis-a-vis key performance indicators and its competition.

· Identify significant trends or patterns in the firm's financials that impact strategy.

· Conduct a SWOT analysis to summarize findings from company situation analysis—internal and external environment.

· Interpret SWOT analysis.

· Identify firm and industry strategic issues and determine their implications and impact.

· Apply ethical reasoning and ethical principles throughout strategic management process.

Welcome to Module 2, Part 2: Internal Environment

Module 2, Part 1 focused on the external business environment, which includes the general environmentand the competitive environment.

You also learned about strategic analysis and planning and examined the strategic challenges and issues various firms of an industry face in planning and decision-making.

In Module 2, Part 1 you learned that strategists engage in three categories of critical thinking and analysis to develop a sound plan:

· strategy analysis

· strategy formulation

· strategy implementation or execution

During this course you will gain practical knowledge about making business policies and strategic decisionsby working toward developing a strategic business plan for Harley-Davidson, which is the final project for the course. The lectures in this module will help you begin creating the plan.

During Module 2, Part 2 we continue strategy analysis, this time focusing on the internal environment of a firm to determine how well the current strategy of the firm may be working and how the strategy can be improved.

In the planning process, the phase "strategy analysis of the internal environment of the firm" is also referred to as the Company Situation Analysis and Analysis of Effectiveness of Current Strategy.

From a strategic point of view, leaders combine findings from both the internal and external analyses to formulate and execute winning strategies.

The attention this module will be on:

· Evaluating the effectiveness of the firm's current strategy

· Identifying the aspects of the strategy that need to be analyzed

· Examining the factors internal to the firm

There are several broad areas to analyze:

· Strengths, Weaknesses, Opportunities, and Threats (SWOT) and Resources Analysis: Current tangible and intangible resources, as well as organizational capabilities to determine if they provide the firm sustainable competitive advantage (SCA)

· Value Chain Analysis: The value chain, which may include the primary and secondary activities of the firm

· Financial Ratio Analysis: In comparison with the key competitors and industry averages, the financial performance of the firm within a specific time frame

We will study each area in detail, starting with the firm's resources—the internal environment of the firm.

Internal Environmental Analysis

The internal environment consists of all factors internal to a firm, including its current strategy, financial performance and goal attainment, leadership preferences, workforce, technology, past successes and failures, and corporate culture.

By analyzing the internal environment, strategists review an organization's internal capabilities, performance levels, strengths, weaknesses, and challenges.

All these actions are part of examining the "big picture" of the organization.

Internal Environmental Analysis Continued

The SWOT Analysis and More

You must be familiar with a SWOT analysis. For this class, the SWOT analysis will be done after all external and internal analyses are completed, and it should be a summary of your findings regarding both the internal and external environment of the firm.

Strengths and weaknesses are internal to a firm, while opportunities and threats are external. This is why a thorough analysis of both external and internal environments is needed before a SWOT can be fully drawn.

We will analyze the internal environment this module; therefore, we will discuss the strengths and weaknesses this module.

SWOT Analysis

What do strategists actually do to assess the internal environment?

Many strategic planning teams begin by reviewing the firm's strengths and weaknesses.

Strengths

Strengths are a particular skill, resource, or distinctive competence that the business possesses and that will enable it to achieve its stated objectives.

Strengths may include a source of competitive advantage. Strengths should be protected and built upon.

They do not automatically provide companies with SCA discussed later in the topic "Resource-Based View of the Firm."

For instance, as you assess Harley-Davidson, you can identify many things that it does very well. These are its strengths.

A partial list of its strengths would include the following:

· It is the dominant firm in the motorcycle industry with a large industry market share.

· It has several distinct business units, each focusing on its own market niche.

· It has new models in the pipeline.

· It has the financial strength to grow through mergers and acquisitions, targeting new business ventures.

· Strong customer loyalty.

· Strong brand equity/recognition.

Weaknesses

Weaknesses are areas where performance is below expectations and can be problematic for businesses.

Suppose a firm has a weak technology platform or poor online marketing strategy. If these areas are the key success factors in an industry, the firm is at a disadvantage.

An internal weakness is also an issue when a competitor is strong in that area and uses it to take market share away from the firm.

Examples of weaknesses could include:

· Slowing revenue growth

· Rising expenses that are not yielding the expected return on investment

· Negative customer feedback and poor perception in the marketplace

· Declining quality

· Poor leadership

· Broken business processes

· Lack of investment in the growth and development of people

· Underinvestment or wrong investments in technology

SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities, and threats. SWOT analysis is a methodology

used to aid strategic planning and decision-making.

Internal Analysis External Analysis

Strengths

 What are your firm’s advantages?

 What does your firm do well?

Threats

 What is your competition doing?

 Are the requirements for your firm

changing?

Weaknesses

 What could be improved about your firm?

 Which areas are not covered by your

firm’s skill set?

Opportunities

 What are the opportunities facing your

firm specifically or the industry as a

whole?

 What are the trends that your firm can

take advantage of?

It is obvious that both strengths and weaknesses come in many forms, such as people, customers, processes, performance, and technology.

After a thorough review of internal and external factors, the planning team does a SWOT analysis.

To learn more about and view examples of SWOT analyses, click here.

Value Chain Analysis

After thoroughly evaluating the internal strengths and weakness, and analyzing the firm's resources, strategists dissect the firm's value chain. This is done to see if there are ways of improving performance along the value chain, consequently cutting costs or improving people, process, and performance.

Value Chain Analysis

Value chain analysis is another important contribution of Michael Porter. He proposed that well-managed firms can gain competitive advantage (CA) by effectively managing the activities in their respective value chains.

Each primary or secondary activity provides opportunities to reduce costs and improve customer satisfaction and loyalty, or both.

By making wise strategic investments to enhance a value chain activity, a leader can improve performance and build SCA discussed earlier.

The activities that the firms perform are divided into primary and secondary activities. Both sets of activities can deliver value to customers and be managed effectively to improve margins and profits.

Value Chain Examples

Let's study some examples of businesses that excel in these value chain activities.

Walmart: We are familiar with Walmart's exceptional skill at managing its inbound and outbound logistics. It also performs exceptionally well in its procurement and technology investments.

All these together add up to a world-class supply chain that consistently delivers margin to the bottom-line and value to its customers.

Go to www.walmart.com to read about Walmart's supply-chain management strategy.

As a resource this capability is difficult but not impossible to imitate. What is hard to imitate is Walmart leaders' unrelenting drive and focus on reducing costs and returning the cost savings to the customers.

Critics would say that an unrelenting emphasis on one aspect of the value chain can lead to strategic blind spots.

Ritz-Carlton Hotels: The Ritz-Carlton Hotel chain provides an excellent example of a firm that manages its value chain activities to deliver exceptional value and a unique experience to its guests.

Read about its hotels and its employee promise at www.ritzcarlton.com .

Ritz-Carlton invests a significant amount of resources in its support activities of human resources to ensure the right people are hired and trained to perform in the exceptional manner the guests expect. It also has posh and unique locations, which were costly to acquire but reinforce the Ritz-Carlton value proposition.

Ritz-Carlton banks on guest loyalty to consistently increase revenues, and it is a good example of a value chain designed to deliver more experience and satisfaction to the guests willing to pay for the experience.

Resource-Based Analysis

Resource-Based View of the Firm and SCA

Leaders and academics both concluded that a SWOT analysis alone is not enough to build winning strategies. Firm management must also look at the resources a firm has at its disposal.

In addition, you need to assess whether the resources are valuable, rare, hard to copy, and hard to substitute. If these four conditions are met, the resource or strength is said to provide the firm with an SCA.

Let's begin with a definition of resources.

Resources: Resources are defined as tangible, such as plants, hotels, technology, and patents; intangible, such as good will, reputation, culture, past successes, top management chemistry, and highly skilled workforce; and organizational capabilities, such as excellent supply chain optimization, superior customer service, and excellent human resources practices to recruit and train the best employees.

Resources are essential to a firm's strategy because these can be used to improve efficiency and effectiveness. Being efficient and effective allows the firm to better fend off rivals, develop new products, expand globally, hire and develop people, and be an innovator and effective player in the industry and the global market.

As mentioned earlier, resources can provide a firm with SCA if the resources are:

· Valuable: Allow the firm to neutralize threats and exploit opportunities.

· Rare: Ensure that not many firms possess the same resource or capability.

· Difficult to Imitate: Ensure that the resource is physically unique, such as a beautiful location for a golf resort. The resource has social complexity, such as longstanding, complex relationships formed over time and is difficult to trace backwards. You cannot evaluate the multiple factors leading to the resource or capability. In other words, it is impossible to set in motion the same path the organization created for the resource or capability.

· Difficult to Substitute: Permit SCA compared with CA.

· Sustainable Competitive Advantage

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· A resource may be categorized as SCA and CA if the resource, which is the process in question, is easy to copy, has a reasonably priced substitute, and can earn above-normal profits for a reasonable period.

· Sustainable Competitive Advantage (SCA)

· States that a firm possesses Sustainable Competitive Advantage when it has value creating processes and positions that cannot be duplicated or imitated by other firms, which lead to the production of above normal rents, also called profits.

· Competitive Advantage (CA)

· States that competitive advantage is a position that a firm attains, which leads to above normal rents or profits or a superior financial performance.

· The processes and positions that engender such a CA position are not necessarily nonduplicable or inimitable.

· SCA is different from CA. It is possible for some companies to, temporarily in the short term, make profits above the cost of capital without SCA. These above-normal profits, however, can attract new entrants who drive down profits within the industry.

· In conclusion, SCA is the one that can be maintained for a significant amount of time even in the presence of competition trying to copy the strategy or resource.

· What is a "significant amount of time"?

· CA becomes SCA when all duplication and imitation efforts have ceased and the rival firms have not been able to create the same value that the said firm is creating.

· Represents that sustainable competitive advantage (SCA) happens over the long term, and competitive advantage (CA) is temporary until copied or replaced.

· This module your discussion questions and assignments will help you apply the concept of SCA in a number of ways.

· SCA is the "holy grail" of strategic management because if your firm has got SCA, it will, over time, reap excess profits over and above your rivals.

Financial Ratio Analysis
By performing a thorough analysis of the value chain, another piece of the internal puzzle is evaluated. A final look at the firm is required—a hard look at the firm's financial performance over time.

Here we will learn about how the financials of a firm are evaluated.

First, let's sum up the factors of review and analysis of a firm's performance:

· SWOT Analysis: The analysis of a firm's internal strengths and weaknesses and external opportunities and threats.

· Value Chain Analysis: The analysis of the value chain considering the primary and secondary activities.

· Resources: The review of resources to see if they provide SCA.

· Financial Analysis: The analysis of the financial performance of a firm.

Financial Analysis

To determine whether a firm's financials are strong, you need to analyze the firm's income statement and balance sheet over time. Typically, the data of positive or negative trends in revenues, operating margins, profit margins, balance sheet, and cash flow performance should be collected for a five-year period and analyzed.

Next, you should compare this data with that of the firm's industry cohort group and the industry as a whole. This shows how competitive the firm is in comparison with its strategic group rivals.

Fortunately today, most of this information can be found on the Internet. Many firms post their financials complete with all the ratios calculated. It eliminates the "busy work" aspect of the financials but challenges you to really interpret what the numbers mean.

Financial Ratio Analysis Continued
States that in financial analysis, ratios are very important profit tools that help financial analysts implement the plans that improve factors such as profitability, liquidity, financial structure, and leverage. Although ratios report mostly on past performances, they can be predictive too and provide lead indications of potential problem areas. Ratio analysis is used primarily to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Trend analysis identifies trends — good and bad — and adjusts business practices accordingly. This can help compare and analyze how the company’s ratios fair against those of other businesses, both in and out of your industry. Directs you to click to review the ratios typically performed. What should you look for in all these numbers?

You need to analyze if the business is successful; you need to know if this business, given everything you know about its internal and external environment, is a good place to continue to invest the scarce resources of the company.

For this module's assignment for Harley-Davidson, you need to analyze its financials as well as the financials of its primary competitors.

Ultimately, as you move into the strategy formulation phase, you will want to know just how well Harley-Davidson's current strategy is working, how much it has to invest in new strategies, and whether the company is attractive to both Wall Street and Main Street.

Remember that these numbers tell a story. They represent points in time and, over time, trends. These will need to be explained as you interpret the numbers and their meaning. This will be another input toward strategy selection.

Balanced Scorecard

Directs you to click to research and review examples of a balanced scorecard.

Balanced Scorecard: A Strategic Management and Measurement System

In the 1990s, many firms recognized that scrutinizing financial performance alone misses some important aspects of firm performance.

Interestingly, it was a Harvard accounting professor, Robert Kaplan, in conjunction with David Norton, who, in 1992, wrote the groundbreaking article "The Balanced Scorecard: Measures that Drive Performance" for the Harvard Business Review. Kaplan and Norton advocated measuring four key aspects of firm performance. They called these aspects "perspectives."

Company Performance Perspectives

· The Customer Perspective - This emphasizes how a firm is performing on things highly valued by the customer.

· The Financial Perspective -This is viewed as an outcome measure of doing the other three perspectives well.

· The Business Process Perspective-This includes a focus on how a firm’s internal business processes are performing.

· The Learning and Growth Perspective-This includes people and technology.

Click here to learn more about a balanced scorecard and the four perspectives.

The balanced scorecard has its roots in continuous improvement. It is also a useful process for managers to achieve alignment of goals and measures across the organization.

Let's discuss the example of a midsize company that implemented a balanced scorecard. As a result, the entire organization focused on a few key drivers of performance. This helped people focus on doing the right things to build customer loyalty.

Improving customer loyalty and satisfaction required significant process improvement and change. New technology was required to track customers better.

In addition, people required additional training to be able to serve customers better.

The balanced scorecard also pointed out that a strong customer-focused culture is needed and that employee retention and satisfaction are directly related to customer retention.

The experience at this company demonstrates the power of the balanced scorecard.

The economy, however, took a nosedive in 2001, and the scorecard became a luxury the firm could not afford because lay-offs and cost cutting became the focus.

As with any major strategic initiative, top management support and leadership is essential to the success of the balanced scorecard. It is interesting to note that the emphasis on measurement and metrics was unnerving to the employees of this organization, who worried that this degree of attention on metrics of performance would lead to termination.

One of the lessons learned is that the culture of an organization is essential to determine if the organization will accept the balanced scorecard. If a measurement or strong accountability culture is not present, it will take work in this area first to build a culture of performance and prepare the way for a full-blown measurement system.

Summary, Part 2

To wrap up this module and the topic of strategy analysis, let's summarize what we learned.

This module we learned about the inner workings of an organization through an extensive internal analysis.

In this internal analysis, you:

· Did a SWOT analysis, which summarizes the following:

· Strengths

· Weaknesses

· Opportunities

· Threats

Internal analysis discusses the strengths and weaknesses; whereas, external analysis discusses the opportunities and threats.

· Checked whether the firm is resource based and whether the resources constitute a form of competitive or SCA over rival firms.

· Examined the firm's value chain, which consists of primary and secondary activities. These activities are "resources" to provide additional value to customers and areas to look for creative cost savings.

· Analyzed the firm's financial performance over time, which helps to determine the important trends in financial performance. It also helps to discern the firm's performance in the industry and compared with that of its industry cohorts—the strategic group.

Having done the internal analysis you are now ready to answer these questions:

1. Is the firm's strategy working? How well is the strategy working? What evidence do you have to support your view?

2. Is the firm well positioned compared with its competitors? What evidence do you have?

3. Who are the firm's major competitors? What are their strengths and weaknesses? How are their strategies working?

4. How much strategic change is needed given your findings? On a continuum from very little to major turnaround, where would you place the firm?

5. Is the firm performing on all of Kaplan and Norton's four perspectives?

In the following modules, the scenario will address these questions thoroughly so you have the chance to practice both types of analysis—internal and external—and the concepts are clearer.