Strategy to Win Element 3 - Internal Analysis

 

Internal Analysis: Understanding Your Capabilities and Setting Strategic Priorities

In this video, we discuss the importance of internal analysis in developing a winning strategy for companies. Understanding a company's capabilities and identifying its revenue sources are essential. The internal analysis provides valuable insights that enable senior executives and CEOs to determine their current position, where they need to be, and what changes they must make.

 

Internal analysis empowers executives to gain a comprehensive view of their company's strengths, weaknesses, and vulnerabilities actively. By conducting an accurate and objective internal analysis, companies can make informed decisions that lead to success.

 

SWOT Analysis and the Role of Competitors

SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is a helpful tool; however, leaders often overlook the importance of comparing themselves to their competitors. The SWOT analysis becomes more valuable when conducted in relation to your competitors and strategic objectives. Expanding the analysis to include competitor analysis is crucial for comprehensively understanding the market landscape. It helps leaders assess more accurately how they are perceived in the marketplace and the strategic moves that will strengthen their position.

 

Avoiding Core Rigidities: A Look in the Mirror

Companies sometimes fail because they become too focused on their core competencies, leading to rigidity that hinders adaptation to changing market trends. If a company is not careful, core strengths can turn into core rigidities. Take the example of Blockbuster, which failed to anticipate the shift toward the customer trend of online streaming of movies.

 

Blockbuster dominated the video rental chain for over a decade. However, it failed to adapt to changing customer preferences and new technologies, such as online streaming and DVD-by-mail services offered by Netflix. Additionally, Blockbuster made some bad strategic decisions, such as charging high late fees, declining to acquire Netflix when it had the chance, and accumulating a huge debt. As a result, Blockbuster went bankrupt in 2010. At its peak, Blockbuster's market cap was valued at $5 billion in 2002, whereas as of June 30, 2023, Netflix's market cap was $190.37 billion, or 38 times larger than Blockbuster's peak value.

 

It is essential not to allow "core rigidities" to prevent us from adapting to what is important to customers. To remain competitive, companies must continuously monitor their environment, including customer trends, changes in technology, and moves made by their competition, and be willing to make bold decisions. Internal analysis is the tool that helps executives see and decide what is important.

 

Performing a SWOT Analysis with Implications

We have all conducted a SWOT analysis and discussed its various elements, which include strengths, weaknesses, opportunities, and vulnerabilities. It is crucial to go beyond merely listing internal factors; instead, we must consider the implications of trends, weaknesses, and strengths. Identifying implications helps CEOs and executives effectively prioritize their strategic initiatives, forming the basis of their decisions.

 

Making Calculated Moves and Courageous Decisions

Utilizing internal analysis is essential in making calculated decisions that address identified weaknesses or threats. Gary mentioned a company that stopped selling to distributors undercutting their prices through Amazon. Despite experiencing a 40% loss in sales revenue, the company saw an overall increase in profits and earnings. Conducting a thorough analysis and planning before making such bold moves is of utmost importance.

 

Collaborative Internal Analysis

To effectively implement internal analysis, we encourage leaders to involve their executive teams. Conducting collaborative discussions leverages the team's knowledge and experience, leading to increased consensus on strengths, weaknesses, and vulnerabilities. It helps the leadership team buy into the basic assumptions that inform the overall strategy. By involving the team in the process, companies can achieve a more complete and accurate assessment of their internal landscape.

 

Analyzing Competitors and Assessing Strengths and Weaknesses

Regarding internal analysis, it is vital to highlight the value of comparing a company's strengths and weaknesses against its competitors. By closely examining the competition, companies can identify areas of vulnerability and potential growth opportunities.

 

To perform a comparative SWOT analysis with their competitor's SWOT, you can follow these 5 steps:

 

1. Identify your main competitor or competitors, including their history, performance, marketing strategies, customer base, and financial health.

2. Gather and analyze data about your competitor(s), such as their products, services, prices, quality, reputation, distribution, and market share.

3. Create a matrix with four quadrants: strengths, weaknesses, opportunities, and threats, and fill each quadrant with the relevant factors that you identified from your data.

4. Use the matrix to identify your competitor's advantages and disadvantages, as well as the potential risks and opportunities for your business.

5. Make decisions based on the results of your analysis, such as improving your strengths, addressing your weaknesses, exploiting your opportunities, and avoiding or minimizing your threats.

 

Linking Internal Analysis to Strategic Objectives

We emphasize the importance of conducting internal analysis with a strategic objective in mind. This approach involves beginning with the end goal in mind. By conducting the SWOT analysis from the perspective of achieving the strategic objective, companies can identify areas of focus that will propel them toward their desired goals. This way, they can avoid getting distracted by unrelated priorities or interests.

 

Margins Analysis and Knowing Where You Make Money

The SWOT analysis is one useful type of internal analysis. Next, it is essential to analyze the profit margins within different segments of the business. Understanding where a company is making money and where it is not is crucial. By breaking down the company by product line, business segment, or channel, executives gain valuable insights into profitability, enabling them to make informed decisions.

 

For instance, NVIDIA's 2023 10-K report reveals an overall increase in revenue from 2022 to 2023. However, when we examine the two major segments of the company, Compute & Networking, and Graphics, there is a difference in their contributions to the overall revenue in these two segments:

 

• "Compute and Networking" showed a revenue increase of 36% from 2022.

• "Graphics" showed a revenue decrease of 25% from 2022.

 

The report also indicates a significant decrease in their gross and net profit margins. While the company may celebrate an overall successful year in terms of revenue on their 2023 report, including their remarkable $1.1 trillion market cap as of July 2023, which reflects an increase of about 179% from July 2022, it is still crucial for them to understand which segments of their business are diluting revenue and margins. This understanding will empower them to make decisions that will turn the situation around.

 

Product Analysis: Quantifying Profitability

Knowing the profitability of each product within a company's portfolio is crucial. While some products in certain companies might act as loss leaders or generate minimal profits, accurately quantifying these aspects is essential. We urge you to conduct a product analysis and break down your business by product lines to analyze the gross margin of each category. This will help you understand which products contribute to profitability and which ones do not.

 

Understanding Margins and Maximizing Profitability

Break down your company's overall gross margin and examine the individual performance of each product line. This will enable you to identify product lines with higher margins and those that are less profitable. Focus on finding ways to raise margins for less profitable product lines and increase sales for highly profitable ones. Making informed decisions regarding pricing and product focus will lead to improved profitability.

 

Analyzing Channels and Identifying Profitable Streams

Moving beyond product analysis, we need to examine the profitability of different sales channels through which the company sells its products. Understand the profitability of various sales channels, such as wholesale, online, or distributor partnerships.

 

Assess whether certain channels are generating sufficient profits or if there are opportunities to optimize margins through different channels. Understanding the margins and costs of various channels is crucial for making strategic decisions.

 

Segment Analysis: Identifying Logical Units

Certain companies may have different segments within their business, such as branded products, private label products, domestic and international markets, or geographic divisions. Break down your business into logical segments and assess the profitability of each segment. This will provide a focused understanding of the profitability of different areas of the business and facilitate targeted decisions to maximize profitability. Identifying which customer segments are generating a profit and which ones are costing you money will lead to profitable decisions.

 

Making Informed Decisions and Seizing Opportunities

To uncover missed opportunities and prioritize strategic initiatives, conduct a thorough internal analysis. Amidst day-to-day operations, it's easy to lose sight of the bigger strategic picture of your business. Avoid unintended declines in revenues and profit margins by periodically assessing profitability at the product, channel, and segment levels, which naturally occur in the course of day-to-day business. Analyzing the numbers and understanding where a company is making money and where it is not will empower executives to make informed decisions, optimize profitability, seize growth opportunities, and align activities with strategic objectives actively.

 

Enterprise Risk and Opportunity Management (EROM)

EROM is a process that helps businesses identify and assess external factors that could pose risks or opportunities. These factors may range from changes in technology and market trends to economic recessions or supply chain disruptions. By discussing these factors as an executive team, companies can anticipate potential challenges and proactively explore ways to mitigate risks or capitalize on emerging opportunities.

 

Drawing Implications and Setting Strategic Priorities

Moving beyond the analysis phase, it is essential to draw implications from your internal analysis. The next step is to identify strategic priorities based on the desired strategic objectives. However, it is crucial to be mindful of your capacity to handle projects effectively. We recommend taking on no more than three significant projects at a time to ensure efficient implementation and resource allocation.

 

Evaluation, Implications, and Priorities

Thoroughly evaluate the implications that arise from market research, internal analysis, and customer journey. Identifying trends, weaknesses, vulnerabilities, and opportunities will provide valuable insights to help prioritize your actions. However, avoid rushing to judgment and instead consider the broader market perspective, internal capabilities, and customer journey. This comprehensive approach ensures that the chosen strategic priorities are well-informed and will have a lasting impact.

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Strategic Priorities as Long-term Projects

Strategic priorities are not quick fixes or short-term goals but instead, they represent long-term projects that require substantial resources and time. While the analysis may yield some immediate actions, they do not qualify as strategic priorities. For example, raising prices on a specific product segment might be a quick adjustment, but it does not fall under the category of a strategic priority. Patience is crucial as companies work through the training and subsequent elements to effectively prioritize and implement strategic initiatives.

 

Adjusting Strategic Objectives

Insights gained from the analysis may lead to a reevaluation of the strategic objectives. As companies delve deeper into market research, internal analysis, and customer journey, they may discover new capabilities or realize the need to adjust their strategic objectives. This ongoing process ensures that the strategic objectives remain aligned with the company's capabilities and market dynamics.

 

Conclusion: The Value of a Detailed Internal Analysis

In conclusion, the detailed analysis conducted through market research, internal analysis, and customer journey provides valuable insights that shape your strategic priorities. By thoroughly evaluating the implications derived from your analysis, companies can prioritize their actions and focus their resources on projects that deliver the most significant impact. The process of deciding strategic priorities requires patience, a comprehensive understanding of the market, and a consideration of internal capabilities.

 

Even if resources are limited, investing in even a small amount of analysis can provide a competitive edge. This training aims to cultivate a strategic mindset and equip companies with the tools and knowledge to succeed. By completing the assigned homework and continuing with the coursework, you will build a strong foundation for strategic decision-making and achieve long-term success.