Deck 2: Internal Audit of Strategic Assets: Resources and Competencies

Question 1

In the strategic planning and management process, what is the purpose of performing an internal audit of strategic assets? In answering that question, define the term "strategic assets".

Answer 1

$\bullet$ An organization's "strategic assets" are all the resources and competencies that it possesses that might be deployed in the implementation of its strategies or that might impact the choice of those strategies. The purpose of the internal audit is to determine exactly what strategic assets the organization has to work with in making its strategic plans. The most thoughtful plans take fullest advantage of those assets. A strategy is doomed to failure if it relies on assets that the organization does not currently own. However, an organization may choose to acquire assets necessary for a strategy that it believes to be important to its future.

Question 2

List and describe briefly the fundamental three methods for viewing, analyzing, and understanding an organization's strategic assets.

Answer 2

• Financial Performance Analysis: This method examines the most critical strategic asset - an organization's financial resources. The available capital is a primary determinant of what an organization can achieve strategically. Furthermore, financial assets can purchase almost all the other resources required to implement strategies - space, equipment, people, buildings, intellectual property, and skills. The success of the strategies is typically measured in financial terms. Many stakeholders, particularly the owners of for-profit corporations, pay primary attention to dollar metrics.
• A few common measures are traditionally watched as indicators of an organization's fiscal health. Most of them are calculated and followed over a period of time to detect trends.
• Sales, market share, and profits.
• Free cash flow.
• External capital sources.
• Capital project hurdle rate.
• Other capital demands.
• Shareholder value.
• Liquidity ratios, profitability, operating efficiency, and capital structure ratios.
• Resources And Competencies Review: This method consists of an inventory of the various strategy-relevant resources possessed by the organization and the competencies that are manifested through them. It tells the organization what means are available to it for carrying out any strategies that it might have in mind.
• Value Chain Evaluation: This method analyzes an organization's strategic potential by describing the chain of value-adding activities that it performs in creating goods and services. At each point in the chain, it identifies the assets (resources and competencies) being applied to create value. The method then determines whether those assets are being used as efficiently as possible to create that value, whether the same value could be created in entirely different ways, whether new values could be created at different points in the value chain, and whether the entire value chain could be reengineered to deliver greater value more efficiently. The ultimate strategic purpose of this method is a persistent quest for sustainable competitive advantage.

Question 3

Explain what strategic "resources" and "competencies" are, how they are different from each other, and how they are interrelated.

Answer 3

$\bullet$ Resources are the things that an organization owns and the people that it employs. The resources are either tangible or intangible, and fall into the following categories.
$\bullet$ Tangible (visible, touchable, measurable): financial, organizational systems and structures, physical, technological.
$\bullet$ Intangible (unseen, amorphous): human, creative, perceptual.
$\bullet$ These resources have competencies - latent abilities to perform the activities that animate the value chain. The competencies are usually the product of combinations of resources, the most important being the human ones. A typical competency is reflected in a person operating a piece of equipment or interacting with a system.

Question 4

If you wish to understand an organization's financial capabilities for strategic initiatives, what are five financial metrics that you would look at? Explain how each is calculated and what it tells you about the organization.

Question 5

List and explain non-financial metrics that could be used to assess the success of operations and strategies in a physician group practice or in a biotechnology startup.

Question 6

Briefly describe each of the characteristics of a competence that might serve as the basis for a "sustainable competitive advantage".

Question 7

Describe four ways in which an organization can "manage" its resources and competencies in order to assure that they are well matched to the strategies that are planned.

Question 8

Explain the concept of the "internal value chain" as though you were talking to someone with no background in management or strategy.

Question 9

Describe in detail how an organization can use sophisticated knowledge of its internal value chain to guide its strategic decisions.

Question 10

Discuss the difference between performing an activity better in the existing way and performing it in an entirely different way. Which approach is most effective in gaining competitive advantage and why?