Strategic Analysis and Planning Series V: Internal Analysis

Learn who you are, what you do well and what you don’t do well.
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This internal analysis considers your practice’s leadership, culture, business structure, value chain and financial performance in order to explore your core competencies and the presence of a competitive advantage.

In this series of articles, we have examined the concept of strategic planning, the analysis of the external environment, and the conditions of the competitive and competitor environments. In Part Five, we will analyze what is happening inside your individual practice by conducting an internal audit.

This internal analysis considers your practice’s leadership, culture, business structure, value chain and financial performance in order to explore your core competencies and the presence of a competitive advantage. The purpose of this investigation is to identify the strengths and weakness of your business, and to assess how salient they are in light of the external, competitive and competitor environments.

By identifying your veterinary firm’s core competencies, you can begin to determine the best strategic positioning and sustainable competitive advantage for your practice.

Leadership

Leaders set the tone of the firm, as well as influencing its culture. Leadership of the practice can be a source of competitive advantage (think Steve Jobs) or disadvantage.

Leadership can also be a weakness when owners make poor decisions about how to employ resources or find it hard to remain disciplined in their business management practices.

An important issue related to leadership is governance. Is the partner group managing the practice team effectively? Do they communicate well with each other and practice collaborative decision making? It is important to determine whether leadership and governance are a source of strength or weakness for your practice.

For example, at ABC Equine, leadership and governance are not highly developed. Three partners own the practice equally, and while one partner performs some management duties, there is no CEO or president heading the practice. A fairly laissez-faire form of leadership exists, with sporadic reactionary actions to events or crises. Despite efforts to write policies and create procedures to set expectations for team members, little accountability exists. Significant frustration and low morale occur in staff members due to inconsistencies in practice owners’ words and actions.

When partners individually attempt to exhibit leadership, it is not uncommon for other partners to initially support efforts but later withdraw support. It is not uncommon for a partner to make a hasty unilateral decision that must later be modified. The three partners struggle to make timely decisions, accomplish management tasks, discuss strategy or provide a vision for the practice.

Revenue production is highly valued and takes precedence over all other activities. Communication with team members is sporadic and inconsistent in message and vision.

Culture

Business culture refers to the beliefs and behaviors that determine how a company’s employees and management interact and handle business transactions. Culture develops organically over time from the cumulative traits of the people the company hires and the leadership within.

Culture is another potential source of advantage, as it influences the practice’s ability to maintain a highly motivated, effective team and respond to shifts in the competitive environment. Being open to change could be the difference between earning above-average returns and struggling to stay afloat.

Companies such as Southwest Airlines can claim their culture as a core competence and a source of advantage. Their strong culture attracts employees who are dedicated, often willing to work for less compensation than a competitor pays, and who take pride in exemplifying the firm’s values.

Case in point: A passenger on a Southwest flight was traveling to a medical specialist. Delays made her miss her connecting flight to a town four hours away. A Southwest employee, knowing that there would be no other way to get the passenger to her appointment, drove her. This abbreviated vignette demonstrates the power of a strong culture and a firm that creates its competitive advantage around superior customer service.

At our example practice, ABC Equine, the culture is one of caring: for its patients, its clients and also for one another. Practice members love horses and direct their actions in a caring way without overt leadership. All questions about how to respond to situations can generally be answered by referring to whether or not the action demonstrates a high level of care and caring.

This appears to occur without conscious thought, as a form of practice DNA. Employees frequently remain with the practice long term, some for decades, and demonstrate true caring about the practice’s success.

Organizational Structure

Most small, private practices have never thought about their organizational structure. The definition of organizational structure is the hierarchical arrangement of lines of authority, communications, rights and duties of an organization.

Small firms usually have a simple structure where decision-making is centralized in the owners’ group. However, as the number of employees grows, considering to whom they report and who has authority to answer questions and make decisions becomes much more important. When practice owners make all the decisions, they have less time to earn revenue. Leadership and competitive advantage suffer as a result.

At ABC Equine, there are currently three equal partners who loosely govern the practice, aided by an office manager. The office manager also serves as the human resources, financial and administrative manager, supervising the approximately 18 employees. Associate veterinarians utilize the office manager for administrative functions but answer to the partners in professional matters. Partners sometimes do not support decisions made by the office manager, leading to the loss of her authority with employees.

Value Chain Analysis

A value chain is defined as all the activities within an organization that add value to the service or products that the company produces. When all of these activities occur at their optimum level, a business can gain a competitive advantage. The value obtained exceeds the costs of providing it, and as a result, clients feel they receive excellent value for the price they pay and should return enthusiastically to the practice for more services.

Depending on where in the firm’s value chain a core competency originates, it might be possible to leverage it across other activities and provide a platform for a truly sustainable competitive advantage.

In Figure 1 at the bottom of this article, ABC Equine’s value chain demonstrates more areas of strength than weakness. Strengths lie in operational excellence, with a very high level of attention to detail and personal care for the needs of both the client and the patient.

Within the hospital, the entire experience of the client and patient is planned to minimize discomfort, fear and inconvenience while maximizing patient outcomes. In the ambulatory setting, personal relationships develop between veterinarians, clients and patients after decades of care. A high level of attention to compliance ensures that safety, liability protection and adherence to regulations are maximized.

Weaknesses revolve around communication failures and lapses between clients, receptionists and doctors. Lack of leadership, vision and accountability allow this failure in service to continue without correction.

Significant frustration and dissonance is experienced by staff members when the caring response they expect from doctors does not occur, whether through reluctance to attend an emergency or failure to respond to a client inquiry promptly. Client frustration occurs regularly when seamless and accurate appointment scheduling is not delivered.

Scheduling mistakes, omissions and tardy arrival of doctors are common. Lack of effective communication in inquiring about, making and attending appointments is significant.

Financial Analysis

The financial analysis should examine the firm’s health and competitiveness over a three- to-five year period. An assessment of revenue and profit trends is appropriate. Key performance indicators can be used to assess good management of accounts receivable (AR) and inventory. Average Days to Collection, average percent of revenue in AR, Inventory Turnover ratio, Days of Inventory on Hand and the Cost of Goods Sold (COGS) percentages are frequently used as benchmarks. Seeking assistance from your accountant might be prudent if you have only a rudimentary grasp of financial statements.

Our example practice, ABC Equine, has steadily increased profit as a percent of gross revenue for the last five years (see Figure 2). This is a strong improvement of financial performance.

Strategic V figure 2

Resources, Capabilities and Core Competence

All businesses are composed of a series of tangible (e.g., equipment) and intangible (e.g., intellectual capital) resources. When a company combines these resources with technical skills and processes, various capabilities are created. Capabilities can then be reflected in the sets of activities that combine to form the services that are provided by the business.

Capabilities and activities both have the potential to foster core competencies. They can even fuel a competitive advantage if they have perceived value to the client, are relatively rare, are hard to duplicate and if substitutes are hard to find.

Activities have value when clients select a particular practice’s service above a competitor’s because they perceive that the benefit they receive outweighs the cost of purchasing it. Value must also exist for the firm in that it can command a price for its service that is greater than the cost of its creation. Both value perspectives need to exist if competitive advantage is to be achieved.

When there are few competitors who provide similar services in an area, then these activities gain value because of their rarity. Further, if the activities are difficult to copy or cannot be readily replaced with other services, then they can become a practice’s core competency.

For example, if a board-certified ophthalmologist begins to practice in a region that has no other animal eye specialist, the services offered by that doctor would be highly valued, rare for the region, hard to duplicate in most instances, and substitutes would be hard to find. As a result, that veterinarian would have a strong competitive advantage in this core competency activity.

ABC Equine’s Resources

The most important resource at ABC Equine is its intangible intellectual capital. The combined education and experience of two boarded specialists and two experienced generalists provide a deep pool of knowledge.

The hospital facility is a tremendous resource, providing attractive, spacious and biosecure surroundings for the care of patients. A robust complement of diagnostic, medical and surgical equipment, as well as instrumentation, allows the veterinarians to perform at a high level and achieve excellent outcomes.

Highly integrated veterinary management software allows paperless recordkeeping, easily accessed treatment orders and automatic invoice production. An open-office structure promotes consultation, debate and the sharing of case details and imaging. While these resources contribute strongly to ABC Equine’s success, they are imitable despite significant financial barriers for competitors, and as such, are not a source of sustainable competitive advantage.

ABC Equine’s Capabilities

ABC Equine has broad professional capabilities in the areas of medicine, surgery, sports medicine, reproduction, dentistry and wellness. These skills are readily found in the marketplace of highly-trained veterinarians that are currently under-employed.

While the practice has recruited, selected and retained an excellent team, it would be foolish to assume that a group of similar individuals could not be assembled by a competitor.

ABC Equine’s Core Competence

The core competence that could drive ABC Equine’s success and sustainable competitive advantage is the level of care that the team brings to each part of the value chain, in particular the careful management of the client/patient experience.

This pervasive thread of caring acts as the practice DNA and is expressed throughout the value chain, despite weak leadership and the lack of an articulated vision.

Take-Home Message

After performing the internal analysis, it is wise to formulate a written statement or brief notes about your findings. The internal environment is a composite of activities and capabilities that provide the foundation for strategic positioning and competitive advantage. You should note the strengths and weaknesses of your practice and indicate the core competencies.

Understanding what the practice can do and the direction in which the market is moving can help you to create strategic positioning and sustainable advantage better—and perhaps faster— than your competitors.

The internal audit of ABC Equine revealed a number of strengths. These include a strong financial position and a well-diversified team of professionals that provide care to several broad segments of the equine industry, with a high level of skill and detail. Other strengths are a strong infrastructure that supports the activities of the firm and a core competence of caring that is very difficult to imitate.

Weaknesses lie in leadership, vision and communication. Additionally, accounts receivable collection is an area of underperformance. These weaknesses are significant in that they originate in the partners’ group, have been present historically for the life of the practice, and might be difficult to eradicate.

The practice strengths are a foundation for sustained value creation for clients who desire high levels of technical expertise delivered with compassion and attention to detail. If weaknesses can be improved, the core competence of caring might prove to provide sustained competitive advantage.

As the great hockey player Wayne Gretzky described it, you need to skate to where the puck is going to be. It is not enough to know what the practice does really well and for whom. It is imperative to understand what your team can still do better and where your practice needs to evolve and why, as well as how competitors are addressing the same issues.

Once a business truly understands the source(s) of its competence and advantages, it must ensure that its structure is aligned in such a way as to strategically maximize capabilities. Human capital is best employed thinking and acting in those areas that are sources of sustainable advantage. 

(Editor's note: Right-click on the image below and choose OPEN IMAGE IN NEW TAB. Click on that new tab and you can enlarge Figure 1 to read all the details.)

Strategic V Figure 1 NEW