ISL457U-STRATEGIC MANAGEMENT
Chapter 4: Internal Environment Analysis
Introduction
It is very important to take the context into consideration in a firm, which informs about how it operates. The context provides information on the plan, the factors that lead to improvement, success, tools for the plan as well as those that are needed for competition and sustainability.
Why Internal Analysis?
Internal Analysis is vital in order to keep competition and sustainability. Without an internal analysis, the company may lose its profit or even it may collapse. In the last years we have witnessed the biggest collapse of the biggest companies in the history, such as Nokia, TWA, and Kodak. Other biggest companies, such as Sony, Panasonic, or Motorola struggle to survive during their harsh competition with Apple, Samsung, and Huwaei.
However, no company is safe in the struggle of competition. If they are not considered as innovative, they are prone to fail. For this reason, every company is trying to improve in terms of quality, innovation, and service in the fast-changing economic conditions.
Organizations carry out an internal analysis for their businesses for the following reasons:
• to identify their resources, competences, and core competencies • to evaluate how effectively value-adding activities are organized; • to evaluate the performance of products; • to evaluate financial performance, particularly in comparison with competitors; • to evaluate investment potential • to assess the suitability, feasibility, and acceptability of future strategies.
Some organizations must make a very comprehensive analysis to evaluate:
• Resource analysis, • Competence audit and the sources of distinctive capabilities, • Internal activities analysis, • Performance analysis of financial and non- financial indicators, • Human resources and culture, • Financial resources and financial performance, • Products and their positions in markets
Overview of Internal Analysis
Some companies do better than their competitors due their internal analyses of identifying their strengths and weaknesses in combination with an analysis of the external environment’s opportunities and threats of a company.
Some companies do better than their competitors due their internal analyses of identifying their strengths and
weaknesses in combination with an analysis of the external environment’s opportunities and threats of a company.
Internal analysis is a three-step process:
1. Understanding the process by which companies create value and profit and the role of resources, capabilities, and distinctive competencies of the company. 2. Understanding the need for superior efficiency, innovation, quality, and customer responsiveness to create high profit. 3. Analyzing the sources of the company’s competitive advantage
Managers must investigate the company’s existing resources and capabilities; this may be easier and less costly then searching for new ones outside. In order to achieve this aim they need to:
1. Focus on resources as appropriate capabilities, on the achievement of clear and specific strategic objectives. 2. Accumulate and develop resources, 3. Put together potentially complementary resources by blending and balancing, 4. Conserve the existing resources 5. Use time wisely in order to achieve the result
Sustainable Competitive Advantage
A competitive advantage is achieved when the company can create values or goods that its rivals fail to do lack. Companies work hard to achieve such advantages over their rivals by developing their resources and capabilities.
A company may create sustainable competitive advantage by addressing the following 6 questions:
1. Does the resource or capability have value in the market? 2. Is it unique? 3. Is there a substitute for the resource or capability? 4. Do organizational systems realize the potential of the resource or capability? 5. Is the organization aware of the advantages of the resource or capability? 6. Can the resource or capability be easily imitated?
These are important questions to be considered in evaluating the sustainable competitiveness.
Resource-Based View
Internal Analysis is important in determining a company’s resources, strengths, and weaknesses. In order to carry out an effective internal analysis, managers must understand the resources of a firm. This approach is known as ‘Resource-Based View’. (RBV). According to RBV, a firm’s resources and unique capabilities must be determined and evaluated in terms of competition.
RBV emphasizes a firm’s resources and competition potential against its rivals as well its profitability, growth, and survival. These resources can be categorized as in the following:
• physical resources such as plant, land, equipment, technology, etc., • human resources such as the manpower, their skills, work culture, training level, experience, intelligence, abilities, • organizational resources such as features of an organization consisting of structure, systems, processes, patents, trademarks, brand value, etc.
By analyzing all these resources effectively, a company can gain competitive advantages over its rivals.
Adding Competitive Value to the Firm: The Value Chain Analysis
This type of analysis focuses on value-added to the value chain of the firm. The value adding activities are as in the following:
• purchasing supplies, • manufacturing, • distribution and marketing of its goods and, • services.
The value chain is a combination of these activities functioning together. These chains are mostly unique and this determines the uniqueness of a firm and may lead to advantages in competing with its rivals.
The Value Chain
The value chain connects value activities to the firm’s operation. Two aspects are considered in this case:
1. The added value that each part of the organization contributes to the whole organization, and, 2. The contribution to the competitive advantage of the whole organization that each of these parts might make
The value chain analysis is carried out at the level of product rather than at the corporate level.
The company is investigated from two different perspectives: Primary activities (production and its components) and Support activities (finance, and marketing). The Primary activities are the following:
• Inbound logistics: Receiving, storing and transporting the goods. • Operations: The production area of the company • Outbound logistics: Distribution of the final product to the customer (transport and warehousing, etc.) • Marketing and sales: Customers’ wants and needs and advertising and promotions fall within this area. • Service: Service for preinstallation or after-sales
When these functions are carried out better, they may provide advantage on competition with their rivals.
On the other hand, support activities are as in the following:
• Procurement: In many companies, a separate department exists that is responsible for purchasing the highest quality goods and materials for the lowest prices. • Technology development: This may be an important area for new products in the company. • Human resource management: Recruitment, training, management development, and reward structures • Firm infrastructure: The background planning and control systems
These support activities also add value to the company.
Internal Analysis Approaches
Some of the most common internal analysis approaches are the following:
1. Functional approach 2. GAP analysis 3. SWOT Analysis 4. VRIO Analysis 5. OCAT 6. McKinsey 7S Framework 7. Core Competencies Analysis
Functional Approach
This approach deals with the analysis of each function of a firm, such as production, marketing, finance, human resources, R&D, and management.
This process is carried out in order to understand which functions at the firm are contributing substantially or has poor performance. As a result, the managers can shape their strategies accordingly. This process is called the ‘functional approach’.
The Gap Analysis
This is an internal evaluation tool that helps firms to identify performance deficiencies by comparing the firm’s current state to the desired future state. Then a series of actions/strategies are developed the bridge the gap between the two. Gap analysis can be very specific in terms of fine-tuning one process such as marketing, finance, or production.
SWOT Analysis
SWOT is an initialism of Strengths, Weaknesses, Opportunities, and Threats. It is very simple and widely- used and based on the weaknesses, threats and opportunities in its operating markets and target customers. This analysis can help the company to create a sustainable niche in its market as well as strengthen its market position.
VRIO Analysis
The VRIO framework is a way of analysis that seeks to answer the following questions on a particular compotency of the firm:
1. Value: Does it provide a competitive advantage? 2. Rareness: Do no other competitors possess it? 3. Imitability: Is it costly for others to imitate? 4. Organization: Is the firm organized to exploit the resource?
If the answer to these questions is yes for a particular competency, it is considered to be a strength.
OCAT
The Organizational Capacity Assessment Tool (OCAT) was designed to evaluate the internal environment of non- profit organizations by using 10 internal dimensions:
• Aspirations • Strategy • Leadership, Board & Staff • Funding • Marketing & Communications • Advocacy • Business Processes • Infrastructure & Organizational Structure • Culture and shared values • Innovation and adaptation
The results of the OCAT help non-profit organizations evaluate their resources and improve their capacity.
McKinsey 7S Framework
McKinsey 7S aims to analyze 7 internal aspects of an organization that need to be aligned for an organization to compete. The model’s 7 elements include:
• Strategy • Structure • Systems • Shared Values • Skills • Style • Staff
Core Competencies Analysis
The core competency analysis is an internal analysis to identify the organization’s core competencies that create unique value to its customers. After these core competencies are identified, strategies can be created to focus on only what the organization does well and s oto provide unique value to the customer.
Assessment is very important to be successful in the environment of severe competition in today’s world. An organization must continuously develop itself.