MODULE 5

ORGANIZATIONAL APPRAISAL: INTERNAL ASSESSMENT 1

Lesson 1: Importance of Internal Analysis

Lesson 2: SWOT Analysis

INTRODUCTION

The terms "internal appraisal," "organizational audit," "internal corporate assessment," etc. are also used
to describe internal analysis. The total strengths and weaknesses of a firm's resources and competencies
have been demonstrated to be more crucial for a strategy over time than environmental factors, according
to study. Businesses that released superior products made good profits even in unappealing and normally
unsuccessful industries.

Managers perform internal analysis to identify the strengths and weaknesses of a firm’s resources and
capabilities. The basic purpose is to build on the strengths and overcome the weaknesses in order to avail
of the opportunities and minimize the effects of threats. The ultimate aim is to gain and sustain competitive
advantage in the marketplace.

Module 5 is the first of the 2 parts discussions about how the company perform organizational appraisal
or internal assessment. This module will focus on the discussion about the importance of internal analysis
and SWOT Analysis where you can learn that analyzing internal environment is also important in strategic
management.

LEARNING OUTCOMES

After studying this module, the students are expected to:

1. Explain the importance of internal analysis.

2. Discuss SWOT analysis.

LESSON 1: IMPORTANCE OF INTERNAL ANALYSIS

Strategic management is ultimately a “matching game” between environmental opportunities and overall
organizational strengths. But, before a firm actually starts tapping the opportunities, it is important to know
its own strengths and weaknesses. Without this knowledge, it cannot decide which opportunities to choose
and which ones to reject. One of the ingredients critical to the success of a strategy is that the strategy
must place “realistic” requirements on the firm’s resources. Therefore, the company cannot afford to rely
solely on intuition or unproven assumptions. Only systematic analysis of its strengths and weaknesses
can be of help. This is accomplished in internal analysis by using analytical techniques like RBV, SWOT
analysis, Value chain analysis, Benchmarking, IFE Matrix etc.

Thus, systematic internal analysis helps the firm:

1. To find where it stands in terms of its strengths and weaknesses

2. To exploit the opportunities that are in line with its capabilities
3. To correct important weaknesses
 4. To defend against threats
5. To assess capability gaps and take steps to enhance its capabilities

This practice serves as the foundation for creating the competitive advantage necessary for the firm's
survival and expansion.

Remember: The strengths of its resources and the abilities the organization uses to translate those
resources into outputs determine the opportunities that can be successfully utilized. In this way,
organizational resources and capabilities turn into a core element on which a strategy's survival and
success depend.

LESSON 2: SWOT ANALYSIS

SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis is a widely used
framework to overviews a company’s situation or current position. Any business engaging in strategic
planning must perform a SWOT analysis, which involves determining its current position in light of its
strengths, weaknesses, opportunities, and threats. Internal analysis gives information needed to identify
strengths and weaknesses, while environmental and industry analyses provide information needed to
identify opportunities and threats. These are the fundamental areas of focus in SWOT analysis.

SWOT analysis stands at the core of strategic management. It is important to note that strengths and
weaknesses are intrinsic (potential) value creating skills or assets or the lack thereof, relative to
competitive forces. Opportunities and threats, however, are external factors that are not created by the
company, but emerge as a result of the competitive dynamics caused by ‘gaps’ or ‘crunches’ in the market.

1. Strengths: Strength is something a company possesses or is good at doing. Examples include a

skill, valuable assets, alliances or joint ventures, an experienced sales team, simple access to raw
materials, a reputable name in the market, etc. An expanding market, new products, etc. are not
strengths.
2. Weaknesses: A company's weakness is a characteristic it lacks or performs poorly within.
Examples include a lack of knowledge or competence, asset deficiencies, functional area
deficiencies, etc. Although a company's weaknesses are frequently considered as the logical
"inverse" of its threats, the company's lack of strength in a particular sector or market is not always
indicative of a relative weakness because other companies may also be lacking in this particular
strength.
3. Opportunities: An opportunity is a significant favorable circumstance in the environment of a
company. Examples include market expansion, favorable adjustments to the regulatory or
competitive environment, technological advancements or demographic shifts, an increase in
demand, the chance to introduce products into new markets, the ability to generate revenue from
R&D through the licensing or sale of patents, etc. The level of opportunity analysis depends on the
level of detail and perceived realism.
4. Threats: A threat is a significant unfavorable circumstance in a company's environment. Examples
include greater competition, slow market development, increased purchasing or supplier power,
and regulatory changes, among others. Because they could result in reduced sales, higher
operating costs, higher capital costs, an inability to break even, decreasing margins or profitability,
etc., these forces pose serious threats to a company. The opportunity that your competitor has
could pose a threat to you.
Carrying out SWOT Analysis

A SWOT analysis initially assesses the strengths and weaknesses in terms of capabilities, resources, and
skills. The analyst then should see whether the internal capabilities match with the demands of the key
success factors. The job of a strategist is to capitalize on the organization’s strengths while minimizing the
effects of its weaknesses in order to take advantage of opportunities and overcome threats in the
environment. Table 5.1 illustrates an example of a SWOT analysis for a typical company.

Steps in SWOT Analysis

The three important steps in SWOT analysis are identification, conclusion and translation.

1. Identification:

a. Identify company resource strengths and competitive capabilities

b. Identify company resource weaknesses and competitive deficiencies
c. Identify company’s opportunities
d. Identify external threats

2. Conclusion: Draw conclusions about the company’s overall situation

3. Translation: Translate the conclusions into strategic actions by acting on them:

a. Match the company’s strategy to its strengths and opportunities

b. Correct important weaknesses
c. Defend against external threats

In formulating a SWOT analysis, there are several factors that will enhance the quality of the material:

1. Keep it brief; lengthy analysis is typically not required.

2. Relate strengths and weaknesses, wherever possible, to industry key factors for success.
 3. Strengths and weaknesses should also be stated in competitive terms, that is, in comparison with
competitors.
4. Statements should be specific and avoid blandness.
5. Analysis should reflect the gap, that is, where the company wishes to be and where it is now.
6. It is important to be realistic about the strengths and weaknesses of one’s own and competitive
organizations.

The most frequent error in SWOT analysis is probably to present a lengthy number of points but little
reasoning, explanation, or evidence. A short list with each point well-argued is more likely to be convincing.

TOWS Matrix

TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats, opportunities, weaknesses
and strengths. This matrix was proposed by Heinz Weihrich as a strategy formulation – matching tool.

TOWS analysis poses a number of questions:

What actions should a company take? Should it focus on using company’s strengths to capitalize on
opportunities, or acquire strengths in order to be able to capture opportunities? Or should it actively try to
minimize weaknesses and avoid threats?

TOWS matrix illustrates how internal strengths and weaknesses can be matched with external
opportunities and threats to generate four sets of possible alternative strategies. This matrix can be used
to generate corporate as well as business strategies. An example of TOWS matrix is shown below:

Internal factors/ External Strengths(S) Weaknesses(W)

factors
Opportunities(O) SO strategies: strategies that use strengths WO strategies: strategies that
to take advantage of opportunities. take advantage of opportunities by
over-coming weaknesses
Threats(T) ST strategies: strategies that use strengths WT strategies: strategies that
to avoid threats. minimize weaknesses and avoid
threats.

To generate a TOWS matrix, the following steps are to be followed:

1. List external opportunities available in the company’s current and future environment, in the
‘opportunities block’ on the left side of the matrix.
2. List external threats facing the company now and in future in the “threats block” on the left side of
the matrix.
3. List the specific areas of current and future strengths for the company, in the “strengths block”
across the top of the matrix.
4. List the specific areas of current and future weaknesses for the company in the “weaknesses box”
across the top of the matrix.
5. Generate a series of possible alternative strategies for the company based on particular
combinations of the four sets of factors.
The four sets of strategies that emerge are:

SO Strategies

SO strategies are generated by thinking of ways in which a company can use its strengths to take
advantage of opportunities. This is the most desirable and advantageous strategy as it seeks to mass up
the firm’s strengths to exploit opportunities. For example, Jollibee has been augmenting its strengths by
taking over businesses in the food industry, to exploit the growing potential of the food business.

ST Strategies

ST strategies use a company’s strengths as a way to avoid threats. A company may use its technological,
financial and marketing strengths to combat a new competition. For example: Jollibee has been employing
this strategy to fight the increasing competition from fast food chains coming from abroad that expand
here in the Philippines.

WO Strategies

WO Strategies attempt to take advantage of opportunities by overcoming its weaknesses. For example: a
textile machinery manufacturer’s main weakness is being dependent on foreign firms for technology and
the longtime taken to execute an order. The strategy followed was the thrust given to R&D to develop
indigenous technology so as to be in a better position to exploit the opportunity of growing demand for
textile machinery.

WT Strategies

WT Strategies are basically defensive strategies and primarily aimed at minimizing weaknesses and
avoiding threats. For example, managerial weakness may be solved by change of managerial personnel,
training and development etc. Weakness due to excess manpower may be addressed by restructuring,
downsizing, delayering and voluntary retirement schemes. External threats may be met by joint ventures
and other types of strategic alliances. In some cases, an unprofitable business that cannot be revived may
be divested.

Exploitative or "developmental strategies" – referred to as strategies for utilizing a strength to seize an

opportunity.

Blocking strategies – strategies that take advantage of a strength to overcome a weakness.

Remedial strategies – strategies used to overcome a weakness in order to seize an opportunity or get
rid of a threat.

The TOWS matrix is a very helpful tool for coming up with a number of alternate strategies that the firm's
decision-makers might not have otherwise thought about. It may be used to a particular business unit
inside a firm or to the company as a whole. However, it may be noted that the TOWS matrix is only one
of many ways to generate alternative strategies.
Critical Assessment of SWOT Analysis

SWOT analysis is one of the most basic techniques for analyzing firm and industry conditions. It provides
the "raw material" for examining a firm's internal and external situations. SWOT analysis can be used in
many ways to aid strategic analysis. It can be used, for instance, to systematically discuss a firm's
resources and the basic alternatives that result from such analysis. Such a discussion is necessary
because a strength to one firm may be a weakness for another firm, and vice-versa. For example, although
growing health consciousness poses a danger to some businesses (such as the tobacco industry), it
presents an opportunity for others (e.g. health clubs).

According to Johnson and Sholes (2002), a SWOT analysis summarizes issues from the business
environment and the strategic capability of an organization that impacts strategy development. This can
also be useful as a basis for judging future courses of action. The aim is to analyze how well the existing
strengths and weaknesses relate to and are able to handle the changes occurring in the business
environment. It can also be used to determine whether there are chances to further leverage the
organization's distinctive assets or core competencies. Overall, SWOT analysis helps focus discussion on
future choices and the extent to which the company is capable of supporting its strategies.

Advantages and Limitations of SWOT Analysis

Advantages

1. It is simple.
2. It portrays the essence of strategy formulation: matching a firm’s internal strengths and weaknesses
with its external opportunities and threats.
3. Together with other techniques like Value Chain Analysis and RBV, SWOT analysis improves the
quality of internal analysis.

Limitations

1. It gives a static perspective, and does not reveal the dynamics of competitive environment.
2. SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and ignores other
factors needed for competitive success.
3. A firm’s strengths do not necessarily help the firm create value or competitive advantage.
4. SWOT’s focus on the external environment is too narrow.
5. Hill and Westbrook criticize SWOT analysis by saying that it is not a panacea. According to them,
some of the criticisms against SWOT analysis are:
a. It generates lengthy lists
b. It uses no weights to reflect priorities
c. It uses ambiguous words and phrases
d. The same factor can be placed in two categories (e.g. an opportunity may also be a threat).
e. There is no obligation to verify opinions with data or analysis.
f. It is only a simple level of analysis. There is no logical link to strategy implementation.
g. SWOT helps only as a starting point. By itself, SWOT analysis rarely helps a firm develop
competitive advantage that it can sustain over time.
Note: The majority of organizations still utilize SWOT analysis as a common analytical method in spite of
the aforementioned criticism and its shortcomings. Using what is referred to as a TOWS matrix, it is
definitely a helpful tool for generating alternative strategies.

Keywords to Remember:

Resource – an asset, skill, process or knowledge controlled by an organization.

SWOT Analysis – Strengths, Weakness, Opportunities and Threat Analysis.

Summary

 The internal environment of an organization contains the internal resources and possesses internal
capabilities and core competencies.
 SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture.

Prepared by:

PROF. RACHELLE E. ESPERANZA, MBA

References:

AA. Thompson and AJ. Strickland, Strategic Management, Business Publications, Texas, 1984.
Francis Cherunilam, Strategic Management, Himalaya Publishing Home, Mumbai, 1998.
Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th Edition, Pearson Education Ltd.,
2002.
Michael Porter, Competitive Advantage, Free Press, New York.

www.mystrategicplan.com/resources/internal-and-external-analysis
www.quickmba.com/strategy/swot