CH 4 Internal Evironmental Anaysis
CH 4 Internal Evironmental Anaysis
CH 4 Internal Evironmental Anaysis
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number of feasible options available to operations managers, or R&D managers may develop
products for which marketing managers need to set higher objectives. A key to organizational
success is effective coordination and understanding among managers from all functional
business areas. Through involvement in performing an internal strategic-management audit,
managers from different departments and divisions of the firm come to understand the nature and
effect of decisions in other functional business areas in their firm. Knowledge of these
relationships is critical for effectively establishing objectives and strategies.
A failure to recognize and understand relationships among the functional areas of business can
be detrimental to strategic management, and the number of those relationships that must be
managed increases dramatically with a firm’s size, diversity, geographic dispersion, and the
number of products or services offered. Governmental and nonprofit enterprises traditionally
have not placed sufficient emphasis on relationships among the business functions. Some firms
place too great an emphasis on one function at the expense of others.
The changes in the environment may create opportunities, which the organizations try to exploit
or may bring threats for the organizations, which the latter tries to neutralize. However, in order
to develop successful strategies to exploit such opportunities and defend the threats, analysis of
an organization’s capabilities is important for strategy making which aims at producing a good
fit between a country’s resource capability and its external situation.
Many of the issues of strategic development are concerned with changing strategic capability
better to fit a changing environment. However, looking at strategic development from a different
perspective i.e. stretching and exploiting the organizations capability to create opportunities is
very essential and is called the Resource Based View (RBV) of strategy. That is all the resources
of the organization should mobilized to achieve the objectives.
Professionals from different organizations suggest that a firm’s overall strengths and weaknesses
and its ability to execute are often found more important to its performance than environmental
factors. Internal capabilities and process execution at time allow firms to gain competitive edge
over competitors even with relatively lesser resources and lesser advantageous position.
Strategic management is a highly interactive process that requires effective coordination among
management, marketing, finance/accounting, production, R&D, and information systems. A
failure to recognize and understand relationships among the functional areas of business can be
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detrimental to strategic management, and the number of those relationships that must be
managed increases dramatically with a firm’s size, diversity, geographic dispersion, and the
number of products or services offered. Financial managers, for example, may need to restrict
the number of feasible options available to operations managers, or R&D managers may develop
products for which marketing managers need to set higher objectives. A key to organizational
success is effective coordination and understanding among managers from all functional
business areas.
ii. Integrating strategy and culture: relationships among a firm’s functional business activities
can perhaps be exemplified best by focusing on organizational culture. Organizational culture
can be defined as “a pattern of behavior developed by an organization as it learns to cope with its
problem of external adaptation and internal integration that has worked well enough to be
considered valid and to be taught to new members as the correct way to perceive, think, and
feel.”
There are three types of resources-Assets, capabilities and competencies which have been
identified under Resource Based View (RBV) of the firm. Strategic thinkers explaining the RBV
suggest that the organizations are collection of tangible and intangible assets combined
capabilities to use those assets. These help organizations develop understanding of these three
types of resources and help us to know how a firm’s internal strength and weaknesses affect its
ability to compete. Strategic importance of Resources
1. Available resources: are those resources that are basic to the capability of any organization:
Physical resources
Human resources
Financial resources
Intellectual capital
2. Unique resources: unique resources as defined in strategy texts are those resources, which
critically underpin competitive advantage. Their ability to provide value in product is better than
competitor’s resources and is difficult to imitate. Some organizations have patented products of
services that give them advantage; for some service organizations, unique resources may be
particularly the people working in that organization.
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3. Core competencies: competency refers to the ability to perform. The difference in
performance between organizations in the same market is rarely explainable by differences in
their resource base, since resources can usually be imitated or traded. Superior performances are
actually determined by the way in which resources are deployed to create competences in the
organization’s activities.
Scarcity: - this is a very basic test to understand its resource value. Just in case any
resource is widely available, then it’s not likely to be a source of competitive advantage.
Inimitability: - a resource that is easy to imitate is of little competitive advantage b/c it
will be widely available from a variety of sources. Inimitability however does not last for
long and at some point competition matches or even betters any offering. Therefore,
firms should make effort which may temporarily limit imitation. Physical uniqueness,
causal ambiguity or scale deterrence are few ways how organizations attempt doing this.
Durability: - hyper competitive market conditions have a tendency to make competitive
advantage less and less sustainable. Durability in such situations becomes a more
stringent test for valuing resources, capabilities and competencies.
Superiority: - competencies are valuable only if they manifest themselves as competitive
advantages and these means that they are superior to those held by rivals. “Being good is
not enough and a firm must be better than its competitor.”
1. Quantitative and Qualitative Assessment
Since every organization’s creation of wealth is the primary goal, any assessment has to focus on
measuring the variety of means that contribute to the creation of wealth. The creation of wealth
depends largely on providing superior value for customers and this is possible when the
organizations have efficient and effective operations with necessary capabilities. The required
capabilities depend on the employees, their skills and motivation levels.
Financial data is the most basic and universally accepted approach in assessing a firm. Financial
analysis emphasizes on the study of financial ratios (ratio analysis)
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i. Profitability ratios
ii. Liquidity ratios
iii. Leverage ratios
iv. Activity ratios
Often it has been found that quantitative analysis alone is not sufficient to understand any
organization’s strengths and weaknesses. Particularly the factors related to human resources,
organizational culture and its temperament towards creativity and innovation are few which can
be understood only through qualitative information. Qualitative information also supplements
quantitative data in understanding basic concepts of what customers’ value and how they feel
about a given product.
2. Comparison Standards
In order to arrive at some meaningful conclusion regarding strengths and weaknesses, the
analysis should be supported by appropriate standards for comparison. The three commonly
accepted comparison standards are:
a) Industry Norms
The industry norms compare the performance of an organization in the same industry or sector
against a set of agreed performance indicators. Data on industry norms are widely available and
can be found from several published sources. Using such data and comparing an organization
against others in its industry helps the organization understand its true position. For e.g., in the
case of the healthcare sector, such indicators can be; mortality index, doctors per 100 beds…etc.
The danger of industry norms comparison is that the whole industry may be performing badly
and losing out competitively to other industries.
B) Historical Comparisons
Provides the motivation and the means many firms need to seriously rethink how their
organizations perform certain tasks.
3. SWOT- Analysis
A systematic approach to understanding the environment is the SWOT analysis. Business firms
undertake SWOT analysis to understand the external and internal environment. SWOT, which is
the acronym for strengths, weaknesses, opportunities and threats. Through such an analysis, the
strengths and weaknesses existing within an organization can be matched with the opportunities
and threats operating in the environment so that an effective strategy can be formulated. An
effective organizational strategy, therefore, is one that capitalizes on the opportunities through
the use of strengths and neutralizes the threats by minimizing the impact of weaknesses.
The process of strategy formulation starts with, and critically depends on, the appraisal of the
external and internal environment of an organization.
SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a business venture. It involves specifying the objective of
the business venture and identifying the internal and external factors that are favorable and
unfavorable to achieving that objective. It summarizes the key issues from the external
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environment and the internal capabilities of an organization those which become critical for
strategy development. SWOT analysis is based on the assumption that if managers can carefully
review such strengths, weaknesses, opportunities, and threats, a useful strategy for ensuring
organizational success will become evident to them. The environment in which an organization
exists can, therefore, be described in terms of the opportunities and threats operating in the
external environment apart from the strengths and weaknesses existing in the internal
environment. An understanding of the external environment, in terms of the opportunities and
threats, and the internal environment, in terms of the strengths and weaknesses, is crucial for the
existence, growth and profitability of any organization.
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Opportunity is a favorable condition in the organization's environment which enables it to
consolidate and strengthen its position. An example of an opportunity is growing demand for the
products or services that a company provides.
Opportunities are abundant. You must develop a formula which will help you define what
comes within the ambit of an opportunity to focus on those areas and pursue those opportunities
where effectiveness is possible. The formula must define product/service, target market,
capabilities required and resources to be employed, returns expected and the level of risk
allowed.
Weaknesses of your competitions are also opportunities for you. You can exploit them in two
following ways:
1. Marketing warfare: attacking the weak leader's position and focusing all your efforts at
that point, or making a surprise move into an uncontested area.
2. Collaboration: you can use your complementary strengths to establish a strategic
alliance with your competitor.
The external environmental analysis may reveal certain new opportunities for profit and growth.
Example:
An unfulfilled customer need
Arrival of new technologies
Loosening of regulations
Removal of international trade barriers
D. Threats
Threat is an unfavorable condition in the organization's environment which creates a risk for, or
causes damage to the organization. An example of a threat is the emergence of strong new
competitors who are likely to offer stiff competition to the existing companies in an industry.
External threats arise from political, economic, social, technological (PEST) forces.
Technological developments may make your offerings obsolete. Market changes may result from
the changes in the customer needs, competitors' moves, or demographic shifts. The political
situation determines government policy and taxation structure.
Changes in the external environment also may present threats to the firm. Example:
Shifts in consumer tastes away from the firm’s products
Emergence of substitute products
New regulations
Increased trade barriers
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Any organization must try to create a fit with its external environment. The SWOT-diagram is a
very good tool for analyzing the internal strengths and weaknesses a corporation and the external
opportunities and threats. Organizations may use confrontation matrix as a tool to combine the
internal factors with the external factors.
Opportunities Threats
S – O Strategies: - pursue opportunities that are a good fit to the company’s strengths.
S – T Strategies: - identify ways that the firm can use its strengths to reduce its vulnerability to
external threats.
W – T Strategies: - establish a defensive plan to prevent the firm’s weaknesses from making it
highly susceptible to external threats.
Strengths: Opportunities::
R and D almost complete Market segment is poised for rapid growth
Basis for strong management team Export markets offer great potential
Key first major customer acquired Distribution channels seeking new products
Initial product can evolve into range of offerings Scope to diversify into related market segments
Located near a major centre of excellence
Very focused management/staff
Well-rounded and managed business
Threats: Weaknesses
Major player may enter targeted market segment Over dependent on borrowings - Insufficient cash
New technology may make products obsolescent resources
Economic slowdown could reduce demand Board of Directors is too narrow
Euro/Yen may move against $ Lack of awareness amongst prospective customers
Market may become price sensitive Need to relocate to larger premises
Market segment's growth could attract major Absence of strong sales/marketing expertise
competition Overdependence on few key staff
Emerging new technologies may move market in new
directions
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