Internal business environment

Analysis of Internal Environment.Analysis of Internal Environment.
Mr.John Obote.Mr.John Obote.
MBA.MBA.

OutlineOutline
 Nature of internal analysis.
 SWOT analysis - organizational strengths
and weaknesses.
 Value chain analysis - the primary and
support activities.
 Resource based view - organizational
resources, capabilities and distinctive
capabilities
 Meaningful Comparison
2December 2016 MS607 Strategic Management

An organization’s future success depends on its
own internal conditions as well as external
conditions.
The success on pursuit of market opportunities
normally depends on firm’s competitive
advantage which arise from firms internal
resources and capabilities.
 Internal environment consist of variables that form
the context within which the work is done.
 They include the organization’s resources, structure
and culture.
Nature of Internal AnalysisNature of Internal Analysis

Nature of Internal AnalysisNature of Internal Analysis
Internal environment is assessed in order for
managers to gain an understanding of the firm’s
resources and capabilities and how they
compare to other firms.
 Internal analysis (audit) is the process of identifying
and evaluating an organization’s specific characteristics
to determine firm’s strengths and weaknesses.
 Strength is a distinctive resource and capability that
gives the firm a comparative advantage in the market
place.
 A weakness is a limitation in resources and capabilities
that seriously impedes firm’s effectiveness.

Internal analysis suggests what the firm can
do as opposed to external analysis which
provides direction about what the firm
should do.
 Provides a framework about how a firm’s
resources can be deployed to best exploit
opportunities and neutralize threats.
 Enables managers to discover potential sources
of competitive advantage.
 Allows a firm to develop strategy with a
reasonable expectation of competitive advantage.
Why Internal AnalysisWhy Internal Analysis

Internal analysis involves:
 identification of key internal factors,
 comparing them with company’s past performance
standards and competitors’ capabilities and
 preparing a profile to be used in formulating plans.
The strategic internal factors are the firm’s
internal capabilities that are most critical for
firms success in a particular industry..
 They include managerial and marketing skills,
technology, organization, production, distribution,
product development, etc.

Examples:
 For a fast food restaurant – KIFs may
include location, quality of food, speed and
friendly service, cleanliness and store and
design.
 For a beer company – KIFs may include
full utilization of brewing capacity
(keeping manufacturing cost low), a strong
network of wholesale distributors (access
to retail outlets) and clever advertising.

Several approaches are normally
adopted by managers for conducting
internal audit.
They include:
 SWOT analysis
 Value chain analysis
 The resource based view
 Standards for comparison
Approaches for Internal AnalysisApproaches for Internal Analysis

SWOT is an acronym for internal Strengths and
Weaknesses of a firm and the environmental
Opportunities and Threats facing that firm.
 It is based on the assumption that an effective
strategy derive from a sound fit between firm’s
resources (strengths and weaknesses) and its
external situation (opportunities and threats).
 A good fit maximizes strengths and opportunities
and minimizes weaknesses and threats.
 An opportunity is a major favourable situation in
the firm’s environment.
SWOT AnalysisSWOT Analysis

 Examples opportunities may include:
 Previously overlooked market segment;
 Changes is competitive or regulatory
circumstances;
 Favourable technological changes;
 Improved buyer or supplier relationships.
 A threats/challenge is a key external
impediment to the firm’s desired position.
 Examples are entrance of new competitors, slow
market growth, revised government regulations,
etc.

 An strength is a firm’s resource or capability that
gives it an advantage relative to competitors in
meeting the needs of the customers it serves.
 Strength arises from the resources and
competencies available to the firm.
 Examples may include:
 Ability to offer variety and to a large segment of
populations;
 Possession of efficient distribution channels;
 Ability to offer service 24 hours, seven days a week;
 Ability to provide the product or service at relatively
lower cost/price.

 A weakness is a deficiency in one or more of a firm’s
resources or capabilities that create a disadvantage
in effectively meeting customers’ needs relative to
its competitors.
 Weaknesses arise from the resources and
competencies available to the firm.
 Limited financial capacity;
 Poor quality of human resources;
 Lack of exposure to foreign market segments;
 Operating with obsolete technology;
 Inability to buy in large buy in bulk.

SWOT analysis has been a choice among many
managers for a long time.
 It is simple to use and portrays a logical strategy
formulation (matching firm’s opportunities and
threats with its strength and weaknesses.
SWOT analysis is susceptible to some
limitations including:
 SWOT analysis may overemphasize internal
strength (e.g. financial capacity) and downplay
external threats (e.g. legal requirements0;
 It can be static and can risk ignoring changing
circumstances – a one time event..
Limitations of SWOT AnalysisLimitations of SWOT Analysis

 SWOT overemphasizes a single strength or
dimension of strategy.
 A strengths may not necessarily be a source of
competitive advantage.
Limitations of SWOT AnalysisLimitations of SWOT Analysis

The Value Chain ApproachThe Value Chain Approach
Value chain is a “chain” or sequential process of
value-creating activities.
 The sum of these activities represents the value the
firm provides to its customers.
 Value chain analysis (VCA) a systematic process of
determining the contribution of each of the
organizational activities from purchasing raw
materials to the point where the product or service
is delivered to the customer.
 It disaggregates a firm into its strategically
important activities so as to identify the sources of
its competitive advantage.

The Value Chain ApproachThe Value Chain Approach
VCA attempts to look at costs across the series
of activities to determine where low-cost
advantage s or disadvantages exist.
 The basic firm’s activities can be grouped into
two categories:
 Primary (line) activities– deal with the physical
creation, marketing, delivery and after sales
support of the firms’ product or service.
 Support (staff) activities - provide
infrastructural support that allow primary
activities to take place on an on going basis.

Primary ActivitiesPrimary Activities
 Primary activities can be grouped into five
basic categories:
a) Inbound logistics - receiving, storing and
disseminating inputs i.e. material handling,
warehousing, inventory control, vehicle scheduling
and returns to suppliers.
b) Operations - transforming inputs into final products
i.e. manufacturing/processing, packaging, assembly,
equipment maintenance, testing, printing and facility
operations.
c) Outbound logistics - collecting, storing and physical
distribution of products to customers i.e. transporting,
warehousing, material handling, delivery vehicle
operation, order processing and scheduling.

Primary ActivitiesPrimary Activities
d) Marketing and sales - inducing buyers to
purchase the products i.e. advertising,
promotion, channel selection, channel relations
and pricing.
e) Service activities - providing service to enhance
or maintain the value of the product such as
installation, repair, training, parts supply and
product adjustment.

Support ActivitiesSupport Activities
These provide infrastructural support that
allow primary activities to take place on an
on going basis.
Four categories can be distinguished:
a) Procurement – purchasing and providing
inputs such as raw materials, services and
machinery to facilitate the primary activities.
b) Research and technology development -
designing the product as well as increasing and
improving the ways in which the various
activities in the value chain are performed.

December 2016 MS607 Strategic Management 20
Evaluation of Strategic Internal FactorsEvaluation of Strategic Internal Factors

Conducting VCAConducting VCA
VCA involves identifying the value-creating
activities, allocating costs and identifying value-
creating activities that differentiate the firm.
 Identifying activities – involves diving the
company’s operations into specific activities and
processes according to primary/support activities
framework.
 The strategist need to be very detailed.
 Allocating costs (costing) – involves attaching costs
to each discrete activity which can be compared to
competitors, budgets or industry averages.

Conducting VCAConducting VCA
 Identifying value-creating activities that
differentiate the firm – involves identification of
activities that are sources differentiation advantage
relative to competitors.
 It deals with identification of activities that are
critical to customer satisfaction and market success.

Resource Based View (RBV) of the FirmResource Based View (RBV) of the Firm
RBV is a method of analyzing and identifying
a firm’s strategic advantages based on
examination of distinct combination of assets,
skills, capabilities and intangibles.
 The underlying premise is that firms differ in
possession of unique assets and
organizational capabilities.
 Each firm develops competencies from
resources which become the source of its
competitive advantages.

The RBV framework delineates three basic
types of resources – tangible assets, intangible
assets and organizational capabilities.
 Tangible assets – normally found in the firm’s
balance sheet, are the physical and financial means
a firm uses to provide value to its customers.
 Include production facilities, raw materials, financial
resources real estates, computers, etc.
 Intangible assets – assets that cannot be touched
that are critical for creating competitive advantage.
 Include brand names, public image, patents, technical
knowledge, employee morale and accumulated experience.

 Organizational capabilities – refers to ability and
ways of combining assets, people and processes to
transform inputs into outputs.
 They enable the firm to convert the same input factors as
rivals have into goods and services with greater efficiency
and/or better quality.
The guidelines used to determine resources that
present strengths or weaknesses are:
 Are critical in meeting customer’s needs than other alternatives.
 Are scarce/rare – it is in short supply, not easily substituted for.
 Are durable – they can be used in a longer term.

Meaningful ComparisonMeaningful Comparison
The use of the above presented approaches
require firms to make meaning comparison
based on different perspectives.
The comparison may be based on past
performance, benchmarking with competitors
and based on industry success factors.
 Comparison with past performance – use of
firm’s historical experience in evaluating internal
factors.
 Current performance and financial results are
compared with past results to determine strength
and weaknesses.

Meaningful ComparisonMeaningful Comparison
 Comparison with competitors (benchmarking) –
strategists compare firm’s resources and
capabilities with that of their competitors.
 Firms in the same industry have different marketing
skills, financial resources, operating facilities, brand
images, etc. which may become relative strengths or
weaknesses for a particular firm.
 Comparison with industry success factors –
comparing in terms of factors associated with
successful participation in a given industry.
 The critical success factors define the strengths or
weaknesses relative to the drives of industry success.

The Concept of Driving ForcesThe Concept of Driving Forces
As an alternative to SWOT analysis a manager
may decide to analyze the forces that cause
important changes in the industry.
Driving forces are the most dominant forces
that have the strongest influence environmental
changes.
 The long term industry growth rate – they
influence investment decisions of existing firms and
entry of new firms.
 Buyers’ characteristics and behavior – they
influence marketing practices.

 Product innovation - can broaden demand,
enhance product differentiation, economies of scale
and reduce marketing cost.
 Process innovation – can reduce unit costs, capital
requirement, can enhance capacity utilization, etc.
 Marketing innovation – can widen demand,
increase product differentiation, lower unit costs,
etc.
 Entry or exit of major firms - new ideas and new
rules for competing and new key players.
 Diffusion of proprietary knowledge - easier for new
competitors to spring up.

 Cost and efficiencies – allows growth among
existing firms while restricting entry of new firms.
 Regulatory influences and government policy -
influence significantly the character of industry.

Internal business environment

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