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 Comparison2December 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.3December 2016 MS607 Strategic Management

Nature of Internal AnalysisNature of Internal Analysis

Nature of Internal AnalysisNature of Internal AnalysisInternal 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.

4December 2016 MS607 Strategic Management

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 analysisValue chain analysisThe resource based viewStandards 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 ApproachValue 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 ApproachVCA 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 Activitiesd) 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 ActivitiesThese 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 Evaluation of Strategic Internal FactorsFactors

Conducting VCAConducting VCAVCA 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 Resource Based View (RBV) of the Firm 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.


Resource Based View (RBV) of the Resource Based View (RBV) of the Firm Firm 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.24December 2016 MS607 Strategic Management

Resource Based View (RBV) of the Resource Based View (RBV) of the Firm Firm 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 ComparisonThe 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 ForcesAs 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.


The Concept of Driving ForcesThe Concept of Driving Forces 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.


The Concept of Driving ForcesThe Concept of Driving Forces 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

Business