Internal Environment Analysis

When the internal context is comprehended, managers can understand the firm’s strengths and weaknesses, and the resources they need to strengthen their competition against rivals and competencies that need to be improved.

Recent studies strongly show that what makes a business successful against its competitors largely depends on the actions and the abilities of the business itself (Grant & Jordan, 2012). Therefore, the internal analysis seems to be more valued in recent years.

A successfully conducted internal analysis will provide business’ managers with an in-depth understanding of the organization’s true potential to create a competitive advantage.

No company is safe against the sharp competition in today’s open and very fast world economy. As a result, to keep their edge and strength to compete in today’s business environment, companies must work hard to excel in their work, keep doing great in their products and services, and must be current in the eyes of their consumers in terms of quality, innovation, and service (David, 2005).

Some or all of the following reasons are why organizations carry out an internal analysis for their businesses (Campbell et al., 2002);

• to identify resources, competences, and core competencies to be developed and exploited;

• to evaluate how effectively value-adding activities are organized;

• to identify areas of weaknesses to be addressed in future strategy and its implementation;

• to evaluate the performance of products;

• to evaluate financial performance, particularly in comparison with competitors;

• to evaluate investment potential if finance is being sought from external sources;

• as a first step in assessing the suitability, feasibility, and acceptability of future strategies.

Internal analysis is a three-step process (Hill & Jones, 2010; p.74):

1. Managers must understand the process by which companies create value for customers and profit for themselves, and they need to understand the role of resources, capabilities, and distinctive competencies in this process;

2. They need to understand how important superior efficiency, innovation, quality, and customer responsiveness are in creating value and generating high profitability; and

3. They must be able to analyze the sources of their company’s competitive advantage to identify what is driving the profitability of their enterprise and where opportunities for improvement might lie.

What a manager must understand in this process is that the strengths of a firm are the key to the success and profitability of the firm while its weaknesses are the sources of failure, and low and/or no profit. Therefore, understanding what makes a function and/or feature of a firm a strength or weakness can be a very powerful source for managers in developing and crafting strategies for the success or failure of the companies they are managing.

By putting together potentially complementary resources. This involves a process of simultaneous blending and balancing, that is, putting the resources and capabilities together in a mix within the desired strategy.

Blending comprises three possibilities; enterprises can aim for just one kind of blend or all three. These are:

• a new technological integration, which is more the capacity to develop a new technical area than knowledge of actual processes,

• a new functional integration,

• an imagined new product.

By conserving the resources it already has. This is made possible by recycling resources away from activities which no longer deliver a competitive advantage to new ones which do. This includes:

• the redirection of a resource into a different part of an enterprise in order to boost a technical capability, help to produce another product, or assist another functional area.

• the co-option of partners into actions that both reinforce existing resources and shield them from damage. Again, strategic action can highlight the value of resources already held.

According to Enz (2010), a firm’s ability to create competitive advantage through capitalizing on resources or capabilities depends on the answers to the following six questions:

1. Does the resource or capability have value in the market?

2. Is the resource or capability unique?

3. Is there a readily available substitute for the resource or capability?

4. Do organizational systems exist that allow the realization of the potential?

5. Is the organization aware of and realizing the advantages?

6. Is the resource or capability difficult or costly to imitate?

Essentially, there are three categories that need to be taken into account for the resources of a firm. These resources are categorized as (Meesala, 2015); a. physical resources such as plant, land, equipment, technology, and similar resources, b. human resources including the manpower, their skills, work culture, training level, experience, intelligence, abilities and others, and finally, c. organizational resources such as softer features of an organization consisting of structure, systems, processes, patents, trademarks, brand value, and so on.

Resource-based view (RBV) is an approach to identify a firm’s resources and unique capabilities, and determination of the potential of such resources and capabilities in terms of a competitive edge to help companies reach an above-average return on their investments.

According to Michael Porter (1985) value of a business consists of activities that function together to develop the desired ends. These value-creating activities can be listed as;

• purchasing supplies,

• manufacturing,

• distribution and marketing of its goods and,

• services.

The crucial support activities are listed as:

Procurement: In many companies, there will be a separate department (or group of managers) responsible for purchasing goods and materials that are then used in the operations of the company. The department’s function is to obtain the lowest prices and highest quality of goods for the activities of the company, but it is only responsible for purchasing, not for the subsequent production of the goods.

Technology development: This may be an important area for new products in the company. Even in a more mature industry, it will cover the existing technology, training, and knowledge that will allow a company to remain efficient.

Human resource management: Recruitment, training, management development, and reward structures are vital elements in all companies.

Firm infrastructure: This includes the background planning and control systems – for example, accounting, etc. – that allow companies to administer and direct their development. It includes corporate strategy.

The functional approach mainly deals with the analysis of each function of a firm. The functions that are most commonly found in a firm include production, marketing, finance, human resources, R&D, and management.

This process is undertaken to understand which functions at the firm are contributing substantially or, contrarily, having noticeable poor performance. At the end of the review, the key internal factors that are strong to be capitalized or need to be improved are identified so that the managers can shape their strategies accordingly. This process is called the ‘function approach’.

The Gap Analysis is an internal evaluation tool that helps firms to identify performance deficiencies. At a Gap Analysis process, what company managers do at the first step is to compare the firm’s current state to the desired future state, and identify and understand the gaps that exist between the two states. Later, they develop a series of actions/strategies that will bridge the identified gaps. This is important because it helps management understand if their organization is performing to its potential. If not, the next question is to ask why the firm is not performing to its potential. This helps to identify mistakes in resource allocation, planning, production, and execution.

SWOT is a word used to describe Strengths, Weaknesses, Opportunities, and Threats that are accepted as the most important strategic factors of a company (Wheelen & Hunger, 2012). SWOT is one of the most known and wide-spread used business analysis tools in analyzing a firm’s competitive environment. Its popularity lies in its simplicity (both an internal and external analysis implemented), and equally for its effectiveness.

SWOT analysis helps a firm to better understand its strengths and weaknesses in comparison to the threats and opportunities in its operating markets and target customers. This analysis can, in turn, help the company to create a sustainable niche in its market, strengthen its position in the market, and increase its market share. The SWOT analysis allows organizations to uncover the opportunities they have, the strength to exploit and minimize their weaknesses, and the risk of impending threats. Using this tool, organizations can distinguish themselves from competitors and successfully compete in their given marketplace.

Barney (1997), in his VRIO framework of analysis, proposes four questions to evaluate a firm’s competencies:

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?

The Organizational Capacity Assessment Tool (OCAT) ) was primarily designed to assess the internal environment of non-profit organizations. OCAT assesses how well an organization performs across 10 internal dimensions, namely:

• Aspirations

• Strategy

• Leadership, Board & Staff

• Funding

• Marketing & Communications

• Advocacy

• Business Processes

• Infrastructure & Organizational Structure

• Culture and shared values

• Innovation and adaptation

The model’s 7 elements include:

• Strategy

• Structure

• Systems

• Shared Values

• Skills

• Style

• Staf

The core competency analysis is an internal analysis tool that helps organizations create strategies that move them ahead of their competitors. The basic premise of the analysis is to identify the organization’s core competencies - the combined resources, knowledge, and skills of an organization that creates unique value to its customer. Once organizations have identified their core competencies, strategies can be created to focus on only what the organization does well and provides unique value to the customer.