MGT. 406- STRATEGIC MGT.

CHAPTER 4. INTERNAL ASSESSMENT

4.1 The nature of an internal audit
4.2 Key internal forces and the process of performing an internal audit
4.3 The resource-based view (RBV) in strategic management.
4.4 Integrating strategy and culture
4.5 Determine and to priorities a firm’s internal strengths and weaknesses
4.6 The importance of financial ratio analysis
4.7 Internal factor evaluation (EFE) matrix
4.8 Cause/benefit analysis, value chain analysis and bench marking as strategic
management tools.

INTERNAL ASSESSMENT
An internal analysis examines an organization’s internal environment to assess its
resources, assets, characteristics, competencies, capabilities, and competitive
advantages. In short, it allows you to identify your organization's strengths and
weaknesses, which can help management during the decision-making, strategy
formulation, and execution processes.

Every internal analysis should be accompanied by an external analysis, which evaluates

the external environment and external factors that influence the organization. The
combination of both an internal & external scan is key in gaining a holistic picture of the
organization's environment and developing a strategy that will allow your organization to
succeed. 

The internal/external scan should always be undertaken before the actual creation of
your strategy begins. If you're in the process of creating a new strategic plan and have
skipped this step, we'd recommend pausing and completing an internal/external scan
first. You can then move back into the strategy creation process with confidence.
If you're not sure where to begin, a great tool for conducting an external environmental
scan is Porter's 5 Forces or PESTEL. These frameworks will help you analyze your
organization's environment and the different factors that will affect your profitability and
growth prospects. You'll then be able to adjust your strategy accordingly.

Why Conduct an Internal Analysis?

An internal analysis will highlight an organization's internal strengths and weaknesses in
relation to its competencies, resources, and competitive advantages. Once complete,
the organization should have a clear idea of where it's excelling, where it's doing okay,
and where its currents deficits and gaps are. The analysis will arm management with
the knowledge to make full use of its strengths, expertise, and opportunities. It also
allows management to develop strategies to mitigate any threats and compensate for
identified weaknesses and disadvantages.

Suppose you wait to begin your strategy formulation until after you've completed your
analysis. In that case, you will ensure your strategic plan has been formulated to take
advantage of your strengths and opportunities as well as to offset or improve
weaknesses and reduce threats, such as those from rivals and competitors. Your
organization can then be confident that you're funneling your resources, time, human
capital, and focus effectively and efficiently.

Internal Analysis Tools

Before undertaking an internal analysis, you'll need to decide which tools you'd like to
use to conduct the analysis. Many tools and frameworks exist and each is valuable for a
certain purpose. To help you choose the right tool, we've compiled a list of some
popular and effective internal analysis tools with a description of what each of them will
help you achieve.

GAP Analysis
GAP analysis is an internal evaluation tool that allows organizations to identify
performance deficiencies. A GAP analysis helps you compare your current state to your
desired future state, identify and understand the gaps that exist between the two states,
and then create a series of actions that will bridge those gaps. This is important
because it helps management identify if their organization is performing to its potential,
and if not, why. In addition, this helps to pinpoint flaws in resource allocation, planning,
production, etc.

While other internal analysis tools, such as SWOT analysis, offer a more
comprehensive study of the internal environment, GAP analysis can be more targeted
towards fine-tuning a single process instead of the company as a whole.

Strategy Evaluation
A strategy evaluation analyses the results of a strategic plan's implementation. It's
useful to undertake a strategy evaluation at regular intervals during your strategic
implementations. For example, you might opt to conduct an evaluation every six
months, every year, or at the conclusion of your implementation. The strategy
evaluation process involves looking back at the goals in your strategic plan and
assessing how well your strategic management initiatives fared in achieving them. If
you're looking for a thorough guide on how to conduct a strategy evaluation, check out
our article on the topic.

SWOT Analysis
The SWOT analysis is one of the most well-known and most common business analysis
tools around. It gained popularity thanks to its simplicity (it covers both an internal and
external analysis), but it's also known for its efficacy. The name SWOT is derived from
the factors in its grid (strengths, weaknesses, opportunities, and threats), which form the
SWOT matrix.

This tool can be used to create a sustainable niche in your market and grow your
market share. The SWOT analysis allows organizations to uncover the external
opportunities they have the strength to exploit while simultaneously minimizing the
internal factors that cause weaknesses. It also helps to reduce the risk of impending
threats. Using this tool, organizations are able to distinguish themselves from
competitors by understanding their unique capabilities and sources of competitive
advantage, which can help them compete in their given marketplace.

For example, a SWOT analysis may uncover that some of a company's strengths are its
talented employees and strong organizational capabilities, that its greatest weakness is
its reliance on problematic supply chains and scarce raw materials, that it has an
opportunity to take advantage of low interest rates, but that the growth of Amazon
threatens it. The company can then use this analysis to develop strategic alternatives
that will help it meet its goals.

OCAT
The Organizational Capacity Assessment Tool was designed for non-profit
organizations looking to assess their internal environments. OCAT assesses how well
your organization performs across 10 internal dimensions, including:
● Aspirations
● Strategy
● Leadership, Board & Staff
● Funding
● Marketing & Communications
● Advocacy
● Business Processes
● Infrastructure & Organizational Structure
● Culture and shared values
● Innovation and adaptation

The results of the assessment help non-profits evaluate and improve their
organizational capacity.

4.1 THE NATURE OF AN INTERNAL AUDIT

According to the Institute of Internal Auditors, an internal audit helps a corporation
ensure it has the right controls, governance, and risk management mechanisms in
place, as reported by Chron Contributor (2020). It is, by definition, an independent
activity carried out by a person or group capable of presenting objective findings and
making recommendations for corrective action. Internal auditing can help your firm save
money by swiftly identifying and correcting flaws. Internal auditors have a broader
variety of tasks and reporting obligations than external auditors, who are primarily
concerned with financial risk.
An internal auditor, according to Isaac Clarke (2019), is a firm employee who assesses
the organization's activities independently and objectively. An internal auditor's job is to
obtain relevant and objective information about a company. Internal auditors act as the
company's eyes and ears, reporting to senior management and the board of directors.
Their allocated task may include any aspect of an organization; nevertheless, the audit
committee should direct their efforts. Historically, internal audits have been linked to
accounting and financial reporting audits. When conducting internal audits, an internal
auditor must remain objective and impartial. Internal politics or biases can compromise
an internal auditor's or auditing team's objectivity, making this difficult at times. When
this happens, the team's effectiveness is hampered, and their value to the firm is
diminished. Internal auditing should not be used to audit an organization's own work to
mitigate this risk. Internal audit should not notify the person or group they are auditing.
The internal audit function should report to the audit committee of the organization or a
board member with supervisory responsibility. Internal auditors try to maintain
objectivity, and corporate leadership must recognize that internal auditors must maintain
objectivity. As a result, leadership should avoid influencing or pressuring internal audits
to reach a specific conclusion. Leadership, for example, should not put assumptions on
an internal audit in order to manipulate a result.

1. Independent: The internal auditor should work independently. The word independent
implies that the audit work should be free from any sort of restrictions that may have a
significant impact on the scope and effectiveness of the review process and on the
reporting of the findings and conclusions. Therefore, the internal audit work is detached
from regular day-to-day operations of the organization.

2. Appraisal: The word appraisal implies a critical evaluation and assessment of the
existing controls and operations of the business enterprise. The internal auditor should
appraise them based on appropriate criteria.

3. Established: The management should organize an independent internal audit

department and duties should be specifically assigned to the department.

4. Examine and Evaluate: The terms of examination and evaluation describe the two-
fold functional roles and responsibilities of the internal auditor. Firstly, the internal
auditor should make an examination and enquiry for fact finding. Secondly, he should
make a judgmental evaluation after thorough examination.

5. Activities of the Organization: Internal audit aims at conducting a systematic

examination of records, procedures, and operations of an organization. The internal
auditor should carefully examine the controls established inside the organization. In this
sense internal audit can be described as Control Over Other Controls. Controls are
essential for every organization. In the absence of controls, it would be impossible for
any organization to protect its assets, rely on the records and perform its functions
successfully. The internal auditor examines the effectiveness of each control system
and traces out the deficiencies in each system.

6. Service: Internal audit is a service to the whole organization. The internal auditor is
an employee of the organization. His services can be availed at any time of emergency.
His advice can be obtained on any matter or point significant from the business and
strategic point of view. His services can also be effectively utilized by other employees
from the top to bottom. Any employee can consult him in solving the day-to-day
problems.

7. To the Organization: The primary concern of an internal auditor is the phase of

business activity where he can render any service to the management not only top
management but all other managerial as well as operating staff. Therefore, the internal
auditor should be an expert in all branches of business. In this respect, the internal
auditor is superior to the financial auditor and even the cost auditor. His services are
very useful to all the employees throughout the organization at all times. The terms ‘To
the Organization ‘also signifies that internal audit is a total concept of service having a
broad meaning and connotation.

Scope or Functions of Internal Auditing

Internal audit involves five major functions or areas of operation. They are as below:

1. Reliability and Integrity of Information: The internal auditor should review the
reliability and integrity of financial and operating information and examine the
effectiveness of the means used to identify, measure, classify, and to report such
information.
2. Compliance with Policies and Procedures: The systems and procedure also.
Have considerable impact on the operation of the business enterprise. The
internal auditor should gauge the effectiveness and impact of such systems and
report thereon.
3. Safeguarding the Assets: The internal auditor should review the existing system
for safeguarding the assets and if necessary, should verify the existence of such
assets.
4. Economical and Efficient Use of Resources: The internal auditor should also
appraise the economy and efficiency with which the resources are employed.
Further the internal auditor should identify the conditions, which would prevent
the economical use of resources. They are as follows:
● Underutilization of capacity.
● Non-productive work.
● Procedures, which are not cost, justified.
● Over staffing or under staffing.
5. Accomplishment of the Established Objectives and Goals: The internal auditor
should make a review of the operations or programmed of the enterprise and
should ascertain whether the results are not inconsistent with the established
goals and objectives of the enterprise. He should also ascertain whether the
programmed are carried out as per plan.

The role of internal audit is to provide independent assurance that an organisation's risk
management, governance and internal control processes are operating effectively.

We have a professional duty to provide an unbiased and objective view. We must be

independent from the operations we evaluate and report to the highest level in an
organisation: senior managers and governors. Typically this is the board of directors or
the board of trustees, the accounting officer or the audit committee.

To be effective, the internal audit activity must have qualified, skilled and experienced
people who can work in accordance with the Code of Ethics  and the International
Standards.

The nature of internal auditing, its role within the organisation and the requirements for
professional practice are contained within the International Professional Practices
Framework (IPPF). The components and the detailed content of the IPPF are available
in the Global professional guidance area of the website.

Internal auditors deal with issues that are fundamentally important to the survival and
prosperity of any organisation. Unlike external auditors, they look beyond financial risks
and statements to consider wider issues such as the organisation's reputation, growth,
its impact on the environment and the way it treats its employees.

In sum, internal auditors help organisations to succeed. We do this through a

combination of assurance and consulting. The assurance part of our work involves
telling managers and governors how well the systems and processes designed to keep
the organisation on track are working. Then, we offer consulting help to improve those
systems and processes where necessary.

Why is internal audit important to your organisation?

By reporting to executive management that important risks have been evaluated and
highlighting where improvements are necessary, the internal auditor helps executive
management and boards to demonstrate that they are managing the organisation
effectively on behalf of their stakeholders. This is summarised in the mission statement
of internal audit which says that internal audit’s role is 'to enhance and protect
organisational value by providing risk-based and objective assurance, advice and
insight'.

Hence, internal auditors, along with executive management, non-executive

management and the external auditors are a critical part of the top level governance of
any organisation.

Internal Audit
● It is also known as internal strategic management audit.
● It is a procedure for gathering and compiling data on important internal
factors.
● It helps to organize the strengths and weaknesses of the organization
mostly in the departments of marketing, finance, and management and
along with the production or operations, research and development are
also important.
● It is also done to assist the organization in maximizing its strengths for
success while also addressing its identified inadequacies.
● It is the parallel process of external audit.
● Data gathered are from:
o the management
o marketing
o finance/accounting
o production/operations
o Research and Development and;
o Management Information Systems
 ● Engaging in an internal strategic management audit provides a vehicle for
learning about the nature and impact of decisions made in other functional
business areas of the company.
● Its key to the organizational success is coordination and understanding
among managers from all functional areas.
● Functional relationships include the number and complexity increases
relative to organization size.
● Financial Ratio Analysis exemplifies complexity of relationships among
functional areas of the business.

An internal audit assesses the organization's standing within its industry in

strategic management. This process, which generally includes of at least one, if not a
mix of, unique analytical techniques, is critical for establishing and maintaining a
sustainable competitive edge.

Internal strategic management audits are very useful for understanding the
nature and consequences of actions made in different functional areas of the company.
Almost every company has specific strengths and weaknesses in various functional
areas. There is no such thing as an organization that is entirely equitable in all of its
organizational functions. Proctor & Gamble, for example, excels in efficient marketing,
whereas Maytag excels at flawless manufacture and product design. The organization's
internal weaknesses and strengths are linked with external threats and opportunities,
and a clear purpose statement serves as a foundation for the organization's objectives
and tactics. The core aspect of the aims and strategies is to use the organization's
strengths while improving its deficiencies.

Internal audit is a control that examines and evaluates the effectiveness of other
controls. Internal audit's ultimate goal is to safeguard a company's assets or properties,
not just from fraud but also from other issues such as waste, loss, and so on.

The internal strategic management audit is critical to the organization's

performance. Internal audit improves knowledge and collaboration among managers
from various functional areas.

Other Natures of Internal Audit:

1. Independent: The internal auditor should be able to work on their own. The term
"independent" indicates that the audit work should be devoid of any constraints
that might limit the breadth and efficacy of the review process, as well as how the
findings and conclusions are reported. As a result, internal audit work is
separated from the organization's ordinary day-to-day activities.
2. Appraisal: The term appraisal refers to a thorough examination and assessment
of a company's current controls and operations. They should be evaluated by an
internal auditor using suitable criteria.
3. Established: Management should establish an independent internal audit
department with specified responsibilities.
4. Examine and Evaluate: The phrases examine and evaluate define the internal
auditor's two-fold functional tasks and responsibilities. To begin, the internal
auditor should conduct a fact-finding investigation and inquiry. Second, following
a comprehensive inspection, he should give a judgement assessment.
5. Activities of the Organization: Internal auditing is the process of performing a
systematic review of an organization's records, processes, and activities. The
internal auditor should evaluate the controls in place inside the business with
attention. Internal auditing may be thought of as Control Over Other Controls in
this way. Controls are necessary for any business. It would be difficult for any
organization to secure its assets, rely on its records, and perform its tasks
properly without controls. The internal auditor assesses the efficacy of each
control system and identifies any weaknesses.
6. Service: Internal auditing is a service that is provided to the entire organization.
The internal auditor is an organization's employee. His services are available at
any moment in the event of an emergency. His opinion may be sought on any
topic or issue that is important from a business and strategic standpoint. Other
employees, from the top to the bottom, can benefit from his services.
7. To the Organization: An internal auditor's major focus is the phase of company
activity during which he may provide any service to management, including not
just top management but all other managerial and operational employees.As a
result, the internal auditor should be knowledgeable in all areas of company.
Internal auditors are better to financial auditors and even cost auditors in this
regard. His services are always beneficial to all employees within the
business.Internal audit is a comprehensive notion of service with a broad
meaning and connotation, as shown by the phrases "To the Organization."

4.2 KEY INTERNAL FORCES AND THE PROCESS OF PERFORMING AN

INTERNAL AUDIT

Key Internal Forces

It is not possible in a strategic-management text to review in depth all the material
presented in courses such as marketing, finance, accounting, management,
management information systems, and production and operations; there are many
subareas within these functions, such as customer service, warranties, advertising,
packaging, and pricing under marketing. But strategic planning must include a detailed
assessment of how the firm is doing in all internal areas.
For different types of organizations, such as hospitals, universities, and government
agencies, the functional business areas, of course, differ. In a hospital, for example,
functional areas may include cardiology, hematology, nursing, maintenance, physician
support, and receivables. Functional areas of a university can include athletic programs,
placement services, housing, fund-raising, academic research, counseling, and
intramural programs. Within large organizations, each division has certain strengths and
weaknesses. A firm’s strengths that cannot be easily matched or imitated by
competitors are called distinctive competencies. Building competitive advantages
involves taking advantage of distinctive competencies. Strategies are designed in part
to improve on a firm’s weaknesses, turning them into strengths and maybe even into
distinctive competencies
The illustrates that all firms should continually strive to improve on their weaknesses,
turning them into strengths, and ultimately developing distinctive competencies that can
provide the firm with competitive advantages over rival firms.
According to the book of Internal Assessment (2014), It is not possible in a business
policy text to review in depth all the material presented in courses such as marketing,
finance, accounting, management, management information systems, and
production/operations; there are many subareas within these functions, such customer
service, warranties, advertising, packaging, and pricing under marketing.
For different types of organizations, such as hospitals, universities, and government
agencies, the functional business areas, of course, differ. In a hospital, for example,
functional areas may include cardiology, hematology, nursing, maintenance, physician
Supports, and receivables. Functional areas of a university can include athletic
programs, placement services, housing, fund-raising, academic research, counseling,
and intramural programs. Within large organizations, each division has certain strengths
and weaknesses.
A firm’s strengths that cannot be easily matched or imitated by competitors are called
distinctive competencies. Building competitive advantages involves taking advantage of
distinctive competencies. For example, 3M exploits its distinctive competence in
research and development by producing a wide range of innovative products. Strategies
are designed in part to improve on a firm’s weaknesses, turning them into strengths-and
maybe even into distinctive competencies.
Functional departments such as Marketing, finance, MIS, human resource, research
and development, and production/operation are the major internal factors that need to
be considered when designing a strategic plan.
1. Marketing- It is the only department that looks at earning money whereas other
departments spend. Marketing is required for advertising activities, customer analysis,
customer acquisition and retention, and understanding market trends and activities,
demand, opportunities creation, branding, etc.

2. Finance- It is important to understand the transaction of money, investment, capital

requirements, etc. Accounting helps to understand the overall health of an organization
in terms of monetary matters. It helps in ratio analysis, cash inflow, and outflow
analysis, etc. It looks at how to spend money on the necessary area.

3. Operations- It looks at the operations of daily activities and the production of

products of an organization. It looks at process, inventory, quality, quantity, etc.

4. Research and development- It looks at the research of products/services in the

marketplace such as its demand, trends, customer analysis, market analysis, product
analysis, etc.
5. Human resource- It helps in analyzing the work done by the employees, hiring
strategies, training, motivation, salaries, benefits, and others are considered.
These functional areas are important for designing a strategic plan for an organization.
This analysis helps in understanding the strengths and weaknesses of the firm and also
helps in improving, evaluating, controlling by understanding any mistakes or changes
required in an organization. It helps to formulate strategy in an effective way and
develop a vision and mission statement, establish long-term objectives, and generate,
evaluate, and select strategies. These internal factors assessment of resources and
functional help in designing a proper strategic plan.

8 Steps to Performing an Internal Audit

1. Identify Areas that Need Auditing
Identify departments that operate by using policies and procedures written by the
organization or by regulatory agencies. This can include areas as complex as
manufacturing processes or as simplistic as accounting procedures. Make a list of each
area and the functions of the area that require review.
2. Determine How Often Auditing Needs to be Done
Some areas may only need to be audited annually, while some departments may
require more frequent audits. For example, a manufacturing process may require daily
audits for quality control purposes, while the HR function may only require an annual
audit of records and processes.
3. Create An Audit Calendar
A structured and systematic approach to the auditing process can help ensure the
function gets completed. And, like any other business goal, audits should be integrated
into corporate objectives. Scheduling audits on the business calendar ensures that it is
done consistently.
4. Alert Departments of Scheduled Audits
It is simply common courtesy to give departments notice of an audit so they can have
the necessary documents and materials ready and available for the reviewer. A surprise
audit should only be done if there is suspicion of unethical or illegal activity. Department
managers should not feel threatened by an auditor but view them as a valued resource
to help them better manage their area.
5. Be Prepared
The auditor should come prepared with an understanding of policies and procedures
and a list of items that will be reviewed. For example, an HR audit may focus on
employee files and I-9 compliance. The more prepared the auditor is, the more efficient
the process will be, and the less downtime there will be for the area being reviewed.

6. Interview Users
The auditor should interview employees and ask them to explain their work process.
Compare the process, as the employee explained it, to what the written policy says.how
to conduct an internal audit. This step is to gain an understanding of employee
competence and identify areas that need additional training.
7. Document Results
Document the results and any differences in practice to how the policies are written,
when policies are complied with and when they are not.This may also include other
information that is gathered from the interview process. Again, the goal is to identify
gaps in compliance and to figure out a way to bridge that gap.
8. Report Findings
Create an easy-to-read audit report. These reports should be reviewed with senior
management, and an improvement plan should be developed for areas that have gaps
in practice compliance.

The Process of Performing an Internal Audit in Strategic Management

In strategic management, an internal audit determines the organization’s position within
its industry. This process is essential for building and maintaining a sustainable
competitive advantage, and typically consists of at least one, or a combination of,
distinct analytical tools.

Gap Analysis
The gap analysis is a type of internal audit that measures the gap between the
organization’s current situation and its desired position. For example, a gap may exist
between an organization's current financial status and its desired financial position. This
can be due to poor customer service, sales numbers or production. Depending on the
cause and measure of the gap, organizational leaders will develop strategic objectives
designed to close it, such as new training methods or shelving a product that isn't
selling.

SWOT Analysis
A common part of the strategic management process is to identify the organization’s
strengths, weaknesses, opportunities and threats, or SWOT. Strengths and
weaknesses are part of the internal audit process, while opportunities and threats are
due to external influences. Strengths include those internal aspects of the organization
that leaders can capitalize on to build a sustainable competitive advantage.
Weaknesses consist of internal stressors that misalign operational activities with the
mission statement. These stressors can range from poorly trained production
employees to faulty machines. The SWOT analysis requires all the members of
management, production, finance, marketing, research and development, and other
functional teams to be involved.

Organizational Culture
A cultural analysis evaluates the current culture of the organization and determines
what aspects must change to best support strategic objectives. The cultural audit often
includes employee surveys to analyze worker perceptions of whether they are treated
fairly by managers or paid fairly in comparison to coworkers.

Competencies
One of the goals of the internal audit in strategic management is to identify the core
competencies of an organization. The existence of strong core competencies is what
typically leads consumers to choose one organization over another. For example, a
shoe brand that successfully markets its products to build a loyal customer base can
charge higher prices than shoe brands that are relatively unknown.

Key Internal Forces

● The functional domains of finance, marketing, manufacturing, and
information systems are not adequately explained in the business policy
text. Warranties, customer service, packaging, promotion, and pricing are
only a few of the subareas covered by these key functional categories.
● Various types of companies, such as universities, hospitals, and
government entities, have different functional business sectors. Nursing,
cardiology, physician support, hematology, and receivables are examples
of functional areas at a hospital.
● Placement services, sporting activities, money raising, counseling,
housing services, academic research, and intramural programming are all
examples of university organizations.
● Each subsidiary of a bigger corporation has its own set of strengths and
limitations. The ATT organization, for example, is weak in computer
technology but powerful in communications.
● Its functional business areas may
o Vary in organization and;
o divisions have differing strengths and weaknesses
● Distinctive Competencies
o Firm’s strengths that cannot be easily matched or imitated by
competitors
o Building competitive advantage involves taking advantage of
distinctive competencies
o Strategies designed to improve on a firm’s weaknesses and turn to
strengths

4.3 THE RESOURCE-BASED VIEW (RBV) IN STRATEGIC MANAGEMENT.

When establishing a plan to achieve long-term competitive advantages, the Resource

Based View (RBV) analyses and interprets an organization's internal resources,
focusing on resources and capabilities. It's also a management paradigm for assessing
which strategic resources a company might employ to acquire a long-term competitive
edge.

According to RBV, an organization can be considered as a collection of physical

resources, human resources and organizational resources (Barney, 1991; Amitand
Shoemaker, 1993). Resources of organizations that are valuable, rare, imperfectly
imitable and imperfectly substitutable are main source of sustainable competitive
advantage for sustained superior performance (Barney, 1991)

According to Barney valuable resource ‘must enable a firm to do things and behave in
ways that lead to high sales, low costs, high margins, or in others ways add financial
value to the firm’ (1986, 658). Barney also emphasized that ‘resources are valuable
when they enable a firm to conceive of or implement strategies that improve its
efficiency and effectiveness’ (1991, 105). RBV helps managers of firms to understand
why competences can be perceived as a firms’ most important asset and, at the same
time, to appreciate how those assets can be used to improve business performance.
RBV of the firm accepts that attributes related to past experiences, organizational
culture and competences are critical for the success of the firm (Campbell and Luchs,
1997; Hamel and Prahalad, 1996). Table 1 provides brief outline of prior work on RBV

Resources can be thought of as inputs that allow businesses to carry out their
operations. The resource-based view RBV is a model that considers resources to be
crucial to a company's success. If a resource has VRIO characteristics, it can help the
company obtain and maintain a competitive edge. RBV is a strategy for gaining a
competitive edge that evolved in the 1980s and 1990s as a result of important works by
Wernerfelt, B. Prahalad and Hamel, The Resource-Based View of the Firm the
Corporation's Core Competence, J. Barney.

This model explains RBV and emphasizes the key points of it.
According to proponents of RBV, it is far more practical to exploit external possibilities
by repurposing existing resources rather than acquiring new skills for each opportunity.
Resources are given a vital role in the RBV model in assisting organizations in
achieving improved organizational performance. Tangible and intangible resources are
the two sorts of resources. The relevance of the source-based view to strategic
management is that resources that are valuable, scarce, difficult to duplicate, and non-
replaceable are the most advantageous for a company's long-term growth. These
strategic resources can lay the groundwork for the development of firm skills that will
lead to improved performance over time. According to resource-based theory,
resources that are precious, scarce, difficult to duplicate, and non-substitutable are the
best for a company's long-term success. These strategic resources can lay the
groundwork for the development of firm skills that will lead to improved performance
over time. Capabilities are required to bundle, manage, and otherwise utilize resources
in a way that adds value to clients and gives the company a competitive advantage.

Businesses have grown more competitive as a result of technological breakthroughs

and ever-growing innovations as a work culture. Today, every company's ultimate goal
is to create value propositions for their customers in order to stay relevant in the face of
ever shifting market trends. “To bring this strategy into action, managers must
extensively evaluate their resource pool and competencies and leverage them to the
maximum potential.” After all, a company's employees are its most important asset.
Managers create a thorough resource-based vision approach to make the most of their
abilities. It improves project performance and delivery by allowing seamless resource
allocation to the relevant activity. This in turn to helps the organization's long-term
prosperity.

According to RBV proponents, it is much more feasible to exploit external opportunities

using existing resources in a new way rather than trying to acquire new skills for each
different opportunity. In RBV model, resources are given the major role in helping
companies to achieve higher organizational performance. There are two types of
resources: tangible and intangible.

● Tangible assets are physical things. Land, buildings, machinery, equipment and

capital – all these assets are tangible. Physical resources can easily be bought in
the market so they confer little advantage to the companies in the long run
because rivals can soon acquire the identical assets.

● Intangible assets are everything else that has no physical presence but can still
be owned by the company. Brand reputation, trademarks, intellectual property
are all intangible assets. Unlike physical resources, brand reputation is built over
a long time and is something that other companies cannot buy from the market.
Intangible resources usually stay within a company and are the main source of
sustainable competitive advantage.

There are fundamentals of resource-based view strategy (RBV):

RBV, a strategy devised by businesses to better understand the elements of their
business in order to get a long-term competitive edge. This idea arose from the
important writings of B Wernerfelt, Hamel, Prahalad, and others in the 1980s and
1990s.

Benefits of RBV Strategy:

The resource-based view strategy aims to gain a sustainable competitive advantage.
But how can an organization achieve this advantage? It's done by in-depth resource
analysis, resource allocation, and cross-functional resource utilization. Only by releasing
the actual potential of a company's personnel can it innovate better and outperform the
competition.

RBV strategy helps them achieve the same:

Visibility for efficient resource allocation. Managers can receive insight into resource
skills and competences thanks to the comprehensive perspective of all resource pools.
As a result, managers are able to distribute resources based on the project's scope and
demand. Real-time data enables them to make data-driven decisions, optimize talent
potential, and increase profitability.

Maintains the competitive advantage. As market volatility rises, so does the demand for
ad hoc projects, which can be the decisive factor in your company's growth and
success. To complete crucial multi-faceted tasks, resource managers can use both their
core and secondary workforce talents. Demand fulfillment can maintain their competitive
edge by using a resource-based perspective strategy on a consolidated platform.

Cross-functional usage of resources. It aids in the allocation of appropriate resources

from other departments and the formation of a cross-functional project team. It lowers
the expense of the hiring process while also allowing you to take advantage of your
diverse staff. Employees are also given a variety of tasks to work on in order to expand
their professional portfolio.
The Major concepts of RBV Analysis is understanding why organizations outperform
their competitors is beneficial. It is a widely used analytical tool for determining an
organization's strengths and weaknesses, as well as evaluating its staff.

The Resource Based View of Business is based on the idea that a company's
performance is determined by the resources available to it. The way these resources
are used and arranged allows the company to function well and might even provide it a
competitive advantage. SWOT analysis is one of the most extensively utilized strategy
tools. The majority of businesses build their strategy by looking outside of the company.
The approach is based on what they see as market opportunities and dangers. Internal
perspectives, such as strengths and weaknesses, are sometimes overlooked, but a
balanced approach should take into account both perspectives, which is why RBV is so
crucial.

According to Jay Barney, resources should be valuable, rare, imperfectly imitable, and
non-substitutable in order to provide long-term competitive advantage. This is
commonly abbreviated as VRIN and utilized as the foundation for evaluating your
resource base. Although resource-based firm theory has a long history, recent
advances such as core competences have gotten a lot of attention. Many of these
innovations have been conceptual, making them difficult to put into effect. We'll go over
the principles and offer some tools to assist you with the practical parts of establishing
and nurturing resources and competencies.

The Resource Based View examines why businesses thrive or fail in the marketplace
from the inside out, or from the perspective of a single company. According to RBV, a
company's capabilities also enable it to add value to the customer value chain, develop
new products, and enter new markets. In order to build durable competitive advantages,
the RBV taps into the organization's resources and competencies. However, not all of a
company's resources are strategic, and hence sources of competitive advantage. 

4.4 INTEGRATING STRATEGY AND CULTURE

"A pattern of conduct produced by the organization" is how organizational culture is

defined.

Organizational culture is a pattern of behavior formed by an organization as it learns to

cope with its challenge of external adaptation and internal integration that has proven to
be legitimate and can be taught to new members as the correct way to perceive, think,
and feel. Culture, which is remarkably resistant to change, can be a key strength or
weakness for a company.

Culture is one of the most powerful - and most often neglected - elements of the
profit equation. There are few other aspects of your business that have the inherent
capacity to increase employee productivity, streamline your work processes, and
grow revenues in ways that are as powerful and predictable as your corporate
culture.
Corporate culture is simple: it’s the way we work together, the ways in which our
organizational structures support business strategy, and the ways we attract and
retain excellent employees and customers. Basically, corporate culture provides the
frame-work to implement and operationalize your strategy.

Organizational culture, an internal phenomenon that pervades all departments and

divisions of a company, may be the finest example of relationships among a firm's core
business activities. Organizational culture is defined as a pattern of behavior formed by
an organization as it learns to deal with its challenge of external adaptation and internal
integration, and that has proven to be valid enough to be taught to new members as the
correct way to perceive, think, and feel. This definition emphasizes the importance of
matching external with internal factors in making strategic decisions The subtle, elusive,
and generally unconscious dynamics that shape a workplace are captured by
organizational culture. Culture may be a key strength or weakness for a company
because it is so resistant to change. It could be the root of any significant company
function's strengths and flaws.
The development of a strategic plan is critical to the success of any firm. To reach its
performance improvement goals, an organization must be able to execute that
approach effectively. The most crucial determinant of successful execution is generally
the organization's culture.

The Importance of Culture in Strategy Execution

The development of a strategic plan is critical to the success of any firm. To reach its
performance improvement goals, an organization must be able to execute that
approach effectively. The most crucial determinant of successful execution is generally
the organization's culture. At its foundation, implementing strategy is based on two key
components. Creating and maintaining an organizational culture that supports and
accelerates change. At every agency level, from administrative assistant to senior
leadership, cultivating a feeling of personal accountability for strategy implementation
ownership.

Creating an open-to-change organizational culture begins with a senior leadership team

that communicates the agency's strategic priorities frequently and effectively. Every
member of the team contributes to the agency's success. Everyone should take
personal responsibility for their actions. In a case study involving AT&T, it was
discovered that successful team collaboration, commitment to an employee's personal
action plan, and open communication with senior management resulted in an
environment in which employees at all levels felt valued. Participants in the study
devised measurable goals and methods for communicating clearly, as well as feedback
channels for senior leadership. The mood created by the participants resulted in better
strategy execution and performance.

The relationship between organizational culture and strategy has piqued the interest of
academic academics as well as actual managers relatively soon after the idea of
organizational culture was established. Although it was not evident which of the two was
older in this relationship, which is the cause and which is the consequence, it was
immediately clear that there is a specific causal relationship between organizational
culture and company strategy. The process of strategy design and selection, as well as
its implementation, is heavily influenced by organizational culture. The selection and
implementation of strategy, on the other hand, can enhance or change the existing
corporate culture.

Strategy is the most important planned choice that has a significant impact on an
organization's business operations. It is at the core of the strategic management
concept, which is the concept of managing a firm through strategy. A company's
strategy is a fundamental method of achieving its objectives. It demonstrates how a
business aligns its capabilities and resources with the demands of the ever-changing
environment in which it works. The corporation seeks to employ all of its alternatives
and avoid all of the threats in its environment through its strategy, as well as to
maximize all of its advantages and minimize its weaknesses in comparison to
competitors. Today, strategy is viewed as a dynamic, ongoing process.

The strategic management process entails the formulation and execution of a strategy.
Strategic analysis, strategy selection, and strategy implementation are the three
essential steps. Analysis of mission and goals; analysis of external elements such as
the environment; and analysis of internal factors are all part of strategic analysis. The
process of selecting a strategy entail generating strategic possibilities, evaluating them,
and selecting the best strategic option. It also represents various reactions by a
corporation to a given environmental scenario that are in line with its capabilities and
resources. The implementation of strategy is carried out in the final phase of strategic
management. It is required to operationalize the chosen strategy through a plan of
action and dedicate resources to the chosen course of action in order for it to be
achieved. It is vital to adapt the organization to the new strategy's requirements. Finally,
because implementing a new strategy usually necessitates implementing specific
changes within an organization, strategic change management is both a component and
a prerequisite for implementing the strategy.

Organizational culture can be defined as a set of beliefs, values, norms, and attitudes
expressed through symbols that members of an organization have formed and adopted
through mutual experience to help them understand the world around them and how to
behave in it. Organizational culture, it can be inferred, is made up of collective cognitive
structures such as assumptions, values, norms, and attitudes, as well as symbols that
materialize and show their cognitive content. Organizational culture is the product of
social interaction among members of an organization as they work to solve the problem
of external adaptation of a business to the environment and internal integration of the
collective.

Successful solutions to these challenges are generalized, systematized, and pushed

into the subconscious minds of organization members, resulting in collective cognitive
structures shared by all or most of the employees Organization and Management and
managers. Employees and managers can use culture to decide the meaning of
concepts, things, and events both inside and beyond the organization. They operate in
accordance with their interpretation of reality, making decisions, taking acts, and
engaging in interactions with others. This fact reveals the significant impact that
organizational culture has on a company's business operations.

Recent empirical study on the relationship between strategy and culture can be
classified into two groups, depending on the context. One line of inquiry focuses on the
connections between generic strategies and cultural assumptions and values. The third
area of study is the relationship between culture and individual enterprise functional
strategies or strategies within specific business domains like human resources
management, production, or marketing. Only representative studies from both groups
will be presented, along with their findings. In Australia, the most extensive empirical
study of the links between an enterprise's general strategy and organizational culture
was recently conducted.

The Competing Values Framework, which recognizes clan culture, hierarchical culture,
market culture, and adhocracy culture, is used to examine the impact of corporate
culture on strategy of innovation or imitation. The authors propose that adhocracy as an
organizational culture model does really contribute to innovative company conduct,
whereas hierarchy culture leads to imitation as a market entry strategy.

Both the strategy design and implementation processes are heavily influenced by
organizational culture. Culture has a substantial impact on strategy selection during the
strategy formulation phase, and culture may be both a motivating force and an
insurmountable obstacle during the strategy implementation phase. The impact of
culture on top management's interpretative schemes or mental maps, as well as middle
and lower-level managers and employees, can be seen in both periods.

Organizational culture serves as a reference framework for strategic decision-makers

during the strategy formulation process, which comprises activities such as strategic
analysis, strategic options creation, and strategy selection, as we've seen. All
employees in an organization share cultural assumptions, beliefs, and conventions,
which establish a framework that encompasses all employees' perceptions,
interpretations, and conclusions, including those who conduct strategic analysis,
generation, and selection of strategic options. Top management mental models are
heavily influenced by widely held assumptions, attitudes, and norms. These schemes, in
turn, have a considerable impact on their perception and interpretation of both the
external world and the organization itself, as well as their ability to draw conclusions
about possible organizational strategies and choose the optimal one.

The way management obtains information and analyzes both the environment and
corporate resources is determined by organizational culture. In the process of external
analysis, how a firm gathers information from the environment and what image of the
environment it builds relies on how it gathers information.

Culture determines the way in which top management gathers information, the way in
which they perceive and interpret the environment and the company resources, but it
also influences the way in which they make strategic decisions, make the strategy
selection. Organizational culture influences strategy implementation by legitimizing or
delegitimizing the strategy, depending on the consistency between cultural values and
the selected strategy. When culture legitimizes strategy, it significantly facilitates
strategy implementation, and when culture delegitimizes strategy in the view of
employees and managers, it makes the implementation of the selected strategy almost
impossible.

Strategy influences organizational culture by institutionalizing or deinstitutionalizing the

culture, depending on the conformity with cultural values and norms. If activities through
which the selected strategy is operationalized and implemented are in conformity with
cultural values and norms, the strategy will institutionalize and strengthen the existing
culture. Conversely, long-lasting and consistent implementation of the selected strategy
will deinstitutionalize organizational culture, whereby the process of its change begins.
The basic recommendation to management regarding the relationship between strategy
and organizational culture is that a way must be found for these two fundamental
company management components to be harmonized. This can be achieved in two
basic ways. First, in strategy formulation, management of the company must have in
mind cultural assumptions, values and norms in order to provide in advance for the new
strategy to comply with them. To be able to do this, management must, in the phase of
strategic analysis, perform and scan organizational culture profile of the enterprise.
Also, management must, in the phase of strategy selection, be ready to adapt the
strategy to the existing culture of the company. On the other hand, if management is
forced to select a strategy which is inconsistent with the existing culture, they must be
ready and able to close the “cultural gap” during the strategy implementation, which is
achieved by changing the existing culture. In order to do this, management must have
abilities and knowledge of how to change organizational culture in a planned manner

Organizational Culture Can Inhibit Strategic Management

▪ Miss external changes due to strongly held beliefs
▪ Natural tendency to “hold the course” even during times of strategic change
▪ Organizational culture significantly affects business decisions and thus, must be
evaluated during an internal strategic management audit

Many organizational theorists write of importance of corporate culture in

implementation and argue that culture needs to be considered in the implementation
of strategy.

The correct relationships between cultural values and beliefs, organizational

strategy, and the business environment can enhance organizational performance.
Dan Denison argues that the fit among strategy, environment, and culture is
associated with four categories of culture: adaptability, mission, involvement, and
consistency.

The adaptability culture is characterized by strategic focus on the external

environment through flexibility and change to meet customer needs. The culture
encourages norms and beliefs that support the capacity of the organization to detect,
interpret, and translate signals from the environment into new behavior responses.

The mission culture places major importance on a shared vision of organization

purpose. Organizational leaders shape behavior by envisioning a desired future
state that is important to everyone. One example is Medtronic, the premier
manufacturer of cardiac pacemakers.

Over the years the environment has changed with respect to government
regulation, competition, and healthcare reimbursement, but the organization's
mission remains essentially the same. The involvement culture has a primary focus
on the involvement and participation of the organization's members and on rapidly
changing expectations from the external environment. Involvement and participation
create a sense of responsibility and grater commitment to the organization.

The consistency culture has an internal focus and a consistency for a stable
environment. Symbols, heros, and ceremonies would support cooperation, tradition,
and following established policies and practices as w way to achieve goals.

These categories are based on two factors: (1) the extent to which the
competitive environment requires change or stability and (2) the extent to which the
strategic focus and strength is internal or external.

According to Arthur Thompson Jr., and A. Strickland III creating an organizational

culture which is fully harmonized with the strategic plan usually involves five steps:

Step 1
Is to diagnose which facets of the present culture are in line with strategy and
which are not.

Step 2
Is to develop ways to make the needed changes in culture and to recognize how
long it will take for the new culture.

Step 3
Is to use the available opportunities to make incremental changes that improve
the alignment of culture and strategy.

Step 4
Is to insist that subordinate managers take actions of their own to set an example
and to do things which will further instill organizational values and reinforce the
culture.

Step 5
Is to proactively build and nurture the emotional commitment that managers and
employees have to the strategy to produce a temperamental fit between culture
and overall strategic plan.
Normally, managerial actions taken to modify corporate culture need to be both
symbolic and substantive.

Integrating Culture With Your Strategy

 How do you work with your own business culture to maximize your profits and to
realize your strategy? The answer begins with analyzing just what type of corporate
culture you want to have.

For example, many companies have a strategic objective to obtain - and then
retain - a certain percentage of market share. If you have a strategic goal similar to
this, how do you structure the work that your employees do in order to realize that
goal? Are your employees free to offer their ideas and experiences, so that you reap
the benefit of as many sources of new and creative ideas as possible? Do you
encourage free and open discussion, and do you try to allow this to happen outside
of the normal work day? We often find that while many companies say they
encourage new and innovative ideas from their employees, few actually build this
process into their work day. Some of our clients, in seeking to link their culture to
their strategy in this area, have developed both formal and informal processes that
encourage employees to offer their ideas in safe and open environments, and have
built in a reward process to honor those ideas that are adopted or implemented by
the company.

Another example of corporate culture is how you deal with the idea of change.
Any good strategic plan has built into it a capacity fordealing with changes in product
and market. Does your corporate culture reflect this strategic element? This is one of
the most critical areas of corporate culture, and one which many companies
seriously neglect. The secret here is to make sure that you have formal and
established processes by which you can measure the extent to which you are
staying ahead of the change curve. For example, if your company manufactures a
product that must change with certain advances in technology it is critical that your
employees have access to and discussions about that market. An educated work
force is as critical as an educated CEO; unfortunately, most companies spend their
time and money on educating their top management, and rely on random “trickle-
downs” when it comes to the continuing education of their work force. Staying
informed about critical market change requires discipline and planning, and must be
a goal not only of senior management but of the employees involved as well.

Finally, perhaps the most obvious and important element of your corporate
culture is your leadership. There is no single factor more important in the success of
your company than your ability to steer your organization and your employees into
the increasingly complex marketplace of tomorrow. Corporate culture is all about
how you do that. Do you communicate your strategy clearly and often? Do you help
your employees learn from their mistakes as well as their successes? Do you take
the time to celebrate accomplishments? Can your employees depend on you for
consistent and predictable behavior? Do you model the very behaviors and actions
that you expect in your employees? While there may be no secret to effective
leadership, there is also no substitute for it. An effective corporate culture that is
designed to increase revenues depends on consistent and highly visible leadership.
The fast-paced market of today demands that you deal with change, opportunity,
and uncertainty. By creating and nurturing a clear and consistent corporate culture
you will not only increase your ability to realize your strategic objectives, but you will
increase revenues while simultaneously building a company where people want to
work, want to produce - and want to stay.

4.5 DETERMINE AND TO PRIORITIES A FIRM’S INTERNAL STRENGTHS AND

WEAKNESSES.

How to Determine the Strengths and Weaknesses of Your Business

Your company, like every small business, excels at some things while occasionally
falling short in others. For example, you might be a natural at distribution but struggle
with dealing with client problems in real time. Alternatively, you could have a strong
marketing message but little to no social media presence. Whatever the circumstance,
any company should have a complete understanding of its strengths and shortcomings,
or risk missing out on untapped opportunities or being outsmarted by the competitors.

How do you go about determining these Strengths and Weaknesses

Start with a SWOT analysis.

A SWOT analysis studies internal and external factors that are helpful or harmful to your
business and the way it’s run. This approach focuses on identifying factors in the
following 4 categories:

· Strengths - The strongest parts of your business model and your most effective
selling points. The core competencies of your team and your investments.

· Weaknesses - The weakest parts of your business model and weak spots in the sales
funnel. What’s lacking in your team and missing from your investments.

· Opportunities - Potential leads, investors, events, and even new target markets.

· Threats - Potential competitors, reasons investors would cut funding, or negative

market developments.

Here are several tips for determining a firm’s internal strengths and weaknesses:
1. ANALYZE.
 It is important to conduct an analysis in order to determine the strengths
and weaknesses of your business. In doing this, you will want to be honest.
Again, it can be difficult to admit to places that we have weaknesses, but in order
to make improvements, we must identify those areas. Sometimes these changes
might have to be made to prices after you review your prices in comparison to
the marketplace through a pricing analysis report. In other cases, they may come
from a lack of knowledge of your overall audience. Changes cannot happen
without taking stock of everything and being honest with yourself.

2. START WITH A SWOT ANALYSIS.

A SWOT analysis studies internal and external factors that are helpful or
harmful to your business and the way it’s run. This approach focuses on
identifying factors in the following 4 categories:
● Strengths - The strongest parts of your business model and your most
effective selling points. The core competencies of your team and your
investments.
● Weaknesses - The weakest parts of your business model and weak spots
in the sales funnel. What’s lacking in your team and missing from your
investments.
● Opportunities - Potential leads, investors, events, and even new target
markets.
● Threats - Potential competitors, reasons investors would cut funding, or
negative market developments.

“A weakness isn’t necessarily a weakness if all the competitors in a

market suffer from it,” Forbes notes. When assessing both weaknesses and
strengths, it’s best to “zoom out and evaluate SWOT components from the entire
market’s perspective.” This helps you gain insights into how things look from the
perspective of your intended customer base.

3. CONSULT WITH OTHERS.

Of course, you’re the expert on your business. But potentially valuable
information is possible if you take time to consult with different stakeholders,
including customers, suppliers, and employees.
Through formal or informal methods, seek their input into the company’s
perceived strengths and weaknesses. There’s a strong likelihood you’ll garner
insights into everything from pricing strategy to customer service that you may
not otherwise have considered. All of that data can be factored into a
comprehensive look at what your company does best, and where its efforts might
be improved.
Moreover, PriceManager, a legitimate business website, added that if you
have difficulty identifying what the strengths and weaknesses of your business
are, consider bringing others in on the conversation. Ask family, friends,
employees, and possibly even customers what they think. If you are going to ask
customers you may want to create a survey for them to fill out, where they can
provide feedback on your service or products, along with areas they feel your
company could make improvements. One example would be to go and get help
through a competitive price analysis firm to see what is going on with your
company’s price schedule and how relative it is to market values. The information
you receive from something like this can be invaluable in helping you grow and
make positive changes.

4. CLOSELY MONITOR CUSTOMER COMPLAINTS.

Evaluating your company’s strengths is likely easier than taking a hard
look at its flaws. One helpful source of information is customer complaints. If
you’re not already monitoring the frequency and substance of these complaints,
this is a good time to start.
“The information you receive will help you identify weaknesses because
you will see patterns of complaints,” notes Price Manager. This can be
particularly helpful “when a complaint is consistently being made about a specific
policy, product, or service.
Furthermore, Price Manager explained that a company should track the
customer complaints that it receives, and start making a process and policy for it.
This is a great way to learn more about what the weaknesses of your company
are. The information you receive will help you identify weaknessesbecause you
will see patterns of complaints. Use this information to make changes, especially
when a complaint is consistently being made about a specific policy, product, or
service.

5. MATCH YOUR BUSINESS AGAINST THE COMPETITION.

There’s a lot you can learn about your own company by viewing it through
the lens of the competition. Just as you strive to examine your business
objectively, take an equally dispassionate look at what your competitors do well
and where there are gaps in their market performance:
✔ Is their website more impressive than your own, or is it difficult for
prospective customers to navigate?
✔ Do competitors place sufficient emphasis on high-quality customer service
or does that message get lost in their other marketing themes?
✔ What aspects of their business appear more or less efficient and cost-
effective than your own?
Looking closely at their promotional/advertising materials—as well as
checking out their social media platforms—might offer a valuable perspective on
your own operations and processes.
PriceManager added that as a firm gathers all this information you will find
out what your strengths and weaknesses are. The information about your
weaknesses is perhaps the most important and should be addressed. Don’t
overwhelm yourself by taking on all of them at once. Instead, focus on two or
three weaknesses at one time. That way you can make a goal and plan to
address those, before moving on to others. If improvements can be made
immediately, great. But if they are ones that will take longer-term solutions don’t
fret. Start implementing changes and work toward strengthening the areas of
weakness, and in time things will improve.

6. JOIN A PEER ADVISORY BOARD.

Perhaps the best way to get an up-close, impartial look at your business is by
joining a peer advisory board like TAB. In a confidential setting, CEOs and business
owners share ideas and insights, take turns discussing their challenges and
receiving advice (and accountability), and learn from the experience of their
executive-level peers.
 Not only can you do this analysis as a whole company, but you can also do it
with your employees. Have them take an honest inventory of their strengths and
weaknesses. Once they have, see what can be done to address the weaknesses.
Perhaps making a couple of changes in your duties will help your company become
more efficient. Being able to make such changes saves time and helps with the future
growth of the company.
Identifying strengths can be fun and even exciting. But, it’s never exciting to have
to look at the weaknesses within your company or employees. Yet it is something that is
important to do. This is especially true if you want to address threats, help stay ahead of
the competition, and meet your company goals. Make it a goal to do this exercise at
least once a year, as new weaknesses may arise over time. This will help ensure that
problems are addressed and your company will continue to flow like a river!
Be sure to get help through a competitive price analysis firm and to take a look at
your customer base as well. You need to make sure you understand your plans for
making your business more viable.

How to Perform a SWOT Analysis

A SWOT analysis is a key part of the situational analysis in your marketing
plan and helps you develop marketing strategies. A SWOT analysis is a collection of
information about internal factors (your company’s strengths and weaknesses) and
external factors (your industry’s opportunities and threats) which have or could have an
impact on your business.

Internal Factors
Internal factors can be directly managed by your business. To determine your strengths
and weaknesses, look at your
resources, including land, equipment, knowledge, brand equity, and intellectual
property;
core competencies;
functional areas, including management, operations, marketing, finances, and human
resources;
organizational culture; and
value chain activities.

How to Perform a SWOT Analysis

A SWOT analysis is a key part of the situational analysis in your marketing
plan and helps you develop marketing strategies. A SWOT analysis is a collection of
information about internal factors (your company’s strengths and weaknesses) and
external factors (your industry’s opportunities and threats) which have or could have an
impact on your business.

Internal Factors
Internal factors can be directly managed by your business. To determine your strengths
and weaknesses, look at your
● resources, including land, equipment, knowledge, brand equity, and intellectual
property;
● core competencies;
● functional areas, including management, operations, marketing, finances,
and human resources;
● organizational culture; and
● value chain activities.

It can sometimes be difficult to determine whether something is a strength, a weakness,

or neither.
You should always consider various internal factors in relation to your competitors. If
you have a 20% profit margin, you might automatically assume that it’s a strength. If
your competitors, however, have a 30% profit margin, then your profit margin may be a
weakness.
You can also determine whether something is a strength or weakness by asking
questions to determine whether it exhibits VRIO characteristics. If a resource is
not valuable, then it’s a competitive disadvantage, or a weakness, for your company. A
resource that is valuable but not rare is a competitive parity and neither a strength nor a
weakness. If a resource is valuable and rare, but easy for your competitors to imitate,
then it’s a short-term strength for your company. If your resource is valuable, rare,
difficult to imitate, and your company is organized to capture the value, then the
resource is a long-term strength.

Strengths
Your company’s strengths give you an advantage over your competitors. To begin
thinking about your strengths, ask yourself the following questions:
● What does my business do well?
● What do my customers say I do well?
● Which resources do I have?
● What advantages do I have over my competition?
● What unique resources do I have access to?

Weaknesses
Your company’s weaknesses can be harmful if your competitors use them against you.
To begin thinking about your weaknesses, ask yourself the following questions:
● Which areas can I improve?
● What areas do my competitors handle better than I do?
● Where do I lack knowledge?

External Factors
External factors are outside your company’s control and include political, economic,
social, environmental, and legal factors. They also include changes in technology, your
market, and your industry.

Opportunities
Opportunities are favorable situations that can give your company an advantage.
Questions to consider when thinking about opportunities for your company include:
● What trends in the marketplace favor my company?
● What is my marketplace missing?
● Where are my competitors failing to satisfy my target market?

Threats
Threats are unfavorable situations that can harm your company. When considering
whether something is a threat to your company, consider the following questions:
What trends in the marketplace are working against my company?
● How well are my competitors’ products doing in the market ?
 ● Can I keep up with changes in technology?
● Are government regulations going to negatively affect me?

Prioritizing SWOT Factors

After you’ve compiled a list of three to five factors in each category, you should prioritize
each factor to determine which factors will influence your company the most.

Strengths & Weaknesses

To prioritize your strengths and weaknesses, you’ll look at the importance, rating, and
score for each factor.
Determine how important each factor is and assign a value between 0.01 (unimportant)
and 1.0 (extremely important) to each strength and weakness. Be careful about
assigning 1.0 to a strength or weakness, however, because when you add the
importance values of all your strengths and weaknesses, it should be equal to 1.0.
After you’ve assigned an importance value to each factor, you’ll assign a rating between
1 and 3. If the factor is a minor strength or weakness, you’ll assign a value of 1; if the
factor is a major strength or weakness, assign a 3.
To determine the score, multiply each factor’s importance value by its rating. When
developing your marketing strategy, you’ll want to focus on the strengths and
weaknesses with the highest scores.

Opportunities & Threats

Prioritizing your opportunities and threats is like prioritizing your strengths and
weaknesses. You’ll consider the importance and score of each factor, but instead of
assigning a rating, you’ll assign a probability value.
If an opportunity or threat is likely to impact your company, assign a high probability of
3; if it’s unlikely to impact your company, assign a low probability of 1.
To determine the score of each factor, multiply the importance value by the probability.

How to Use Your SWOT Analysis

After you’ve prioritized your strengths, weaknesses, opportunities, and threats, you can
use your analysis to develop marketing strategies for your company.
● Opportunity-Strength Strategies use your strengths to exploit opportunities.
● Opportunity-Weakness Strategies exploit opportunities to overcome your
weaknesses.
● Threat-Strength Strategies use your strengths to avoid threats.
● Threat-Weakness Strategies minimize your weaknesses and avoid threats.

4.6 THE IMPORTANCE OF FINANCIAL RATIO ANALYSIS

WHAT IS FINANCIAL RATIO ANALYSIS?

Financial ratio analysis is the best and most widely used method for determining
and evaluating an organization’s internal strengths and weaknesses in the investment,
financing, and dividend areas. Because the functional areas of business are so closely
related, financial ratios can signal strengths or weaknesses in management, marketing,
production, research and development, and management information systems activities.
Moreover, potential investors and current shareholders look closely at firms ’financial
ratios, making detailed comparisons to industry averages and to previous periods of
time.
It is important to note here that financial ratios are equally applicable in for-profit
and nonprofit organizations. Even though nonprofit organizations obviously would not
have return-on-investment or earnings-per-share ratios, they would routinely monitor
many other special ratios. For example, a church would monitor the ratio of dollar
contributions to the number of members, while a zoo would monitor dollar food sales to
the number of visitors. A university would monitor the number of students divided by the
number of professors. Therefore, be creative when performing ratio analysis for
nonprofit organizations because they strive to be financially sound just as for-profit firms
do.

BASIC TYPES OF FINANCIAL RATIOS

Financial ratios are computed from an organization’s income statement and
balance sheet. Computing financial ratios are like taking a picture because the results
reflect a situation at just one point in time. Moreover, financial ratios are important tools
for quantitative analysis. Certain ratios are available to evaluate both short- and long-
term financial and operational performance, making them useful at identifying trends in
the business and providing warning signs when it may be time to make a change. There
are also specific ratios that can measure important variables essential to one industry or
another. By evaluating particular ratios, a business can benchmark itself against similar
companies and understand its strengths, weaknesses, threats, and areas of
opportunity.
Comparing ratios over time and to industry averages is more likely to result in
meaningful statistics that can be used to identify and evaluate strengths and
weaknesses. Trend analysis is a useful technique that incorporates both the time and
industry average dimensions of financial ratios. Note that the dotted lines reveal
projected ratios. Some Web sites calculate financial ratios and provide data with charts.
Table 4-6 provides a summary of key financial ratios showing how each ratio is
calculated and what each ratio measures. However, all the ratios are not significant for
all industries and companies. For example, accounts receivable turnover and average
collection period are not very meaningful to a company that primarily does a cash
receipts business.
Key financial ratios can be classified into the following five types:
1. Liquidity ratios measure a firm’s ability to meet maturing short-term obligations.
● Current ratio
● Quick (or acid-test) ratio

2. Leverage ratios measure the extent to which a firm has been financed by debt.
● Debt-to-total-assets ratio
● Debt-to-equity ratio
● Long-term debt-to-equity ratio
● Times-interest-earned (or coverage) ratio

3. Activity ratios measure how effectively a firm is using its resources.

● Inventory turnover
● Fixed assets turnover
● Total assets turnover
● Accounts receivable turnover
● Average collection period
 4. Profitability ratios measure management’s overall effectiveness as shown by
the returns generated on sales and investment.
● Gross profit margin
● Operating profit margin
● Net profit margin
● Return on total assets (ROA)
● Return on stockholders’ equity (ROE)
● Earnings per share (EPS)
● Price-earnings ratio

5. Growth ratios measure the firm’s ability to maintain its economic position in the
growth of the economy and industry.
● Sales
● Net income
● Earnings per share
● Dividends per share

WHY IS FINANCIAL RATIO ANALYSIS IMPORTANT?

Financial Ratio Analysis is important for the company in order to analyze its financial position,
liquidity, profitability, risk, solvency, efficiency, and operations effectiveness and proper
utilization of funds which also indicates the trend or comparison of financial results that can be
helpful for decision-making for investment by shareholders of the company.
Below are the importance and uses of financial ratio analysis:

1 – Analysis of Financial Statements

Interpretation of the financial statements and data is essential for all internal and external
stakeholders of the firm. With the help of ratio analysis, we interpret the numbers from the
balance sheet and income statements. Every stakeholder has different interests when it comes
to the financial results, for example, equity investors are more interested in the growth of the
dividend payments and the earnings power of the organization in the long run. Creditors would
like to ensure that they get their repayments on their dues on time.

2 – Helps in Understanding the Profitability of the Company

Profitability ratios help to determine how profitable a firm is. Return on Assets
and Return on Equity helps to understand the ability of the firm to generate earnings.
Return on assets is the total net income divided by total assets. It means how much a
company earns a profit for every dollar of its assets. Return on equity is net income by
shareholder’s equity. This ratio tells us how well a company uses its investors’ money.
Ratios like the Gross profit and Net profit margin. Margins help to analyze the firm’s
ability to translate sales to profit.

3 – Analysis of Operational Efficiency of the Firms

Certain ratios help us to analyze the degree of efficiency of the firms. Ratios like
account receivables turnover, fixed asset turnover, and inventory turnover ratio. These
ratios can be compared with the other peers of the same industry and will help to
analyze which firms are better managed as compared to the others. It measures a
company’s capability to generate income by using the assets. It looks at various aspects
of the firm like the time it generally takes to collect cash from debtors or the time period
for the firm to convert the inventory to cash. It is why efficiency ratios are critical, as an
improvement will lead to a growth in profitability.

4 – Liquidity of the Firms

Liquidity determines whether the company can pay its short-term obligations or
not. By short-term obligations, we mean the short-term debts, which can be paid off
within 12 months or the operating cycle. For example, the salaries due, sundry
creditors, tax payable, outstanding expenses, etc. The current ratio and quick ratio are
used to measure the liquidity of the firms.
5 – Helps in Identifying the Business Risks of the Firm
One of the most important reasons to use ratio analysis is that it helps in
understanding the business risk of the firm. Calculating the leverages (Financial
Leverage and Operating Leverages) helps the firm understand the business risk, i.e.,
how sensitive the profitability of the company is with respect to its fixed cost deployment
as well as debt outstanding.

6 – Helps in Identifying the Financial Risks of the Company

Another importance of ratio analysis is that it helps in identifying the Financial
Risks. Ratios like Leverage ratio, interest coverage ratio, DSCR ratio, etc. help the firm
understand how it is dependent on external capital and whether they are capable of
repaying the debt using their capital.

7 – For Planning and Future Forecasting of the Firm

Analysts and managers can find a trend and use the trend for future forecasting
and can also be used for critical decision-making by external stakeholders like
investors. They can analyze whether they should invest in a project or not.

8 – To Compare the Performance of the Firms

The main use of ratio analysis is that the strengths and weaknesses of each firm
can be compared. The ratios can also be compared to the firm’s previous ratio and will
help to analyze whether progress has been made by the company.

In conclusion, a sustainable business and mission require effective planning and

financial management. Financial ratio analysis is a useful management tool that will
improve a firm’s understanding of financial results and trends over time, and provide key
indicators of organizational performance. It is a vital activity that pinpoints strengths and
weaknesses from which strategies and initiatives can be formed. Most importantly,
funders may use ratio analysis to measure your results against other organizations or
make judgments concerning management effectiveness and mission impact.

4.7 INTERNAL FACTOR EVALUATION (EFE) MATRIX.

Internal Factor Evaluation (IFE) Matrix is a strategy tool used to evaluate firm’s
internal environment and to reveal its strengths as well as weaknesses.

External Factor Evaluation (EFE) Matrix is a strategy tool used to examine

company’s external environment and to identify the available opportunities and threats.
 The internal and external factor evaluation matrices have been introduced by
Fred R. David in his book ‘Strategic Management’ (at least I found them there and
couldn’t trace their origins anywhere else). According to the author, both tools are used
to summarize the information gained from company’s external and internal environment
analyses. The summarized information is evaluated and used for further purposes, such
as, to build SWOT analysis or IE matrix. Even though, the tools are quite simplistic, they
do the best job possible in identifying and evaluating the key affecting factors. Both tools
are nearly identical so we’ll only show an example of an EFE matrix right now.

Key External and Internal Factors

EFE Matrix. When using the EFE matrix we identify the key external
opportunities and threats that are affecting or might affect a company. Where do we get
these factors from? Simply by analysing the external environment with the tools like
PEST analysis, Porter’s Five Forces or Competitive Profile Matrix.

IFE Matrix. Strengths and weaknesses are used as the key internal factors in the
evaluation. When looking for the strengths, ask what do you do better or have more
valuable than your competitors have? In case of the weaknesses, ask which areas of
your company you could improve and at least catch up with your competitors?

The general rule is to identify 10-20 key external factors and additional 10-20 key
internal factors, but you should identify as many factors as possible.

Weights

Each key factor should be assigned a weight ranging from 0.0 (low importance)
to 1.0 (high importance). The number indicates how important the factor is if a company
wants to succeed in an industry. If there were no weights assigned, all the factors would
be equally important, which is an impossible scenario in the real world. The sum of all
the weights must equal 1.0. Separate factors should not be given too much emphasis
(assigning a weight of 0.30 or more) because the success in an industry is rarely
determined by one or few factors.

In our first example, the most significant factors are ‘Processed food market
growing by 15% next year in our largest market.’ (0.24 points), ‘The contract with the
main customer expires in 2 months.’ (0.17 points) and ‘New law, requiring decreasing
the amount of sugar in the food by 20%, could be passed next year.’ (0.14 points).

Ratings

The meaning of ratings is different in each matrix, so we’ll explain them

separately.

EFE Matrix. The ratings in external matrix refer to how effectively company’s
current strategy responds to the opportunities and threats. The numbers range from 4 to
1, where 4 means a superior response, 3 – above average response, 2 – average
response and 1 – poor response. Ratings, as well as weights, are assigned subjectively
to each factor. In our example, we can see that the company’s response to the
opportunities is rather poor, because only one opportunity has received a rating of 3,
while the rest have received the rating of 1. The company is better prepared to meet the
threats, especially the first threat.

IFE Matrix. The ratings in internal matrix refer to how strong or weak each factor
is in a firm. The numbers range from 4 to 1, where 4 means a major strength, 3 – minor
strength, 2 – minor weakness and 1 – major weakness. Strengths can only receive
ratings 3 & 4, weaknesses – 2 & 1. The process of assigning ratings in IFE matrix can
be done easier using benchmarking tool.

Weighted Scores & Total Weighted Score

The score is the result of weight multiplied by rating. Each key factor must
receive a score. Total weighted score is simply the sum of all individual weighted
scores. The firm can receive the same total score from 1 to 4 in both matrices. The total
score of 2.5 is an average score. In external evaluation a low total score indicates that
company’s strategies aren’t well designed to meet the opportunities and defend against
threats. In internal evaluation a low score indicates that the company is weak against its
competitors.

In our example, the company has received total score 2.40, which indicates that
company’s strategies are neither effective nor ineffective in exploiting opportunities or
defending against threats. The company should improve its strategy and focus more on
how take advantage of the opportunities.

Benefits

Both matrices have the following benefits:

● Easy to understand. The input factors have a clear meaning to everyone inside
or outside the company. There’s no confusion over the terms used or the
implications of the matrices.
● Easy to use. The matrices do not require extensive expertise, many personnel or
lots of time to build.
● Focuses on the key internal and external factors. Unlike some other analyses
(e.g. value chain analysis, which identifies all the activities in the company’s
value chain, despite their importance), the IFE and EFE only highlight the key
factors that are affecting a company or its strategy.
● Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-
McKinsey matrix or for benchmarking.
Limitations

● Easily replaced. IFE and EFE matrices can be replaced almost completely by
PEST analysis, SWOT analysis, competitive profile matrix and partly some other
analysis.
● Doesn’t directly help in strategy formation. Both analyses only identify and
evaluate the factors but do not help the company directly in determining the next
strategic move or the best strategy. Other strategy tools have to be used for that.
● Too broad factors. SWOT matrix has the same limitation and it means that some
factors that are not specific enough can be confused with each other. Some
strengths can be weaknesses as well, e.g. brand reputation, which can be a
strong and valuable brand reputation or a poor brand reputation. The same
situation is with opportunities and threats. Therefore, each factor has to be as
specific as possible to avoid confusion over where the factor should be assigned.

Using the tool

Step 1. Identify the key external/internal factors
EFE matrix. Do the PEST analysis first. The information from the PEST analysis reveals
which factors currently affect or may affect the company in the future. At this point, the
factors can be either opportunities or threats and your next task is to sort them into one
or the other category. Try to look at which factors could benefit the company and which
ones would harm it.

You should also analyze your competitors’ actions and their strategies. This way you
would know what competitors are doing right and what their strategies lack.

IFE matrix. In case you have done a SWOT analysis already, you can gather some of
the factors from there. The SWOT analysis will usually have no more than 10 strengths
and weaknesses, so you’ll have to do additional analysis to identify more key internal
factors for the matrix.

Look again into the company’s resources, capabilities, organizational structure, culture,
functional areas and value chain analysis and recognize the strong and weak points of
the organization.

Step 2. Assign the weights and ratings

Weights and ratings are assigned subjectively. Therefore, it is a more difficult process
than identifying the key factors. We assign weights based on industry analysts’
opinions. Find out what the analysts say about the industry’s success factors and then
use their opinion or analysis to assign the appropriate weights. The same process is
with ratings. Although, this time you or the members of your group will have to decide
what ratings should be assigned. Ratings from 1-4 can be assigned to each opportunity
and threat, but only the ratings from 1-2 can be assigned to each weakness and 3-4 to
each strength.

Step 3. Use the results

IFE or EFE matrices have little value on their own. You should do both analyses and
combine their results to discuss new strategies or for further analysis. They are
especially useful when building advanced SWOT analysis, SWOT matrix for strategies
or IE matrix.

4.7 CAUSE/BENEFIT ANALYSIS, VALUE CHAIN ANALYSIS AND BENCH

MARKING AS STRATEGIC MANAGEMENT TOOLS.

Value Chain Analysis

Value chain analysis (VCA) is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs or
increase differentiation.
Value chain represents the internal activities a firm engages in when transforming inputs
into outputs.

Understanding the tool

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is
to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage. In
other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it competes through cost
advantage, it will try to perform internal activities at lower costs than competitors would do.
When a company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all
the internal activities a firm engages in to produce goods and services. VC is formed of primary
activities that add value to the final product directly and support activities that add value
indirectly.

Although, primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive advantage mainly
derives from technological improvements or innovations in business models or processes.
Therefore, such support activities as ‘information systems’, ‘R&D’ or ‘general management’ are
usually the most important source of differentiation advantage. On the other hand, primary
activities are usually the source of cost advantage, where costs can be easily identified for each
activity and properly managed.
Firm’s VC is a part of a larger industry's VC. The more activities a company undertakes
compared to industry's VC, the more vertically integrated it is. Below you can find an industry's
value chain and its relation to a firm level VC.
Using the tool
There are two different approaches on how to perform the analysis, which depend on
what type of competitive advantage a company wants to create (cost or differentiation
advantage). The table below lists all the steps needed to achieve cost or differentiation advantage
using VCA.
Benefits of Value Chain
The value chain framework helps organizations understand and evaluate sources of
positive and negative cost efficiency. Conducting a value chain analysis can help businesses in
the following ways:
● Support decisions for various business activities.
● Diagnose points of ineffectiveness for corrective action.
● Understand linkages and dependencies between different activities and areas in the
business. For example, issues in human resources management and technology can
permeate nearly all business activities.
 ● Optimize activities to maximize output and minimize organizational expenses.
● Potentially create a cost advantage over competitors.
● Understand core competencies and areas of improvement.
A value chain analysis can offer important benefits; however, when emphasizing granular
process details in a value chain, it's important to still give proper attention to an organization's
broader strategy.

Benchmarking
Benchmarking is a strategy tool used to compare the performance of the business
processes and products with the best performances of other companies inside and outside the
industry.
Benchmarking is the search for industry best practices that lead to superior performance.

Understanding the tool

Comparing your own business to a rival is essential when competing. Without it, you
would never know how successful your performance is in a market or whether you perform one
or another task better than your competitor does. For example, 85% customer satisfaction might
look great for you or even compared to your industry’s average, but what if some other
companies (not necessarily rivals) easily achieve 97% rate? In this situation, your 85%
satisfaction rate doesn’t look that brilliant. To better understand your situation and improve
company’s performance, the managers use benchmarking.
Some form of comparison in the companies was used, since 1800s, and mainly included
product’s quality and feature comparison. This type of comparison was scarcely used and didn’t
become a valuable management tool until late 1980s and 1990s, when Xerox introduced the
process benchmarking technique.[2] This type of comparison proved very beneficial and Xerox,
AT&T and other companies began comparing the performance of their processes to the best
standards in the industry. The following table shows how benchmarking evolved into a modern
strategy tool:
According to Camp, benchmarking is simply “Finding and implementing the best business
practices”. Managers use the tool to identify the best practices in other companies and apply
those practices to their own processes in order to improve the company’s performance.
Improving company’s performance is, without a doubt, the most important goal of
benchmarking.
Other uses of the tool:

● To reveal successful business processes. It is often unclear how successful companies

achieve superior performance. By observing and scrutinizing such companies you can
identify the processes, skills or competences that contribute to organization’s success and
then apply the same practices to your own company.
● To facilitate knowledge sharing. The knowledge acquired about other businesses can be
easily transferred to your own organization.
● To gain competitive advantage. The company can gain a competitive advantage if it
applies the best practices from other industries to its own industry. For example, a small
family owned farm selling its own agricultural products online could apply the same
social media strategies as internet blogs to attract attention and gain new customers. This
would be a new way to gain customers and may result in at least temporary competitive
advantage.

Popularity
The tool is one of the most recognized and widely used tools of all the business strategy
tools. The survey done by The Global Benchmarking Network[4] reveals that adaptation of the
tool in organizations vary from 68% for informal benchmarking to 49% and 39% for
performance and best practice benchmarking, respectively. In addition, annual surveys from Bain
& Company’s indicate similar results.

Types

There are different types of benchmarking the managers can use. Tuominen[7] and
Bogan& English[8] identified these 3 major types:

● Strategic benchmarking. Managers use this type of benchmarking to identify the

best way to compete in the market. During the process, the companies identify
the winning strategies (usually outside their own industry) that successful
companies use and apply them to their own strategic process. It is also common
to compare the strategic goals in order to spot new strategic choices.
● Performance benchmarking. It is concerned with comparing your company’s
products and services. According to Bogan&English[8] the tool mainly focuses on
product and service quality, features, price, speed, reliability, design and
customer satisfaction, but it can measure anything that has the measurable
metrics, including processes. Performance benchmarking determines how strong
our products and services are compared to our competition.
● Process benchmarking. It requires to look at other companies that engage in
similar activities and to identify the best practices that can be applied to your own
processes in order to improve them. Process benchmarking is a separate type of
benchmarking, but it usually derives from performance benchmarking. This is
because companies first identify the weak competing points of their products or
services and then focus on the key processes to eliminate those weaknesses.
For example, an organization using performance comparison identifies that their
product ‘X’ is superior in features, manufacturing quality and design, but pricier
than competitor’s product ‘Y’. Then the company determines, which processes
add the most to the cost of the product and seek how to improve them by looking
at similar, but less cost heavy processes in other companies.

Approaches
In addition to the types, there are four ways you can do benchmarking. It is important to
choose the optimal way because it reduces the costs of the activity and improves the
chances to find the ‘best standards’ you can rely on.

● Internal benchmarking. In large organizations, which operate in different

geographic locations or manage many products and services, same functions
and processes are usually performed by different teams, business units or
divisions. This often results in processes performed very well in one division but
poorly in another. Internal benchmarking is used to compare the work of separate
teams, units or divisions to identify the ones that are working better and share the
knowledge throughout the company to other teams to achieve higher
performance. It is usually employed by the companies that have recently
expanded geographically, but haven’t yet created proper knowledge sharing
systems between divisions. If such systems are in place, there’s no need to use
internal benchmarking to look for best practices.
● External or competitive benchmarking. Some authors use these terms
interchangeably but there are a few differences between them. First, competitive
benchmarking refers to a process when a company compares itself with the
competitors inside its industry. Whereas external benchmarking looks both inside
and outside the industry to find the best practices, thus, including competitive
 benchmarking.[9] Second, competitive benchmarking, in my opinion, will only be
used with performance benchmarking to compare your products and services.
Strategic or process benchmarking won’t be viable options, because it’ll be very
hard to find a competitor, who wants to share sensitive information with you and
you’ll never outcompete your rival if you’ll be using his strategy or processes.
Besides, external benchmarking is a more beneficial approach to use due to
higher possibilities of finding the best practices.
● Functional benchmarking. Managers of functional departments find it useful to
analyze how well their functional area performs compared to functional areas of
other companies. It is quite easy to identify the best marketing, finance, human
resource or operations departments, in other companies, that excel in what they
do and to apply their practices to your own functional area. This way the
companies can look at a wide range of organizations, even unrelated ones, and
instead of improving separate processes, they can improve the whole functional
areas.
● Generic benchmarking. According to Kulmala,[9] it refers to comparisons, which
“focus on excellent work processes rather than on the business practices of a
particular organization”. For example, your company tries to improve its
marketing capabilities and benchmarks itself against company ‘A’. While
observing company’s ‘A’ marketing processes you also notice how well their
human resources are managed using ‘big data’ analytics. This gives you an idea
to implement the data collecting and analysis team in your own company to
significantly improve its overall performance.
● The other example of generic benchmarking would be to compare your
processes against generally accepted best standards. For example, every
organization strives to become a learning organization, because such an
organization is better equipped to overcome challenges and adapt to the market
changes. By comparing your company to some general standards, which would
indicate that your company is a learning organization, you would be using
generic benchmarking.
The following diagram summarizes the types and approaches to benchmarking:
Advantages
● Easy to understand and use.
● If done properly, it’s a low cost activity that offers huge gains.
● Brings innovative ideas to the company.
● Provides you with insight of how other companies organize their operations and
processes.
● Increases the awareness of your costs and level of performance compared to
your rivals.
● Facilitates cooperation between teams, units and divisions.

Disadvantages
● You need to find a benchmarking partner.
● It is sometimes impossible to assign a metric to measure a process.
● You might need to hire a consultant.
● If your organization is not experienced at it, the initial costs could be huge.
● Managers often resist the changes that are required to improve the performance.
● Some of best practices won’t be applicable to your whole organization.

Using the tool

Benchmarking is used extensively by organizations, but no universal process of how to
conduct it is established. Each organization designs its own way of using the tool.
Before revealing some of the examples, we provide you with the guidelines[3] to make
the process easier.

Guidelines:
1. Only choose the products, services or processes, which perform poorly.
Comparing the processes you are good at will be a waste of time and money,
and won’t bring the desired results.
2. Define the specific metrics or processes to measure. Be careful not to choose too
broad processes that can’t be measured as you won’t be able to compare it
properly.
3. Prepare your company for change. Your organization must overcome the
resistance to change to implement new best practices.
4. Choose the team that is qualified. Although benchmarking is easy to use, you
shouldn’t pick up just anybody to do it. Include the people that will be responsible
for implementing the changes and the people that are skilled at it.
5. Participate in benchmarking networks and use the appropriate software to
facilitate the process. There are various benchmarking networks, where
participating companies can find benchmarking partners or gather the data for
the metrics they need. Such participation facilitates the process significantly by
reducing the costs and time spent looking for the right data.
6. Look for the best standards and ideas even in unrelated areas. Many significant
discoveries will be made by observing the companies that are completely
unrelated to your organization.

Benchmarking Wheel
The benchmarking wheel model introduced in article “Benchmarking for Quality”
is a 5 stage process that was created by observing more than 20 other models.
It’s fairly simple and comprises of following stages:
1. Plan. Assemble a team. Clearly define what you want to compare and assign
metrics to it.
2. Find. Identify benchmarking partners or sources of information, where you’ll be
able to collect the information from.
3. Collect. Choose the methods to collect the information and gather the data for
the metrics you defined.
4. Analyze. Compare the metrics and identify the gap in performance between your
company and the organization observed. Provide the results and
recommendations on how to improve the performance.
5. Improve. Implement the changes to your products, services, processes or
strategy.