BUSINESS POLICY & STRATEGY

INTERNAL/ ORGANISATIONAL ANALYSIS

Analysis of Internal resources

Scanning & analyzing the external environment for opportunities and threats is not enough to provide
an organisation a competitive advantage. Strategic managers must also look within the corporation itself
to identify internal strategic factors. Those critical strengths and weaknesses which are likely to
determine whether the firm will be able to take advantage of opportunities while avoiding threats. This
internal scanning often referred to as organisational analysis is concerned with identifying and
developing an organisation’s resources.

An organisation uses different types of resources & exhibits a certain type of behavior.

Interplay of these resources along with the prevalent behavior produces synergy with an organisation;
which leads to the development of strengths & weaknesses over a period of time.

Need of Internal Resource Analysis

1. All enterprises are not equally strong in all their functional attributes: Companies with a highly
competent general management team may not have an equally favorable competitive
advantage. One which is financially sound and prosperous may be lagging in R & D efforts.
2. The effect of deficiencies on companies’ prosperity & growth is certainly visible. It is evidenced
over a period of time when some companies continue to grow and prosper while others
stagnate and decline.
3. Executives must be aware of their competencies as well as deficiencies to be able to match their
capabilities with the environmental challenges and threats. Awareness of corporate strengths &
weaknesses can be possible only if there is a systematic analysis of the factors reflecting
strategic advantages.

Indeed the basic purpose of analyzing internal resources and capabilities is for the strategist to
ascertain what the company is capable of doing. Considering the external environment in which it
operates.
1
 The choice of corporate strategy is predicted on 2 sets of considerations:

I. Relating to the external opportunities & threats

II. Comprising the company’s capabilities.

FRAMEWORK FOR THE DEVELOPMENT OF STRATEGIC ADVANTAGE BY AN ORGANISATION

Organisational resources: The organisational resources are the formal systems & structures as well as
informal relations among groups. A firm is a bundle of resources- tangible, intangible. These include all
assets, capabilities, organisational processes, information, knowledge and so on. These resources could
be classified as physical, human and organisational resources.

2
 a. Physical resources- technology, plant & equipment, geographic location, access to raw
materials.
b. Human resources- Training, experience, judgment, intelligence, relationships and so on.
c. Organisational resources- Formal systems & structures as well as informal relations among
groups.

But the mere possession of resources does not make an organisation capable. Much depends on their
usage within an organisation. The usage in turn is based on organisational behavior.

Organisational behavior: It is the manifestation of the various forces & influences operating in the
internal environment of an organisation that create the ability for, and place constraints in the usage of
resources.

It leads to the development of a special identity & character of an organisation.

Organisation’s resources & behavior do not exist in isolation. They combine in a complex fashion to
create strengths & weaknesses within the internal environment of an organisation.

Synergistic effects: Like resources & behavior, strengths & weaknesses do not exist individually but
combine in a variety of ways. Synergy is a situation where attributes do not add mathematically but
combine to produce an enhanced or a reduced impact. This is synergistic effect.

The synergy is the idea that the whole of is greater or lesser than the sum of its parts. It is also expressed
as ‘the-two-plus-two-is-equal-to-five-or-three-effect’

Competencies: These are special qualities possessed by an organisation that make them withstand
pressures of competition in the market place. Synergistic effects manifest themselves in terms of
organisational competencies. Net result of strategic advantage and disadvantages that exist for an
organisation determines its ability to compete with its rivals. These may b unique resources, core
capabilities, invisible assets or embedded knowledge in the organisation.

Distinctive competence any advantage a company has over its competitors because it can do something
which they cannot or it can do something better than they can.

Difference between competencies, core competencies & distinctive competencies lies in the degree in
the uniqueness associated with them.
3
Organisational Capability: The inherent capacity or potential of an organisation to use its strengths &
overcome its weaknesses in order to exploit opportunities & face threats in its external environment. It
is the skill of coordinating resources and putting them to productive use. Without capability, resources
even though valuable & unique, may become worthless.

Strategic advantage: It is the outcome of organisational capabilities. The result of organisational

activities leading to rewards in terms of financial parameters such as profit or shareholder value and or
non-financial parameters such as market share or reputation.

A special case of strategic advantage where there is one or more identified rivals against whom rewards
or penalties could be measured is known as competitive advantage.

BARNEY’S VRIO FRAMEWORK

A company’s competencies can be evaluated by Barney’s VRIO framework.

1. Value: Does it provide competitive advantage?

2. Rareness: Do other competitors possess it?
3. Imitability: Is it costly for others to imitate?
4. Organisation: Is the firm organized to exploit the resources?
If the answer to these questions is yes for a particular competency, it is considered to be
strength and thus a distinctive competency.
STRATEGIC ADVANTAGE ANALYSIS
The process by which strategists examine a firm’s resources and capabilities in the key
functional areas to determine where the firm has significant strengths (& weaknesses) so that it
can exploit the opportunities & meet the threats in the environment.

Factors of common concern:

Assessment of the strengths & weaknesses of a firm centers round an analysis of the following
factors:

1. MARKETING & DISTRIBUTION FACTORS:

a. Competitive position and market share
b. Product line
4
 c. Product life cycle
d. Pricing strategy
e. Mature of the market
f. Channels of distribution
g. Brand image
h. Market research
i. Packaging
j. Marketing policy
2. FINANCE & ACCOUNTING FACTORS:
a. Financial resources & strength
b. Capital structure & cost of capital
c. Relations with owners (shareholders)
d. Financial planning & budgeting
e. Accounting system & audit procedures
f. Tax planning & tax advantages.
3. PRODUCTION & OPERATIONS MANAGEMENT:
a. Cost of operations
b. Capacity utilization (existing demand can be fulfilled & capital fully utilized or not)
c. Production facilities
d. Cost & availability of materials & components
e. Plant location
f. Purchasing & inventory control
g. Operation procedures (design, testing, scheduling & quality control)
h. Production control & management information
4. RESEARCH & DEVELOPMENT AND PRODUCTION ENGINEERING:
a. Facilities created (adequate labs, equipments, tooling & testing arrangements)
b. R&D expenditure
c. Results of R&D efforts
d. Technical expertise & personnel
e. Work environment (creativity & innovation)
f. Nature of R&D projects (long term projects/ short term projects)

5
 5. H.R & ORGANISATIONAL FACTORS:
a. Organisational climate
b. Employees performance record (consistency)
c. Personnel policies & practices (effectively implemented or not?)
d. Managerial/ leadership style
e. Union-management relationships
f. Corporate image (source of loyalty & pride for employees)
6. GENERAL MANAGEMENT CAPABILITY- It is defined as its propensity & its ability to engage in
behavior which will optimize attainment of firm’s objectives.
A profile of general management capability should therefore comprise the following aspects
1. Managers- Mentality, power, competence, capacity
2. Organisational climate- Culture (attitude towards change, risk, time perspective, critical
success factors)
3. Organisational competence- problem solving skills, organisational structure’s flexibility,
managerial reward system, organisational capacity.

VALUE CHAIN APPROACH TO INTERNAL ANALYSIS:

Generic Value chain- Micheal Porter

Identifying the series of activities which are undertaken by the firm and are strategically relevant
for meeting customers demand and in respect of which the firm may potentially have an edge
over its competitors. Thus, internal factors of key importance are sought to be linked with the
chain of value activities through systematic identification of the discrete activities as potential
sources of strengths & weaknesses.

Two categories of value activities are:

1. Primary activities- Activities connected with physical creation of firm’s product / service, its
marketing & delivery provision of after sales support.
2. Support Activities-Activities which provide inputs or infrastructure for primary activities to be
performed.

6
PRIMARY ACTIVITIES:

Inbound Logistics: Activities associated with storage and flow of inputs to the product like material
handling, warehousing, inventory control, vehicle scheduling & returns to suppliers. It involves activities
like warehousing, material handling, inventory control, scheduling.

Operations: Activities associated with transformation of inputs into final products like machining,
assembly, packaging, equipment maintenance, testing and facility operation belong to this category.

Outbound logistics: Activities associated with collection, storage, physical distribution of finished goods,
order processing, scheduling deliveries, operation of delivery vehicles.

7
Marketing & sales: Activities like advertising, sales promotion, sales force management, channel
selection, channel relation, pricing.

Service: Activities aimed at providing services to enhance or maintain the value of the product, like
installation, repair, training, supply of parts & product adjustment.

SUPPORT ACTIVITIES

Provide infrastructure for primary activities and required to be identified by isolating them on the basis
of technological & strategic distinctiveness.

1. Procurement: purchasing inputs, purchasing equipments & machinery. It pervades all other
activities as inputs are needed everywhere.
2. Technological development: Activities related with creating and improving the way in which
various activities in the value chain performed. It includes up gradation & development of
technology.
3. HRM: recruitment, Training & development, remuneration, performance appraisals, etc.
4. Firm Infrastructure: Distinct from specific primary/ support activities because these are essential
for entire chain of activities.

Benefits of Value chain approach:

It provides guidance for a systematic internal analysis of the firm’s existing or potential strengths &
weaknesses.

It enables the strategist to identify key internal factors for closer examination as potential services of
competitive advantage.

FUNCTIONAL AREA PROFILE & RESOURCE DEPLOYMENT MATRIX

It was given by Hofer & Schendel

8
Matrix is prepared by using functional areas and some common characteristics to each
functional area.
Resource outlay and focus of efforts over time in respective functional areas be presented also
in the form of a matrix.
The matrix indicates how the key functional areas stand in relation to each other and as
compared to the competitors with respect to the deployment of resources and the focus of
efforts in the respective areas.
Functional area profile & resource deployment matrix helps in determining the interpretation
and diagnosis of data and constitute the basis on which strengths and weaknesses are to be
identified.
Strategist should consider what policies and approaches were governing the operations, are
governing the operations and will be governing the operations.
Present position should be examined in the light of past achievements, future expectations and
internal requirements.
Strength sometimes work as weaknesses with different policies & situations.
Analysis takes into account the position over a period of time. This would enable the strategist
to see whether the areas of advantage are being further strengthened or getting dissipated.
Relative strengths & weaknesses of key functional areas should be considered together. If a
company has developed competencies in one functional area, it needs to be examined whether
the capabilities in other areas have compatible potentialities. Otherwise, the imbalance may
lead to a position of weakness for the company as a whole.
In this capability analysis, strengths & weaknesses are compared.
Emphasis on strengths rather than on weaknesses because of optimism and to take advantage
of an opportunity on the basis of strengths.
Strengths & weaknesses are considered on the basis of external conditions, usually in realtion to
competing firms.
Choice of competitor firms should also b appropriate i.e. companies in same phase of product
life cycle, with similar mission statements and more than one company should be considered.
Strengths & weaknesses should be diagnosed on the basis of operational details and also on the
basis of key areas & indicators.
These areas may be the areas of activity of company excellence, activities of poor performance.

9
 Identification of intensity of weaknesses.

FUNCTIONAL RESOURCE 2006-2007 2007-2008 2009-2010 2010-2011

AREA DEPLOYMENT &
FOCUS OF
EFFORTS
MARKETING Development
outlay (%)
Focus of efforts

PRODUCTION Development
outlay (%)
Focus of efforts

FINANCE Development
outlay (%)
Focus of efforts

R&D Development
outlay (%)
Focus of efforts

MANAGEMENT Development
outlay (%)
Focus of efforts

STRATEGIC ADVANTAGE PROFILE

SAP is a summary statement which provides an overview of the advantages& disadvantages in key areas
likely to affect future operations of the firm.

It systematically evaluates the strategic advantage factors and diagnose each factor in each functional
area and then prepares a detailed profile.

It is a summary statement of corporate capabilities in summarizing the functional competencies; a

comparative view needs to be taken in the light of external conditions & the time horizon of projections.

It is also taken in consideration that how much strength can be relied upon and how long will it be
considered as an advantage in the near future.

10
It must also recognize the danger of relying on strengths in a particular area without simultaneously
reckoning the capabilities in other interdependent units of activity.

Internal area/ capability factor Competitive strengths or weaknesses

Marketing +

Operations +

R&D +

Finance +

SWOT Analysis

Matching internal capabilities with environmental opportunities & threats.

Interlinking ETOP & SAP

SWOT MATRIX

Strengths Weaknesses

Threats ST- Strengths required to face WT- Weaknesses which an

threats organisation should over come
to face threats

11
Opportunities SO- Strengths required to SW- weaknesses which an
acquire opportunities organisation should overcome
to acquire opportunities

12