INTERNAL ANALYSIS

All organizations have strength and weaknesses in the functional areas of business. Internal
strength / weaknesses, coupled with external opportunities /threats and a clear mission
statement, provide the basis for establishing objectives and strategies. Objectives and
strategies are established with the intention of capitalizing upon internal strengths and
overcoming weaknesses.

a. Managers perform internal analysis to identify strength to build on and weaknesses to

overcome as they formulate strategies for competitive advantage. Research and
experience have shown that a firm’s overall strength and weaknesses and its ability to
execute may be even more important to its performance than environmental factors.

b. The process of performing an internal audit provides more opportunity for

participants to understand how their jobs, departments and divisions fit into the whole
organization.
This is a great benefit because managers and employees perform better when they
understand how their work affects other areas and activities of the firm. For example,
when marketing and manufacturing managers jointly discuss issues related to internal
strengths and weaknesses; they gain a better appreciation of the issues, problems,
concerns and needs of all the functional areas.

c. Through an internal environment analysis, companies can identify and

understand their own unique resources, capabilities, and competencies that are
required for their sustainable competitive advantage.
Doing the following can help in assessing internal analysis/audit;

1. Carrying out SWOT analysis

2. Resource based view of the firm
3. Value chain

SWOT analysis
A scan of internal and external environment is an important part of the strategic planning
process. Environmental factors internal to the firm usually can be classified as strength (S) or
weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats
(T) The SWOT analysis provides information that is helpful in matching the firm’s resources
and capabilities to the competitive environment in which it operates.

Internal strength
A firm’s strengths are its resources and capabilities that can be used as a basis for developing
a competitive advantage. Strength is a resource advantage relative to competitors and the
needs of the markets a firm serves or expects to serve. Examples of such strength include;
 Patents
 Strong brand names
 Good reputation among customers
 Cost advantages from proprietary know- how
 Exclusive access to high grade natural resources
  Favorable access to distribution networks
 Good management
 Access to economies of scale
 Product innovation abilities
 Adequate financial resources

Internal weaknesses
A weakness is a limitation or deficiency in one or more resources or competencies relative to
competitors that impedes a firm’s effective performance. The absence of certain strength may
be viewed as a weakness. Examples;
 Lack of patent protection
 A weak brand name
 Poor reputation among customers
 High-cost structure
 Lack of access to the best natural resources
 Lack of access to key distribution channels
 State of facilities whether obsolete or need replacement
 Lack of managerial talent & depth
 Missing key skills or competencies

External opportunities
An opportunity is a major favorable situation in a firm’s environment. This favorable
situation may reveal chances of an organization increasing on its growth or profit.
Examples
 An unfilled customer needs
 Arrival of new technologies
 Loosening of regulations
 Removal of international trade barriers
 Complacency among rival firms
 Improved buyer or supplier relationships.

External threats
A threat is a major unfavorable situation in a firm’s environment. Threats are key
impediments to the firm’s current or desired position. Example;

 Shifts in consumer tastes away from the firm’s products

 Emergence of substitute products
 New regulations
 Increased trade barriers
 Slow market growth
 Increased bargaining powers of key buyers or suppliers
 Technological changes
 Adverse demographic changes
The SWOT analysis needs to be more than a set of lists. It is essential to evaluate the SWOT
listing in terms of what the implications are for strategy and what adjustments in strategy may
need to be explored e.g. some strategy related strength are more important than others. Some
strategy related weaknesses could be fatal while others may not matter much or can easily be
remedied. Some opportunities may make more sense to pursue than others and the firm may
find itself much more vulnerable to some threats than to others.

The Resource based view of the firm

Example; The Red Cross is a disaster relief agency that comprises a variety of tangible assets
(trucks, mobile hospitals, computers etc) and intangible assets (strong morale, a good
reputation, brand name awareness etc). It also comprises a variety of important capabilities
such as logistical planning, emergency medicine, and contingency planning & fund raising.
By combining its assets capabilities the Red Cross has established a competency in fund
raising and providing disaster relief services that makes it a leader in its field.

The Resource based view is a useful starting point to understand internal analysis
The resource based view shows firms as collections of tangible and intangible assets
combined with capabilities to use those assets to develop competencies to achieve
competitive advantage. The underlying premise is that firms differ in fundamental ways
because each firm possesses a unique bundle of resources, each firm develop competencies
from these resources and when developed especially well, these become the source of the
firm’s competitive advantages.

The 3 basic resources

1. Tangible assets
These are easy to identify and are often found on a firm’s balance sheet. They include
production facilities, raw materials, financial resources, real estate, and computers.
Tangible assets are the physical and financial means a company uses to provide value to
its customers.
2. Intangible Assets
These are things like brand names, company reputation, organizational morale, technical
knowledge, patents, and trademarks and accumulated experience within an organization.
While they are not assets that we can see or touch they are very often critical in creating
competitive advantages.
3. Organizational capabilities
These are skills, the ability and ways of combining assets, people and processes that a
company uses to transform inputs into outputs. Developed capabilities can be a source of
sustained competitive advantage. They enable a firm to take the same input factors as
rivals and convert them into products and services, either with greater efficiency in the
process or greater quality in the output or both.

Classifying Resources

1. Financial resources
 Cash reserves
 Short term financial assets
 Borrowing capacity
 Cash flow

2. Physical Resources
 Plant equipment (scale, location, vintage/age (period), technology,
flexibility)
 3. Human Resources
 The experience and skills of different categories of employee.
 Adaptability of employees
 Loyalty of employees
 Skills and experience of top management.

4. Technology
 Proprietary technology in the form of patents, copyrights, and trade
secrets.
 Technology resources in the form of R&D facilities.
5. Reputation
 Product brands and their associated brand equity
 Trade marks
 Company reputation
6. Relationship
 With customers, suppliers, distributors and government authorities.

What makes a resource valuable?

1. Competitive superiority; does the resource help fulfill a customer’s need better
than those of the firm’s competitors?
For example two restaurants offer similar food at similar prices but one has a location
much more convenient to down town offices than the other. The tangible asset,
location helps fulfill daytime worker’s lunch eating needs better than its competitor
resulting in greater profitability and sales volume for the conveniently located
restaurant. It is important to recognize that resources that contribute to competitive
superiority are valuable. In the above example resources such restaurants menu were
essential to doing business but contributed little to competitive advantage because
they did not distinguish how the firm fulfilled the customer needs.

2. Resource Scarcity
Is the resource in short supply? When it is in short supply it is more valuable.
When a firm possesses a resource and few if any others do, then it becomes a
distinctive competence for the firm. The real way resource scarcity contributes value
is when it can be sustained over time.

3. Inimitability
Is the resource easily copied or acquired? A resource that competitors can easily
copy can only generate temporary value. It cannot generate a long-term competitive
advantage. Inimitability doesn’t last forever. Competitors will match or better any
resource as soon as they can. The firm’s ability to forestall this eventuality is very
important; the RBV identifies four characteristics, called isolating mechanisms that
make resources difficult to imitate.
i) Physically unique resources; these are virtually impossible to imitate. For example
real estate location, mineral rights, and patents cannot be imitated.
 ii) Path dependent resources; are very difficult to imitate because of the difficult path
another firm must follow to create the resource. These are resources that cannot
instantaneously acquired but rather must be created over time in a manner that is
frequently very expensive and always difficult to accelerate.
iii) Causal ambiguity; this refers to situations where it is difficult for competitors to
understand exactly how a firm has created the advantage it enjoys. Competitors
can’t figure out exactly what the uniquely valuable resource is or how resources
are combined to create the competitive advantage. Causally ambiguous resources
are often organizational capabilities that arise from subtle (not straight forwardly
displayed) combinations of tangible and intangible assets and culture processes
and organizational attributes the firm possesses
iv) Economic deterrence; this usually involves large capital investments in capacity to
provide products or services in a given market that are scale sensitive. It occurs
when a competitor understands the resource that provides a competitive advantage
and may even have the capacity to imitate but chooses not to because of the
limited market size that realistically would not support two players the size of the
first mover.
4. Appropriability; who actually gets the profit created by a resource? Sports teams,
investment services and consulting businesses are examples of companies that
generate sizeable profits based on resources (key people, skills, contacts) that are not
entangled /linked to the company and therefore do not allow the company to easily
capture the profits. Super star sports players can move from one team to another or
command excessively high salaries and this circumstance could arise in other personal
services business situations..
N.B resources that one develops and controls where ownership of the resource and its
role in value creation is obvious – are more valuable than resources that can be easily
bought, sold or moved from one firm to another.
5. Durability; how rapidly will the resource depreciate? The slower the resource
depreciates the more valuable it is. Tangible assets like commodities or capital can have
their depletion measured. Intangible resources like Brand names or organizational
capabilities present a much more difficult depreciation challenge e.g. coca-cola brand has
continued to appreciate whereas technical know-how in various computer technologies
depreciates rapidly.

6.Substitutability; Are other alternatives available? If the firm can easily switch its
resources to the production of the required good that meets the customers need without
involving extra costs; this makes the resource more valuable.

Value Chain Analysis

The Value chain is a graphical representation of a firm’s activities arranged in such a way to
show the sequence of these activities. The value chain provides a powerful framework for
identifying and appraising the resources and capabilities of a firm, in part because it
emphasizes the linkages between the different activities and also because it facilitates
comparisons between firms, regarding both individual activities and the structuring activities.
The term value chain describes a way of looking at a business as a chain of activities that
transform inputs into outputs that customers value. The goal of these activities is to create
value that exceeds the cost of providing the product or service, thus generating a profit
margin. Any of the primary activities may be vital in developing a competitive advantage.
 Customer value is derived from 3 basic sources, i.e. activities that differentiate the product,
activities that lower its cost and activities that meet customers’ need quickly.

Mickinsey’s Business system value chain ;Figure 4

Technology Product design Manufacturin Marketing Distribution Service

tttt g

Source function integration Prices channels

Choices Physical R/materials advertising/ integration
Patents Characteristics capacity promotion inventory
Product Location sales force warehousing
Process Quality procurement package transport
Parts production
Brand
Assembly

Service

Warranty
Speed
Captive/independent prices

Corporate value chain analysis involves the 3 steps indicated bellow;

1. Examine each product line’s value chain in terms of the various activities involved in
producing that product or service. Which activities can be considered strengths (core
competencies) or weaknesses (core deficiencies)? Does any of the strengths provide
competitive advantage and can thus be labeled distinctive competencies?

2. Examine the linkages within each product line’s value chain. Linkages are
connections between the way one value activity for example marketing is performed
and the cost of another activity for example quality control.

3. Examine the potential synergies among the value chain of different product lines or
business units. Each value element such as advertising or manufacturing has an
inherent economy of scale in which activities are conducted at their lowest possible
cost per unit of output. If a particular product is not being produced at a high enough
level to reach economies of scale in distribution, another product could be used to
share the same distribution channel. This is an example of economies of scope which
result when the value chains of two separate products or services share activities such
as the same marketing channels or manufacturing facilities.

Critical success Factors

Many industries have relatively small, but extremely important set of factors that are essential
for successfully gaining and maintaining competitive advantages. Critical success factors
(CSFs) describe those areas in which good results help ensure an organization’s successful
competition and poor results usually lead to declining performance.

Relevant CSFs for individual companies arise from environmental and firm specific
considerations.

Research has identified 4 major sources of CSFs in general

1. Industry characteristics; CSFs are often industry specific. The CSFs for a supermarket
chain include product mix, inventory turnover, sales promotion and pricing. In airline
industry fuel efficiency, load factors and an excellent reservation system are critical. No one
set of CSFs applies to all industries & CSFs change as industries change.

2. Competitive position; CSFs vary with a firm’s position relative to its competition. For
example in a smaller firm within an industry dominated by one or two large competitors
actions often produce new and significant problems that become CSFs. At one time in the
personal computer industry, many smaller companies believed that it was critical for them to
offer products compatible with IBM’s, so IBM’S every move took on significance.

3. General environment; Changes in any of the 4 dimensions of general environment (seen in

external analysis) can affect how CSFs emerge. At the beginning of 1973, virtually no chief
executive in United States would have listed ‘energy supply availability’ as a CSF. But the oil
embargo and the emergence of OPEC, energy supply indeed became critical. Later as new
sources of oil were found and OPEC began to lose its effectiveness as a cartel, energy
availability became less critical.

4.Organizational Development
Internal developments may give rise to new CSFS. Sometimes short-term issues must be
dealt with before the firm can address long-lasting issues. Thus, internal organizational
considerations become temporal critical success factors. For example if several key
executives of an investment banking firm quit to form a competing ‘spin-off firm (a by-
product especially valuable), rebuilding the executive group would become a first priority for
the original organization.
N.B if a firm identifies its capabilities, develops its competencies and combines them with
assets and produces good results in CSFs it will have competitive advantage.

Understanding relationships between functional areas of business

Strategic management is a highly interactive process that requires effective coordination

among management, marketing, finance /accounting, production /operations, and
management information systems managers. Success in strategic management process
requires that managers and employees from all functional areas work together to provide
ideas and information. Financial managers may for example restrict the number of feasible
options available to operations managers, or managers may develop products that marketing
managers need to set higher objectives.

A key organisational success is effective coordination and understanding among managers

from all functional business areas.
Failure to recognize and understand relationships among the functional areas of business can
be detrimental to strategic management. The number of those relationships that must be
managed increases dramatically with a firm’s size, diversity, geographical dispersion and the
number of services or products offered. Governmental and non profit enterprises traditionally
have not placed sufficient emphasis on relationships among the business functions. Some
firms place too great emphasis on one function at the expense of others.

Financial Analysis exemplifies the complexity of relationships among the functional areas of
business. A declining return on investment or profit margin ratio could be the result of
ineffective marketing, poor management policies, research and development errors or a weak
management information system.

The effectiveness of strategy formulation, implementation and evaluation activities hinges

upon a clear understanding of how major business functions affect one another. For strategies
to succeed a coordinated effort among all functional areas of business is needed.

Management
The function of management consists of 5 basic activities namely; planning, organising,
motivating, staffing, and controlling.

Planning
The only thing certain about the future of any organization is change and planning is the
essential bridge between the present and the future that increases the likely hood of achieving
desired results. Planning is the process by which one determines whether to attempt a task,
works out the most effective way of reaching desired objectives and prepares to overcome
unexpected difficulties with adequate resources. Planning consists of all those managerial
activities related to preparing for the future. Specific tasks include forecasting, establishing
objectives, devising strategies, developing policies and setting goals. Planning is the
cornerstone of effective strategy formulation. Though it is considered the foundation of
management it is commonly the task that managers neglect most. Planning is essential for
successful strategy implementation and strategy evaluation, the rest of the management
function depends on planning.

The process of planning must involve managers and employees through out the organization.
Planning can have a positive impact on the organisational and individual performance. It
allows for opportunity identification and minimizes the impact of an external threat.

An organization can develop synergy through planning. Synergy exists when everyone pulls
together as a team that it knows what it wants to achieve. (Synergy is the 2+2=5 effect). The
strategic management process is aimed at creating synergy in an organization. Planning
allows a firm to adapt to changing markets and thus to shape its own destiny. Strategic
management can be viewed as a formal planning process that allows an organization to
pursue proactive rather than reactive strategies

Organizing
Organizing includes all those managerial activities that result in a structure of task and
relationships. Specific areas include organisational design, job specialization, job
descriptions, job specifications, span of control, unity of command, coordination, job design
and job analysis.
The purpose of organizing is to achieve coordinated effort by defining task and authority
relationships. Organizing means determining who does what and who reports to whom. A
well organized firm generally has motivated workers who are committed to seeing the firm
succeed.

The organizing function of management can be viewed as consisting of three sequential

activities; breaking tasks down into jobs (work specialization), combining jobs to form
departments (departmentalization), and delegating authority. Breaking tasks down into jobs
requires the development of job descriptions and job specifications. These tools clarify for
both managers and employees what particular jobs entail.

Combining jobs to form departments, results in organization structure, span of control and a
chain of command. Changes in strategy often require changes in structure because positions
may be created, deleted or merged. Organisational structure dictates how resources are
allocated and how objectives are established in a firm.

Motivating
Motivating involves efforts directed toward shaping human behavior. Specific areas include
leadership, communication, work groups, behavior modification, delegation of authority, job
enrichment, job satisfaction, needs fulfillment, organisational change, employee morale, and
managerial morale.

Motivating can be defined as the process of influencing people to accomplish specific

objectives. Motivation explains why some people work hard and others do not. Objectives,
strategies and policies have little chance of succeeding if employees and managers are not
motivated to implement strategies once they are formulated. The motivating function of
management has at least four components; leadership, group dynamics, communication and
orgnisational change.

When managers and employees strive to achieve high levels of productivity, this indicates
that the firm’s strategists are good leaders. Leadership includes developing a vision of the
firm’s future and inspiring people to work hard to achieve the vision. An organisation’s
system of communication determines whether strategies will be implemented successfully.
Good two way communication is essential for gaining support for departmental and
divisional objectives and policies. The strategic management process becomes easier when
employees can air their concerns.

Staffing
The management function of staffing, includes activities such as recruiting, interviewing,
selecting, orienting, training, developing, caring for employees, evaluating, rewarding,
disciplining, promoting, transferring, demoting, dismissing as well as managing union
relations.

Staffing activities play a major role in strategy implementation efforts and for this reason,
human resource managers are becoming more actively involved in strategic management
process. It is important to identify strengths and weaknesses in the staffing area.

Controlling
The controlling function of management includes all those activities undertaken to ensure that
actual operation conform to planned operations. Controlling consists of 4 basic steps;
 1. Establishing performance standards
2. Measuring individual and orgnisational performance
3. Comparing actual performance to planned performance standards
4. Taking corrective actions.

Marketing
Marketing can be described as the process of defining, anticipating, creating and fulfilling
customer’s needs and wants for products and services.
It has 7 basic functions1) customer analysis (2) selling products/services (3) product and
service planning (4) pricing (5) distribution (6) marketing research (7) opportunity analysis.
Understanding these functions helps strategists identify and evaluate marketing strengths and
weaknesses.

Customer Analysis
Customer analysis deals with the examination and evaluation of customer’s needs, desires,
and wants. This involves administering customer surveys, analyzing consumer information,
evaluating market-positioning strategies, developing customer profiles and determining
optimal market segmentation strategies. The information generated by customer analysis is
essential in developing an effective mission statement. Customer profiles can reveal the
demographic characteristics of an organization’s customers. Buyers, sellers, distributors,
sales people, managers, whole sellers, retailers, suppliers and creditors can all participate in
gathering information to identify customers’ needs and wants successfully. Successful
organizations continually monitor present and potential customers’ buying patterns.

Selling products/services
Successful strategy implementation generally rests upon the ability of an organisation to sell
more product or service. Selling includes many marketing activities, such as advertising,
sales promotion, publicity, personal selling, sales force management, customer relations and
dealer relations. These activities are critical when a firm pursues a market penetration
strategy. Personal selling is most important for industrial goods companies while advertising
is important for consumer goods companies. Determining orgnisational strength and
weaknesses in selling a function is an important part of performing an internal strategic
management audit.

Product and service planning

Product and service planning includes activities such as test marketing, product brand
positioning, devising warranties, packaging, determining product options, product features,
product style and product quality, deleting old products and providing customer services.
Product and service planning is particularly important when a company is pursuing product
development or diversification. One of the most effective product and service planning
techniques is test marketing. Test markets allow an organisation to test alternative marketing
plans and to forecast future sales of the product. It can also allow an organisation to avoid
substantial losses by revealing weak products and ineffective marketing approaches before
large scale production begins.

Pricing
Five major stakeholders affect the pricing decisions; customers, governments, suppliers,
distributors and competitors. Sometimes an organization will pursue a forward integration
strategy primarily to gain better control over prices charged to consumers. Governments can
impose constraints on price fixing, price discrimination, minimum prices, unit pricing, price
advertising and price controls.

Competing organizations must be careful not to discuss prices, markups and costs at trade
associations meetings or to uniformly restrict production to maintain high prices. Strategists
should view price from both a short and long-run perspective because, competitors can copy
prices with relative ease. Often a dominant firm will aggressively march all price cuts by
competitors.

Distribution
It includes warehousing, distribution channels, distribution coverage, retail site locations,
inventory levels and location, transportation carriers, wholesaling and retailing. Most
producers today do not sell their goods directly to consumers, various marketing entities act
as intermediaries, they bear a variety of names such as wholesalers, retailers, brokers,
vendors, facilitators, agents etc.

Distribution becomes especially important when a firm is striving to implement a market

development or forward integration strategy. Successful organizations, identify and evaluate
alternative ways to reach their ultimate market. Possible approaches vary from direct selling
to using just one or many wholesalers and retailers. Strengths and weaknesses of each
channel alternative should be determined according to economic, control and adaptive
criteria. Benefits and costs of various wholesaling and retailing should be evaluated. Once a
channel is chosen it must be adhered to for an extended period of time.

Marketing Research
Marketing research is a systematic gathering, recording and analyzing of data about problems
relating to the marketing of goods and services. Marketing research can uncover critical
strengths and weaknesses. Marketing researchers employ numerous scales, instruments,
procedures, concepts and techniques to gather information. Marketing research activities
support all of the major business functions of an organization. Organizations that possess
excellent marketing research skills have a definite strength in pursuing generic strategies.

Opportunity analysis
Opportunity analysis involves assessing the costs, benefits and risks associated with
marketing decisions. Three steps are required to perform a cost/benefit analysis (1) compute
the total costs associated with a decision (2) estimate the total benefits from the decision (3)
compare the total cost with the total benefits.

When expected benefits exceed total costs, an opportunity becomes more attractive.
Cost/benefit analyses should also be performed when a company is evaluating alternative
ways to be socially responsible.

Management information system

Information ties all business functions together and provides the basis for all management
decisions. It is a cornerstone of all organizations. Information represents a major source of
competitive management advantage and disadvantage. Assessing a firm’s internal strengths
and weaknesses in information systems is a critical dimension of performing an internal
audit. A management information system’s purpose is to improve the performance of an
enterprise by improving the quality of managerial decisions. An effective information system
thus collects, codes, stores, synthesizes and presents information in a manner answering
important and strategic questions. Because organizations are becoming more complex,
decentralized and globally dispersed, the function of information systems is growing in
importance.

We are in the information age. Firms whose information system skills are weak are at a
competitive disadvantage. On the other hand, strength in information systems allow firms to
establish distinctive competencies in other areas. Low-cost manufacturing and good customer
service for example depend on a good information system
There are five main components of an Internal Analysis;
1. Resources
2. Capabilities,
3. Core competencies,
4. Competitive advantage,
5. Strategic competitiveness. Each component is the basis of next one in turn.

1. Resources:
A company’s resources include two types: tangible and intangible. The former is asset
that can be observed and counted, such as, office furniture, production equipment,
computer, and warehouse, etc. Unlikely, the intangible resources are assets that are
rooted deeply in the company’s history, accumulate over time, and are relatively
difficult for competitors to learn and copy, such as brand, intellectual property and
reputation, etc.

2. Capabilities: Capabilities are used by a company that can complete

A successful competitive strategy focus on creating value to customers, by efficiently
use and integrate of these components Resources, capabilities, and core competencies
are the foundation of competitive advantage.