The Internal

Environment
Analysis
Learning Objectives
At the end of this chapter, the student should
be able to:

01. Describe the elements comprising the internal

environment of a company;

Explain the importance of producing an internal

02. environment analysis and;

03. Conduct an internal environment analysis.

 The Internal Environment
• A strategic management analysis is conducted to provide
companies with competitive advantage. External
environment scanning or analysis alone is not enough to
achieve it. Strategic managers must also consider the
need to scan or analyze the internal environement of a
company.

• An internal environement analysis identifies a company’s

internal strategic factors, such as its strenghts and
weaknesses, to enable it to exploit opportunities and
avoid threats of the external environment.
The internal environment refers to the environment
within a company. Its variables are not within the
control of the top management within a short-run
period. It consist of the following strategic
elements:

Corporate Organizational Business

culture structure resources
 Corporate culture refers to
the beliefs, values, practices,
Corporate and expectations of every
Culture member of a company on how
company conducts itself. In
short, it is a company’s way of
doing things. It is defines
corporate identity.
 Organizational Structure
 The pattern of the relationships among the members of a company is
depicted in its organizational structure. A company’s organizational
structure defines how tasks are to be performed, how resources should
be utilized, and how relationships among employees should be defined.

 Every organizational structure has its own advantage and disadvatges.

Staretgic managers must thorougly asses and evaluate the structure
that is most appropriate for a company to achieve its goal effectively
and efficiently.

 A well-defined organizational structure exhibits an effective flow of

information, a well-defined control and monitoring system, and a clearly
pattered chain of command.
Business Resources
 Resources are assets owned or controlled by a company. They
can be tangible or intangible assets. Examples of tangible
assets include land, processing plants, machinery, equipment,
and inventory. Intabgible assets are patents, trademarks,
processes, formulas, and computer programs. Resources also
include humans, processes, technologies, knowledge, and skills.
A resource alone, however, does not provide competitive advantage
to a company. It must be a strategic resource, and a company must
have the capabilities to exploit it to gain competitive advantage. A
resource is considered strategic when the following attributes
exist:

1. It can exploit opportunities.

2. It is not common among competitors.
3. It is difficult or costly to imitate or copy.
4. There are no equivalent substitutes.
 CONDUCTING AN INTERNAL
ENVIRONMENT ANALYSIS
Conducting an internal environment analysis is more complicated compared to
that of an external environment scanning for the following reasons:

1. An external environment analysis uses secondary data, while an internal

scanning makes use of primary data. Secondary data are readily available from
the reports and publications of government agencies and other organizations.
Hence, gathering data for an external environment analysis is not as burdensome
compared to that of an internal environment analysis.

2. An internal environment analysis evaluates the five strategic elements

comprising the internal environment separately, while an external environment
analysis simultaneously scans the different strategic factors.

3. An internal environment analysis includes an assessment of a company's

competency to exploit opportunities and gain competitive advantage.
 Analyzing Corporate Culture
 This is usually determined through one-on-one personal interviews with
employees as individuals, team leaders, and corporate managers, as well as a
survey instrument. The analysis of the internal audit will be supported by
the findings from personal interviews and survey questionnaires. The
objective of the analysis is to determine how corporate culture affects the
formulation and adoption of proposed strategies. The range of issues and
concerned to be assessed and evaluated vary from business to business.

To conduct a corporate culture scanning, the following steps are to be

performed:
1. Identify cultural values and core beliefs.
2. Gather information about the employees' perception of company values and
beliefs.
3. Rate company practices, values, and beliefs as perceived by the employees.
4. Integrate collected information from research and observation.
5. Describe the company's current culture, whether it can provide competitive
advantage
or not.
 Data and their Employee’s Likely Ability of
Elements under Sources (From Perception of Corporate Culture to
Corpoarte Corporate Culture Interviews, Corporate Culture Influence Strategy Remarks
Culture Prevalent in the Surveys, or Other (Not Evident, Formulation (Low,
Company Internal Records) Evident, or Highly Medium, or High)
Evident)

Employee’s welfare,
growth,
satisfaction,
cultural diversity,
and interpersonal
relationships

Company practices,
policies,programs,
and workplace
envronment

Reward, security,
recognition system,
compensation, adn
benefits

Motivation, career
development, and
management support
 Analyzing the Organizational Structure

The objective of the analysis is to determine the structure that can achieve
the organizational goals effectively and efficiently. The analysis of an
organizational structure is easily conducted with the aid of an organizational
audit.
When analyzing an organizational structure, the following steps are to be
observed:

1.Assess the present business model and organizational structure.

2. Identify problems encountered recently with the present model and
structure.
3. Examine the performance of different functional units.
4. Define possible measures to improve the structure.
A business model is an approach adopted by a company about the way
it generates money in the current business setting. It includes the
customers, the products or services, the manner of generating
money, the measures adopted to sustain competitive advantage, and
the manner and channel distributions.
There are several types of business models that a company may
adopt to earn money. Some of these models include the following:
1. Profit pyramid model
2. Advertising model
3. Customer solution model
4. Efficiency model
5. Entrepreneurial model
 Strategic managers must determine the point in the value chain where the
company earns money so that the business model will function effectively.

 The different functional areas of a business such as finance, operations, human

resources, marketing, and research and development must also be critically
evaluated to determine the different functional resources that must be
exploited and identify different strategic issues.
 Data and their Employee’s Likely Ability
Factors Important Recent Sources (From Perception of of Corporate Remarks
Influencing Elements Problems Interviews, Corporate Culture to
Organizational Needing Ecountered Surveys, or Culture Influence
Structure Analysis Other Internal (Not Evident, Strategy
Records) Evident, or Formulation
Highly Evident) (Low, Medium,
or High)

Business model,
functional units,
and strctures

Management
style,
responsibilities,
and
accountabilities

Mechanism to
achive goal

Productivity,
technology, and
efficiency
 Analyzing Business Resources
A resource must be a strategic factor for a company to gain competitive advantage.
The resources of a company can be grouped under the following categories:
1. Financial resources
2. Human resources
3. Physical resources
4. Technological resources
5. Organizational resources

The objective of the analysis is to determine which business resources contribute to the
attainment of competitive advantage with which a company obtains benefits. Competitive
advantage refers to a company's resources (e.g., valuable, rare, and not imitable) and its
capability to obtain benefits from them and to overcome competitive forces. When a company
has the core competency, it has the capability to exploit its resources at different functional
levels to achieve competitive advantage. Capability refers to the ability of a company to
exploit its strategic resources. Competency is the integration or coordination of cross-
functional capabilities. A company will gain distinctive competency when its core competency is
superior over that of its rivals.
The VRIO framework, which was introduced by Jay Barney, an American
professor in strategic management, is an analytical tool used to evaluate a
company's resources to gain competitive advantage.
VRIO stands for value, rareness, imitability, and organization.
The following steps are undertaken when identifying the core and distinctive
competencies of a company:

1. Determine if the company has valuable resources or capabilities.

2. Scan if competitors have the capabilities to provide what customers consider
valuable.
3. Assess if the company's resources or capabilities can be imitated.
4. Evaluate if the company is organized to exploit its resources and capture what
customers consider valuable.
5. Assess if the company has competitive advantage.
 Business Elements Data and Data and Likely Likely Rare Likely Imitable
Resources under their sources their sources Valuable (low,medium, (low,medium, or
Business about the about the (low,medium, or high) high) Remarks
Resources Business largest or high)
competitor

Financial
resources

Human resources

Physical
resources

Technological
resources

Organizational
resources
Strengths Data and Reasons Assigned Percentag Weighted Remarks
and their for their weight e rating score
Weakness sources dources
es
Strengths
(1-5 items)

Weaknesse
s
(1-5 items)
The following steps are to be followed when using the strengths and weaknesses analysis:

1. Identify the company's strengths and weaknesses.

2. Gather information and identify the possible reasons for their selections.

3. Assign a weight that will range from 0.0 to 1.0 to each identified strength and weakness based on
its importance and urgency to the company. The most important strength or weakness shall receive
the highest weight of 1.0, and the factor that is not important is designated as 0.0. However, the
total weight in all instances in Column D shall be equal to 1.0.

4. Rate how the company's management handles the identified strengths and weaknesses using a
particular scale. If a 5-point Likert scale is used, 5.0 is outstanding, 4.0 is above average, 3.0 is
average, 2.0 is below average, and 1.0 is poor.

5. Determine the weighted score by multiplying the assigned weight (Column D) by the rate given
(Column E). The total weighted score reflects the internal performance of the company in
responding to the needs of the industry. The average total score is 3.0 when using the 5-point Likert
scale. When the weighted score is relatively higher than 3.0, it means the company is above average
in terms of the strengths and weaknesses of the competitors in the industry.

6. Clearly define the company's strengths and weaknesses status. The strength/weakness index is
above average when the total weighted score is above 3.0, meaning the company is responding
favorably to the challenges of the external environment by effectively utilizing its strengths in
exploiting its resources.
 Define a Company's Current Profitability and
Market Share Performance

The last stage in the evaluation of a company's internal environment is to define

its present status in terms of profitability and market share performance.

Strategic managers also assess the ability of a company to sustain its profitability
performance by evaluating the different factors that contribute to the
realization of profit. One important factor that strategic managers must define is
the current market share of a company compared to that of its competitors. It is
very important for a company to define its current profitability and market share
performance as basis for strategy formulation in order to gain competitive
advantage.