Internal Organizational Analysis

In formulating a strategy, the strategic decision makers must also analyze conditions internal to
the organization. An internal analysis leads to a realistic company profile, which is the
determination of a firm's strategic competencies and weaknesses.

The development of a company profile in four-step process:

* In step 1, managers audit and examine key aspects of the business's operation, seeking to
target key areas for further assessment.

* Step 2 Managersis required to evaluate the firm's status on these factors by comparing their
current condition with past abilities of the firm.

* In step 3, Manager seek some comparative analysis - linked to key industry or

product/market conditions - thisanalysis would determine whether the company's condition on a
particular factor represents a potential strength or weakness.

* The final step in internal analysis is to provide the results, or company profile, as input into
the strategic management process. Compile results or a company profile

This explains internal analysis as a process, but in practice, efforts to distinguish each step are
seldom emphasized because the process is very interactive.

The Areas That Most Businesses Should Analyze

An internal organizational analysis evaluates all relevant factors in an organization in order to
determine its strengths and weaknesses. Some of the areas that most businesses should analyze
include the following:

1. Financial position. The financial position of a business plays a crucial role in

determining what it can or cannot do in the future.
2. Product position. For a business to be successful, it must be acutely aware of its
product position in the marketplace.
3. Marketing capability. Closely allied with an organization's product position is its
marketing capabilities (i.e., its ability to deliver the right product at the right time at the
right price).
4. Research and development capability. Every organization must be concerned about
its ability to develop new products.
5. Organizational structure. Organizational structure can either help or hinder an
organization in achieving its objectives.
6. Human resources. All the activities of an organization are significantly influenced by the
quality and quantity of its human resources.
7. Infrastructure and equipment. The condition of an organization's facilities and
equipment can either enhance or hinder its competitiveness.
 8. Past objectives and strategies. In assessing its internal environment, every business
should attempt to explicitly describe its past objectives and strategies.

Internal analysis is difficult and challenging. The specifications can be helpful in determining
specific strengths and weaknesses in the functional areas of business.

Environmental Scanning
The second component of environmental analysis is to develop information about the
environment.Information has two primary strategic role - in objective setting and the second is
strategy formulation. As managers scan the environment, they interpret environmental
influence in the light of their own perceptions, expectations, and values.

Environmental scanning is the process of gathering information about events and their
relationships within an organization's internal and external environments. The basic purpose of
environmental scanning is to help management determine the future direction of the
organization. The most widely accepted method for categorizing different forms of scanning
divides into the following three types:

1. Irregular scanning systems: These consist largely of ad hoc environmental studies.

2. Regular Scanning systems: These systems revolve around a regular review of the
environment or significant environmental components. This review is often made
annually.
3. Continuous scanning systems: These systems constantly monitor components of the
organizational environment.

Forecasting The Environment

Macroenvironmental and industry scanning are only marginally useful if all they do is reveal
current conditions. To be truly meaningful, such analyses must forecast future trends and
changes.

Environmental forecasting is a technique whereby managers attempt to predict the future

characteristics of the organizational environment and hence make decisions today that will help
the firm deal with the environmental issuesarise in the future.

Forecasting involves the use of statistical and nonstatistical, or qualitative, techniques. Four
techniques can be particularly helpful: time series analysis, judgmental forecasting, multiple
scenarios, and the Delphi technique.
 SUMMARY
Before managers can begin to formulate an effective strategy, they must make a critical
examination of the firms's environment.

Assessing the strategic situation is the first phase in determining the content of the proper
strategies for a firm. This process begins with an assessment of the general environment of the
firm, in terms of economic, technological, social, and political/legal influences.

Analyzing the organization's industry is the second major aspect of assessing the firm's strategic
situation. An industry structure analysis identifies the major forces affecting competition in an
industry and determines the strengths and weaknesses of the business relative to the industry.

Michael Porter has identified five basic competitive industry forces: the threat of new entrants in
the industry, the intensity of rivalry among existing competitors, the pressure from producers of
substitute products or services, the bargaining power of buyers of the industry's outputs, and the
bargaining power of suppliers to the industry's companies.

Management must find for a firm a position in the industry from which it can best defend itself
against these competitive forces or can influence them to its advantages. Another major element
of the industry environment is the product/market life cycle which assumes that all products,
and, therefore, industries, move through stages of a life cycle.

In analyzing an industry, its is also useful to determine if the industry is a global industry, that
is, an industry that requires global operations to compete effectively.

The organization's internal environment is the third aspect of assessing the strategic situation,
which must be done before strategy alternatives are formulated.

Several techniques are available to help management develop a worthwhile environmental

analysis.

Environmental scanning involves studying and interpreting social, political, ecological, and
technological events in an effort to spot budding trends and conditions that could affect the
industry.

Strategic managers must not only understand the current state of the environment and their
industry but also be able to forecast its future states. Moreover, once having implemented the
environmental analysis process, management should continually evaluate and strive to improve
it.
SWOT Analysis
SWOT is an acronym used to describe the particular Strengths, Weaknesses,
Opportunities, and Threats that are strategic factors for a specific company. A
SWOT should represent an organizations core competencies while also
identifying opportunities it can not currently use to its advantage due to a gap in
resources.

The SWOT analysis framework has gained widespread acceptance because of its
simplicity and power in developing strategy. Just like any planning tool, a SWOT
analysis is only as good as the information that make it up. Research and accurate data
is vital to identify key issues in an organization’s environment.
Assess your market:

 What is happening externally and internally that will affect our company?
 Who are our customers?
 What are the strengths and weaknesses of each competitor? (Think Competitive
Advantage)
 What are the driving forces behind sales trends?
 What are important and potentially important markets?
 What is happening in the world that might affect our company?
 What does it take to be successful in this market? (List the strengths all
companies need to compete successfully in this market.)

Assess your company:

 What do we do best?
 What are our company resources – assets, intellectual property, and people?
 What are our company capabilities (functions)?
Assess your competition:

 How are we different from the competition?

 What are the general market conditions of our business?
 What needs are there for our products and services?
 What are the customer-market-technology opportunities?
 What are the customer’s problems and complains with the current products and
services in the industry?
 What “If only….” Statements does a customer make?

Opportunity an area of “need” in which a company can perform profitably.

Threat
A challenge posed by an unfavorable trend or development that would lead (in absence
of a defensive marketing action) to deterioration in profits/sales.

An evaluation needs to be completed drawing conclusions about how the opportunities

and threats may affect the firm.

EXTERNAL: MACRO- demographic/economic, technological, social/cultural,

political/legal MICRO- customers, competitors, channels, suppliers, publics INTERNAL
RESOURCES: the firm

Competitor analysis is a critical aspect of this step.

 Identify the actual competitors as well as substitutes.
 Assess competitors’ objectives, strategies, strengths & weaknesses, and reaction
patterns.
 Select which competitors to attack or avoid.

The Internal Analysis of strengths and weaknesses focuses on internal factors that give
an organization certain advantages and disadvantages in meeting the needs of its
target market. Strengths refer to core competencies that give the firm an advantage in
meeting the needs of its target markets. Any analysis of company strengths should be
market oriented/customer focused because strengths are only meaningful when they
assist the firm in meeting customer needs. Weaknesses refer to any limitations a
company faces in developing or implementing a strategy (?). Weaknesses should also
be examined from a customer perspective because customers often perceive
weaknesses that a company cannot see. Being market focused when analyzing
strengths and weaknesses does not mean that non-market oriented strengths and
weaknesses should be forgotten. Rather, it suggests that all firms should tie their
strengths and weaknesses to customer requirements. Only those strengths that relate
to satisfying a customer need should be considered true core competencies.(Marketing
and Its Environment, pg 44)
The following area analyses are used to look at all internal factors effecting a company:

 Resources: Profitability, sales, product quality brand associations, existing overall

brand, relative cost of this new product, employee capability, product portfolio
analysis
 Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems,
constraints and uncertainties

The External Analysis takes a look at the opportunities and threats existing your
organizations environment. Both opportunities and threats are independent from the
organization. You can differenciate between strengths/weakness and
opportunities/threats is to ask this essential question: Would this be an issue if the
organization didn’t exist? If yes, it is an issue that is external to the organization.
Opportunities are favorable conditions in an organization’s environment that can
produce rewards if leveraged properly. Opportunities must be acted on if the
organization wants to benefit from them. Threats are barriers presented to organization
which prevent them from reaching their desired objectives.
The following area analyses are used to look at all external factors effecting a company:

 Customer analysis: Segments, motivations, unmet needs

 Competitive analysis: Identify completely, put in strategic groups, evaluate
performance, image, their objectives, strategies, culture, cost structure, strengths,
weakness
 Market analysis: Overall size, projected growth, profitability, entry barriers, cost
structure, distribution system, trends, key success factors
 Environmental analysis: Technological, governmental, economic, cultural,
demographic, scenarios, information-need areas Goal: To identify external
opportunities, threats, trends, and strategic uncertainties
The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is
important to understand how these element work together. When an organization
matched internal strengths to external opportunities, it creates core competencies in
meeting the needs of its customers. In addition, an organization should act to convert
internal weaknesses into strengths and external threats into opportunities.

Focus on your strengths. Shore up your weaknesses. Capitalize on your opportunities.

Recognize your threats.

Identify

 Against whom do we compete?

 Who are our most intense competitors? Less intense?
 Makers of substitute products?
 Can these competitors be grouped into strategic groups on the basis of assets,
competencies, or strategies?
 Who are potential competitive entrants? What are their barriers to entry?
Evaluate
 What are their objectives and strategies?
 What is their cost structure? Do they have a cost advantage or disadvantage?

 What is their image and positioning strategy?

 Which are the most successful/unsuccessful competitors over time? Why?
 What are the strengths and weaknesses of each competitor?
 Evaluate competitors with respect to their assets and competencies.
Size and Growth What are important and potentially important markets? What are their
size and growth characteristics? What markets are declining? What are the driving
forces behind sales trends?
Profitability For each major market consider the following: Is this a business are in
which the average firm will make money? How intense is the competition among
existing firms? Evaluate the threats from potential entrants and substitute products.
What is the bargaining power of suppliers and customers? How attractive/profitable are
the market now and in the future?
Cost Structure What are the major cost and value-added components for various types
of competitors?
Distribution Systems What are the alternative channels of distribution? How are they
changing?
Market Trends What are the trends in the market?
Key Success Factors What are the key success factors, assets and competencies
needed to compete successfully? How will these change in the future?
Environmental Analysis An environmental analysis is the four dimension of the
External Analysis. The interest is in environmental trends and events that have the
potential to affect strategy. This analysis should identify such trends and events and the
estimate their likelihood and impact. When conducting this type of analysis, it is easy to
get bogged down in an extensive, broad survey of trends. It is necessary to restrict the
analysis to those areas relevant enough to have significant impact on strategy.
This analysis is divided into five areas: economic, technological, political-legal,
sociocultural, and future.

Economic What economic trends might have an impact on business activity? (Interest
rates, inflation, unemployment levels, energy availability, disposable income, etc)
Technological To what extent are existing technologies maturing? What technological
developments or trends are affecting or could affect our industry?
Government What changes in regulation are possible? What will their impact be on our
industry? What tax or other incentives are being developed that might affect strategy
development? Are there political or government stability risks?
Sociocultural What are the current or emerging trends in lifestyle, fashions, and other
components of culture? What are there implications? What demographic trends will
affect the market size of the industry? (growth rate, income, population shifts) Do these
trends represent an opportunity or a threat?
Future What are significant trends and future events? What are the key areas of
uncertainty as to trends or events that have the potential to impact strategy?
Internal Analysis Understanding a business in depth is the goal of internal analysis.
This analysis is based resources and capabilities of the firm.
Resources A good starting point to identify company resources is to look at tangible,
intangible and human resources.
Tangible resources are the easiest to identify and evaluate: financial resources and
physical assets are identifies and valued in the firm’s financial statements.

Intangible resources are largely invisible, but over time become more important to the
firm than tangible assets because they can be a main source for a competitive
advantage. Such intangible recourses include reputational assets (brands, image, etc.)
and technological assets (proprietary technology and know-how).

Human resources or human capital are the productive services human beings offer the
firm in terms of their skills, knowledge, reasoning, and decision-making abilities.

RESOURCE MAIN CHARACTERISTICS KEY INDICATORS

Tangible
Financial The firm’s borrowing capacity and  Debt to equity ratio
its internal funds generation
determines its capacity to weather  Ration of net cash to
fluctuations in demand and profits capital expenses
overtimes.
 Credit rating
Physical The physical resources related to  Resale value of assets
plan, equipment, assets,
technology, raw materials.  Age of capital equipment
 Flexibility of PPE
Intangible
Technological Stock of technology in the form of
proprietary technology (copyright,
patents, trade secrets) and
expertise in the application of
technology (know-how).
Reputation Reputation with customers  Brand recognition
through the ownership of brands,
established relationships with  Price premium over
customers, reputation of the firm’s competing brands
products and services.Reputation
of the company with suppliers,  Percent of repeat buying
employees, etc.  Level and consistency of
company performance
Human Resources Training and expertise of  Educational, technical and
employees determine the skills
professional qualifications
available to the firm.Adaptability of
employees determines key of employees
aspects of strategic flexibility of  Compensation relative to
the firm.Commitment and loyalty
industry
of employees determines the
capacity of the firm to attain and  Record of labor disputes
maintain competitive advantage.
 Employee turnover

Capabilities
Resources are not productive on their own. The most productive tasks require that
resources collaborate closely together within teams. The term organizational capabilities
is used to refer to a firm’s capacity for undertaking a particular productive activity. Our
interest is not in capabilities per se, but in capabilities relative to other firms. To identify
the firm’s capabilities we will use the functional classification approach. A functional
classification identifies organizational capabilities in relation to each of the principal
functional areas.

Functional Area Capability

Corporate  Financial management
 Expertise in strategic
control
 Effectiveness in
motivating and
coordinating business
units
 Management of
partnerships
 Overall company
 management/
resource management
Information Management  Comprehensive and
effective information
system that can be
used for managerial
decision making
Research and Development  Capability in basic
research
Product Design  Design capability
Marketing  Brand management
and promotion
 Promotion and
exploiting reputation
for quality
 Understand of and
responsiveness to
market trends
Sales and Fulfillment  Effectiveness in
promoting and
executing sales
 Efficiency and speed
of fulfillment
 Quality and
effectiveness of
customer service