Ch- 11 (Internal Analysis)

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Excel BooksStrategic Management and Business PolicyText and Cases

Ch-11: Internal Analysis

Part- II : Purpose, Environment and Resource Analysis

Copyright © 2008, C Appa Rao, B Parathiswara Rao, K Sivaramakrishna

11– 1C Appa Rao, B ParathiswaraRao K Sivaramakrishna

Chapter

11 Internal Analysis


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Introduction

We will see in this chapter, a firm can exploit its opportunities and overcome

its threats successfully depending on its internal resources and capabilities.

So, a systematic and methodical analysis of the strengths and weaknesses

of a firm’s internal resources and capabilities and also its functional areas is

called “internal analysis”, which is a critical activity in strategy formulation. Internal analysis is also referred to as “internal appraisal”, “organizational

audit”, “internal corporate assessment” etc. Over the years, research has

shown that the overall strengths and weaknesses of a firm’s resources and

capabilities are more important for a strategy than environmental factors.

Managers perform internal analysis to identify the strengths and

weaknesses of a firm’s resources and capabilities. The basic purpose is to

build on the strengths and overcome the weaknesses in order to avail of the

opportunities and minimize the effects of threats.


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Importance Of Internal Analysis

Strategic management is ultimately a “matching game” between

environmental opportunities and organizational strengths. But, before a firm

actually starts tapping the opportunities, it is important to know its own

strengths and weaknesses.

This is accomplished in internal analysis by using analytical techniques likeRBV, SWOT analysis, Value chain analysis, Benchmarking, IFE Matrix etc.

Thus, systematic internal analysis helps the firm:

i. To find where it stands in terms of its strengths and weaknesses

ii. To exploit the opportunities that are in line with its capabilities

iii. To correct important weaknesses

iv. To defend against threats

v. To asses capability gaps and take steps to enhance its capabilities.


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Strengths And Weaknesses – MeaningStrengths

Strengths are the resources, skills or other advantages a firm enjoys

relative to its competitors.

A skill or an important attribute

Valuable physical assets

Valuable intangible assets

Alliances or corporate ventures, etc.

Weaknesses

A weakness is a limitation or deficiency in resources, skills and

capabilities that seriously impede effective performance.

Inferior skills or lack of expertise

Lack of intellectual capital

Deficiencies in physical, organizational or intangible assets

Inferior capabilities in key functional areas


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Criteria For Determining Strengths And Weaknesses

Four types of criteria have been suggested to classify an element into a

strength or weakness:

1. Historical

2. Normative

3. Competitive parity

4. Critical success factors


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Measuring Strengths And Weaknesses

Strengths and weaknesses may exist in varying degrees. So an analyst needs

appropriate ‘measures’ to judge the degree of a strength or a weakness. There

are three measures that can be used for this purpose.

1. Attribute measures

2. Effectiveness measures

3. Efficiency measures


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Cont….

Frameworks To Internal Analysis

A comprehensive and objective analysis of strengths and weaknesses can be

done by using different formats or frameworks. We discuss hereunder some of

the important frameworks used for the purpose. The tools and techniques for

identifying strengths and weakness are discussed in the subsequent sections:

1. Resource Based View (RBV)

2. Bates and Eldredge Approach

3. Ansoff's Grid Approach

4. Functional Resources Scanning

5. The 7 – S Framework







Cont….

Resource Based View (RBV)

The resources are the means by

which an organization generates

value. It is this value that is then

distributed for various purposes.

Resources and capabilities of a firm

can be best explained with the helpof Resource Based View (RBV) of a

firm which is popularized by Barney.

RBV considers the firm as a bundle

of resources – tangible resources,

intangible resources, andorganizational capabilities. Competitive

advantage, according to this view,

generally arises from the creation of

bundles of distinctive resources and

capabilities.

Creation of Competitive Advantage

Competitive Advantage

↑

Distinctive competencies

↑

Core competencies

↑

Competencies

↑

Strengths and weaknesses

angi!"e and intangi!"e #rgani$ationa" capa!i"ities

Reso%rces







Cont….

Strategic Importance of Resources

Johnson and Sholes (2002 ) explain the strategic importance of resources with

the concept of ‘strategic capability’. According to them, strategic capability is the

ability of an organization to put its resources and capabilities to the best

advantage so as to enable it to gain competitive advantage. There are three typeof resources:

Available resources

Threshold resources

Unique resources







Cont….

Bates and Eldredge Approach

Bates and Eldredge have suggested the following factors to evaluate the different

dimensions of a firm:

Analysis of Management Dimension

Analysis of Finance Dimension

Analysis of Operations Dimension







Cont….

Strengths and Weaknesses Profile

Dimension Basis of Raning !"isting #t$engt%s o$Compa$ison &eanesses

&anagement'inancia"

#perations

() he p%rpose o* the pro*i"e is to ens%re that the strategist is aware o* the !asiso* comparison

2) Ranking sho%"d give the importance o* the *actor %nder assessment) Critica"*actors sho%"d have a ranking o* ()

+) A !rie* description is needed)) Coding is to !e done as *o""ows-

• 0 - ne%tra"

• . - strength• / - weakness

More pluses (+) indicate







Cont….

Ansoff's Grid Approach

This approach was suggested by Ansoff, and is similar to the framework

recommended by Bates and Eldredge. The framework is shown in Exhibit.

'ene$a( )a*i(ities +e$sonne( ,$gani-ationa( .anagement.anagement !/ipment si(( *apai(ities *apai(ities

)inan*eRD ,pe$ation

.a$eting areho%sing,Retai" #%t"ets,ransportation,1%ipment,raining 'aci"ities

*or sa"es sta**Data Processing1%ipment

Door / to / door Se""ing,Retai" 3ho"esa"e Se""ing,Direct 4nd%strySe""ing,

Cross / 4nd%strySe""ing, App"ication1ngineering ,

Advertising 3Sa"es Promotion,Servicing, etc)

Direct sa"es,Distri!%tion chain,Retai" chain,Cons%mer service,4nd%stria" service,Prod%ct s%pport,

4nventory distri5!%tion 3 Contro",Prod%ct %a"ity etc)

4nd%stria"&arketing, Cons%mer &erchandising,6arge c%stomer Base,Decentra"i$ed

contro",'avo%ra!"e p%!"icimage,'%t%re orientation,1thica" standards

'$id fo$ nte$na( Ana(sis







Cont….

Functional Resources Scanning

Pearce and Robinson6 have suggested the following checklist for functional

areas to evaluate strengths and weaknesses.

Marketing

Finance and Accounting

Production/Operations/Technical

Human Resources

Organization/General Management







The 7 ‘S’ Framework

This framework was developed by McKinsey Consultants to indicate the

interrelationship among various elements of an organisation. This framework can

also be used to perform internal analysis of an organization. The 7 ‘S’ framework

can be used both at the corporate level as well as at the functional level. One

such matrix for the corporate level is shown in Exhibit.

The 7 ‘S’ Framework Functions

Dimension Marketing Finance Human Production

Resources

1. Strategy

2. Structure

3. Systems

4. Shared Valued

5. Skills

6. Style

7. Staff







Cont….

Techniques of Internal Analysis

Internal analysis is comprehensive and long-term in nature. The emphasis is not

just on current behaviour but also on what the organization needs to do in future

to successfully compete in the market. A number of analytical tools and

techniques are used for this purpose. Some of the popular techniques are:

Comprehensive Analysis

1. SWOT Analysis

2. TOWS Matrix

3. Value Chain analysis

4. Financial Analysis

5. Key Factor Rating

6. Strategic Advantage Profile (SAP)

7. Balanced Scorecard

8. Internal Factor Evaluation (IFE) Matrix







Comparative Analysis

9. Historical Analysis

10. Industry Norms

11. Benchmarking







Cont….

Critical Success Factors (CSFs)

Critical Success Factors (CSFs) are defined as the resources, skills and

attributes of an organization that are essential to deliver success in the

market place. CSFs are also called “Key Success Factors” (KSFs) or

“Strategic Factors”. They are the key factors which are critical for

organizational success and survival.

Critical success factors will vary from one industry to another. For example,

in the perfume and cosmetics industry, the critical success factors include

branding, product distribution and product performance, but are unlikely to

include low labour costs, which is a very important CSF for steel companies.

CSFs can be used to identify elements of the environment that are

particularly worth exploring.

P E i dR A l i







Cont….

Rockart (1979) has applied the CSFs approach to several organizations

through a three step process for determining CSFs. These steps are:

a) Generate CSFs (asking, What does it take to be successful in business?)

b) Convert CSFs into objectives (asking, “What should the organization’s goals

and objectives be with respect to CSFs)

c) Set Performance standards (asking “How will we know whether the

organization has been successful in this factor?”)

Rockart has also identified four major sources of CSFs:

i. Structure of the industry

ii. Competitive strategy, industry position and geographic location

iii. Environmental factors

iv. Temporal factors

P E i dR A l i







Cont….

Identifying CSFs in the industry

As already explained, CSFs concern not only the resources of an organizations

but also the competitive environment in which the organization operates. There

are three important areas that need to be analyzed. They are known as Ohmae’s

three Cs:

Customers

Competition

Corporation

P E i t dR A l i







Cont….

How CFSs vary by industry

Depending on the nature of industry, the key factors for success may live in

any function, operational areas, distribution channels and so on. These can

be identified among the various functional activities of business starting from

raw materials to customer servicing.

It is necessary to scrutinize the whole vertical chain of business system fromsourcing raw materials to after sales servicing to identify CSFs. In aircraft

industry, for example, designing is a key factor for success.

Critical comments on the concept

Criticism of CSFs revolve around four issues:

1. Identification

2. Causality of relationships

3. Dangers of generalizing

P E i t dR A l i


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11 21C Appa Rao, B Parathiswara

The ‘Fit’ Concept

The traditional concept of organizational strategy is based on the ‘fit’ concept.

This is because it attempts to achieve a ‘match’ between the internal resources

and capabilities of an organization and external opportunities and threats in the

industry environment.

The ‘Stretch’ Concept Gary Hamel and CK Prahalad in their classic paper, “Strategy as Stretch

and Leverage”, in Harvard Business Review (March – April 1993)

introduced the concept of ‘stretch’.

They criticized the ‘fit’ model because it can lead to a mindset in whichmanagement focuses too much on the degree of fit between the existing

resources of a company and current environmental opportunities, and not

enough on building new resources and capabilities to create and exploit

future opportunities.

Ch- 11 (Internal Analysis)

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