Chapter 5:

Internal environmental analysis

 LEARNING OUTCOMES
• Discuss the importance and challenge of conducting an internal
environmental analysis
• Apply SWOT analysis in an organisation and explain its importance
in environmental analysis
• Identify all the important resources and capabilities in an
organisation and discuss their importance in the resource-based
view with regard to internal environmental analysis
• Describe value chain analysis as a method for performing internal
environmental analysis
• Apply the functional approach in internal environmental analysis
• Understand and apply the SWOT matrix to identify strategic goals
 INTRODUCTION

• Strategy is about the relationship between organisational

performance and its resources and capabilities.

• Organisations try to build their capacity as a source of competitive

advantage in terms of their resources and capabilities.

• It is important to identify and evaluate the organisation’s strengths

and weaknesses in all its functional areas

• Identify what is good and what is lacking or not so good.

• Organisations that have built a competitive advantage through their

capacity include FNB, Shoprite, Cashbuild and Pick n Pay.
 THE IMPORTANCE AND CHALLENGE
OF INTERNAL ANALYSIS

• The outcome of an internal analysis will determine what an

organisation can do

• Ability to change is important.

• An organisation is a bundle of resources, capabilities and

core competencies that must be used to create an exclusive
position in the market.
 THE IMPORTANCE AND CHALLENGE OF
INTERNAL ANALYSIS
Figure 5.1 The relationship between the components of internal analysis and strategic
competitiveness (Textbook, page 104)
 SWOT ANALYSIS
• Acronym for “strengths, weaknesses, opportunities and threats”.

• Strength: A resource or a capability that the organisation has which

is an advantage relative to what the competitors have.

• Weakness: Refers to the lack of, or deficiency in, a resource that

represents a relative disadvantage to an organisation in comparison
to what competitors have.

• Opportunity: A favourable situation in the organisation’s external

(market and macro) environment

• Threat: An unfavourable situation in the organisation’s external

environment
 SWOT ANALYSIS
Figure 5.2 The components of SWOT analysis (Textbook, page 106)
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 SWOT ANALYSIS

• Limitations of the SWOT analysis.

− The focus on the external environment may be too

narrow.
− It is perhaps a static assessment – a one-shot view of a
moving target.
− The strengths that are identified may perhaps not lead to
an advantage.
− It may lead to an overemphasis of a single feature or
strength and disregard of other important factors that
may lead to competitive success.
 RESOURCE-BASED VIEW
• It is important to look more closely at the organisation’s
resources, capabilities and core competencies in order to gain
an informed understanding of its current situation.

Resource-based view (RBV)

• Resources, organisational capabilities and core competencies are

the foundational characteristics that make up the competitive
advantage of an organisation.

• The RBV holds that an organisation’s resources are more important

than the industry structure when attempting to gain and keep a
competitive advantage.

• Resources determine efficiency and effectiveness.

 RESOURCE-BASED VIEW

Resources
There are three broad categories of resources that are central to
the RBV and will lead to distinctive competencies and therefore
to a competitive advantage.

These are:

• Tangible assets

• Intangible assets

• Organisational capabilities
RESOURCE-BASED VIEW
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY
DEVELOPMENT

Resource-based view
Table 5.1 Examples of different resources (Textbook, page 108)
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY
DEVELOPMENT

Resource-based view
Table 5.1 Examples of different resources (Textbook, page 108)
 Some examples of intangible resources

• Reputation of the firm and its product

• Employee know-how

• Perception of quality

• Ability to manage change

• Ability to innovate

• Team-working ability

• Participative management style

3 types of intangible resources
 RESOURCE-BASED VIEW
Capabilities

• The capacity to deploy resources through a complex process of

interactions with the tangible and intangible resources

• Organisational capabilities: The complex network of processes

and skills that determine how efficiently and effectively the inputs
in the organisation will be transformed into outputs.

• The foundation of many organisations’ capabilities lies in the skills

and knowledge of the employees and often in their functional
expertise.

• Organisations need to invest constantly in employees’ continuous

development.
Identifying a Company’s Internal Strengths
Ranges from:
• A Competence
– Is internal activity that firm perform with proficiency - a
capability.

• A Core Competence
– Is a proficiently performed internal activity that is central to a
firm’s strategy & competitiveness
– E.g. BMW’s core competence in design and engine technology

• .A core competency develops into a unique capability that actually

distinguishes an organisation from its competitors – known as a
distinctive capability or distinctive core competency.
 Types of Capabilities
Ranges from:
• A Threshold Capability
– minimum capabilities needed to compete in a market.

• A Distinctive Capability or Distinctive Core Competency

– Is a competitively valuable activity that a firm performs better
than its rivals
– E.g. For MCDonald, their unique processes used in quick product
delivery

• A Dynamic Capability
– Ability to build, integrate and restructure capabilities to address
the rapidly changing environment
– E.g. rapid and flexible product innovation to adapt to the changes
• For a resource to be valuable and lead to competitive
advantage, it must be either:

(1) Valuable

(2) Rare

(3) hard to Imitate

(4)exploited by the Organisation

• These characteristics of resources are called Empirical

Indicators
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 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY
DEVELOPMENT

Resource-based view Figure 5.3 The VRIO framework with

characteristics of resources that will
lead to competitive advantage
(Textbook, page 111)
 VALUE-CHAIN ANALYSIS

• The value chain as a method of doing internal analysis refers to a

way of looking at the chain activities of an organisation to
determine where value is really added to the product or service.
• Value: The amount of money that customers are willing to pay
for what the organisation is providing them.
• Inputs to outputs – value is added.

• Turning inputs into outputs requires different activities.

• In order to determine where is value is added, you must

determine strengths and weaknesses.

Where is value added and where is potential to add value?

VALUE CHAIN ANALYSIS
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY
DEVELOPMENT

Value chain analysis

Primary activities
– Input logistics – the receiving, storing and the distributing of
inputs to the product.
– Operations – all the activities that are associated with the
transformation of the inputs into the final product.
– Output logistics – all the issues related to the distribution of
the product or service to the customers.
– Marketing – the inducements used to get customers to buy
the final products or services.
– Customer service – activities undertaken to make sure the
value of the product is maintained.
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY
DEVELOPMENT
Value chain analysis
Support activities
– Procurement – the actions that can be taken to optimise the
quality and speed of the procurement of inputs.
– Technological development – the different processes and
equipment used throughout the entire value chain.
– Human resource management – the recruitment, selection,
training and compensation of employees; very important
because it affects all levels of the organisation.
– General administration and infrastructure – a certain general
administration and organisational infrastructure must be in
place to achieve the overall goals of the organisation.
– Financial management – all activities must adhere to effective
financial recording and control.
 FUNCTIONAL APPROACH

• An effective and simple approach to internal environmental analysis.

• Can be conducted by analysing the organisation’s functional

activities.

• Issues in the functional areas that should be included in an internal

audit (Table 5.2).

• The major goal is to determine how well or poorly these

functions are being performed.
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY DEVELOPMENT
Functional approach
Table 5.2 Some internal audit questions regarding the functional areas
(Textbook, page 117)
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY DEVELOPMENT
Functional approach
Table 5.2 Some internal audit questions regarding the functional areas
(Textbook, page 117)
 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY DEVELOPMENT
Functional approach
Table 5.2 Some internal audit questions regarding the functional areas
(Textbook, page 117)
 THE SWOT MATRIX
• A matrix can be developed where one includes the lists of the
different strengths, weaknesses, opportunities and threats that
has been identified during the environmental analysis.
• It is composed of nine cells, the left top of which is always left
blank.
• Remember the following:
– Alternative goals are only possible feasible options.
– Help managers to see that there are viable options available.
– SO goals use the organisation’s internal strengths to take
advantage of the external opportunities that exist – important
to remember that an opportunity must not be pursued if the
organisation has not the corresponding strength to support it.
– WO goals are trying to improve the organisation’s weaknesses
by taking advantage of the external opportunities.
 THE SWOT MATRIX
• ST goals use the organisation’s internal strengths to try and avoid
the possible external threats.
• WT goals are very defensive and try to reduce internal weakness
and avoid external threats.
• A typical approach that must be followed by the organisation is to
stay away from “tempting” (risky) decisions that can harm the
organisation.

Figure 5.5 Components of a SWOT matrix (Textbook, page 118)

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