INTERNAL ANALYSIS

Internal analysis enables a firm understands its ability to function successfully in its business environment
will revolve around an understanding of the following factors:

A. Strategic capability analysis

B. The Value Chain Analysis
C. Stakeholders Analysis
D. Corporate Social Responsibility
E. internal audit

1.1.1 STRATEGIC CAPABILITY ANALYSIS

Successful strategies heavily depend on the organizations strategic capability to perform at the level that
is required for success i.e. ability of the organizational strategies to fit the environment in which the
organization operates in.

Strategic capability analysis will include the following:

1. Product features
2. Critical success factors
3. Strategic importance of resources
4. Competence and core competences
5. Robustness

1. PRODUCT FEATURES

The success of an organization is related to how well it is able to provide product features that are valued
at a given price

If organizations are to be profitable, they must be capable of operating effectively. Where effectiveness
means the ability to meet customer requirements on product features at a given cost.

Effectiveness can be achieved by managers who undertake the following:

 i) They must know the product features most valued by customers (threshold product features)
in the advance.
ii) They must undertake the drivers of uniqueness and how they can create and sustain this
uniqueness.
iii) They must be capable of evaluating customer’s willingness to pay for the added uniqueness.
iv) They must communicate the product features properly to create a positive perception among
buyers.
v) The added unique product features must provide more value in the new market than already
existi ng market offer from competitors.

2. CRITICA L SUCCESS FACTORS (CSFs)

CSFs are those produc t features that are particularly valued by a group of customers and
therefore where the organization must excel to outperform competition.

Customers are likely to value certain features above others and this may vary from one
segment to another as follows:-

Some customers may particularly be interested in price, others in reliability, others on

delivery time, others on convenience of shopping for the product etc.

For example supermarkets are in bitter rivalry with small shops in retailing. Supermarkets
provide one stop shopping services and lower prices through their resources (store location,
product range) and competence (knowledge of merchandising, securing low supply cost, and
computerized logistic systems). This gives supermarkets competitive advantage particularly
with customers who want one stop shopping experience.

The major critical success factors sought by customers include; brand reputation, excellence
of service, delivery, product range and innovation.

3. THE STRATEGIC IMPORTANCE OF RESOURCES

Resources are what the organization needs to successfully implement strategic decisions of an
organization and create competence.
 An organization’s resources include those that are owned by the organization and those that are
leased or accessed occasionally to support strategies.

Typically resources can be grouped as:

(a) Physical resources – machines, buildings and production capacity.

(b) Human resources – include knowledge, skills of people and adaptability of human
resource.
(c) Financial resources – include capital, cash, debtors and creditors (shareholders,
bankers etc)
(d) Intellectual property – knowledge captured in patents, brands, business systems and
customer databases.

Every business organization needs a set of threshold resources to exist in a given business e.g.
physical resources.

Organizations also need unique resources. Unique resources are those that give a competitive
advantage to an organization over its competitors and which competitors find difficult to imitate.

4. COMPETENCE AND CORE COMPETENCE

Competences are activities that give an organization an advantage over its competitors

Core competence gives an organization the ability to create or meet the critical success factors of
particular customer groups better than other providers in ways that are difficult to imitate.

In order to achieve this advantage, core competence must fulfill the following characteristics:

i) The core competence must relate to an activity or process in the product or service feature
which adds value in the customers’ eyes.
ii) It must lead to a level of performance that is slightly better than that of competitors. (A
position which can be tested through benchmarking).
iii) The core competence must help in building a profitable value chain relationship.
6. ROBUSTNESS

A further consideration about core competence is the extent to which they are robust i.e. difficulty
for competitors to imitate.

The four main sources of robustness include:

i) Rarity – The resource or competence is rare.

ii) Complexity – The competence is concerned with managing complex activities or process
hence difficult to imitate.
iii) Causal ambiguity – competitors are not sure which resources or competences have
underpinned the success of their better performing rivals.
iv) Culture – The competence might be embedded in the organizational culture resulting in
causal ambiguity.

1.1.2 CORPROATE SOCIAL RESPONSIBILITY

C orporate social responsibility is concerned with ways in which an organization exceeds the minimum
obligations to stakeholders specified in its regulation and corporate governance.

Strategy ought to be ethical. It should involve rightful actions and not wrong ones. Ethics concern human
duty and the principles on which this duty rests. Each business has a duty to the stakeholders including;
owners/shareholders, employees, customers, suppliers and community at large.

Organizations are faced with four types of CSR:

1. Economic Responsibilities - Organizations have a responsibility of improving the economic

welfare of the society within which they operate.
2. Legal Responsibility - Corporate are there to maximize profit making. In the process of
doing so, they are expected to conduct their business activity within the context of the law.
3. Ethical Responsibilities - Ethical responsibilities include behaviors and activities that are
strongly expected of business by society’s members.
4. Discretionary Responsibility - This include voluntary beneficial activities that are strongly
expected of business by society’s members

Significance of Corporate Social Responsibility

 i) Employment creation – The community fill rewarded by getting job opportunities.
ii) Products – The company’s products perform better in the market and customers recognized with
them.
iii) Working conditions – Enables the organization to address the employees working conditions.
iv) Publicity – Gives the organization positive publicity hence enhancing sales performance.
v) Community relationship – Fosters a good core relationship between organization and community.
vi) Green accounting – Compels the organization to account for their environmental pollution and
hence care for it
vii) Maximizing shareholders wealth - The best way to maximize shareholders wealth is to act in a
socially responsible manner.

1.1.3 Internal audit (internal assessment of key management areas)

The process of performing an internal audit closely parallels the process of performing an external audit.
A firm’s internal audit requires gathering and assimilating information about the firm’s strengths and
weakness. This requires gathering information about the firma management, marketing, finance,
accounting, production/operations, research and development and management information systems. This
process provides an opportunity for participants to understand how their jobs, departments and divisions
fits in the whole organizations. Managers and employees perform better when they understand how their
work affects other areas and activities of the firm.

This can be done by reviewing the functional areas in the business organization in term of it

1 Management
2 Marketing
3 Finance and accounting
4 production and operations management
5 research and development
The role of the strategic manager is to manage, coordinate and integrate these functional areas so that they
are efficiently and effective for the organization .efficient in the sense that the costs are minimized and
effective in the sense that the organization could achieve the objectives/target set before operation. lets
look at the function in detail.

1. Management
Management consists of the following basic functions are Planning, organizing, motivating, staffing and
controlling

Planning

consists of all those managerial activities related to preparing for future, the specific tasks include
forecasting, establishing objectives, devising strategies, developing policies and setting goals.

Organizing

It includes all managerial activities that result in a structure of task and authority relationships. Specific
areas include organizational design, job specialization span of control, unity of command, coordination,
and job design and job analysis.

Motivating

involves efforts directed towards shaping human behaviour .specific topics include leadership,
communication, work groups, behaviour modification, delegation of authority, job enrichment, job
satisfaction, needs fulfilment, organizational change, employee morale and managerial morale.

Staffing

These activities are centred on personnel or human resource management, included are wage and salary
administration, employee benefits, interviewing, hiring, firing, training, management development,
employee safety, affirmation action, equal employment opportunities, union relations, career
development, personnel research, discipline policies, grievances procedures and public relations

Controlling
refers to all those managerial activities directed towards ensuring that actual results are
consistent with planned results .key areas of concern include quality control, financial control,
sales control, inventory control, expense control analysis of variance ,rewards and sanctions .

The following questions can help determine specific strength or weakness in the management
function o f the business .an answer of no or any negative to any question indicate potential
weakness. While a positive or yes answer to the question suggests potential areas of strength
Management audit checklist questions

1. Does the firm management use strategic management concept?

2. Are the objectives and goals measurable and well communicated?
3. Do managers delegate authority?
4. Do mangers at all hierarchical levels plan effectively
5. Is the organization structure appropriate?
6. Are job description and job specification clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organization rewards and control mechanism effective?.

Marketing

It can be described as the process of defining, anticipating, creating and fulfilling customer needs and
wants for products and services. There are seven basic functions of marketing, customer analysis, selling
products /services, product and service planning, pricing, distribution, market research and opportunity
analysis. Understanding these function help a strategist identify and evaluate marketing strength and
weaknesses. Below are a set of questions about marketing that must be examined in strategic planning

Marketing audit checklist of question

a) Are market segmented effectively

b) Is the organization positioned well among competitors?
c) Has the firm market share been increasing?
d) Are present channels of distribution reliable and cost effective?
e) Does the firm have an effective sales organization?
f) Does the firm conduct market research?
g) Are product quality and customer service good?
h) Are the firm’s products and services priced appropriately?
i) Does the firm have an effective promotion, advertising and publicity strategy?
 j) Are marketing, planning and budgeting effective
k) Does the firm marketing manager have adequate experience and training?
l) Is the firm internet presence excellent as compared to rivals?

Finance and accounting functions

These functions comprise of three decisions, the investment decisions, the financing decisions and the
dividend decisions. Financial ratio analysis is the most widely used method for determining an
organization straights and weakness in the investment, financing and dividend areas. Because the
functional areas of businesses are closely related, financial ratios can signal strengths or weakness in
management, marketing, production, research and development, and management information systems
activities

The five common used finance ratios are

a) Liquidity ratio- measures a firma ability to meet maturing short term obligations
b) Leverage ratios- measures the extent to which a firm has been financed by debt
c) Activity ratio –measures how effectively a firm is using resources
d) Profitability ratio-measures management overall effectiveness as shown by the returns
generated on sales and investment
e) Growth ratios-measures the firm ability to maintain its economic position in the growth
of the economy and industry
Financial ratio analysis must go beyond the actual calculation and interpretation of ratio. The analysis
should conduct on three separate fronts.

a) Has the ratio changed over time? This will provide means of evaluating historical trends,
it is important to note whether the ratio has been increasing, decreasing or nearly
constant.
b) How does each ratio compare to industry norms?
c) How does each ratio compare to competitors?

The following finance questions similar to marketing and management earlier should be examined
 a) Where is the firm financially strong and weak as indicated by financial ratio analysis?
b) Can the firm raise needed short-term capital?
c) Can the firm raise needed long-term capital through debt and/or equity?
d) Does the firm have sufficient working capital?
e) Are capital budgeting procedures effective?
f) Are dividend payout policies reasonable?
g) Are the firms financial managers experienced and well trained?
h) Does the firm have good relations with investors and stockholders?
i) Is the firm dept situation excellent?

Production and operation functions

Production and operation functions consist of all those activities that transform inputs into goods and
services .this consists of five functions of decision areas process, capacity, inventory workforce and
quality.

Process-these decisions include choice of technology, facility layout, process flow analysis facility
location, and process control and transportation analysis. Distances from raw materials to production sites
are a major consideration.

Capacity –these decisions include forecasting, facilities planning, aggregate planning, scheduling,
capacity planning, and queuing analysis, capacity utilization is of major importance.

Inventory –managing the level of raw materials, work in process and finished goods, especially
considering what to order, when, how much and material handling

Workforce-managing skilled and unskilled employees, caring for job design, job enrichment, work
standards and motivation techniques.

Quality-ensuring high quality goods and services are produced by caring for quality control, quality cost
and total quality management.

The following questions must be examined

Questions such as the following should be examined:

 a) Are the suppliers of raw materials parts and subassemblies reliable and reasonable?
b) Are facilities, equipment, machinery and offices in good conditions?
c) Are inventory policies and procedures effective?
d) Are facilities, resources and marketing strategically located?
e) Does the firm have technological competences?

Research and development

The fifth major area of internal operation that should be examined for strength and weakness .many firm
depends on research and development for survival. Firms pursuing a product development strategy
especially need to have strong R&D orientation. organization invest in R&D because they believe that
this investment will lead to superior products and services and will give them a competitive advantage,
the R&D expenditures are directed at the development of new products before competitors ,improving
quality and improving the manufacturing process to reduce the costs.

Effective management of the R&D function requires a strategic and between R&D and other vital
business functions.

a) Questions such as the following should be asked when performing an R&D audit
b) Does the firm have R&D facilities? Are they adequate?
c) If outside R&D firms are used are they coat –effective?
d) Are the organizations R&D personnel well qualified?
e) Are R&D resource allocated effectively?
f) Are management information and computer systems adequate?
g) Is communication between R&D and other organization units effective?
h) Is present product technology competitive?

Management information systems

Information ties all business functions together and provides the basis for all managerial decisions. When
assessing a firm’s strengths and weakness information system is a critical dimension of performing an
internal audit.
Management information system main 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 such a manner that it answers important operating and
strategic questions. The heart of an information system is a database containing the kinds of records and
data important to managers. An MIS receives data bout both the internal business function and the
external environment that is relevant to the manager. it is the integrated in a way to support the mangers
decisions .

An effective information system is like a library, categorizing and filing data for use by managers
throughout the organization. Information system is a major strategic resource. monitoring internal and
external issues and trends. Identifying competitive threats and assisting in the implementation, evaluation,
and control of strategy.

Firms whose information system skills are weak are at a competitive disadvantage. In contrast strengths
in information systems allow establishing distinctive competencies in other area. low cost manufacturing,
and good customer service.

Questions such as the following should be asked when conducting this audit

1. Do all managers in the firm use the information system to make decision?
2. Is there a chief information officer or director of information system position in the
firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm contribute input to the information
system?
5. Are there effective passwords for entry into firm’s information system?
6. Are strategists of the firm familiar with the information systems of rival firms
7. It the information system user-friendly
8. Do all users of the information system understand the competitive advantage that
information can provided
9. Are computer training workshops provide for users of the information system?

1.1.4 Value chain analysis

According to porter, the business of a firm can be best be described as a value chain, in which total
revenue minus total cost of all activities undertaken to develop and market a product or service yield
value.
All firms in a given industry have similar value chain which includes activities such as obtaining raw
materials, designing products, building manufacturing facilities, developing cooperative agreements, and
providing customer services. a firm will be profitable as long as total revenue exceeds the total costs
incurred in creating and delivering the product or services. Firms should strive to understand not only
their value chain operation butt also their competitor’s value chains.

The value chain describes the activities within and around an organization which together creates a
product or service.

The primary analytical tool of strategic tool of strategic cost analysis is a value chain that identifies the
separate activities, functions, and business processes that are performed in designing and producing a
product or service.

The diagram below summarizes the value chain

Value Chain Analysis According to Porter (1985)

Value Chain Analysis According to Porter (1985)

Firm infrastructure

Secondary Human Resource Management

activities
Technology development

Operations Outbound Marketing

logistics and sales
In bound
logistics Service

Primary activities
Representative Value Chain Thompson and Strickland (2001)

Purchases Distribution Sales and Profit

Primary & Outbound Marketin Margin
Supplies & Operation Logistics Service
Activities g
s s
Inbound
And Costs

Support Product R&D Technology and Systems Development

Activities Human Resource Management

And Costs General Administration

According to Michael Porter the value chain is divided into two broad activities i.e primary activities and
secondary activities.

Primary activities are those directly concerned with the creation and delivery of product or service. They
are grouped into five as follows:

i) Inbound logistics – Are the activities concerned with receiving, storing and distributing the
inputs to the operation department. They include material handling, stock control, transport,
etc.
ii) Operations – Transforms the various inputs into the final product or service. They include
machinery, packaging, assembly, testing, etc.
iii) Outbound logistics – Collect, store and distribute the final product to customers. For tangible
products these would be warehousing, materials handling, transport etc. In case of services
they may be concerned with arranging to bring customers to the service if it is in a fixed
position e.g. sports events, church service, etc.
iv) Marketing and sales – Provide the means whereby consumers/users are made aware of the
product or service and are able to purchase it. It includes advertising, sales promotions,
personal selling, etc.
v) Service – Includes all activities will enhance or maintain the value of a product or service,
such as installations, repairs, training and spares.
Each of the groups of primary activities above is linked to support activities. Support activities help to
improve the effectiveness or efficiency of primary activities. They may be divided into four areas:

i) Procurement – Refers to the process of acquiring the various resource inputs for the primary
activities.
ii) Technology development – Technology refers to the know how of undertaking an activity.
The key technology may be concerned with product (R & D, product design) or with
processes (e.g. process development) or with a particular resource (e.g raw material
improvement).
iii) Human resource management – Is concerned with those activities involved in recruiting,
managing, training, developing and rewarding people within the organization.
iv) Infrastructure – Refers to the structures and routines of the organization which sustain its
culture includes systems of planning, finance, quality control, information management etc.
In the second diagram, Thompson and Strickland (2001) note that a complete value chain includes a profit
margin because a mark-up over the cost of performing a firms value creating activities is customarily part
of the price (total cost) borne by the buyer. They note that creating value that exceeds the cost of doing so
is the fundamental objective of the business

[Link] Value chain analysis

Value Chain analysis refers to the process whereby a firm determines the costs associated with
organizational activities from purchasing raw materials to manufacturing products to marketing those
[Link] aims to identify where low-cost advantages and disadvantages along the value chain from
purchasing raw materials to customer service activities. The low cost advantages can be seen as an
organization strength while disadvantages as its weakness.

VCA can enable a firm to better identify its own strength and weakness especially as compared
to competitors VCA and their own data examined overtime.

considerable judgement is require when performing a VCA because different items along the
value chain may have an impact on other items either positively or negatively, so there exist
complex interrelationships. For example exceptional customer service may be especially
expensive yet it may reduce the costs of returns and increase revenue. Costs and price differences
among rival firms can have their origins in activities performed by suppliers, distributors,
creditors, or even share holders.

Despite the complex of VCA. The initial step in implementing this procedure is to divide firms
operations into specific activities or business processes. Them the analyst attempt to attach a cost
to each discrete activity and the cost could be in terms of both time and money. Finally the
analysts convert the cost data into information by looking for competitive costs strength and
weaknesses that may yield competitive advantages and disadvantages. A firm offering low
prices than competitors can be due to low costs advantages along the value chain relative to the
value chain of the rivals firms.

Benchmarking
It is an analytical tool used to determine whether a firms value chain activities are competitive
compared to the rivals and thus conducive to winning in the market place. Benchmarking entails
measuring cost of the values chain activities across an industry to determine the best practices
among competing firms to duplicate or improve upon the best practices.

1.2 ANALYSING STAKEHOLDERS AND COALITIONS EXPECTATION

Who is a stakeholder?

ii) Stakeholders are those individuals or groups who depend on the organization to fulfil their own
goals and on whom in turn the organization depends.
iii) Stakeholders are also defined as a group of individuals who can affect or be affected by the
performance of the organization

Classifications of stakeholders
- Shareholders who finance the business

- Managers who manage it

- Employees who work for it

- The suppliers, customers, government etc.

What is a Coalition?

A group consciously established to comprise parties who can be affected or can affect the performance of
the firm. Can be divided into two:

External Coalition:

(a) Consumer association,

(b) Trade unions.

Internal Coalition:

(a) Top management

(b) Operators

(c) Line managers

(d) The planners

(e) Support staff

(f) The ideology: shared belief.

Areas of stakeholders conflict of interest

i) In order to grow profitability in the short run, cash flow and pay levels may need to be sacrificed.
ii) Production related: Customers seek to maximize satisfaction while organization seeks to
minimize cost and maximize revenue.
iii) Profit oriented: Shareholders seek to maximize profits while customers want to pay minimum
prices.
iv) Market share: The organization seeks to maximize market share, competitors seek to capture
organizations market share.
v) Cost efficiency: Efficiency through capital investment might mean job losses.

Analyzing Internal and External Stakeholders

(a) Shareholders

- Interested in growth and profitability of company.

- Can increase or decrease level of investment depending on dividend returns.

- Are worried of fluctuations in share price.

(b) Institutional investors

- Worried about high risk investments

- Demand high returns

- Concerned with balancing their portfolio.

(c) Managers

- Seek high salaries and

- Have power in the organization emanating from their status.

- Are responsible for strategic levels in the organization

- Are attracted by job security

 - Have to counter challenges of the business environment.

(d) Employees

- Seek job security

- Are keen on the take home pay

- Motivated by good conditions of employment

- Are watchful for promotion opportunities

- Seek job satisfaction

(e) Consumers

- Very keen on quality of products

- Want value for money

- Interested in safety of products

- Thirst for new products

- Attracted to a variety to choose from

1.3 The internal factor evaluation matrix (IFE)

A summary step for conducting an internal audit is to constrict the internal factor matrix. The strategy
formulation tool summarizes and evaluates the major weakness in the functional areas of a business ad it
also provides a basis for identifying and evaluating relationship among the areas.

Intuitive judgement is required for developing an IFE.

Steps in developing an IFE

 1. List key internal factors as identified in the internal audit. Use a total of 10-20 internal
factors Including both strengths and weakness. list strengths first the weakness ,be as
specific as possible using percentages ratios, and comparative numbers
2. Assign weigh of 0.0 (not important) to 1.0 (important) all to each factor. The weight
assigned to each factor indicates relative importance to the factor to being successful in
the firm industry. Irrespective of whether the key factor is a strength or weakness. The
factors considered to have the greatest influence on the organization performance should
be assigned the highest weight. The sum of all weight must equal 1
3. assign a 1-4 rating to each factor to indicate whether that factor represents major
weakness (rating=1)a minor weakness (rating =2)a minor strength (rating =3)and a major
strength (rating=4)
4. multiply each factors weigh by its rating to determine a weighted score for each variable
5. sum the weighted score for each variable to determine the total weighted score for the
organization
6. The total weighted score of below 2.5 indicate an organization that is weak internally.
Whereas above 2.5 indicate strong internal position.

Below is an illustration of an IFE

weighted Rating weighted score

strength
Reliable and cost effective channels of 0.05 3 0.15
distribution
Competitive product technology 0.07 4 0.28
Effective organization rewards and control 0.1 3 0.3
mechanism
Sufficient working capital 0.05 3 0.15
Firm management use strategic management 0.02 3 0.06
concept
The firm conduct market research 0.15 3 0.45
Managers in the firm use the information 0.05 4 0.20
system to make decision
Reasonable dividend payout policies 0.03 3 0.09
Reliable and reasonable suppliers of raw 0.02 3 0.06
materials parts and subassemblies
weakness
Low quality facilities 0.1 2 0.2
Ineffective inventory policies and procedures 0.15 1 0.15
Information system not updated regularly 0.02 1 0.02
Inability to raise needed short-term capital 0.02 1 0.02
Low employee morale 0.04 1 0.04
Poor customer service good 0.05 2 0.10
Managers do not delegate authority 0.03 1 0.03
Poor advertisement strategy 0.05 1 0.05
Total 1 2.35

The above IFE shows that the organization is weak internally.

4.5 Activities
1. Prepare an IFE matrix for KCA University, what strategies do you think
would allow your university to capitalize on its strengths, what strategies
will allow your university to improve its weaknesses
2. Identify two competing organization and carry out a value chain analysis
of this organization. Identify if the value chain activity provides a
competitive edge over others.