Chapter Five
The Internal Environmental Assessment
Internal environmental analysis (strategic capability assessment)
is the process by which the strategist defines the distinctive
competencies of the firm, i.e.
• the strength and weakness in performing identified functions.
Strengths are a resource, skills, or other advantages relative to
competitors and the needs of the markets a firm serves or expects to
serve.
- Strengths may exist with regard to financial resources, image,
buyer/supplier relations etc.
Weaknesses are a limitation or deficiency in resource, and capabilities
that seriously impedes a firm’s effective performance.
- Weak facilities, financial resources, & management capabilities, can be
source of weaknesses.
Dr. Tizazu K. 1
Cont…
Internal environmental analysis is, therefore, the process through
which strategists and managers analyze the various factors of their
organization to evaluate their relative strengths and weaknesses of
its resources, its current practices and strategies, and its
performance.
Analysis of Resources, Capabilities and Core Competencies
Two perspectives
The internal analysis of phenomena within a company
An external analysis of the industry and its competitive environment
Three key types of resources
Tangible resources
Intangible resources
2
Organizational capabilities
Tangible resources
Relatively easy to identify, and include physical, financial,
technological, and organizational assets used to create value for
customers
• Financial resources • Technological resources
Firm’s cash accounts Innovative production
Firm’s capacity to processes
raise equity Patents, copyrights,
Firm’s borrowing trademarks
capacity • Organizational resources
• Physical resources Effective strategic
Modern plant and planning processes
facilities Excellent evaluation and
Favorable control systems
manufacturing
locations
State-of-the-art 3
Intangible Resources
Difficult for competitors (and the firm itself) to account for or
imitate, typically embedded in unique routines and practices
that have evolved over time
• Human • Innovation and
Experience and creativity
capabilities of Technical and scientific
employees skills
Trust Innovation capacities
Managerial skills
• Reputation
Firm-specific
practices and
Effective strategic
procedures planning processes
Excellent evaluation
and control systems
4
Organizational Capabilities
Competencies or skills that a firm employs to transform
inputs to outputs, and capacity to combine tangible and
intangible resources to attain desired end.
For example:-
Outstanding customer service
Excellent product development capabilities
Innovativeness of products and services
Ability to hire, motivate, and retain human capital
5
The Nature of an Internal Audit
All organizations have strengths and weaknesses in the
functional areas of business.
No enterprise is equally strong or weak in all areas. One
may be good in production other may be good in marketing.
Internal audit provide more opportunity for managers and
employees to understand how their jobs, departments, and
others fit into the whole organization.
Internal audit requires gathering, organizing and
evaluating about the firms operations.
6
Process of analyzing internal resources of an organization
1. Developing a profile of the organization’s principal
resources and skills in broad areas: financial; physical,
organizational and human; and technological.
2. Determining the key success requirement of the
product/market segments in which the organization
competes.
3. Comparing the resource profile to the key success
requirements to determine the major strengths and
weaknesses to be overcome.
4. Comparing the organization’s strengths and weaknesses
with those of its major competitors.
7
Cont….
The strategy of the firm is influenced by the existing
structure, culture, values and resources.
Culture, style
and values
Strategy
Structure and Skills and
Systems resources
8
Structure and Systems
Structure can influence the strategy of the firms
particularly where one function tends to dominate the senior
management positions.
Systems can help or hinder the implementation of strategy.
• In some bureaucracies staffs at lower levels have to get
approval from senior management for often quite trivial
decisions or expenditures.
• If you grow up in this type of system you are unlikely to feel
comfortable about taking responsibility and exercising
initiative.
9
Culture, style and values
A manager’s perceptions of the world, like everyone else’s
are colored by his or her background and experience.
So, when we try to inject some analysis and structure into
the strategy making process we need to be aware of the
limitations of the individual manager and the management
team.
Skills and Resources
• Skills refer to a company's capabilities at coordinating its resources
and putting them to productive use.
• Resource includes: the financial, physical, human, technological,
and organizational assets of the company.
10
Relationship among the functional areas of business
Functional analysis takes into account various
functional areas and evaluates these for identifying
strengths and weaknesses.
The functional areas of an organization include;
Marketing
Finance
Operations/production
Human Resources Management/personnel
11
Marketing
Marketing can be described as the process of
defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and
services.
There are seven basic functions of marketing:
1. customer analysis
2. selling products/services
3. product and service planning
4. pricing
5. distribution
6. marketing research, and
7. opportunity analysis
12
Production/Operations
Production/operations management deals with inputs,
transformations, and outputs that vary across industries and markets.
The Basic Functions (Decisions) Within Production/Operations
Decision Areas Example Decisions
Process These decisions include choice of technology, facility layout, process
flow analysis, facility location, line balancing, process control, and
transportation analysis.
Capacity These decisions include forecasting, facilities planning, scheduling,
capacity planning.
Inventory These decisions involve managing the level of raw materials, work-
in-process, and finished goods, and materials handling.
Workforce These decisions involve managing the skilled, unskilled, clerical, and
managerial employees by caring for job design, and motivation
techniques.
Quality These decisions are aimed at ensuring that high-quality goods and
services are produced by quality assurance, and cost control methods
13
Finance/Accounting
The functions of finance/accounting comprise three decisions:
investment decision
financing decision, and
dividend decision
Financial ratio analysis is the most widely used method for
determining an organization’s strengths and weaknesses in the
investment, financing, and dividend areas.
Investment decision is the allocation and reallocation of capital and resources to
projects, products, assets, and divisions of an organization.
Financing decision determines the best capital structure for the firm and
includes examining various methods by which the firm can raise capital, example,
by issuing stock, increasing debt, selling assets.
Dividend decision concern issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and the repurchase or
issuance of stock. 14
Management Information Systems
Information ties all business functions together and provides the
basis for all managerial decisions.
It is the cornerstone of all organizations.
Information represents a major source of competitive management
advantage or disadvantage.
Assessing a firm’s internal strengths and weaknesses in information
systems is a critical dimension of performing an internal audit.
15
Human resources Management/Personnel
The Basic Functions Within Human Resource Management
Recruitment and selection
Training and development
Performance appraisal
Reward
Promotion
Employee empowerment
Employee welfare
Employee retention
16