CHAPTER FOUR

THE INTERNAL ENVIRONMENT

A Comprehensive Strategic-
Management Model
“If you are not faster than your
competitor, you are in a
tenuous position, and you are
only half as fast, you are
terminal.”
George Salk
Outcomes From Internal Environmental Analyses
By Studying the Internal
Environment, firms identify:

• What they can do?

Examine unique resources,

capabilities & competencies
– sustainable competitive
advantage
 Key Internal Forces

 Distinctive competencies
 A firm’s strengths that cannot be easily
matched or imitated by competitors
 Building competitive advantages involves
taking advantage of distinctive
competencies.
 Competitive advantage

 Why do some companies outperform others?

What is (are) the basis of their competitive
advantage?
 In retail industry, Wal-Mart has consistently
outperformed Kmart.
 In the global auto industry Toyota has
consistently outperformed General Motors
for most of the last twenty years
 Competitive advantage…

 A firm outperform its rivals due to the prevalence of

superior efficiency, superior quality, superior
innovation and superior responsiveness to the
market.
 We refer to efficiency, quality, innovation, and
customer responsiveness as the four generic building
blocks of competitive advantage.
 This days information technology and environmental
issues are also generating a competitive advantage
for global firms.
 Competitive advantage

 For a company to outperform its rivals, it

must have unique strengths, or distinctive
competences, in at least one of these building
blocks.
 For example, Wal-Mart outperforms its
rivals in the discount retail industry because
it is more efficient and more responsive to
its customers.
 Internal analysis

 Internal environment analysis enables an

organization to determine what it can do- that
is, the actions permitted by its unique
resources, capabilities and core competencies.

 The proper matching of what a firm can do

with what it might do allows the development
of strategic intent, the pursuit of strategic
mission and formulation of strategies.

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 Internal analysis

Is a way of looking the firms internal

capabilities to determine its internal strengths
and weaknesses
Internal analysis helps the firm:
◦ Determine if its resources and capabilites are
likely sources of competitive advantage
◦ Establish strategies that will exploit any
resources of competitive advantage
 Internal Analysis … cont’d

STRENGTHS:
 Strength is a resource, skill, or other advantage
relative to competitors and the needs of the
markets a firm serves or expects to serve.
 It is a distinctive competence that gives the firm
a comparative advantage in the market place.
 Strengths may exist with regard to financial
resources, image, market leadership,
buyer/supplier relations etc.
 Internal Analysis cont’d …

WEAKNESSES:

 Weakness is a limitation or deficiency in

resource, and capabilities that seriously
impedes a firm’s effective performance.
 Lack of facilities, financial resources,
management capabilities, marketing skills,
and brand image can be source of
weaknesses.
 Internal Analysis … cont’d
The process of internal analysis of an
organization involves four basic steps:

1. Developing a profile of financial; physical,

organizational, & human; & technological
2. Determining the key success requirement of the
product/market segments in which the organization
competes or might compete
3. Comparing the resource profile to the key success
requirements to determine the strengths &
weaknesses
4. Comparing the strengths & weaknesses of the
organization with those of its major competitor’s
 Group Discuss

 SW Analysis (Internal Environment)

 

Instructions:
 List the major strengths and weaknesses of your
organization as you see them. Identify of these strengths
and weaknesses that will be most critical to your
organization’s future success.

Strengths Weaknesses
The Resource-Based View (RBV)

 The Resource-Based View (RBV)

approach

 contends that internal resources

are more important for a firm than
external factors in achieving and
sustaining competitive advantage
 The Resource-Based View (RBV)

 Proponents of the RBV contend that

organizational performance will primarily be
determined by internal resources that can be
grouped into three all-encompassing
categories:

 physical resources,
 human resources, and
 organizational resources
RBV - Resources Vs. Capability

 Resources
 Tangible and intangible assets of a firm
 Used to conceive and implement strategies
 Capabilities
 A subset of resources that enable a firm to take
full advantage of other resources
• E.g. marketing skill, cooperative strategies
 Assumptions of RBV

Two critical assumptions of RBV:

◦ Resource heterogeneity
 d/t firms may have d/t resources
◦ Resource Immobility
 It may be costly for firms without resources to
acquire or develop
 Some resources may not spread from and to a
firm without substantial cost
 What does these assumptions
really mean?

 If one firm has resources that are valuable

and other firms don’t
 If other firms cannot imitate these resources
without incurring costs
 The firm possessing the valuable resources
will likely gain a sustained competitive
advantage
 Internal Analysis-RBV

 There are four indicators of the potential of a

firm’s competitive advantage with respect to
its resources and capabilities. These are:

 Valuable
 Rare
 Costly to imitate
 Non-substitutable
 Internal Analysis (RBV)

 A resource or bundle of resources is subjected

to each question to determine their
competitive implications.
The questions of Value
 Does the resource enable the firm to exploit an
external opportunity or neutralize a threat
 Internal Analysis (RBV)

The question of rarity

 If a resource is not rare, then perfect competition
dynamics are likely to be observed ( i.e. no
competitive advantage, no above normal profits)
 A resource must be rare enough so that prefect
competition has not set in
 If a resource is not rare there is no difference
between the focal firm and other firms
 Internal Analysis (RBV)
The question of imitability
cost of imitation might be high due to:
◦ Unique historical condition
◦ Causal ambiguity
 Causal links b/n resources and competitive advantage
may not be understood
 Bundles of resources may cause the causal links
 Patents
• Patents may be a two edged sword
– Protection –benefit
– Disclosure –cost
 Internal Analysis (RBV)

The question of substitutability

 There should not be a substitutable resource to be
used by business rivalries
 The question of organization
 A firms structure and control mechanism must be
aligned so as to give people ability and incentive
to exploit firms resources – formal and informal
structure, management control and relationships

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 Integrating Strategy and Culture

 Organizational culture significantly affects

business decisions and thus must be evaluated
during an internal strategic-management audit.

 If strategies can capitalize on cultural strengths,

such as a strong work ethic or highly ethical
beliefs, then management often can swiftly and
easily implement changes.
Integrating Strategy & Culture ……….

Organizational Culture

Pattern of behavior developed by an organization

as it learns to cope with its problem of external
adaptation and internal integration…is considered
valid and taught to new members
Integrating Strategy & Culture …………………….

Values

Legends Beliefs

Heroes
Cultural Rites
Products

Symbols Rituals
Myths
 Management

 The functions of management consist of

five basic activities: planning, organizing,
motivating, staffing, and controlling.
 These activities are important to assess in
strategic planning because an organization
should continually capitalize on its
management strengths and improve on its
management weaknesses.
The Basic Functions of
Management
 Management Audit Checklist
of Questions
1. Does the firm use strategic-management concepts?
2. Are company objectives and goals measurable and well
communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms
effective?
 Marketing

 Marketing
 the process of defining, anticipating, creating,
and fulfilling customers’ needs and wants for
products and services
Functions of Marketing
 Cost/Benefit Analysis

Three steps are required to perform a

cost/benefit analysis:
1.compute the total costs associated with a
decision,
2.estimate the total benefits from the
decision,
3.compare the total costs with the total
benefits.
 Marketing Audit Checklist
of Questions
1. Are markets segmented effectively?
2. Is the organization positioned well among
competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and
cost effective?
5. Does the firm have an effective sales
organization?
6. Does the firm conduct market research?
 Marketing Audit Checklist
of Questions
7. Are product quality and customer service good?
8. Are the firm’s products and services priced
appropriately?
9. Does the firm have an effective promotion,
advertising, and publicity strategy?
10. Are marketing, planning, and budgeting effective?
11. Do the firm’s marketing managers have adequate
experience and training?
12. Is the firm’s Internet presence excellent as
compared to rivals?
 Finance/Accounting Functions

The functions of finance/accounting

comprise three decisions:
1.the investment decision
2.the financing decision
3.the dividend decision
 Finance/Accounting Functions

 Investment decision
 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
 Finance/Accounting Functions

 Dividend decisions
 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
 determine the amount of funds that are
retained in a firm compared to the amount
paid out to stockholders
 Finance/Accounting Functions

1. How has each ratio changed over time?

2. How does each ratio compare to industry
norms?
3. How does each ratio compare with key
competitors?
 Finance/Accounting Audit
Checklist
1. Where is the firm financially strong and weak
as indicated by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital
through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
 Finance/Accounting Audit
Checklist
7. Are dividend payout policies
reasonable?
8. Does the firm have good relations with
its investors and stockholders?
9. Are the firm’s financial managers
experienced and well trained?
10. Is the firm’s debt situation excellent?
 Production/Operations

 Production/operations function
 consists of all those activities that transforms
inputs into goods and services
 Production/operations management deals
with inputs, transformations, and outputs
that vary across industries and markets.
The Basic Functions (Decisions)
Within Production/Operations
Implications of Various Strategies
on Production/Operations
 Production/Operations
Audit Checklist
1. Are supplies of raw materials, parts, and
subassemblies reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in
good condition?
3. Are inventory-control policies and procedures
effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically
located?
6. Does the firm have technological competencies?
Research and Development Audit
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization’s R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems
adequate?
6. Is communication between R&D and other
organizational units effective?
7. Are present products technologically competitive?
 Management Information
Systems
 A management information system’s 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
 Management Information
Systems Audit
1. Do all managers in the firm use the information
system to make decisions?
2. Is there a chief information officer or director of
information systems 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 the
firm’s information system?
 Management Information
Systems Audit
6. Are strategists of the firm familiar with the
information systems of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand
the competitive advantages that information can
provide firms?
9. Are computer training workshops provided for
users of the information system?
10.Is the firm’s information system continually being
improved in content- and user-friendliness?
 Value Chain Analysis (VCA)

 Value chain analysis (VCA)

 refers to the process whereby a firm
determines the costs associated with
organizational activities from purchasing raw
materials to manufacturing product(s) to
marketing those products
 aims to identify where low-cost advantages or
disadvantages exist anywhere along the value
chain from raw material to customer service
activities
 Benchmarking

 Benchmarking
 an analytical tool used to determine whether
a firm’s value chain activities are competitive
compared to rivals and thus conducive to
winning in the marketplace
 entails measuring costs of value chain
activities across an industry to determine
“best practices”
 Transforming Value Chain Activities
into Sustained Competitive Advantage
 The Internal Factor Evaluation
(IFE) Matrix
1. List key internal factors as identified in the internal-audit
process
2. Assign a weight that ranges from 0.0 (not important) to
1.0 (all-important) to each factor
3. Assign a 1-to-4 rating to each factor to indicate whether
that factor represents a strength or weakness
4. Multiply each factor’s weight by its rating to determine a
weighted score for each variable
5. Sum the weighted scores for each variable to
determine the total weighted score for the organization
A Sample Internal Factor Evaluation
Matrix for a Retail Computer Store
/ END /