Internal Environment Analysis

The Internal Environment Analysis

• Strategic management analysis helps companies gain a competitive advantage.
• Analyzing the internal environment identifies a company's strategic factors, strengths, and weaknesses.
• This helps exploit opportunities and avoid external threats.
• The internal environment refers to aspects within a company that top management cannot control in the short term.
• Strategic elements of the internal environment include:
• Corporate culture
• Organizational structure
• Business resources

Corporate Culture

• Each company has a unique culture.
• Corporate culture includes beliefs, values, practices, and expectations.
• This defines how the company conducts itself and its corporate identity.
• A well-developed corporate culture provides a competitive edge.
• Also shapes behavior norms, creates identity, fosters belongingness, and motivates employees.
• Effective corporate cultures promote motivated, productive employees and reduce turnover.

Organizational Structure

• Is the relationship patterns among a company's members.
• Structure defines task performance, resource utilization, and employee relationships.
• Each organizational structure has advantages and disadvantages.
• Strategic managers assess the most suitable structure for the company.
• A well-defined organizational structure enables information to flow, control, and monitoring.

Business Resources

• Resources are assets owned/controlled by a company,
• Can be tangible (land, plants, machinery, equipment, inventory) or intangible (patents, trademarks, processes, formulas, computer programs).
• Also includes human resources, processes, technologies, knowledge, and skills.
• A strategic resource must offer competitive advantage
• A resource is strategic if it:
• Exploits opportunities.
• Is uncommon among competitors.
• Is hard to imitate.
• Has no substitutes.

Conducting Internal Environment Analysis

• Internal environment analysis is more complex than external environment scanning.
• Internal analysis requires primary data, while external analysis uses secondary data.
• Internal analysis evaluates strategic elements separately, external analysis scans factors simultaneously.
• Internal analysis assesses the company's competence.
• Strategic managers use resource-based or value-chain approaches.

Analyzing Corporate Culture

• Assessing corporate culture involves determining the state of employees, groups, and the company via interviews and surveys.
• The internal audit is based on interviews and questionnaires.
• It determines how corporate culture influences strategies.
• Steps to perform a corporate culture scanning:
• Identify cultural values and core beliefs
• Gather employee perceptions of these
• Rate company practices, values, and beliefs
• Integrate the data
• Describe the current culture, noting its competitive advantage

Analyzing the Organizational Structure

• Analysis starts with evaluating the organizational chart
• Considers how groups are arranged, communication flow, reporting, and chain of command
• Objective: the structure allows efficient achievement of goals
• An organizational audit aids analysis
• When analyzing organizational structure:
• Assess the current business model and structure
• Identify recent problems
• Examine the performance of functional units
• Define possible improvements
• A business model describes how a company makes money through, customers, services, sustaining advantage and distribution.
• Common business models:
• Profit pyramid
• Advertising model
• Customer solution model
• Efficiency model
• Entrepreneurial model
• Strategic managers must effectively determine how to make money.
• Functional areas (finance, operations, HR, marketing, R&D) must be evaluated to identify issues.

Analyzing Business Resources

• A strategic resource helps a company gain competitive advantage
• Resources can be grouped as:
• Financial
• Human
• Physical
• Technological
• Organizational
• Objective: determining which resources contribute to competitive advantage.
• Competitive advantage refers to resources (valuable, rare, inimitable) and the ability to use them.
• Core competency: exploiting resources for competitive advantage.
• Capability: ability to exploit strategic resources.
• Competency: integrating cross-functional capabilities.
• Distinctive competency: is superior to rivals.
• The VRIO framework (Barney) evaluates resources for competitive advantage based on Value, Rareness, Imitability, Organization.
• Steps to identify core competencies:
• Determine valuable resources/capabilities
• Scan for competitors' capabilities
• Assess imitability of resources/capabilities
• Evaluate company's organization for exploiting resources
• Assess competitive advantage
• A team of managers and supervisors determines distinctions, using focus groups.
• Competitive intelligence is used for competitor evaluations.
• Once core and distinctive competencies are clear, strengths and weaknesses can be identified (max 10 items).

Strengths and Weaknesses Analysis

• Identify strengths/weaknesses
• Gather supporting information
• Assign weights (0.0-1.0) based on importance
• Rate how management handles strengths/weaknesses
• Determine weighted score by multiplying rating by weight
• Define strength/weakness status based on total score.
• The first three strenghts and weaknesses are strategic factors for SWOT analysis.

Company Profitability and Market Share

• Evaluating the internal environment concludes by defining the current profitability and market share.
• Profitability considers gaining/losing, level of investment, competitors' investments, and industry average.
• Strategic managers assess the company's ability to sustain profitability and must define the current market share.
• It is imperative to define performance to aid strategies to gain competitive advantage.