Strategic management: internal analysis

Internal Analysis:

           

Internal analysis is needed in order to determine the possible future strategic options by appraising the organization’s internal resources and capabilities. This involves the identification of those things which the organization is particularly good at in comparison to its competitors.

The analysis will involve undertaking a resource audit to evaluate the resources the organization has available and how it utilizes those resources- for example, financial resources, human skills, physical assets, technologies and so on. It will help the organization to assess its strategic capability. That is the adequacy and suitability of the resources and competences of an organization for it to survive and prosper. Johnson, schools and Whittington (2005) explain that this depends up having:

·         Threshold resources – The resources needed to meet the customers’ minimum requirements and therefore to continue to exist;

·         Threshold competences- The activities and processes needed meet customers’ minimum requirements and therefore continue to exist;

·         Unique resources –The resources that underpin competitive advantage and are difficult for competitors to imitate or obtain;

·         Core competences – are activities that underpin competitive advantage and are difficult for competitors to imitate or obtain.

There is often confusion surrounding the terms ‘resources’ and ‘competences’ –essentially resources are what the organization has, whereas competences are the activities and processes through which the organization deploys its resources effectively. This concept will be returned to later in this chapter when examining the resource- based view of strategy.

Michael Porter suggested that the internal position of an organization can be analyzed by looking at how the various activities performed by the organization added (or did not add) value, in the view of the customer. Porter proposed a model, the value chain (Figure 1.5),

To be included in the value Chain, an activity has to be performed by the organization better, differently or more cheaply than by its rivals.

The value chain of any organization can be divided into primary activities and support activities, each of these activities can be considered as adding value to an organization’s products or services.

The primary activities of the value chain are as follows:

·         Inbound logistics. The systems and procedures that the organization uses to get inputs into the organization, for example the inspection and storage of raw materials.

·         Operations. The processes of converting inputs to outputs, for example production processes.

·         Outbound logistics. The systems and procedures that the organization uses to get outputs to the customer, for example storage and distribution of finished goods.

·         Marketing and Sales. Those marketing and sales activities that are aimed at persuading customers to buy, or to buy more, for example TV or point- of –Sale advertising.

·         Service. Those marketing and sales activities that are clearly aimed before or after the point of sale, for example warranty provision, or advice on choosing or using the product.

The secondary (or support) activities of the Value Chain are as follows:

·         Procurement. The acquisition of any input or resource, for example buying raw materials of capital equipment.

·         Technology development. The use of advances in technology, for example new IT developments.

·         Human resource Management. The use of the human resources of the organization, for example by providing better training.

·         Firm infrastructure. Those general assets, resources or activities of the organization that are difficult to allocate to one of the other activity headings, for example a reputation for quality, or a charismatic Chief Executive.

If you are asked to apply the Value chain to an organization, simply look for things that the organization does well, and put each of them under the most appropriate heading. A brief explanation as to why you feel each activity has strength will suffice.

Corporate Appraisal:

Having undertaken an analysis of the trends and possible external and internal environmental developments that may be of significance to the organization, the next step is to bring together the outcomes from the analysis.

This is often referred to as corporate appraisal or SWOT analysis, standing for strengths, weaknesses, opportunities and threats.

During this stage, management will assess the ability of the business, following its present strategy, to reach the objectives they have set. They will draw on two sets of information:

a)     Information on the current performance and resource position of the business. This will have been gathered in a separate internal position audit exercise.

b)    Information on the present business environment and how this is likely to change over the period of the strategy. This will have been collected by a process of external environmental analysis and competitor analysis.

The four categories of SWOT can be explained in more detail as follows:

1.   Strengths. These are the particular skills or distinctive competences which the organization processes and which gives it an advantage over the competitors.

2.   Weaknesses. These are the things that are going badly (or work badly) in the organization and can hinder the organization in achieving its strategic aims, such as a lack of resources, expertise or skills.

3.   Opportunities. These relate to events or changes outside the organization, that is in its external business environment, which are favourable to the organization. The events or changes can be exploited to the advantage of the organization and will therefore provide some strategic focus to the decision-making of the managers within the organization.

4.   Threats. Threats relate to events or changes outside the organization in its business environment which are unfavourable and that must be defended against. The organization will need to introduce some strategies to overcome these threats in some way or it may start to lose market share to its competitors.

The strengths and weaknesses normally result from the organization’s internal factors, and the opportunities and threats relate to the external environment. So, the strengths and weaknesses come from internal position analysis tools such as the Value Chain, and the opportunities and threats from environment analysis tools such as PEST and the five forces model.

Strategic options and choice (or Plan):

Strategic choice is the process of choosing the alternative strategic options generated by the SWOT analysis. Management need to seek to identify and evaluate alternative courses of action to ensure that the business reaches the objectives they have set. This will be largely a creative process of generating alternatives, building on the strengths of the business and allowing it to tackle new products or markets to improve its competitive position.

The strategic choice process involves making decisions on:

·          What basis should the organization compete and on what basis can it achieve competitive advantage?

·          What are the alternative directions available and which products/markets should the organization enter or leave?

·          What alternative methods are available to achieve the chosen direction?

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