Internal Analysis 25/01/2018

Redeemer Krah @Kramankus ICA Family 2018-

25/01/2018
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KIF – OUR FAMILY

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TOPIC 4

INTERNAL ENVIRONMENT
ANALYSIS
Redeemer Krah (CA)
Kramankus ICA Family 2016
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Internal Environment of Organisations

 What Internal Environment?
 Internal environment refers to the capability of the firm in terms of
resources and competences.
Analysing the internal environment enables responsible managers
to have clear and detailed knowledge of its internal organisational
environment and its capability to create and implement strategy.
 Internal environment analysis entails position audit which is the
process of analysing and assessing the organisation’s resources
and competences (strategic capabilities).
 Thus, internal environment analysis focuses on understanding
capability in terms:
Resources of the organisation
Competencies of the organisation

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Internal environment - Capabilities

Types/forms of capabilities

Strategic capability
It is the adequacy and sustainability of the resources and competences of
an organisation for it to survive and succeed.

Threshold capabilities
These are essential resources and competencies for the organisation to
be able to compete in a given market.

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Internal Envt – Resource based View

 Resource –based view
 The Resource-Based View (RBV) approach to competitive advantage
contends that internal resources are more important for a firm than
external factors in achieving and sustaining competitive advantage.
the RBV view 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 theory asserts that resources are actually what helps a firm
exploit opportunities and neutralize threats.
The basic premise of the RBV is that the mix, type, amount, and
nature of a firm’s internal resources should be considered first and
foremost in devising strategies that can lead to sustainable competitive
advantage. Managing strategically according to the RBV involves
developing and exploiting a firm’s unique resources and capabilities,
and continually maintaining and strengthening those resources.

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Internal Envt – Resource based View

 Resource –based view
Under the resource view, the internal environment is viewed from
two perspectives: resources and competences.
 the resource based view holds that sustainable competitive
advantage is only attained as a result of the possession of
distinctive resources and competences (inward looking instead of
outward looking -market position-based view).
The strength of the resource based view to strategic planning is
that is enable firms to have control over the means of obtaining
advantage.
Resource and competence audit are required to understand the
capabilities of the firm.

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Resource Audit
 Why Resource Audit?
The resource audit identifies the resources that
are available to an organisation and seeks to
start the process of identifying competencies.
The audit tries to asses the relative strength of
the resources base in terms of the quantity,
nature and extent of uniqueness.
 Most often managers rely on the M model in
conducting resource audit.
M model classified resources in factors
beginning with Ms

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M Model
 9 Ms are:
Manpower,
 Money,
Management,
Machinery,
Market,
Material,
Methods,
Management information and
Make up

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Resource Audit – other categories

 Types/categories of resources
Tangible resources
These are the physical assets of an organisation such as plant, labour
and finances. These are operational resources.
Intangible resources
These are non-physical resources (assets) such as information,
reputation and knowledge
Threshold resources
Level of resources an organisation requires to meet the minimum
requirement of the customer ( for survival).
Unique resources
Are distinctive resources of the organisation that can deliver competitive
advantage due to imitation barriers.

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Competence Audit
 What is organisational Competence?
It refers to a group of abilities, resources or skills that enable the
organisation to act effectively.
 Competence is therefore result of combination of resources within
the organisation. It is the activities and processes through which an
organisation deploys its resources effectively.
 Types of Competences
Core competences
These are things that organisation does to creates competitive advantage.
Things that are difficult for your competitors to emulate. These are
competences of the order winners.
 Threshold competences
These are things that organisation does well to simply compete in the
market (survival) but not to gain competitive advantage. The is qualifiers
competences and without it you can exist in the market. They are term the
order qualifiers.

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Competence audit (Cont)

 In strategic planning, organisation has to assess it
competence through an audit,
 Competence audit involves:
 Analyse the competences of the organisation and their drivers in
terms of resources (which resource give you that competence?)
 Categorise the competences as core and threshold through the
help of historical data, industry norm, and benchmarking.
 Note that core competences and threshold competences
are dynamic but not static. What is regarded as core
competence today could become the threshold tomorrow
due to change in cultural/expectation, customer and
consumer taste and competitors imitation. For example,
apple mobiles gave them core competence in 2007 but
today those feature are threshold of mobile market

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Competence audit
 Linkage between Competence and CSF
 The two concepts are different but needs to be linked.
Remember that CSFs are what the organisation needs to be good at in
order to compete in the market.

Competences are what the organisation is good at.

Therefore for an organisation to be successful, its competences

and CSFs should be closely aligned as possible.

A good strategy will consider the CSFs and Competences together

in order to maximize the correlation between the two.

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Building Strategic Capability

Strategic capability results from adequacy and suitability
of resources and competencies
 Strategies built on capabilities to deliver competitive
advantage should have four qualities to succeed:
 They must produce effects that are valuable to the customer
It should produce satisfaction to the customer
 they must be rare
It must be hard to come-by in the market. For example copyrights,
exclusive rights, uncommon expertise etc
They must be robust
Difficult to imitate due to complexity, organisational culture and history,
causal ambiguity ( uncertainty about how to imitate)
They must be non-substitutable
Competitive advantage may be threatened by substitute products and
competence. This must be made impossible for competitors

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Building strategic capability

– Cost efficiency
Cost Efficiency
Cost efficiency requires both the possession and efficient use of
appropriate resources and ability to manage cost so that they are
under constant down pressure
 Cost efficiency might constitute a core competence in certain
industry where cost management is very key. However, cost
efficiency is a threshold competence.
Sources of cost efficiency
Economies of scale – reduce cost per unit through volume.
Supply cost – search for proximity (transport cost) and bulk
purchase. Key to trading organisation that add little value.
Product and process design- it could reduce both direct and
indirect cost
Experience – learning curve theory states that as workers become
more familiar with their jobs they learn to do them more efficiently,
and as process is reputed cost decrease and efficiency increase.

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Building strategic capability

- Knowledge management
 What is organisational knowledge?
OK is the collective and shared experience accumulated through
systems, routines and activities of sharing across the organisation.
 OK may constitute a competence of the organisation on it self but
also underpin many other competences.
It is the process by which organisations generate value from their
intellectual and knowledge-based assets.
Form of OK
Explicit knowledge which is expressed and documented in the
organisation
Tacit knowledge which remains in employees memories.

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Building Strategic Capability

- Knowledge management
 Knowledge management
 Knowledge management is the process of capturing, organising
and making widely available all the knowledge the organisation
possesses (both explicit and tacit).
It is the process by which organisations generate value from their
intellectual and knowledge-base assets.
Knowledge management involves capture, record and disseminate:
Discovering or identifying knowledge
Capturing knowledge
Sharing the knowledge
Distributing knowledge
Using knowledge
Maintaining knowledge

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Models for analysing internal

capability
 Internal Capability Models
Commonly used models to assess strategic capability and its fit
with the environment include:
Porter’s Value Chain Analysis & Value Network Analysis
 Benchmarking
SWOT & TOWS Matrix

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Value Chain concept

 What is value Activities?
 it refers to those activities of the organisation that add value to the
purchased inputs.
Value activities are the means by which a firm creates value in its
products.
Primary activities are those involved in the production of goods and
services
Supporting activities provide necessary services to assist the primary
activities.
Linkages are the relationships between activities
Linkages creates what porter called value chain
Activities bring forth to cost in producing a product which brings
revenue

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Value Chain Concept

 Usefulness of value chain concept
 The value chain concept is an important tool in
analysing the organisation’s strategic capability.
It focuses on the overall means by which value is
created rather than on structural functions or
department.
It helps to establish the activities that are core in
providing customers with value they want.
It also helps the to identify those activities that do not
add value which might be outsourced.
It can also help in assessing cost and benefit
associated with the various value activities

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Value Chain

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Value Chain – Porter’s Framework

Primary Activities
 these are activities involved in the physical creation of the product,
transfer to the customers and any after sales service.
 Five categories of primary activities
Inbound logistics- receiving, handling and storing input for
production ( warehousing, transport, inventory control etc)
Operations – conversion of input to output (machining, packing,
assembling, testing and control)
Outbound logistics- Storing and distribution the finished product
(collecting, storing and distribution)
Marketing and sales- creating customer awareness and interest in
the product ( advertising, sales promotions, etc)
Services- After sales services (installation, repairing, upgrading,
spare parts etc.

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Value Chain Framework

 Supporting activities
SAs provide purchase inputs, human resources, technology and
infrastructural functions to support the primary activities
 Four Categories of SAs
 Procurement- Refers to process for acquiring the various
resource inputs to the primary activities(how materials and other
inputs are acquired)
Technology development- Involves product design, improving
process and resources utilisation. The “know how”.
Human resource management- involved recruiting, training,
developing and rewarding the people.
Infrastructure- Refers to the systems of planning, finance, quality
control, information management and routines that constitute the
organisation’s culture.

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Value chain- Benefits

Benefits of value chain analysis
 It provides a generic framework for cost efficiency and product
differentiation.
It provides a tool for identifying activities that a firm engaged in
which do not add value for management attention (improve or
outsource).
Its regroups functions into activities which establishes clear
relationship between activities and links in value chains.
 It enables managers to understand their own organisation and that
of the competitor as multifaceted joined by several interrelated
activities.
Criticisms of value chain
Most suitable for manufacturing and not service industry
 It demands quantification of every activity in terms of cost and
benefit which can be time consuming (activity base costing!!!)

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Value chain -Value Network

 What is the Value Network?
 the value network joins the organisations value chain to those of
its suppliers and customers
It is the set on inter-organisational links and relationships that are
necessary to create a product or service.

Distributors
Suppliers The firm’s value chain
Value chain Value chain

Customers
value chain

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Benchmarking
 What is Benchmarking?
Benchmarking is 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.
Benchmarking entails measuring costs of value chain
activities across an industry to determine “best practices”
among competing firms for the purpose of duplicating or
improving upon those best practices.
Benchmarking enables a firm to take action to improve its
competitiveness by identifying (and improving upon) value
chain activities where rival firms have comparative
advantages in cost, service, reputation, or operation.

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Benchmarking
 What is Benchmarking?
It is the process of gathering data about targets and
comparators that permits current level of performance to be
identified and evaluated against best practices.
It enables an organisation to meet industry standards by
copying others in order to challenge existing ways of doing
things.
Forms of Benchmarking
Historical benchmarking –comparing current with past
performance
Industry/sector benchmarking- comparing across the
industry
Best-in-class benchmarking – search for the best and
compare.

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Benchmarking
 Benchmarking process
 Secure senior management commitment to the process
Determined the areas of performance to be benchmarked and set
objective
Establish key performance measures
 Select the target or comparator
Measure performance
Compare performance
 Design and implement improvement programmes
Monitor improvements

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Benchmarking – Levels
 Three Levels of Benchmarking
 Resource benchmarking
It is carried out through resource audit to know how the firm’s resources
compares with others
Example will be revenue to employee, capital intensity, qualification of
employees etc
Competence in individual benchmarking
It done through comparing the capability of carrying out certain key
activities
Example: sales call per sales persons, output per employee, wastage
Overall competence (linked activities) benchmarking
It is done by analysing the overall performance of the entity.
Example: profitability, market share etc

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Benchmarking - why?
 Why Benchmarking?
 To assess a firms existing position and provides basis for standard
of performance
To focus on improvement in key areas and set challenging targets
 To facilitate sharing of information that can spur innovation
To improve performance of the organisation
 Drawbacks
Can cloud the strategic purpose by paying too much attention to
result.
It fails to offer reasons for performance
It is a copying strategy instead of differentiated strategy
Can expose the firm to threat and security risk through sharing of
performance information.

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SWOT ANALYSIS
 What is SWOT Analysis?
 It is the model that summarises the key issues from the business
environment and the strategic capability of an organisation that are
most likely to impact on strategy development.
SWOT combines the result of the environmental analysis and the
internal appraisal into one framework for assessing the firm’s
current and future strategic fit (or otherwise) with the environment.
 It analyses the strength and weakness of the firm and the
opportunities and threats in the business environment.
 SWOT required identification of S&W and O&T of the firm for
strategic evaluation of the information obtained.

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Diagram here

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SWOT
 Sources of SWOT
Strength may result from:
The things we are doing well
The things we are doing that are competitors are not
Major successes (awards, certification etc)
Weakness may come from:
The things we are doing badly which needs correction or improvement
The things we are not doing but should do as the competitors
Major failures ( bad news)
Opportunities result from:
Change in the environment that can be exploited
Things likely to go well in the future
Threats come from:
 changes in the environment that requires self protection or defence
Things likely to go bad in the future.

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SWOT - Strategy formulation

 How to use SWOT in Strategy formulation
Knowing strengths and weaknesses (as perceived by the
customers) of an organisation and the opportunities and Threats in
the external environment is not enough. It must guide the firm’s
strategy formulation.
 The strategic implications are that:
The firm must seek to match its strength to the opportunities offered by
the environment
The firm must also seek ways to convert weaknesses to strengths (or
the least reduce the intensity of the weaknesses)
The firm must also strategized to mitigate the threat by creating
opportunity from it.
 SWOT has largest implication for IT and Marketing strategy
formulation, though it affects all other areas.

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Weirich’s TOWS Matrix

 What TOWS Matrix
It is a variation of the SWOT model
TOWS matrix emphasises the importance of threats and
opportunities and how to strategize for them.
TOWS Matrix Strategic Options
SO strategies employ strengths to seize opportunities
ST strategies employ strength to counter or avoid threats
WO strategies address weaknesses so as to be able to exploit
opportunities
WT strategies are defensive, aiming to avoid threats and impact of
weakness.

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TOWS Matrix

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Coming next ….. Global Strategies

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