Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Chapter
11

Internal Analysis

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Introduction

We will see in this chapter, a firm can exploit its opportunities and overcome
its threats successfully depending on its internal resources and capabilities.

So, a systematic and methodical analysis of the strengths and weaknesses

of a firms internal resources and capabilities and also its functional areas is
called internal analysis, which is a critical activity in strategy formulation.

Internal analysis is also referred to as internal appraisal, organizational

audit, internal corporate assessment etc. Over the years, research has
shown that the overall strengths and weaknesses of a firms resources and
capabilities are more important for a strategy than environmental factors.

Managers perform internal analysis to identify the strengths and

weaknesses of a firms resources and capabilities. The basic purpose is to
build on the strengths and overcome the weaknesses in order to avail of the
opportunities and minimize the effects of threats.

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Importance Of Internal Analysis

Strategic management is ultimately a matching game between

environmental opportunities and organizational strengths. But, before a firm
actually starts tapping the opportunities, it is important to know its own
strengths and weaknesses.

This is accomplished in internal analysis by using analytical techniques like

RBV, SWOT analysis, Value chain analysis, Benchmarking, IFE Matrix etc.

Thus, systematic internal analysis helps the firm:

i.

To find where it stands in terms of its strengths and weaknesses

ii.

To exploit the opportunities that are in line with its capabilities

iii.

To correct important weaknesses

iv.

To defend against threats

v.

To asses capability gaps and take steps to enhance its capabilities.

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Strengths And Weaknesses Meaning

Strengths
Strengths are the resources, skills or other advantages a firm enjoys
relative to its competitors.
A skill or an important attribute
Valuable physical assets
Valuable intangible assets
Alliances or corporate ventures, etc.
Weaknesses
A weakness is a limitation or deficiency in resources, skills and
capabilities that seriously impede effective performance.
Inferior skills or lack of expertise
Lack of intellectual capital
Deficiencies in physical, organizational or intangible assets
Inferior capabilities in key functional areas
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Criteria For Determining Strengths And Weaknesses

Four types of criteria have been suggested to classify an element into a
strength or weakness:
1.

Historical

2.

Normative

3.

Competitive parity

4.

Critical success factors

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Measuring Strengths And Weaknesses

Strengths and weaknesses may exist in varying degrees. So an analyst needs
appropriate measures to judge the degree of a strength or a weakness. There
are three measures that can be used for this purpose.
1.

Attribute measures

2.

Effectiveness measures

3.

Efficiency measures

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Frameworks To Internal Analysis

A comprehensive and objective analysis of strengths and weaknesses can be
done by using different formats or frameworks. We discuss hereunder some of
the important frameworks used for the purpose. The tools and techniques for
identifying strengths and weakness are discussed in the subsequent sections:
1.

Resource Based View (RBV)

2.

Bates and Eldredge Approach

3.

Ansoff's Grid Approach

4.

Functional Resources Scanning

5.

The 7 S Framework
Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Resource Based View (RBV)
The resources are the means by
which an organization generates
value. It is this value that is then
distributed for various purposes.
Resources and capabilities of a firm
can be best explained with the help
of Resource Based View (RBV) of a
firm which is popularized by Barney.
RBV considers the firm as a bundle
of resources tangible resources,
intangible resources, and
organizational capabilities. Competitive
advantage, according to
this view,
generally arises from the creation of
bundles of distinctive
resources and
capabilities.
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Creation of Competitive Advantage

Competitive Advantage

Distinctive competencies

Core competencies

Competencies

Strengths and weaknesses

Tangible and intangible
Resources

Organizational capabilities

Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Strategic Importance of Resources
Johnson and Sholes (2002 ) explain the strategic importance of resources with
the concept of strategic capability. According to them, strategic capability is the
ability of an organization to put its resources and capabilities to the best
advantage so as to enable it to gain competitive advantage. There are three type
of resources:

Available resources

Threshold resources

Unique resources
Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Bates and Eldredge Approach
Bates and Eldredge have suggested the following factors to evaluate the different
dimensions of a firm:

Analysis of Management Dimension

Analysis of Finance Dimension

Analysis of Operations Dimension

Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Strengths and Weaknesses Profile
Dimension

Basis of
Comparison

Ranking

Existing

Strengths or
weaknesses

Management
Financial
Operations
1. The purpose of the profile is to ensure that the strategist is aware of the basis
of comparison
2. Ranking should give the importance of the factor under assessment. Critical
factors should have a ranking of 1.
3. A brief description is needed.
4. Coding is to be done as follows:
0 : neutral
+ : strength
: weakness
More pluses (+) indicate
Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Ansoff's Grid Approach
This approach was suggested by Ansoff, and is similar to the framework
recommended by Bates and Eldredge. The framework is shown in Exhibit.
Grid for Internal Analysis
General
Facilities
Management Equipment

Personnel
skill

Organizational
capabilities

Management
capabilities

Door to door
Selling,
Retail &
Wholesale Selling,
Direct Industry
Selling,
Cross Industry
Selling,
Application
Engineering ,
Advertising &
Sales Promotion,
Servicing, etc.

Direct sales,
Distribution chain,
Retail chain,
Consumer service,
Industrial service,
Product support,
Inventory distribution & Control,
Product quality etc.

Industrial
Marketing, Consumer
Merchandising,
Large customer
Base,
Decentralized
control,
Favourable public
image,
Future orientation,
Ethical standards

Finance
R&D Operation
Marketing

Warehousing,
Retail Outlets,
Transportation,
Equipment,
Training Facilities
for sales staff
Data Processing
Equipment

Cont.

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Functional Resources Scanning
Pearce and Robinson6 have suggested the following checklist for functional
areas to evaluate strengths and weaknesses.

Marketing

Finance and Accounting

Production/Operations/Technical

Human Resources

Organization/General Management

Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

The 7 S Framework
This framework was developed by McKinsey Consultants to indicate the
interrelationship among various elements of an organisation. This framework can
also be used to perform internal analysis of an organization. The 7 S framework
can be used both at the corporate level as well as at the functional level. One
such matrix for the corporate level is shown in Exhibit.
The 7 S Framework Functions
Dimension

Marketing

Finance

Human

Production

Resources
1. Strategy
2. Structure
3. Systems
4. Shared Valued
5. Skills
6. Style
7. Staff
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Techniques of Internal Analysis

Internal analysis is comprehensive and long-term in nature. The emphasis is not
just on current behaviour but also on what the organization needs to do in future
to successfully compete in the market. A number of analytical tools and
techniques are used for this purpose. Some of the popular techniques are:
Comprehensive Analysis
1.

SWOT Analysis

2.

TOWS Matrix

3.

Value Chain analysis

4.

Financial Analysis

5.

Key Factor Rating

6.

Strategic Advantage Profile (SAP)

7.

Balanced Scorecard

8.

Internal Factor Evaluation (IFE) Matrix

Cont.

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Comparative Analysis
9.

Historical Analysis

10.

Industry Norms

11.

Benchmarking

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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Critical Success Factors (CSFs)

Critical Success Factors (CSFs) are defined as the resources, skills and
attributes of an organization that are essential to deliver success in the
market place. CSFs are also called Key Success Factors (KSFs) or
Strategic Factors. They are the key factors which are critical for

organizational success and survival.

Critical success factors will vary from one industry to another. For example,
in the perfume and cosmetics industry, the critical success factors include
branding, product distribution and product performance, but are unlikely to
include low labour costs, which is a very important CSF for steel companies.
CSFs can be used to identify elements of the environment that are

particularly worth exploring.

Cont.
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Part- II :

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Ch-11: Internal Analysis

Rockart (1979) has applied the CSFs approach to several organizations
through a three step process for determining CSFs. These steps are:
a)

Generate CSFs (asking, What does it take to be successful in business?)

b)

Convert CSFs into objectives (asking, What should the organizations goals
and objectives be with respect to CSFs)

c)
Set Performance standards (asking How will we know whether the
organization has been successful in this factor?)
Rockart has also identified four major sources of CSFs:
i.

Structure of the industry

ii.

Competitive strategy, industry position and geographic location

iii.

Environmental factors

iv.

Temporal factors

Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

Identifying CSFs in the industry
As already explained, CSFs concern not only the resources of an organizations
but also the competitive environment in which the organization operates. There
are three important areas that need to be analyzed. They are known as Ohmaes
three Cs:

Customers

Competition

Corporation

Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

How CFSs vary by industry

Depending on the nature of industry, the key factors for success may live in
any function, operational areas, distribution channels and so on. These can
be identified among the various functional activities of business starting from
raw materials to customer servicing.

It is necessary to scrutinize the whole vertical chain of business system from

sourcing raw materials to after sales servicing to identify CSFs. In aircraft
industry, for example, designing is a key factor for success.

Critical comments on the concept

Criticism of CSFs revolve around four issues:

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1.

Identification

2.

Causality of relationships

3.

Dangers of generalizing

Cont.
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Part- II :

Purpose, Environment and Resource Analysis

Ch-11: Internal Analysis

The Fit Concept
The traditional concept of organizational strategy is based on the fit concept.
This is because it attempts to achieve a match between the internal resources
and capabilities of an organization and external opportunities and threats in the
industry environment.
The Stretch Concept
Gary Hamel and CK Prahalad in their classic paper, Strategy as Stretch
and Leverage, in Harvard Business Review (March April 1993)
introduced the concept of stretch.

They criticized the fit model because it can lead to a mindset in which
management focuses too much on the degree of fit between the existing
resources of a company and current environmental opportunities, and not
enough on building new resources and capabilities to create and exploit
future opportunities.

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