Analyzing the internal environment

What is an Internal Analysis?

An internal analysis is a process where all the
components that interact within an
organization are evaluated in order to identify
failures and areas of opportunity.
The main objective of this type of analysis is
to find out the strengths and weaknesses of
your organization.
Business firms are open systems where internal factors
continuously interact with the external environment.
Strategic managers must have a clear understanding
of the internal and external business environment in
which the business firm operates.
This scanning and analysis of internal environment or
micro environment is called internal appraisal and
analysis of external environment or macro
environment is called external appraisal.
The development of mission and objectives involves
analysis and appraisal of environment.
The results of internal and external analysis will help
managers determine what goals and objectives they
can or should adopt, and the strategic choice that are
available.
The business firm utilises the resources like raw
materials, man power, finance, power and other
utilities as inputs and transform them into
outputs, which is taken to the hands of the
consumers, through marketing intermediaries.
This conversion of inputs into output, operates
under the influence of so many factors in the
internal and external environment.
The factors in the internal and external
environment have a strong influence on the
success of the organisation and the management
must continuously monitor and analyse the
changes that occur in the environmental factors.
These factors, forces, conditions, situations, events,
and relationships over which the organization has
little control are referred to collectively as the
organization’s environment. In general terms,
environment can be broken down into three areas:
the internal environment or micro
environment corresponding to employees,
managers, union, and board directors
the external environment or macro
environment corresponding topolitical, Economic,
Social, Technological, Legal and Ecological factors in
the country.
the Task or Operating environment corresponding
to competitors, markets, customers, regulatory
agencies, and stakeholders.
In formulating a strategy, the strategic
decision makers must analyse conditions
internal to the organization as well as
conditions in the external environment.
Internal Environment
 Internal environment corresponds to those factors which are
within the control of the business firm like company policy,
customers, competitors, suppliers, investors, marketing
intermediaries, and so on.
 The analysis of internal environment (micro-environment) or
internal audit or internal appraisal focus on identifying and
evaluating a firm’s strengths and weakness in the functional
areas of business including management, marketing, human
resources, research and development, production, finance,
information systems and organisational culture.
 Management must analyse each of these areas carefully to
determine their strengths and weakness so that steps can be
taken to reduce the negative effects of any weakness and
can enhance their strengths.
Importance of internal appraisal
It is very much essential for the organisation to
withstand global competition and gain competitive
advantage.
Internal appraisal helps the organisation to develop core
competencies to gain their competitive advantage.
Core competencies involve a firm’s resources and
capabilities that give it a distinct advantage over its
competitors.
 Developing the core competencies will create ‘value’ for
their customers.
Core competencies are actually a value-creating system
through which a company tries to achieve strategic
competitiveness and positions itself above competition.
Importance of internal appraisal Cont’n
An Internal audit provides important
information about an organisation’s specific
assets, skills, work activities and work
relationships in order to determine as to what
is good about them and what is lacking.
 Prior to internal analysis of the company’s
strengths and weakness can be made, it is
important to identify some of the weakness
that leads the company to fail.
 Also, there are some factors that contribute
to the success of the company. These factors
are known as “Critical success factors” (CSF).
Importance of internal appraisal Cont’n
Critical Success Factors are those unique
characteristics of an organisation, which are
essential for competitive advantage.
 For example-
CSF of Walmart is Everyday Low Pricing
(EDLP) and that of APPLE is innovation in its
products and services.
Hence, internal analysis will enable the firm to
identify its core competence and critical
success factors which in turn leads to
competitive advantage.
Internal analysis
The assessment of internal analysis is done
through
 SWOT analysis
 Functional analysis
 Value chain analysis
I. SWOT Analysis
 It refers to analysing strengths, weakness, opportunities and
threats.
 It is an essential strategic planning tool, used for formulating
feasible strategies for the firm.
 (a) Strengths and Weakness
 A strengthis a positive characteristic that adds advantage to the

business firm like

 quality product and services

 skilled workforce

 cost efficiency

 high brand image

 technical innovations

 patents and trade marks

 customer loyalty

 financial resources

 strong research and development team and so on.

I. SWOT Analysis Cont’n
A weakness is that factor that adds
disadvantage to the firm such as -poor
leadership
 lack of infrastructure
 failure to change

 poor marketing network

 obsolete technology

 cost inefficiency

 poor customer service

 Poor product quality and so on

I. SWOT Analysis Cont’n
An opportunity is a favourable factor in the
external environment, which can be used as an
advantage to the firm such as
 Favourable government policy
 Expansion to new markets
 technical advancements
 strategic partnerships
 removal of trade barriers and so on
I. SWOT Analysis Cont’n
A threat is a factor in external environment
which is not beneficial to the organisation,
such as
 entry of low cost global players into domestic
country
 high labour cost and labour turn-out
 availability of substitutes
 scarce resources like fuel and utilities
 recession in economy
 trade barriers by foreign countries
 heavy taxation
 shift in customer loyalty and so on.
Business firm should anticipate such possible
threats and design its strategies to drive
away the threats.
 Hence, SWOT analysis involves evaluating
the company’s internal environment in terms
of strengths and weakness and the external
environment in terms of opportunities and
threats and formulating strategies that take
advantage of all these factors.
Competence in key functional areas like
human resources, production, research and
development, marketing, finance and
accounting, information systems, general
management and organisational culture are
identified and strategies are formulated to
II Value Chain Analysis
It was developed by Michael Porter and identifies
the activities, functions and business process
that have to be performed while designing the
strategies for supporting products and services.
 It divides organisational process into distinct
activities that create value for the customer.
 These value-added activities become a source of
competitive advantage for the organisation.
Value-added activities are broadly classified into
 Primary activities
 Support activities
a) Primary activities
 They are those that are involved in creation of
product or service. Porter has classified these
primary activities into
 1. Inbound logistics

 It involves physical movement of things from one

place to another. It includes receiving, storing and

distributing various inputs, with a purpose to
transform them into outputs.
 Activities related to inbound logistics are

transportation, material handling, warehousing,

inventory management, etc.
 2. Operations

 It includes all those activities through which

inputs are transformed into outputs which an

organisation sells. The activities in operations
include manufacturing, assembling, testing,
packaging, etc.
a) Primary activities cont’n
 3. Outbound logistics
 It is related to finished outputs, which are in

saleable form. Various activities related to outbound

logistics are collecting, storing, preparing delivery
schedules, physical distribution, etc.
 4. Marketing and sales
 Marketing and sales involve inducing buyers to buy

products and converting their intention to buy and

exercise sales. Various activities involved in this
category are advertising and sales promotion,
channel selection, managing sales force, fixing
price, etc.
a) Primary activities cont’n
 5. Service
 Activities related to service aim at creating value to

customers and may include various facilities to

product such as installation, after-sales service,
supply of parts, training to customers, and so on.
 Support activities are those that provide support to

effective performance of primary activities in value

chain.
 They provide infrastructure for primary activities

and basically allow these activities to take place.

These support activities are
 Administration

 Human Resource Management

 Technology development

 Procurement
Administration
It consists of general management activities
like accounting and finance, legal and
regulatory affairs, strategic and operational
planning, safety and security, management
information systems and other administrative
activities.
Human Resource Management

Human resource management and

development function constitutes a distinct
set of support activities in terms of
recruitment, hiring, training, skill and career
development, labour relations, job
enrichment and so on.
Technology development

It refers to learning process which improves

and enhance the utility of all organisational
functions.
 It relates to such activities such as product
and process development, process design and
improvement, computer assisted design
(CAD), Computer assisted
manufacturing(CAM), development of
computerised support systems, Enterprise
resource planning (ERP), Quality
management systems, Total productivity
management, innovation of products and
Procurement

It refers to the total purchase of inputs, raw materials

and spare parts, which would be the part of primary
activity. It involves the purchase of materials,
equipment, machinery and related accessories and
services needed for the primary function. Examples of
the activity include purchase of computer systems,
accessories, sophisticated softwares, communication
devices, printing devices, financial services, etc.
Therefore, any organisation can develop a competitive
advantage in any of the primary and support activities
in the value chain and enhance the value of the
products and services in the firm, thereby satisfying the
customers and leading to customer delight.
External analysis
External appraisal refers to the analysis of
those factors in the external environment,
which are uncontrollable by the firm.
External environment corresponds to those
factors, which are outside the purview of the
organisation and cannot be controlled by the
business firm, but needs to adjust to it.
 They are beyond the control of a firm and
the success of firm depends to a very large
extent on its adaptability to the environment.
PESTLE corresponds to
Political,
Economic,
Socio-cultural,
Technological,
Legal and Ecological factor
Political Environment
The impact of political environment on industry and
business is enormous.
The economic environment is the result of the
political environment.
 Stability and Security of the government has
significant impact over business performance. Stable
government formulates favourable industrial policy,
Fiscal policy, monetary policy, tariff policy, etc. to
provide better opportunities for business.
 They play a crucial role as a planner, promoter, and
regulator of economy to protect and benefit the
business enterprises.
Political Environment Cont’n
Political factors include
Environmental issues and clearances
Business legislation
Regulatory bodies and process
Government policies
Trade policies
Economic Environment
Economic forces refer to the nature and direction of
the economy in which business operates. Economic
factors have a tremendous impact on business firms.
 The general state of the economy (e.g., depression,
recession, recovery, or prosperity), interest rate, stage
of the economic cycle, balance of payments, monetary
policy, fiscal policy, are key variables in corporate
investment, employment, and pricing decisions.
Success and survival of business heavily depend on
economic environment, which determines the
purchasing power of people.

Economic Environment Cont’n
Therefore, the factors of economic environment are
Type of economy- Capitalism, Socialism and Mixed
economy *Nature of business cycle- Boom, recession
and depression *Economic policy
Economic plans- five year plan through NITI,
economic budgets
Infrastructural development like roads, transport,
power, credit support, communication facilities, etc.
Economic indices like money supply, disposable
personal income, spending pattern, savings rate,
GNP, inflation rate, income distribution, BOP position,
wholesale price index. *Interest and exchange rates.
Socio-cultural Environment
 It consists of culture, traditions, beliefs, attitude, opinion,
values and lifestyles of people in the firm’s external
environment.
 They influence the spending pattern and consumer buying
behaviour. Lifestyle trends, demographics, consumer attitudes,
consumer buying patterns, brand image, company goodwill,
ethnic and religious factors influence business performance.
 Social changes happen due to the growing youth population,
strong impact of media, exposure to foreign products,
industrialisation, quick communication, and social networking
culture, global mobility of population, women empowerment
and multi-cultural diversity.
 Increase in the standard of living and concern for quality of
work life has a direct influence over the performance of a
business concern.
Socio-cultural Environment Cont’n
The following are some of the key concerns in
the social environment:
ecology (e.g., global warming, pollution);
demographics (e.g., population growth rates,
aging work force in industrialized countries,
high educational requirements);
quality of life (e.g., education, safety, health
care, standard of living) and
noneconomic activities (e.g., charities)
Socio-cultural Environment Cont’n
 Social forces are often most important because of their effect on
people’s behaviour.
 For an organization to survive, the product or service must be
wanted, thus consumer behaviour is considered as a separate
environmental behaviour.
 Behaviour factors also affect organisations internally, that is, the
employees and management.
 A society’s expectations of business present other opportunities
and constraints. These expectations emanate from diverse
groups referred to as stakeholders.
 Stakeholders include a firm’s owners (stockholders), members of
the board of directors, managers and operating employees,
suppliers, creditors, distributors, customers, and other interest
groups – at the broadest level, stakeholders include the general
public.
Technological environment
Advancements in technology like web
services, robotics, e-business solutions,
nanotechnology, mobile applications etc. has
created greater impact in business
performance in terms of improved products,
improved production technology, usage of
new raw materials and new product
development.
 Technological advancements enhance the
production efficiency, maintains delivery
schedule, reduce cost of production and cuts
down manufacturing leadtime.
Technological environment Cont’n
Some of the factors which operate in
technological environment are
Sources of technology such as indigenous
Research and Development, foreign
collaborations and technical know-how
Technology development, rate of change of
technology and stages of technical
development.
Communication technology and infrastructure
development influencing business.
Technological environment Cont’n
Business firm operates within the framework of
the prevailing legal environment. They are
supposed to be aware of legal rules and
regulations concerning licensing, foreign
investment, price control, distribution of goods,
import and export documentation, public sector
disinvestments, small scale industrial
regulations, consumer protection rights,
environmental protection measures and various
environmental clearances for industries,
corporate social responsibility initiatives and so
on.
Technological environment Cont’n
Some of the legislations influencing business
performance are
Industrial licensing policy *Consumer
Protection Act
Labour legislations *Information technology
act *Foreign Direct Investments *Indian
Companies Act
Workers compensation and working conditions
*Energy conservation and
Waste management practices.
Ecological Environment
 Geographical and ecological factors such as natural resources
availability, climatic and weather conditions, topographical
factors, eco-friendly practices, environment protection
measures, energy conservation measures, waste recycling
practices, pollution control mechanisms and so on influence the
business performance.
 Therefore, any business firm should be aware of the political,
economic, socio-cultural, technological, regulatory or legal and
ecological or natural environmental factors, to improve its
financial and business performance in its business operations.
 Demographic factors like age of the consumers, family size,
income of the family, place of residence, nature of family,
number of family members, religion, educational level, nature of
work and so on have a great impact on business performance
and profitability of the firms.
Task environment
Task environment refers to those industry elements or
factors which are external to the company but have a
direct and specific impact upon the organisation and
are inturn affected by the organisation’s operation.
These factors determine the nature and strength of the
competition in the industry.
Task Environment is the set of conditions originating
from suppliers, distributors, customers, stock markets
and competitors which directly affects the organization
from achieving its goals.
Task environment helps in identifying the
environmental factors responsible for the success of
the company.
Task environment Cont’n
 Factors responsible for Task Environment are
 Competitors
 Competitors generally look for higher margins and for this they provide unique features to its
products, thus try to create differentiation.
 Customers
 Organizations also compete for customers as well as for wholesalers, retailers etc. Customers

decide the fate of any company and hence companies try their level best to lure them.
 Suppliers
 Suppliers have high bargaining power if the raw materials being supplied are rare or if there
are less number of suppliers in the market. So it’s important to hold on the suppliers and
maintain good relationship with them. Acting intelligently, companies often maintain more
number of suppliers to reduce risk of deserting by anyone.
 Distributors
 Distributors who become intermediary between retailers and wholesalers or between

manufacturer and wholesaler play a vital role in a task environment.

 Substitutes
 Substitutes are alternative products that satisfy similar consumer needs. Cost advantage, high
demand for products, technological advancements and so on has led to growing number of
substitutes in the market. Firms that ignore to take note of substitutes, will tend to lose their
market share and demand in the market.

Therefore, a business firm needs to analyse
the micro environment, macro environment
and task environment factors to formulate
mission, objectives and strategies for
successful business performance.
END OF THE SLIDE
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