Internal & External Analysis

7/31/2019 Internal & External Analysis

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Environment can be broadly classified intotwo components:

1)External Environment

2)Internal Environment Literally means Surroundings.

Environment of any organization is theaggregate of all conditions, events and

influences that surround and affect it.specifically called Business Environment.


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1)Complexity: Environment consists of number offactors, conditions and influences arising fromdifferent sources. All of these don't exist inisolation but interact to create new set ofinfluences.

2)Environment is dynamic:

i.e. constantly changes due to variedinfluences.

3)Multi-facet:

i.e. same development is welcomed as anopportunity by one company while anothercompany perceives it as a threat.


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4)Environment has a far-reaching impact:i.e.growth & profitability depends onenvironment


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The 4 environmental influences :1)Opportunity: A favorable condition in theorganizations environment that strengthenthe position of the enterprise.

Eg.-Growing demand of the products.

2)Threat: An unfavorable condition thatcreates risk or, causes damage to the

organization.Eg.-Emergence of a new competitor in anindustry.


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3)Strength: An inherent capacity which anorganization can use to gain advantage overits competitors.

Eg.-Superior R & D gives new productdevelopment.

4)Weakness: An inherent limitation thatcreate strategic disadvantage.

Eg.-Overdependence on a single productline.


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A systematic approach to understand theenvironment is

SWOT analysis.


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External environment consists of all thefactors which provide opportunities or, posethreat to an organization.

The wider perception of the environment are

the general environment. The immediate concerns of any organization

are confined to just a part of generalenvironment which has high strategic

relevance to the organization. i.e. by identifying the relevant environment an

organization can systematically appraise it.


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The classification of relevant environmentinto components to cope up with itscomplexity and comprehend the differentinfluences and relating the environmental

changes to its strategic managementprocesses.


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1)Social environment:Demographic characteristics

Social Concerns

Social attitudesFamily Structure

Role of women in society

Educational levels and awareness


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2)Political Environment:Political systems

political structure

Political processes3)Economic Environment:

Consists of macro-level factors related tomeans of production and distribution of

wealth.


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4)Regulatory Environment: Factors related toplanning, promotion and regulation ofeconomic activities.Eg.- Industrial policy, capital issues,

consumer protection and environmentalpollution.

5)Market Environment:Customer factors

Product factorsMarketing intermediariesCompetitor related factors


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6)Supplier Environment:Cost

Availability

Reliability of supply of raw materials.7)Technological Environment:

Cost of technology acquisition

Sources of technology

Technological developmentImpact of technology on human being


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Process by which organizations monitor theirrelevant environment to identifyopportunities and threats affecting theirbusiness known as Environmental Scanning.

Factors considered environmental scanning:1.Events:Important occurrences taking placein different environmental sectors.2.Trends:General tendencies along which

events take place.3.Issues:Current concerns in response toevents and trends.


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4)Expectations: Demands made by interestedgroups.

Eg.-Union Carbide factory explosion inBhopal

1)Event: Accident and resulting disaster.

2)Trend: General tendency on the part of

regulatory authorities and organizations to beconscious about hazardous chemicals.

3)Issue: Rising concern about environmentalpollutions.

4)Expectations: Concern of general public tomake stricter enforcement in regulations.


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1)Systematic Approach: An organizationcontinuously monitor changes and takerelevant factors into account.

2)Ad Hoc Approach: Here organizationconduct special surveys with specific eventsevolved or, with a view of special venturefrom time to time.

3)Processed form approach: Organizationcollect information from different sourcesboth inside and outside.


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QUEST(Quick environmental scanningtechnique)

-Proposed by B.Nanus

-Its a 4 step process.

-It uses scenario-writing for scanning theenvironment and identifying the strategicoptions.


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4 Steps involved are:1)Strategists make observation about major

events and trends in their industry.

2)then,they speculate on a wide range ofimportant issues that might affect the futureof their organization.

3)Then they prepares a report summarizing the

major issues and their implications.4)Report & scenarios are reviewed to identify

the feasible strategic options.


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1. Identify the factors affecting theenvironmental appraisal.

2. Structuring the environmental appraisal

Factors affecting environmental appraisal:

1.Strategist related factors

2.Organisation related factors

3.Environment related factors


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Factors are trends,events,issues andexpectations.

A feasible approach to identify imp factors isto test each factor with regard to its impacton the business.


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Impact on businessHigh Medium Low

Probability H

Of MImpact L

Critical High Priority LowPriority

High Priority High Priority LowPriorityTo be watched Low Priority LowPriority


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To structure the problem area to highlightthe opportunities & threats.

ETOP(Environmental threat and opportunityprofile) technique by Glueck.


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Environmental Sectors Impact1.Social - Customer preference(

fashionable, easy to ride and durable)

2.Political -No significant factor

3.Economic -High potential in export

4.Regulatory -A thrust area for exports

5.Market -Industry growth rate is 7-8%

6.Supplier -Mostly associated companysupply raw materials.

7.Technological-Upgradation in Progress.


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ETOP is done for the sake of simplicity. The main business is manufacturing cycle for

domestic and export purpose.

Preparation of an ETOP provides a clearpicture of the favorable and unfavorableimpact of each sector on the organization.

It tells the exact position of the company in

the environment.


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Political consensus on economic reforms

Burgeoning middle class

Major changes in life style

Increased urbanization

More & more consumption orientation

Double income & nuclear family on riseLiving on credit become trend

Boom in leisure activities

Upwardly mobile social class on the rise


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Continuation of economic reforms &liberalization

Big growth in service sector

Inflation continue as a problem, but noexcessive rise in recent times

Energy especially petroleum energy becoming

more scarce & costlylabor situation attractive -Abundance of

skilled workers, passenger car industry andauto ancillaries well endowed with skilled

workers.


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More liberal approach to technology import

Significant efforts at internal technologydevelopment

Increasing affluence of urban consumers.

Larger consumer base


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Increasing purchasing powerChanges in lifestyle support products

Changes in buying behaviour -more choosy -cars e.g. Style,comfort apart from fuelefficiency

Total change in competitive scenarioIntense competition


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India -major producer of steel -raw material -no problem

perceived sound by world players

Major changes

It is in hands of world majors in the industryVery few players have technology for small

cars


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Passenger car industry -GROWTH INDUSTRY(short term & medium term)

Industry structure changing -delicensing &opening up of industries for foreigninvestment

Gaining an expert orientation

Industry attractiveness -reasonably good inshort term & medium term.


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1)Divide the environment into differentsectors.

2)Then analyzing the impact of each sectoron the organization.

A Summary of an ETOP show the majorfactors for the sake of simplicity.

ETOP.doc
http://localhost/var/www/apps/conversion/current/tmp/scratch30164/ETOP.dochttp://localhost/var/www/apps/conversion/current/tmp/scratch30164/ETOP.doc


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Internal Environment: strength andweakness in different functional area.

Organization capability: Capacity and

ability to use distinctive competencies toexcel in particular field.

-Ability to use its S & W to exploit Oand face T in its external environment.


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All organization, thus, have strengths &weaknesses.

The appraisal of internal environmentenables a firm to decide about what it cando.

The resources,behaviour,strengths &

weaknesses and competencies of anorganization determine the nature of itsinternal environment.


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Strengths &

Weaknesses

Organizational

Behaviour

Organizational

Resources

StrategicAdvantage

Organizationalcapability

Competencie

s


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A)Resources: RBV(Resource based view)

Firm should possess resources(physicalas well as human resource)that arevaluable and rare to enable them toachieve strategic advantage.

The cost and availability of resources isthe most important factor on whichsuccess of the organization depends.


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For resource to be valuable, it must be either:1)rare

2)hard to imitate

3)not easily substitutable

These are empirical indicators.


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But, mere possession of resourcesdoes not make the organization

capable, it depends on their usagewithin the organization.

That is based on Organizational

behavior.


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Means Resource configuration. It leads to development of an organization

identity.

Eg.- Shared values and culture, managementphilosophy, quality of leadership etc..

Resources and behaviour collectively producestrength and weaknesses.


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Strength is an inherent capability can be usedto gain strategic advantage

Weakness is an inherent limitation thatcreates a strategic disadvantage.


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Strength & weaknesses like resources andbehaviour do not exist individually.

Eg.- Marketing and production shouldsupport each other leading to operating

synergy.On the other hand, a marketinginefficiency reduces production efficiency.


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Special qualities. An organization develops its competencies

over a period of time.

Eg.-Canons core competencies lies in optics.

Honda in engines.

Core competencies cannot be taken for granted, it get lost over time.


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Means potential of an organization to use itsstrength and overcome its weaknesses inorder to exploit the opportunities and facethe threats.

i.e. coordinating resources and putting themin productive use.


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Outcomes of organizational capabilities. Its a reward.

Competitive advantage is a special type ofstrategic advantage where there is one or,more identified rivals against whom rewardsor, penalties could be measured.


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Its a narrower concept. Competitiveadvantage is relative rather than absolute.


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Capabilities are developed in differentfunctional areas.

Its feasible measure too.

Organizational capabilities factors arestrategic strengths and weaknesses existingin different functional areas within anorganization.

There are 6 capability factors:-


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Related to availability, usages andmanagement of funds.

Factors that influence the financial capability:

a)Factors related source of fund: Capitalprocurement, controllership, borrowings,etc


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B)Usage of funds: Investment, Fixed assetacquisition, current assets, loans etc..

C)Management of funds: Tax planning,inflation, state of financial health, etc..

Eg.- Reliance Industries can afford to haveRs.61,700 crore capital plan based on itssuperior ability to raise finances.


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Relate to pricing, promotion and distributionof products or, services.

Factors which influence market capabilities:

a)Product related: variety, quality, etc..

b) Price related: Pricing, policies, etc..


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c)Place related: Distribution, marketingchannels etc

d)Promotion related: Promotional tools, sales,PR etc..

e)Integration factors: Marketing mix, companyimage etc..


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Relates to production of products or,services.

Factors influence operations:

a)Factors related to production system:Capacity, location, layouts, degree ofautomation etc..

b) Operations & control system: Production

planning,inventory,quality control etc..


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C)R & D System: Patents, levels of technologyused, technical collaboration etc..

Eg.- J K Tyres has not capitalised in India asits competitor Bridgestone, have access to

latest tread patterns , have proved better.


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Relate to existence and use of humanresources.

Factors that influence personnel capabilities:

a) Personnel system: Manpower planning,selection, compensation, appraisal etc

b)Employee and organizationalcharacteristics: Working condition, Quality of

management,etc..


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C) Industrial Relations: Union management,safety, collective bargaining etc..

Eg.- IT cos. Implement fun at work schemes.


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Management of flow of information fromoutside into and within an organization.Factors which influence informationcapabilities :

a) Acquisition and retention of information:Sources,quantity,quality,retention capacityand security of information.


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B) Processing and synthesis of information:Database management, computer capabilityand ability to synthesize information.

C)Retrieval and usage of information: capacity

to assimilate and use of information.


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D)Transmission & dissemination: Speed,scope, width and depth of coverage ofinformation, and willingness to acceptinformation.

E)Integrative, systemic and supportive

factors: availability of IT infrastructure, itsrelevance and compatibility toorganizational needs.


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Eg.-Banking is highly integrated business.With a wide geographical spread of branchesthe need of networking is crucial.


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Integration, coordination and direction offunctional capabilities towards common goal.

Factors that influence the generalmanagement capability:

a) General management system: planningsystem, incentives system etc..


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B)External relationship: Rapport with thegovernment, public relations, socialresponsibility etc..

C)Organizational climate: Org. culture, useof power, political powers, etc..

Eg.- Yes bank came with no past track,but high technology and top managementproved great.


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Related to strategists, the organization and tothe internal environment.

Ability of strategist to comprehendcomplexity

Size of organization affects the quality ofappraisal.


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May range from systematic to an ad hocone.

1)Systematic approach is a proactivemeasure to appraise by opting a wellplanned systems.

2)Ad hoc approach is used as a reactivemeasure under some crisis.

Appraisal is needed for strategyformulation.


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May be internal or, external sources. Employees opinion, company files and

documents, financial statements etc..

In total the sources of information for

environmental appraisal could be used fororganizational appraisal.


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1) Value Chain analysis: Value Chain analysis wasfirst suggested by Michael Porter (1995) as a way of

presenting the construction of value as related to end

customer.


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It can be for the product as it relates to endcustomers or customers within a chain.

A value chain is a set of interlinked value-creatingactivities performed by an organization.

Its activities begin with the procurement of basic rawmaterial upto the end products marketed to theultimate consumers.


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Support activities

Primary Activities

Firm Infrastructure

Human Resource management

Technology development

Procurement

Inbound

Logist

ics

Operations

OutboundLogis

tics

Marketing &Sales

Service

ProfitMargin


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The goal of these activities is to offer thecustomer a level of value that exceeds thecost of activities ,there by resulting inincrease of profit margin.


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1)Inbound logistics: the receiving andwarehousing of raw materials and theirdistribution to manufacturing units.

2) Operations: the process of transforming

inputs into finished products.


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3)Outbound logistics: the warehousing anddistribution of finished goods.

4)Marketing and Sales: Identification ofcustomer needs and generation of sales.

5)Service : after sale services.


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1)Infrastructure of the firm: Organizationstructure and culture.

2)Human resource management: employeerecruiting, hiring, training, compensation

etc.. 3)Technology development: Technology to

support value creating activities.


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4)Procurement: purchasing inputs such asmaterials and equipments.

Thus, the firms margin depends on how

efficiently these activities are beingperformed.


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Proposed by kaplan and Norton

Its a set of measures that gives topmanagers a comprehensive view of thebusiness.

It includes the financial measures that tells

the result of action already taken. Andcomplements the financial measures oncustomer satisfaction, internal processesand organizations innovation activities.


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Balance scorecard measures 4 keyperformance measures:

1)Customer perspective

2)Internal business perspective

3)Innovation and learning perspective

4)Financial perspective


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BSC is a tool to convert a strategy into action. Every element selected for a BSC should be an

element in a chain of cause & effect relationship

that communicates the meaning of the BUs

strategy.

ROCFinancial


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ROC

Customer Loyalty

On-time Delivery

Process

Quality

Process

Cycle Time

Financial

Customer

Internal/Business

Process

Learning and GrowthEmployee Skills


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A. FinancialHow do we succeed financially?

B. CustomerHow do we appear to our customers?

C. Internal Process

At what processes must we excel?D. Learning and Growth

How do we sustain our ability to change andgrow?


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FinancialSound

Fiscal

Mgmt

Budgeting

Long-Term

Investment

Strategy

Customer The ValueProposition

Internal Process

Learning & Growth

The Value Proposition

Product/Services

Price Selection

Quality Availability

Relationship

Partnership

Services

Brand

Image

Innovation

New learning

Partnerships

Future needs

Operational Excellence

Admin excellence

Network of supplier for

Products & services

Adaptability

Customer Mgmt

Deepen Knowledge

about customer

Attract

Retain

Grow Relationship

Climate for Action

Personal Growth

Competencies

Functional Excellence

Leadership Skills

Strategic Readiness


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Summarized organizational capability profilefor assessing a companys strengths andweaknesses in dealing with opportunities andthreats in external environment.


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Financial Capability

Bajaj - Cash Management

LIC - Centralized payment, decentralized

collection Reliance - high investor confidence

Escorts - Amicable relation with Fis


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Marketing Capability Hindustan Lever - Distribution Channel

IDBI/ICICI Bank - Wide variety of products

Tata - Company / Product Image


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Operations Capability Lakshmi machine works - absorb imported

technology

Balmer & Lawrie - R&D - New specialty

chemicals Personnel Capability

Apollo tyres - Industrial relations problem


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General management capabilityMalayalam Manorama - largest sellingnewspaper


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Key challenges Rapid growth in employee base fresh and

lateral recruits

Building knowledge and skill base

Ensuring adequate focus on multipleperspectives


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Growth, profitability, service levels, buildingtalent. Ensuring consistent implementation ofstrategy across the organisation

Aligning organisational, business-level and

individual goals Incentivising achievement of the goals set


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Re-defined and expanded financialperspective Growth, market share,profitability and credit costs

Introduced customer perspective: concept of

service levels as an area of performanceevaluation Customer satisfaction scores


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Introduced process perspective: focus onbuilding a process orientation in theorganisation.

Learning perspective: focus on re-skilling for

existing employees and speed-to-job for newrecruits.


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Reducing the number of scorecard templates Already reduced from 750 to 230 in twoyears

Planned reduction to about 150

The balanced scorecard is a tool that helpscommunicate strategy and goals across theorganisation.


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A picture of the more critical areas which canhave a relationship of the strategic posture ofthe firm in the

future.

Capability Factor Competitive S/ WFinance High cost of capital

Marketing Fierce competition,


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Operational - excellent - parts &components available.

Personnel -Quality of management &personnel par with competition

General - High Quality experienced topmanagement - take proactive stance


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The model of the Five Competitive Forces wasdeveloped by Michael E. Porter

An important tool for analyzing anorganizations industry structure in strategic

processes. These forces determine the intensity

of competition and hence the profitability andattractiveness of an industry

Documents

Internal & External Analysis