6 Major Methods of Internal Environment Analysis in Business

Methods of Internal Analysis

Internal analysis or internal environment analysis is an attempt to the identification of organizational capabilities which can be done through various methods or techniques.

Internal analysis is an important tool to understand the internal activities of an organization. It gives information about how its strategies are working, its resource base, relative strengths & weaknesses, and helps to formulate effective strategies.

The 6 major methods for effective internal analysis of an organization are mentioned below:

Value Chain Analysis

Value chain analysis is a process whereby a firm determines the cost associated with organizational activities from purchasing raw materials to manufacturing products to marketing those products.

A business may have a different chain of activities that converts into a usable product that creates customer value. It examines how an organization creates customer value through its different activities.

It lets firms understand the parts of their operations that create value and those that do not.

Understanding these issues is important because the firm can earn a return only if it creates greater value than the costs incurred to create the value.

Activities in the value chain include primary and secondary activities.

Primary Activities:

• Inbound Logistics – They include activities such as materials handling, warehousing, and inventory control.
• Operations – They include activities to convert the input provided by inbound logistics into final product form.
• Outbound Logistics – They include activities relating to the distribution of products to final consumers.
• Marketing and Sales – They are the marketing efforts to persuade customers to purchase the products.
• Services – Activities designed to enhance or maintain a product’s value.

Secondary Activities:

• Procurement – It includes the purchase of inputs needed to produce products.
• Technological Development – Includes the activities related to improving a firm’s products and manufacturing products.
• HRM – Includes activities of recruiting, hiring, training, developing, and compensating employees.
• Firm Infrastructure – Includes activities such as general management, planning, finance, accounting, legal support, and government relations.

Functional Approach

The functional approach of internal analysis analyzes the different business functions of the organization. They are,

(i) Production and Operation Function: The production/operation functions of a business are related to those activities that transform inputs into goods and services. They deal with inputs, transformations, and outputs.

(ii) Marketing Functions: Marketing aims to establish a long-term relationship with customers by satisfying them through quality products. Under this, the functions required for building marketing capabilities are analyzed.

(iii) Financial Functions: A company’s financial state is sometimes seen as the single best indicator of its ability to compete and overall investment appeal. They deal with the acquisition of capital, the control of cash, the management of debtors and creditors, and the administration of interactions with financial institutions.

(iv) Human Functions: Human functions are the most important organizational functions to create a competitive advantage for an organization. Regarding human resources, the number, skills, and competencies are analyzed.

(v) R&D Functions: These are vital for implementing technological strategy in connection with the corporate objective. They are important for the development of new products and processes.

Resource To Competitive Advantage Pyramid

Under these methods of internal analysis, the resources are considered the most important to create a competitive advantage.

The steps through which resources serve as the source of competitive advantage are mentioned below.

Step 1: Company Resources – Resources may be defined as the sum of the assets (both tangible and intangible) that an organization uses to perform its activities effectively. Their availability and effective allocation are very important to capitalize on opportunities.

Step 2: Competitive Capabilities – A capability is the set of resources to perform a task in an integrated manner. Organizational performance is a function of resources and capabilities. Resource capabilities make the organization strong.

Step 3: Core and Distinctive Competencies – Competency is the activity that an organization has learned to perform well. Core competency is the sum of competencies in the organization in which it can do extremely well. And, when core competency is superior to the competitors, it is called distinctive competency.

Step 4: Strategic Assets – The assets that are critical for achieving competitive advantage are strategic assets. They enable an organization to exploit opportunities and mitigate threats.

Step 5: Competitive Advantage – Finally the above-mentioned indicators help the organization to achieve a competitive advantage. A competitive advantage is the capability of an organization to outperform its key competitors over a long period.

Read More: Meaning of External Analysis

Resource Based View

Resource-based view states that organizations’ internal resources are more critical to achieving competitive advantage. It states the three important resources,

• Physical Resources – Include all plant and equipment, location technology, raw materials, and machines.
• Human resources – include all employees, training, experience, knowledge, skills, and abilities.
• Organizational resources – firm structure, planning processes, information systems, patents, trademarks, copyrights, and so on.

This resource-based view contends that to develop strategies that can result in a lasting competitive advantage, a firm’s resources should come first.

It entails creating and utilizing a company’s distinctive resources and competencies, as well as continuously preserving and enhancing such resources.

It states that a business should follow a strategy that is not being used by its rivals at the moment.

Read More: Environmental Analysis in Business

Benchmarking

Benchmarking is the continuous efforts of an organization to measure its toughest competitors’ products, practices, and strategies. It involves openly learning from others to improve techniques.

The benchmarking process usually involves identifying the area to be examined, selecting an accessible set of competitors and best-in-class companies against which to be benchmarked, calculating the differences between the company’s performance measurements and those of the best in class, and determining why the differences exist, development of tactical programs for closing performance gaps and implementing the programs and then compare the resulting new measurements with those of the best in class companies.

The following are the reasons for doing benchmarking.

• It identifies opportunities to improve organizational performance.
• Learn from others’ experiences.
• Set realistic as well as ambitious targets.
• Assess strengths in one’s organization.
• Effective resource acquisition and allocations.

Read More: Mercantilism in International Trade

Strategic Advantage Profile (SAP)

SAP is the last of our internal analysis methods. SAP summarizes the internal factors of an organization using a form. It is prepared after the analysis of the internal environment and identification of the factors crucial to a particular firm.

SAP organizes the internal factors into strengths and weaknesses. It also analyzes how well a company is responding to these factors.

The VRIO (Value, Rareness, Imitability, & Organization) is used to assess the importance of each factor that might be considered a strength.

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