What is Internal Environment Analysis?

Internal environment analysis or internal analysis is the process of assessing of internal

resources and capabilities of an organization to know its strengths and weaknesses.

The organizational internal factors such as goals, policies, resources, structure, culture,
etc. are the source of strengths and weaknesses that resides in different functional units
such as HR, marketing, finance, production, accounting, and R&D.

Internal strength and weakness together with potential opportunities and threats and a
clear mission statement provide a base for a sound objective and strategy formulation.
The internal environment analysis seeks to give the answers to the following questions.
•How well the current strategy is working?
•What is our current situation?
•What are our strengths and weaknesses?
•How many resources are available?
The internal analysis then establishes the organization’s strategic capability, which is the
degree to which an organization’s resources and abilities are sufficient and appropriate to
ensure its survival and success.

What is Internal Environment? The internal environment refers to the conditions and
resources within the organization. It is also called a firm or resource environment.

The internal environment is controllable by the manager in the long run. It determines the
relative strengths and weaknesses of the firm. Strengths are the positive internal
characteristics of the firm which are helpful for achieving desired goals.
And, weaknesses are the negative internal characteristics that might restrict the organization’s
performance.
The primary responsibility of managers is to comprehend how to best utilize the important
elements of the internal environment. A healthy internal environment aids in gaining a
competitive advantage that directs a company in the direction of goal accomplishment.
The components of the internal environment include,
1.Organizational Goals and Policies – Goals are the long-term desired
outcome of an organization. They are the expected end results. Policies are
broad guidelines for organizational activities. An organization with precise and
well-communicated goals and policies is regarded as stronger. M/V
2.Organizational Resources – Resources are the foundation for strategy.
The resources include tangible (financial, organizational, physical resources) and
intangible (human, innovation, reputational resources).
3.Organizational Structure – It specifies jobs and relationships. It defines
job allocation, responsibility, and accountability.
4.Organizational Culture – The shared values, norms, behavior, and belief of
an organization is organizational culture. It influences how an organization
conducts its business.
1. Organizational Goal and
2. Organizational Resources
3. Organizational Structure
4. Organizational Culture
Process of Internal Environment Analysis
Usually, the analysis of the internal environment is conducted in the following five steps.

1. Define Vision, Mission, Goals, and Strategies

The first step of internal analysis is to analyze the organization’s vision, mission, goals, and strategies. A clear analysis or
definition of these components helps to assess the resource requirement of an organization.
2. Strength and Weakness Analysis
In the second stage, the organization’s capability and resources are analyzed to identify relative strengths and weaknesses.
Strengths are supportive of goal achievement whereas weaknesses are deficiency.
3. Identification of Unique Resources
After the identification firm’s strengths and weaknesses, the unique resources of the organization are identified and
analyzed. These are the resources that are valuable, difficult to imitate, non-substitutable, and rare.
4. Identification of Core Competency
In the fourth step of internal environment analysis, the core competencies of the organization are identified. Core
competency is something that the organization can do exceedingly well.
5. Locate Strategic Advantage
In the final stage, the strategic advantage of the organization is located. Strategic advantage is the result of the match
between core competency and match between market conditions. Locating strategic advantage helps an organization
achieve its strategic goals.
Tools/Methods of Internal Environment Analysis are mentioned below.
Value Chain Analysis is an effective tool to understand how an organization generates value for its customers from its
different activities. A business may appear to be a series of interconnected tasks that convert inputs into valuable products
for customers. Values chain analysis looks at the various operations, initiatives, and activities that a business uses to
produce value for its customers in an effort to understand how that value is created.
Functional Approach. A number of functions are carried out in the organizations. The functional approach of internal
analysis attempts to understand the contribution of different functional units such as R&D, Production & Operation,
Marketing, Financial, and Human Resources towards the organization’s performance.
Resource To Competitive Advantage Pyramid. Resources are the base for building a competitive advantage. The competitive
advantage pyramid reflects how resources are a source to achieve competitive advantage.
The pyramid includes, from bottom to top – company resources, competitive capabilities, core & distinctive capabilities,
strategic assets, and finally competitive advantage.
Resource Based View strategy states that the competitive advantage of an organization is explained by the distinctiveness
of its capabilities. It states that internal resources are more important for a firm than external factors in achieving and
sustaining competitive advantage.
By this view, organizational performance is primarily determined by its internal resources which are physical, human, and
organizational resources.
Benchmarking is the continuous process of measuring products, service, and practice against the toughest competitors or
industry leaders. It helps to know what products, techniques, and practices the competitors are employing and attempts
to bridge the gap between their own’s organization performance with the competitors.
 VALUE CHAIN ANALYSIS
• is a process whereby by 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.
 ACTIVITIES IN THE VALUE CHAIN INCLUDE
PRIMARY ACTIVITIES AND SECONDARY ACTIVITIES.
• Primary Activities: • Secondary Activities:
• Inbound Logistics – They include the activities such as • Procurement – It includes the purchase of inputs needed
materials handling, warehousing, and inventory control. to produce products.
• Operations – They include activities to convert the input • Technological Development – Includes the activities
provided by inbound logistics into final product form. related to improving a firm’s products and manufacturing
• Outbound Logistics – They include activities relating to products.
the distribution of products to final consumers. • HRM – Includes activities of recruiting, hiring, training,
• Marketing and Sales – They are the marketing efforts to developing, and compensating employees.
persuade customers to purchase the products. • Firm Infrastructure – Includes activities such as general
• Services – Activities designed to enhance or maintain a management, planning, finance, accounting, legal support,
product’s value. and government relations.
FUNCTIONAL APPROACH
The functional approach of internal analysis analyzes the different
business functions of the organization. They are
• 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.

• Marketing Functions: The aim of marketing is 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.

• 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.

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

• 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 to create a competitive
advantage. The steps through which resources serve as the source of competitive advantage are mentioned
below.
Company Resources – Resources may be defined as the sum of the asset (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.
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.
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 over the competitors, it is called distinctive competency.
Strategic Assets – The assets that are critical for achieving competitive advantage are strategic assets. They
enable an organization to exploit opportunities and mitigate threats.
Competitive Advantage – Finallly 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 of time.
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 RBV contends that in order 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.
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 own organization.
•Effective resource acquisition and allocations.
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.
VRIO FRAMEWORK

The VRIO framework is an internal analysis tool designed to help you identify your
organization’s competitive advantages.
The VRIO analysis too helps you evaluate if a core strength, capability, or resource
is a competitive advantage by assessing if that strength is valuable to your market,
rare in competition, hard to copy, and organized to act upon.
Pro Tip:
The VRIO framework evaluates internal strengths but needs external strategic
analysis of your competition. So, it uses internal and external factors to help you
identify your competitive advantages.
 Tools to Conduct Your Internal Analysis

SWOT Analysis

Conducting a SWOT analysis is easily the most common approach to completing an

internal analysis.
SWOT stands for strengths, weaknesses, opportunities, and threats.
The internal component of a SWOT analysis specifically looks at your
organization’s core strengths (S) and weaknesses (W).

Pro Tip:
A SWOT’s S and W portion is directly influenced by your organization’s internal
factors – meaning factors you can directly influence.
THANKS FOR WATCHING….