CBMEC 1/CBME 102-Strategic Management Jhonniño A.

Serdenia, MBA, CHRA

Internal Analysis for Strategic Management

Learning Objectives:
At the end of this module, you should be able to, to wit:
1. Recognize the importance of internal analysis;
2. Enumerate the internal assessment tools; and
3. Generate different analyses using the Functional, GAP, and Value Chain.

I. Internal Analysis

Let’s start with internal analysis. As the name suggests, internal analysis focuses on evaluating
all aspects of the organization itself. Although internal analysis can sometimes take into
account the actions of external organizations or market-wide shifts, it is largely related to the
inherent traits of the organization at hand.

For example, internal analysis can allow you to identify both strong and weak aspects of your
organization, without taking into account the performance of external organizations.

Here’s another way to think about internal analysis: if your organization was the only one that
existed — meaning your organization had no competition — and your business environment
was entirely neutral — meaning it didn’t in any way affect your organization — then what
factors would you consider when analyzing your organization?

In the context of strategic management, internal analysis is crucial for a few reasons. Your
organization might be spending too much in some areas due to internal inefficiencies, or,
alternatively, your organization could be leaving money on the table. The only way to reveal
these things — and get a true understanding of how resources are being used in your
organization — is by means of internal analysis.

II. Functional Analysis

Finance:

The important element in internal analysis of a firm is evaluating its financial health. A
thorough analysis of financial statements can provide much information about an organization
and will identify symptoms of basic problems occurring within an organization. The trends in
sales, profits, capital employed etc. show whether the firm is improving or worsening in its
performance.

Allocation of key resources and comparison with their real profit contribution will be analyzed.
This will involve a study of the company’s liquid resources and probable future cash flow
position will be analyzed. Like financial policies, financial position and capital structure are
important internal factors affecting business performance, strategies and decisions.

Financial strategies reflect the priorities and expectations of the organization in capital
acquisition and allocation of capital to various projects. Financial strategies also reflect capital
structure, cash flow requirements, and credit and payment policies of the organization.

The financial analysis typically evaluates:

(a) Profitability – ability to utilize assets to produce profit.

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CBMEC 1/CBME 102-Strategic Management Jhonniño A. Serdenia, MBA, CHRA

(b) Liquidity – ability to convert assets into cash to meet current financial needs.

(c) Leverage – balance between debt and equity.

(d) Operating efficiency – performance of various operating subunits relative to inputs utilized.

Financial ratios are commonly used to assess a firm’s financial standing and to identify signs
of existing or potential problems.

The typical list of strengths in financial efficiency includes:

(a) Favourable attitude of shareholders, debenture-holders and potential investors

(b) Easy access to low cost funds

(c) Cooperation from financial institutions and banks

(d) Efficient management information system, as well as, budgetary control system

(e) Tax benefits from central and state governments

(f) High level of creditworthiness

(g) Most favourable debt-equity ratio and liquidity ratio etc.

Marketing and Distribution:

Marketing has been defined as human activity directed at satisfying needs and wants through
exchange processes, satisfying the customers’ needs and wants; involves an examination of
product mix, price, promotion and channels of distribution. Product demand and market
segments serves as important sources of profit. The marketing capability depends on industry
attractiveness, product competitive position, and product market profitability to keep it on the
growth path.

The marketing capability depends on emergence of new customer segments, changes in

customer habits, preference and buying behaviour, product differentiation, product positioning,
product pricing, packing and distribution, sales promotion and advertising, marketing mix,
marketing channels, branding etc. The changes in the technological, regulatory, social or
economic environment of the industry that either have an impact on the product, market scope
of the firm or help it to cut costs and improve productivity and enhance profitability.

Distribution is another important element of marketing strategies. Distribution begins with the
producer and ends with the ultimate consumer. The channels of distribution are the set of
institutions that perform the activities needed to move the product and its title from production
to consumption. A thorough analysis of distribution system will reveal the weaknesses existing
in it. The marketing and distribution strategies needed to be modified depending on the findings
in internal analysis.

A typical list of strengths in the marketing and distribution capability include:

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(a) Established brand image

(b) Most feasible marketing channel partners

(c) Favourable attitude of consumers towards product quality

(d) Most efficient distribution logistic system

(e) Wide range of products

(f) Market oriented product pricing

(g) Effective sales promotion and advertising

(h) Effective feed-back of market information

(i) Effective marketing management information systems

Operations:

The operation function is performed by that group of persons in a business who are responsible
for producing the goods or providing the services that the business offers to the public.
Operations management has been defined as managing the resources required to produce the
products or services provided by an organization.

The operations management consists of decisions in five areas viz., process, capacity,
inventory, human resource and quality. Production strategies relating to decisions on quality,
product design, production cost, production efficiency, capacity management, productivity of
labour and machines, operating personnel, maintenance etc.

The manufacturing process may be intermittent or continuous; and customized or mass

production. The adoption of CAD/CAM, Just-In-Time, Flexible manufacturing,
Standardization, Small batches of production, Supply chain management, Tight inven-tory
control etc. are the features of current production systems.

The economies of scale can be achieved through mass production and it will reduce the overall
unit cost of production. The operations management enables the company to focus on low cost
as well as product differentiation.

The strategic management of operations concentrates on the following issues:

(a) The selecting and designing of products or services to meet customer needs;

(b) Designing and updating production facilities so that products or services are produced
efficiently; and

(c) Controlling of the scheduling of machines and labour so that products or services are
available on schedule and in the quantities and quality required to meet customer needs.

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The operations strategies should align with the overall corporate strategies in pursuit of
organizational goals and objectives.

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Human Resources:

The human resources management functions relates to the centralized management of

personnel, their activities, development and control for the whole organization. In modern
business environment, personnel are considered as resources through which strategies are
developed and implemented.

Quality of human resource management can contribute much to organizational performance.

Human resource management consists of five important strategic decision areas viz.,
employment, human resource development, compensation, human relations and industrial
relations.

J.M. Ivancevich and W.F. Glueck identified the following strategies in human resource are:

(a) Employ the skills and abilities of the work force efficiently.

(b) Provide the organization with well-trained and well-motivated employees.

(c) Increase employees’ job satisfaction and self-actualization.

(d) Develop and maintain a quality of work life that makes employment in the organization a
desirable personal and social situation.

(e) Communicate HRM policies to all employees.

(f) Manage change to the mutual advantage of individuals, groups, the enterprise and the public.

Human resources activities basically consist of the following three areas:

(a) Job Analysis:

i. Job description

ii. Job specs

iii. Forecasting labour needs

iv. Predicting labour market conditions

(b) Procurement of Human Resources:

i. Recruitment planning

ii. Employee selection and training

iii. Affirmative action

(c) Maintenance of Human Resources:

i. Performance appraisal

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ii. Compensation and benefits

iii. Career planning and development

iv. Employee relations

v. Communications and grievances

The human resource management will influence the direct and indirect labour cost of the
organization, which shows impact on overall profitability of the organization. The strategic
issues like engagement of part-time employees, contract workers, job workers, outsourcing,
autonomous work teams, cross functional work teams etc. are also resolved. The skill, interests
and aptitudes of employees influence the strategies selected. The labour turnover and attrition
rates need to be constantly monitored.

Research and Development:

The research activities relates to searching for new products, new manufacturing process,
improvement of existing products, processes or equipment. The development activities involve
putting research on commercial basis. The research and development strategies covers the areas
like searching new product, improve the existing product, finding new production methods,
improving existing technologies etc.

The research costs are incurred for carrying basic research or applied research. But the
development costs start with decision taken to produce new product or improved product and
when decision is taken to adopt new technologies and new production methods. The objective
in carrying basic research is to improve the existing scientific and/or technical knowledge. But
the applied research is carried for the purpose directed towards a specific practical aim or
objective.

The R&D strategies should address:

(a) The focus of R&D activities (pure and applied research)

(b) The relationship of R&D activities to other functional areas (e.g. operations and marketing)

(c) The aggressiveness of the firm’s R&D posture

(d) The time horizon for results expected from R&D department. (Sushmita, n.d.)

III. Gap Analysis

A gap analysis process allows organizations to determine how to best achieve their business
goals. It compares the current state with an ideal state or goals, which highlights shortcomings
and opportunities for improvement.

How do you know what to trim, fix, expand, or change to get your business to the next level?
You do a gap analysis, that’s how.

You might have lots of guesses about what’s going on, and your team might have different
opinions on how to meet your objectives. Rather than groping around in the dark, a gap analysis

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leads you through a detailed examination of where your organization is currently and where
you want to be so you can act on facts, not assumptions, to reach your potential.

If you’re wondering how to do a gap analysis, follow these four simple steps. Regardless of
your industry, you’ll be able to apply these tips across any discipline and meet your business
goals.

1. Analyze your current state

First, you’ll need to choose which area of your business you want to focus on and start with
your current state. You need to discover where your organization currently is before you can
make a plan for reaching your goals.

For example, your company wants to become the most loved in your industry, but your
customer support team reports that many calls and customer interactions end in frustration on
the customers’ part.

Is your product the problem or does your support team need more training on handling difficult
calls? You won’t know until you dig in, which will mean talking to the people involved,
gathering data, and scrutinizing your KPIs. To make sense of this information and visualize
your current state, use a gap analysis tool––a customer journey map, empathy map, service
blueprint, or process flow.

If you wanted to find out what causes customer frustration, you might gather quantitative
information, like your company’s NPS score or the number of negative calls handled each
week. You might also look at qualitative information, like customer comments or feedback
from your support reps on the current call process.

Even if you’re looking to analyze a more strategic area of your business, the process remains
the same. A sales team with the same company vision––becoming the best-loved company in
the industry––might examine the sales reps’ product pitch as well as sales growth, targets, and
conversion rates.

What’s most important at this stage is understanding the root of the problem, which is much
easier to see once you’ve laid out all the contributing factors. In fact, your gap analysis process
should evaluate everything you currently do so you get the “big picture.”

2. Identify the ideal future state

Once you have the big picture figured out and understand how your team or organization
currently functions, you need to become idealistic. Where would you like to be? What’s not
happening that should be? Don’t worry yet about how you’ll get there. That’s the next step.
Right now, the sky’s the limit, and you should dream big.

Maybe you have an exceptional marketing team that outsources all its content, but after
performing a content audit, you realize that your brand is no longer cohesive because it’s
handled by a disparate group of freelancers. Your dream could be to regain control of the
content creation process in order to reclaim your brand identity.

Another example might be of a warehouse needing to meet certain safety regulations, but the
production and human resource managers decide that they want to do more than meet them.
Their ideal would be to exceed what’s mandated so they can attract and retain more talented
and dedicated workers.

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In both scenarios, current performance clearly falls short or needs to be changed. But instead
of charging blindly ahead or slapping a Band-Aid on the situation, picturing the ideal helps you
reach a higher potential. A good gap analysis tool here would be a brainstorming board or a
mind map to really capitalize on your team’s creativity.

But how do you realistically get to the ideal? That’s where the hard work comes in.

3. Find the gap and evaluate solutions

Completing the first two steps in isolation won’t get you great results––the status quo can seem
inescapable, and goals can feel lofty and unattainable. Putting them together, however, exposes
what’s missing between your performance and your potential. You also need to decide which
solutions will most effectively bridge the gap.

Returning to our previous example involving a marketing team (see step 2), a gap analysis
would bring up the following question: How do we go from a muddled brand voice to one
that’s unified and under our control?

Several solutions for bridging this gap present themselves, though not all are created equal:

You could bring content creation back in house by hiring more full-time writers, which would
be more expensive than using freelancers.
You could reevaluate of all your freelancers to determine which ones are worth keeping and
which are falling short of your standards. This option would require some time and might result
in not having enough freelancers to handle your needs.

You could tighten your brand creation guidelines and retrain your freelancers. This option
would also require time and doesn’t necessarily guarantee an improvement in the content
created by your freelancers.

If guaranteed control matters most, then the first solution is best. On the other hand, if cost tops
the list, then the first solution will be out, and your team might choose the second or third
solution. A helpful gap analysis tool would be a decision tree as it calculates costs and benefits
based on conditional probability.

In the end, how you bridge the gap will depend on your organizational and team priorities.
Work together to find what works best.

4. Create and implement a plan to bridge the gap

After you’ve charted out the possible ways to bridge the gap and decided which would be best,
you likely still need to convince others in your organization of that as well. The changes that
you’ll implement may also affect other teams and department, so it’s important to come up
with a plan.

Establish a clear strategy and actionable objectives to help you actualize your transition and
get everyone on board.

For example, when presenting to management or executives, have a timeline or schedule for
rolling out the planned changes. You could also create a more comprehensive action plan that
assigns specific tasks to teams or individuals.

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Keep reading about organizational change management, or use the tools described below to
help you during this gap analysis process. (lucidchart.com)

IV. Porter’s Value Chain Analysis

The idea of the value chain is based on the process view of organisations, the idea of seeing a
manufacturing (or service) organisation as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve
the acquisition and consumption of resources - money, labour, materials, equipment, buildings,
land, administration and management. How value chain activities are carried out determines
costs and affects profits.

Most organisations engage in hundreds, even thousands, of activities in the process of

converting inputs to outputs. These activities can be classified generally as either primary or
support activities that all businesses must undertake in some form.

According to Porter (1985), the primary activities are:

 Inbound Logistics - involve relationships with suppliers and include all the activities
required to receive, store, and disseminate inputs.
 Operations - are all the activities required to transform inputs into outputs (products and
services).
 Outbound Logistics - include all the activities required to collect, store, and distribute
the output.
 Marketing and Sales - activities inform buyers about products and services, induce
buyers to purchase them, and facilitate their purchase.
 Service - includes all the activities required to keep the product or service working
effectively for the buyer after it is sold and delivered.

Secondary activities are:

 Procurement - is the acquisition of inputs, or resources, for the firm.

 Human Resource management - consists of all activities involved in recruiting, hiring,
training, developing, compensating and (if necessary) dismissing or laying off
personnel.
 Technological Development - pertains to the equipment, hardware, software,
procedures and technical knowledge brought to bear in the firm's transformation of
inputs into outputs.
 Infrastructure - serves the company's needs and ties its various parts together, it
consists of functions or departments such as accounting, legal, finance, planning,
public affairs, government relations, quality assurance and general management.
(ifm.eng.cam.ac.uk)