Chapter 5:

Internal Environmental Analysis

 Learning Outcomes

• Discuss the importance and challenge of the internal environment

analysis.
• Apply a SWOT analysis and explain its importance in environmental
analysis.
• Discuss an organisation’s resources and capabilities in the resource
based view.
• Describe and apply the value chain analysis as a method for performing
internal environmental analysis.
• Understand and apply the internal factor evaluation matrix as a method of
doing an analysis.
 THE IMPORTANCE & CHALLENGE OF INTERNAL
ANALYSIS
Ability to change is important. "The only constant in life is change"

• An organisation is a bundle of resources, capabilities and core competencies

that must be used to create an exclusive position in the market.
• Foster environment in which learning is promoted and expected
• Resources and Capabilities be used to gain competitive advantage

When an organisation is able to match what it can do with what it might do,
this allows the organisation to:
– develop its vision or strategic intent
– pursue its strategic mission
– select and implement its strategies
 SWOT ANALYSIS
Strength: A resource or a capability that the organisation has which
is an advantage relative to what the competitors have.

Weakness: Refers to the lack of, or deficiency in, a resource that

represents a relative disadvantage to an organisation in comparison
to what competitors have.

Opportunity: A favourable situation in the organisation’s external

(market and macro) environment
Threat: An unfavourable situation in the organisation’s external
environment
• Limitations of the SWOT analysis
• Strategy in action 5.1: Pick n Pay (page 136)
• An organisation is a bundle of
resources, capabilities and core
competencies that must be
used to create an exclusive
position in the market.

Figure 5.1 The relationship between the

organisation’s internal situation and
strategic competitiveness
• The recognition of core
competencies is essential
before any strategic
management decision can be
taken.
 THE EXTERNAL ENVIRONMENT IMPACTS ON
THE INTERNAL ENVIRONMENT

❑ Has the #BlackLivesMatter movement activated change in

organisations?
- Diversity
- Inclusivity
- Colour- Blindness
- Implicit vs Explicit Bias
- Systemic (Structural/Institutional) Racism
How can organisations respond to Systemic Racism?
https://www.weforum.org/agenda/2020/06/companies-fighting-systemic-
racism-business-community-black-lives-matter/
 How has Shoprite valued employees
during Covid?

• "Our employees are crucial players in the task ahead and Shoprite
wants to thank and reward them," says CEO Pieter
Engelbrecht.Shoprite is giving workers in its shops and distribution
centre a once-off bonus totalling R102 million to thank them for their
“tireless efforts to feed the nation” during this extraordinary time.
https://www.capetalk.co.za/features/380/covid-19-coronavirus-
explained/378812/shoprite-gives-workers-r102-million-bonus-for-their-
tireless-efforts-to-feed-the-nation [30 March 2020]
 INTERNAL ANALYSIS FOR EFFECTIVE
STRATEGY DEVELOPMENT

Resource-based view (RBV)

• Resources, organisational capabilities and core competencies
are the foundational characteristics that make up the
competitive advantage of an organisation.

• The RBV holds that an organisation’s resources are more

important than the industry structure when attempting to gain
and keep a competitive advantage.

• Resources determine efficiency and effectiveness.

 1. RESOURCE-BASED VIEW
1.1 Resources
There are three broad categories of resources that
are central to the RBV and will lead to distinctive
competencies and therefore to a competitive
advantage.
These are:

❑Tangible assets
❑ Intangible assets
❑ Organisational capabilities
 1. RESOURCE-BASED VIEW

❑Tangible assets: Easiest to identify because an organisation’s

location and the status of its building and equipment are visible.

❑ Intangible assets: Assets one cannot touch but they are often
the critical assets that create the real competitive advantage,
e.g. the reputation and brand name of Coca-Cola – potent
source of core competencies.

Table 5.1 (page 138)

Tangible and Intangible Resources

Table 5.1
 RESOURCE-BASED VIEW
1.2 Capabilities
• The capacity to deploy resources through a complex process of interactions
with the tangible and intangible resources
• Organisational capabilities: The complex network of processes and skills that
determine how efficiently and effectively the inputs in the organisation will be
transformed into outputs.
• The foundation of many organisations’ capabilities lies in the skills and
knowledge of the employees and often in their functional expertise.
• Organisations need to invest constantly in employees’ continuous
development.
Coke – formula not valuable on its own
KFC – right mixture added to chicken required, so people with correct skills
required. Action 5.2 (page 139) Cashbuild
 RESOURCE-BASED VIEW
• Capabilities are developed in functional areas – effective motivation and
human resources. Customer service, marketing.
• The result of a dynamic and complex environment – dynamic capabilities.
• To be a successful organisation, timely responsiveness, rapid and flexible
product innovation and management expertise are necessary.
• Understand the difference between capabilities and core competencies.
• McDonalds – quick delivery time (capabilities)
• Core competencies – capabilities should develop into core competencies –
car industry & BMW
• Resources and capabilities must be unique and capable of leading to a
sustainable competitive advantage. (Strategy in Action 5.3 Capitec)
 CHARACTERISTICS THAT MAKE A RESOURCE
VALUABLE: VRIO
• Valuable – skilled employees can make services valuable and needs to
add value. Location also important.
• Rare resources – distinctive competence if no other organization offers.
Meets needs of consumer.
• Inimitability – Hard to imitate, Based on secret recipe: KFC, Coke
• Organised – Organisation have to have capability to capture value of
resource, by organizing its various processes: MIS, processes, policies,
organization structure, culture to realise full potential
 2. VALUE-CHAIN ANALYSIS (VCA)

For an organisation to grow they need customers

• The value chain as a method of doing internal analysis refers to
a way of looking at the chain activities of an organisation to
determine where value is really added to the product or
service.
• Turning inputs into outputs requires different activities.
• In order to determine where is value is added, you must
determine strengths and weaknesses.

Strategy in Action: Checkers Sixty60 home delivery service

 VALUE CHAIN ANALYSIS (VCA)
• Three aspects of resources that result in customer value:
– The product is unique and/or different.
– The product is cheaper than that of competitors.
– The organisation has the ability to respond to the customer’s needs very
quickly.
• Value defined: The amount of money that customers are willing to pay for that
which the organisation is providing.
• Inputs to outputs – value is added.
• Carefully investigate – where is value added and where is there potential to add
value?
• The activities of VCA can be grouped into two categories: primary activities and
support activities.
Performance of primary activities are defendant on the support activities
Value chain activities and strategy to be aligned
Figure 5.2 The primary and support activities of the value chain
Source: Adapted from Dess & Lumpkin (2003: 72)
 PRIMARY ACTIVITIES

• Input logistic (inbound – Porter's)– the receiving, storing and distributing of

inputs to the product (raw materials & warehousing.
• Operations – all the activities that are associated with the transformation of
the inputs into the final product – manufacturing plant efficiency
• Output logistics – (outbound – Porter's) all the issues related to the
distribution of the product or service to the customers.
• Marketing – methods & strategies used to get customers to buy the final
products or services.
• Customer service – activities undertaken to make sure the value of the
product is maintained (guarantees, warrantees, after sales service)
 SUPPORT ACTIVITIES
• Procurement – the actions that can be taken to optimise the quality and
speed of the procurement of inputs – purchasing
• Technological development – the various processes and equipment used
throughout the entire value chain & quality of technology as well as
response time
• Human resource management – the recruitment, selection, training and
compensation of employees; very important because it affects all levels of
the organisation.
• General administration and infrastructure – a certain general administration
and organisational infrastructure must be in place to achieve the overall
goals of the organisation. • Financial management – all activities must
adhere to effective financial recording and control and audits throughout
value chain process.

PURPOSE OF ORGANISATION – PROFIT MARGINS

 3. FUNCTIONAL APPROACH

• An effective and simple approach to

internal environmental analysis.
• Can be conducted by analysing the
organisation’s functional activities.
• Issues in the functional areas that
should be included in an internal
audit (Table 5.2, page 148).
• The major goal is to determine how
well or poorly these functions are
being performed.
• Disadvantage of this approach is that attention is entirely focused on the
functional areas – whether or not a specific functional area makes an
important contribution to competitive advantage is not determined.
Table 5.2 Internal Audit Questions: Functional Area
 THE INTERNAL FACTOR EVALUATION MATRIX

• Internal audit - Internal Factor Evaluation (IFE) Matrix. This evaluates the major
strengths and weaknesses in the different functional areas.
• Questions -Table 5.2 will provide the starting point for this matrix.
• 5 steps are used to complete the summary of IFE Matrix.
• List the 10 to 15 most important internal factors, both strengths and weaknesses, that
are identified in the internal audit.
• A weight can be assigned to a given factor that will indicate the relative importance of
the factor in terms of the success of the organisation in its specific industry.
• Rate these factors out of 5.
• Multiply weight by the rating of the factor to get the weighted score.
• Include comments to increase understanding of the selected factors.
 TABLE 5.3: IFE MATRIX

Vital for any organisation to do an internal analysis before it can

make any strategic decisions.
Important process for gaining a sustainable competitive advantage.
Read with understanding and search
for information to assist your understanding
by accessing organisation’s and competitor’s
websites as well as media articles and
business articles.

• Review Looking Back

• Complete the case study questions for

1) Ackermans
2) Shoprite Checkers (cohesion case study)