Topic 8: Analyzing the internal environment of the firm

Internal Environment Factors Analysis

A business is impacted by the different factors from environment continuously. We can divide
this environment into two way one internal environment factors and other external environment
factors. However, in this article, I will go into much detail about the internal environment
factors. And its areas usually covered by internal analysis, conducting internal environment
analysis: whom to do it?

Internal Environment Factors:

The conditions and forces that exist within the organization, it is called the internal environment
factors of an organization. Internal environment factors portray an organization’s ‘in-house’
situations. An organization has full control over these situations. Unlike the internal
environment, the internal environment is much more directly controllable. It includes various
internal factors of the organization such as resources, owners/shareholders, the board of
directors, employees and trade union, goodwill, and corporate culture. These internal
environment factors are detailed out below.
1. Resources of the organization
2. Owners/Stockholders/Shareholders
3. Board of Directors
4. Organization’s Culture
5. Organization’s Image/Goodwill
Internal Environment Factors Analysis
1. Resources of the organization:
Resources of the organization is an important of the internal environment factors. it can be
discussed under five broadheads. Such as:-

· Physical Resources: Physical resources include land and buildings, warehouses, all
kinds of materials, equipment and machinery. Examples are office buildings, computers,
furniture, fans, and air conditioners.

· Human Resources: Human resources embrace all employees of the association from the
top to the lowest level of the association. Examples are marketing executives in a
manufacturing company, teachers in a university, and manual workers in a factory.

· Financial Resources: Financial resources embrace capital used for sponsoring the
processes of the organization counting working capital. Examples are reserve investment
by funds, profits, owners, and revenues received.

· Informational Resources: Informational resources encompass ‘usable data needed to

 make effective decisions.’ Examples are sales forecasts, price lists from suppliers, and
market-related data employee profile and production reports.

· Technological Resources: There are used different technological resources.

2. Owners/Stockholders/Shareholders:
Owners or stockholders or shareholders of an organization may be an individual in the case of a
sole proprietorship business, partners in a partnership firm, shareholders or stockholders in a
limited company or members in a cooperative society. In public enterprises, the government of
the county is the owner. Whomever the owners, they are an integral part of the origination’s
internal environment factors. Owners perform a significant role in influencing the activities of
the business. This is the cause why managers should take more overhaul of the owners.

3. Board of Directors:
In our state, every single registered corporation (public or private limited company) must have a
board of directors as per the Companies Act, 1994. What would be the number of directors on
the board is stipulated in the company’s Articles of Association. They are accountable for top-
level approach making and providing guidelines to the company. They are strategic decision-
makers and planners. They monitor and oversee the general functioning of the company. Certain
organizations have not existed the board of directors, rather they have created the ‘board of
trustees’ (such as in charitable organization, a hospital or a university) or ‘Managing Committee’
(such as in a non-government school or NGO) or a Governing Body (such as in a college).

4. Organization’s Culture:
The culture of an organization is viewed as the basis of its internal environment factors.
Organizational (or corporate) culture significantly influences employee behavior. Culture is
imperative to every single employee counting managers who effort in the organization. Strong
culture aids a firm to reach its goals better than a firm having a poor culture. Culture in an
organization advances and ‘blossoms’ over several years, initiating from the practices of the
founder(s). Since culture is a vital internal environmental apprehension for an organization,
managers need to recognize its influence on organizational activities.

5. Organization’s Image/Goodwill:
Status of an organization is an actual cherished intangible asset. Goodwill or high reputation
develops a promising image of the organization in the minds of the public (so to say, in the
minds of the customers). ‘No-Reputation’ cannot create any positive image. Negative image
abolishes the organization’s efforts to appeal customers in a competitive sphere.
The internal environment factors analysis (or micro-environment) of an organization is a vital
part of the circumstances analysis. The situation of an organization, whether business or any
other type of organization, is expressed in terms of its internal and external environmental
factors. When an analysis is made of both the types of internal and external environments,
managers can have a clear idea of the overall situation of the organization. External
environmental factors exist in the exterior of the organization and hence, depict the external
situation. The internal environment factors reside inside the organization and, therefore, portray
the internal situation. Internal environmental analysis (some have a preference to demand it
modestly ‘internal analysis’) helps managers identify the internal strengths and weaknesses in
respect of various internal environment factors. The analysis is made of every one issue in
diverse zones of the organization.

Areas Usually Covered by Internal Environment Factors

Analysis:
Internal analysis is made of numerous interior concerns of a firm. Depending on the factors of
the company, the following chief precise issues need to be enclosed in the analysis.

· Product and service positions

· Financial position
· Product and service quality
· Marketing capability
· Conditions of facilities and equipment
· Research and development capability
· Human resources
· Organization structure
· Past and present objectives and strategies
· And many more.
In fact, every area of a company that has a substantial impact on the long-term survival of the
company should be analyzed to determine the strengths and weaknesses of each area. A
framework for internal environmental analysis is shown in the following table. This outline
designates several example queries that need to be addressed while building an internal
examination. These are really significant thoughts for finding out of the strengths and
weaknesses of an organization.

Framework for Internal Environment Factors Analysis

There is shown a table which reflect the internal environment factors analyses of a company in
strategic management
A sample framework for internal environment factors analysis of a company
Strenghts Weaknesses
Adequate financial resources? Poor strategic direction?
A distinctive competence? No clear vision?
Positive image of the company? Lack of managerial talent?
Proprietary technology? Poor track record in strategy implementation?
Excellent Competitive skills? Obsolete machinery?
Cost advantages? Falling behind in research and development?
Access to economies of scale? Lack of competencies?
Competitive advantages? Narrow product line?
Good leadership and management? Competitive disadvantages?
Product innovation abilities? Weak market image?
Well-crafted functional strategies? Inadequate working capital?
Achieved market leadership? Poor Marketing skills?

Conducting Internal Environment Factors Analysis: Whom

to Do It?
The job of assigning the accountability for accomplishment internal environmental analysis may
not be alike in all organizations. The proof shows that performs differ from organization to
organization. Usually, the following practices are prevalent in different organizations:
Involvement of the Planning Department:
Some organizations involve the Planning Department for conducting the analysis of the internal
environment factors. The staffs in the scheduling division are projected to be talented in such
analysis. The gather information and then make an analysis of the internal situations.
Use of Outside Consultants:
Some organizations use independent consultants for conducting the internal analysis. The skilled
consultants have experience in acting such actions. They can also give an impartial view of the
situations, which the internal staffs of the planning department or other persons may not give.

Why Conduct an Internal Analysis?

Once complete, the organization should have a clear idea of where they're excelling, where
they're doing OK and where current deficits and gaps lie. The analysis will arm management
with the knowledge to exploit their strengths and opportunities. It also allows management to
develop strategies to mitigate any threats and compensate for identified weaknesses.
Beginning strategy formulation after this analysis will ensure your strategic plan has been
formulated to take advantage of strengths and opportunities, and offset or improve weaknesses &
threats. Your organization can then be confident that you're funneling your resources, time, and
focus effectively and efficiently.

What tools should you use?

Before undertaking an internal analysis, you'll need to decide which tool(s) you'd like to use to
conduct the analysis. Many tools and frameworks exist and each is valuable for a certain
purpose. To help you choose the right tool, we've compiled a list of some popular and effective
internal analysis tools with a description of what each tool will help you achieve.

GAP Analysis
The Gap Analysis is an internal evaluation tool which allows organizations to identify
performance deficiencies. A Gap Analysis is the process of comparing your current state to your
desired future state, identifying and understanding the gaps that exist between the two states, and
then creating a series of actions that will bridge the identified gaps. This is important because it
helps management identify if they're organization is performing to its potential and if not, why it
is not performing to its potential. This helps to identify flaws in resource allocation, planning,
production etc.
While other internal analysis tools, such as SWOT analysis are a more comprehensive study of
the internal environment, GAP analysis can be very targeted towards fine-tuning one process.

Strategy Evaluation
A strategy evaluation analyses the results of the implementation of a strategic plan in your
organization. It is useful to undertake a strategy evaluation at certain intervals during your
implementation of strategy such as every 6 months, 1 year, or conclusion of your strategy. The
strategy evaluation process involves looking back at the goals in your strategic plan and
assessing how well you've done against achieving them. If you're looking for a thorough guide
on how to undergo a strategy evaluation, look no further..

SWOT Analysis
The SWOT analysis is one of the most well known and used business analysis tools around. It
gained popularity due to its simplicity (covers both an internal and external analysis), though
equally for its effectiveness. The name SWOT is derived from the factors in its grid, namely -
Strengths, Weaknesses, Opportunities, and Threats.
This tool can be used to create a sustainable niche in your market. The SWOT analysis allows
organizations to uncover the opportunities they have the strength to exploit, and minimize their
weaknesses and the risk of impending threats. Using this tool, organizations are able to
distinguish themselves from competitors and successfully compete in their given marketplace.

VRIO Analysis
The VRIO framework is a great tool for specifically assessing an organization's internal
environment. It looks at the different internal resources of an organization and categorizes each
based on overall value to the organization. VRIO is a framework that allows organizations to
identify their competitive advantages and promotes the development of these competitive
advantages to sustainable competitive advantages.
If you're looking to develop a strategy that builds on your organization's competitive advantage,
but you're yet to define what that is - VRIO analysis is the tool you need. Check out the article
we wrote earlier on the VRIO framework. It walks through how you can use it to not only
identify competitive advantages in your own organization but turn those competitive advantages
into sustained competitive advantages.
OCAT
The Organizational Capacity Assessment Tool was designed for non-profit organizations looking
to assess their internal environment. OCAT assesses how well your organization performs across
10 internal dimensions, including:

· Aspirations
· Strategy
· Leadership, Board & Staff
· Funding
· Marketing & Communications
· Advocacy
· Business Processes
· Infrastructure & Organizational Structure
· Culture and shared values
· Innovation and adaptation
The results of the assessment help non-profits evaluate and improve their organizational
capacity.
McKinsey 7S Framework
Another highly popular and battle-tested tool is the McKinsey 7S Framework. McKinsey 7S is
ideal for organizations looking to improve the alignment between departments and processes.
The model can be used to assess an organization's current state, as well as a proposed future
state, and the gaps and inconsistencies between them. McKinsey 7S prompts you to analyze 7
internal aspects of your organization which need to ultimately be aligned for your organization to
truly compete and be successful. The model's 7 elements include:

· Strategy
· Structure
· Systems
· Shared Values
· Skills
· Style
· Staff
If you'd like to learn more about the tool, check out this article we found. It gives a detailed walk
through of the entire model, and how to use it.
Core Competencies Analysis
The core competency analysis is an internal analysis tool which helps organizations create
strategies that move them ahead of their competitors. The basic premise of the analysis is to
identify the organization's core competencies - the combined resources, knowledge, and skills of
an organization that creates unique value to their customer. Once organizations have identified
their core competencies, strategies can be created to focus on only what the organization does
well and provides unique value to the customer.