Internal Environment Analysis

What is Internal Environment Analysis? Definition, Process, Tools, & Importance

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?

A number of various value chains are examined through internal analysis. It makes ensuring that the business’s resources and competencies align with the external environment. It makes an effort to evaluate the intrinsic strength of the resource base, the quantity, type, and degree of uniqueness of the resources that 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,

  • 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.
  • Organizational Resources – Resources are the foundation for strategy. The resources include tangible (financial, organizational, physical resources) and intangible (human, innovation, reputational resources).
  • Organizational Structure – It specifies jobs and relationships. It defines job allocation, responsibility, and accountability.
  • Organizational Culture – The shared values, norms, behavior, and belief of an organization is organizational culture. It influences how an organization conducts its business.

Process of Internal Environment Analysis

How to conduct an internal environment analysis? Usually, the analysis of the internal environment is conducted in the following five steps.

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.

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.

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.

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.

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

The main tools/methods/techniques of internal environment analysis are mentioned below.

Value Chain Analysis

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

The resource view based on 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

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.

Importance of Internal Environment Analysis

Why internal environment analysis is important? Internal analysis is an effective approach to assessing organizational capability. The assessed information can be used in various ways. Some major ways internal analysis helps organizations are,

Helps to Identify Strengths

The first importance of internal analysis we may consider is that it helps to identify the relative strengths of the organization. The organizational strengths may be in terms of resource availability, innovation, skilled manpower, uniqueness, brand, etc.

In addition to identification, it also helps to use these strengths to exploit opportunities and accomplishment of goals.

Helps to Identify Weaknesses

Similar to the strengths, it also identifies the weaknesses of the organization which are weaknesses as compared to its competitors. Once identified, it further prepares the organization to reduce such weakening factors and mitigate external environment threats.

Helps to identify Unique Resources

To be competitive in the market, an organization needs to have unique resources. Unique resources are resources that make a firm different from its competitors.

Usually, the unique resources are valuable, inimitable, rare, and difficult to substitute. They help firms to develop core competencies that lead the organization toward sustainable competitive advantage.

Identifies Core Competency

Along with the identification of unique resources, internal environment analysis also helps to identify and develop core competencies.

A competency is that in which the firm is well. And, core competency is the sum of that the whole organization is exceedingly well in doing than competitors.

They are the most important sources of competitive advantage. They reside in the functional areas of production, marketing, and human resources.

Strategy Formulation

Understanding every aspect of the organization makes the aware manager of capability, competencies, unique resources, strengths, and weaknesses and helps the manager formulate effective strategies.

In Conclusion…

Hence, internal environment analysis is all about assessing the internal capability of an organization and aiming to enhance the capability of functional units and promote the overall organizational effectiveness.

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