34 Internal and External Appraisal in Strategic Management

R. Swaranalatha

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Introduction

 

The sweeping changes in the business environment caused by privatisation, Liberalisation and Globalisation have made the strategic management concept more important. Technological advancements and Managerial competence have initiated drastic changes in business performance. Ground rules of competition change, industry boundaries are withdrawn, established industries are reinvented and new industries and products are created.

 

Enormous changes in business opportunities and threats as a result of economic liberalisation in India have tremendously enhanced the scope of strategic management. Companies have changed their vision and objectives, organisation structure, portfolio of business, markets and competitive strategies.

 

Business firms are open systems where internal factors continuously interact with the external environment. Strategic managers must have a clear understanding of the internal and external business environment in which the business firm operates. This scanning and analysis of internal environment or micro environment is called internal appraisal and analysis of external environment or macro environment is called external appraisal.

 

The development of mission and objectives involves analysis and appraisal of environment. The results of internal and external analysis will help managers determine what goals and objectives they can or should adopt, and the strategic choice that are available.

 

The business firm utilises the resources like raw materials, man power, finance, power and other utilities as inputs and transform them into outputs, which is taken to the hands of the consumers, through marketing intermediaries. This conversion of inputs into output, operates under the influence of so many factors in the internal and external environment.

 

The factors in the internal and external environment have a strong influence on the success of the organisation and the management must continuously monitor and analyse the changes that occur in the environmental factors.

 

These factors, forces, conditions, situations, events, and relationships over which the organization has little control are referred to collectively as the organization’s environment. In general terms, environment can be broken down into three areas:

 

  • the internal environment or micro environment corresponding to employees, managers, union, and board directors
  • the external environment or macro environment corresponding topolitical, Economic, Social, Technological, Legal and Ecological factors in the country.
  • the Task or Operating environment corresponding to competitors, markets, customers, regulatory agencies, and stakeholders.

 

In formulating a strategy, the strategic decision makers must analyse conditions internal to the organization as well as conditions in the external environment.

 

Internal Environment

 

Internal environment corresponds to those factors which are within the control of the business firm like company policy, customers, competitors, suppliers, investors, marketing intermediaries, and so on.

 

The analysis of internal environment (micro-environment) or internal audit or internal appraisal focus on identifying and evaluating a firm’s strengths and weakness in the functional areas of business including management, marketing, human resources, research and development, production, finance, information systems and organisational culture.

 

Management must analyse each of these areas carefully to determine their strengths and weakness so that steps can be taken to reduce the negative effects of any weakness and can enhance their strengths.

 

Importance of internal appraisal

 

It is very much essential for the organisation to withstand global competition and gain competitive advantage.

Internal appraisal helps the organisation to develop core competencies to gain their competitive advantage.

 

Core competencies involve a firm’s resources and capabilities that give it a distinct advantage over its competitors. Developing the core competencies will create ‘value’ for their customers. Core competencies are actually a value-creating system through which a company tries to achieve strategic competitiveness and positions itself above competition.

 

An Internal audit provides important information about an organisation’s specific assets, skills, work activities and work relationships in order to determine as to what is good about them and what is lacking.

 

Prior to internal analysis of the company’s strengths and weakness can be made, it is important to identify some of the weakness that leads the company to fail.

 

Also, there are some factors that contribute to the success of the company. These factors are known as “Critical success factors” (CSF).

 

Critical Success Factors are those unique characteristics of an organisation, which are essential for competitive advantage.

 

For example-

 

CSF of Walmart is Everyday Low Pricing (EDLP) and that of APPLE is innovation in its products and services.

 

Hence, internal analysis will enable the firm to identify its core competence and critical success factors which in turn leads to competitive advantage.

 

Internal analysis

 

The assessment of internal analysis is done through

  1. SWOT analysis
  2. Functional analysis
  3. Value chain analysis

Swaranalatha I. SWOT Analysis

 

It refers to analysing strengths, weakness, opportunities and threats. It is an essential strategic planning tool, used for formulating feasible strategies for the firm.

 

(a)   Strengths and Weakness

 

A strengthis a positive characteristic that adds advantage to the business firm like

 

  • quality product and services
  • skilled workforce
  • cost efficiency
  • high brand image
  • technical innovations
  • patents and trade marks
  • customer loyalty
  • financial resources
  • strong research and development team and so on.

A weakness is that factor that adds disadvantage to the firm such as -poor leadership

 

  • lack of infrastructure
  • failure to change
  • poor marketing network
  • obsolete technology
  • cost inefficiency
  • poor customer service
  • poor product quality and so on.

 

An opportunity is a favourable factor in the external environment, which can be used as an advantage to the firm such as

  • Favourable government policy
  • Expansion to new markets
  • technical advancements
  • strategic partnerships
  • removal of trade barriers and so on

A threat is a factor in external environment which is not beneficial to the organisation, such as

  • entry of low cost global players into domestic country
  • high labour cost and labour turn-out
  • availability of substitutes
  • scarce resources like fuel and utilities
  • recession in economy
  • trade barriers by foreign countries
  • heavy taxation
  • shift in customer loyalty and so on.

 

Business firm should anticipate such possible threats and design its strategies to drive away the threats.

 

Hence, SWOT analysis involves evaluating the company’s internal environment in terms of strengths and weakness and the external environment in terms of opportunities and threats and formulating strategies that take advantage of all these factors.

 

Competence in key functional areas like human resources, production, research and development, marketing, finance and accounting, information systems, general management and organisational culture are identified and strategies are formulated to take advantage of competence available in all functional areas.

 

III. Value Chain Analysis

 

It was developed by Michael Porter and identifies the activities, functions and business process that have to be performed while designing the strategies for supporting products and services.

 

It divides organisational process into distinct activities that create value for the customer.

 

These value-added activities become a source of competitive advantage for the organisation.

 

Value-added activities are broadly classified into

  • Primary activities
  • Support activities

Basic model of value chain analysis is as follows-

a)  Primary activities

 

They are those that are involved in creation of product or service. Porter has classified these primary activities into

 

1. Inbound logistics

 

It involves physical movement of things from one place to another. It includes receiving, storing and distributing various inputs, with a purpose to transform them into outputs.

 

Activities related to inbound logistics are transportation, material handling, warehousing, inventory management, etc.

 

2. Operations

 

It includes all those activities through which inputs are transformed into outputs which an organisation sells. The activities in operations include manufacturing, assembling, testing, packaging, etc.

 

3. Outbound logistics

 

It is related to finished outputs, which are in saleable form. Various activities related to outbound logistics are collecting, storing, preparing delivery schedules, physical distribution, etc.

 

4. Marketing and sales

 

Marketing and sales involve inducing buyers to buy products and converting their intention to buy and exercise sales. Various activities involved in this category are advertising and sales promotion, channel selection, managing sales force, fixing price, etc.

 

5. Service

 

Activities related to service aim at creating value to customers and may include various facilities to product such as installation, after-sales service, supply of parts, training to customers, and so on.

 

Support activities are those that provide support to effective performance of primary activities in value chain.

 

They provide infrastructure for primary activities and basically allow these activities to take place. These support activities are

  • Administration

It consists of general management activities like accounting and finance, legal and regulatory affairs, strategic and operational planning, safety and security, management information systems and other administrative activities.

  • Human Resource Management

Human resource management and development function constitutes a distinct set of support activities in terms of recruitment, hiring, training, skill and career development, labour relations, job enrichment and so on.

  • Technology development

It refers to learning process which improves and enhance the utility of all organisational functions. It relates to such activities such as product and process development, process design and improvement, computer assisted design (CAD), Computer assisted manufacturing(CAM), development of computerised support systems, Enterprise resource planning (ERP), Quality management systems, Total productivity management, innovation of products and services and so on.

  • Procurement

It refers to the total purchase of inputs, raw materials and spare parts, which would be the part of primary activity. It involves the purchase of materials, equipment, machinery and related accessories and services needed for the primary function. Examples of the activity include purchase of computer systems, accessories, sophisticated softwares, communication devices, printing devices, financial services, etc.

 

Therefore, any organisation can develop a competitive advantage in any of the primary and support activities in the value chain and enhance the value of the products and services in the firm, thereby satisfying the customers and leading to customer delight.

 

External analysis

 

External appraisal refers to the analysis of those factors in the external environment, which are uncontrollable by the firm.

 

External environment corresponds to those factors, which are outside the purview of the organisation and cannot be controlled by the business firm, but needs to adjust to it. They are beyond the control of a firm and the success of firm depends to a very large extent on its adaptability to the environment.

 

PESTLE corresponds to

  •  Political,
  • Economic,
  • Socio-cultural,
  • Technological,
  • Legal and Ecological factor

 1. Political Environment

 

The impact of political environment on in dustry and business is enormous.

 

The economic environment is the result of the political environment.

 

Stability and Security of the government has significant impact over business performance. Stable government formulates favourable industrial policy, Fiscal policy, monetary policy, tariff policy, etc. to provide better opportunities for business.

 

They play a crucial role as a planner, promoter, and regulator of economy to protect and benefit the business enterprises.

 

 

Prime Minister, Mr. Narendra Modi’s “Make in India” campaign has encouraged domestic industries to develop indigenous technology and promote innovative products and services.

 

Political factors include

  • Environmental issues and clearances
  • Business legislation
  • Regulatory bodies and process
  • Government policies
  • Trade policies

  2. Economic Environment

 

Economic forces refer to the nature and direction of the economy in which business operates. Economic factors have a tremendous impact on business firms.

 

The general state of the economy (e.g., depression, recession, recovery, or prosperity), interest rate, stage of the economic cycle, balance of payments, monetary policy, fiscal policy, are key variables in corporate investment, employment, and pricing decisions.

 

Success and survival of business heavily depend on economic environment, which determines the purchasing power of people.

 

Therefore, the factors of economic environment are

  • Type of economy- Capitalism, Socialism and Mixed economy *Nature of business cycle- Boom, recession and depression *Economic policy
  • Economic plans- five year plan through NITI, economic budgets
  • Infrastructural development like roads, transport, power, credit support, communication facilities, etc.
  • Economic indices like money supply, disposable personal income, spending pattern, savings rate, GNP, inflation rate, income distribution, BOP position, wholesale price index. *Interest and exchange rates.

 

Information related to economic factors are collected from Centre for Monitoring Indian Economy, Reserve Bank of India, National Council for Applied Economic Research, and journals like India today, Business India and Indiatimes.com.

 

3. Socio-cultural Environment

 

It consists of culture, traditions, beliefs, attitude, opinion, values and lifestyles of people in the firm’s external environment. They influence the spending pattern and consumer buying behaviour. Lifestyle trends, demographics, consumer attitudes, consumer buying patterns, brand image, company goodwill, ethnic and religious factors influence business performance.

 

Social changes happen due to the growing youth population, strong impact of media, exposure to foreign products, industrialisation, quick communication, and social networking culture, global mobility of population, women empowerment and multi-cultural diversity.

 

Increase in the standard of living and concern for quality of work life has a direct influence over the performance of a business concern.

 

The following are some of the key concerns in the social environment:

  • ecology (e.g., global warming, pollution);
  • demographics (e.g., population growth rates, aging work force in industrialized countries, high educational requirements);
  • quality of life (e.g., education, safety, health care, standard of living) and
  • noneconomic activities (e.g., charities)

 

Social forces are often most important because of their effect on people’s behaviour. For an organization to survive, the product or service must be wanted, thus consumer behaviour is considered as a separate environmental behaviour. Behaviour factors also affect organisations internally, that is, the employees and management.

 

A society’s expectations of business present other opportunities and constraints. These expectations emanate from diverse groups referred to as stakeholders. Stakeholders include a firm’s owners (stockholders), members of the board of directors, managers and operating employees, suppliers, creditors, distributors, customers, and other interest groups – at the broadest level, stakeholders include the general public.

 

Determining the exact impact of social forces on an organization is difficult at best. However, assessing the changing values, attitudes, and demographic characteristics of an organization’s customers is an essential element in establishing organizational objectives.

 

4.    Technological environment

 

Advancements in technology like web services, robotics, e-business solutions, nanotechnology, mobile applications etc. has created greater impact in business performance in terms of improved products, improved production technology, usage of new raw materials and new product development.

 

Technological advancements enhance the production efficiency, maintains delivery schedule, reduce cost of production and cuts down manufacturing leadtime.

 

Some of the factors which operate in technological environment are

 

  1. Sources of technology such as indigenous Research and Development, foreign collaborations and technical know-how
  2. Technology development, rate of change of technology and stages of technical development.
  3. Communication technology and infrastructure development influencing business.

Business firm operates within the framework of the prevailing legal environment. They are supposed to be aware of legal rules and regulations concerning licensing, foreign investment, price control, distribution of goods, import and export documentation, public sector disinvestments, small scale industrial regulations, consumer protection rights, environmental protection measures and various environmental clearances for industries, corporate social responsibility initiatives and so on.

Some of the legislations influencing business performance are

 

  • Industrial licensing policy *Consumer Protection Act
  • Labour legislations *Information technology act *Foreign Direct Investments *Indian Companies Act
  • Workers compensation and working conditions *Energy conservation and
  • Waste management practices.

Additionally, the business enterprises are in the need to know the procedures, rules, regulations, clearances and systems, essential for managing the business successfully.

 

6. Ecological Environment

 

Geographical and ecological factors such as natural resources availability, climatic and weather conditions, topographical factors, eco-friendly practices, environment protection measures, energy conservation measures, waste recycling practices, pollution control mechanisms and so on influence the business performance.

 

Therefore, any business firm should be aware of the political, economic, socio-cultural, technological, regulatory or legal and ecological or natural environmental factors, to improve its financial and business performance in its business operations.

 

Demographic factors like age of the consumers, family size, income of the family, place of residence, nature of family, number of family members, religion, educational level, nature of work and so on have a great impact on business performance and profitability of the firms.

 

Task environment

 

Task environment refers to those industry elements or factors which are external to the company but have a direct and specific impact upon the organisation and are inturn affected by the organisation’s operation.

 

These factors determine the nature and strength of the competition in the industry.

 

Task Environment is the set of conditions originating from suppliers, distributors, customers, stock markets and competitors which directly affects the organization from achieving its goals.

 

Task environment helps in identifying the environmental factors responsible for the success of the company.

 

Factors responsible for Task Environment are

 

Competitors

 

Competitors generally look for higher margins and for this they provide unique features to its products, thus try to create differentiation.

 

Customers

 

Organizations also compete for customers as well as for wholesalers, retailers etc. Customers decide the fate of any company and hence companies try their level best to lure them.

 

Suppliers

 

Suppliers have high bargaining power if the raw materials being supplied are rare or if there are less number of suppliers in the market. So it’s important to hold on the suppliers and maintain good relationship with them. Acting intelligently, companies often maintain more number of suppliers to reduce risk of deserting by anyone.

 

Distributors

 

Distributors who become intermediary between retailers and wholesalers or between manufacturer and wholesaler play a vital role in a task environment.

 

Substitutes

 

Substitutes are alternative products that satisfy similar consumer needs. Cost advantage, high demand for products, technological advancements and so on has led to growing number of substitutes in the market. Firms that ignore to take note of substitutes, will tend to lose their market share and demand in the market.

Therefore, a business firm needs to analyse the micro environment, macro environment and task environment factors to formulate mission, objectives and strategies for successful business performance.

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References:

  1. Nitish Sengupta & Chandan.J.S., “Strategic Management-Contemporary Concepts and Cases, First Edition, Vision Books, New Delhi, 2003.
  2. Gupta, Gollakota & Srinivasan, “Business Policy and Strategic Management-Concepts and Applications”, Prentice Hall of India, 2005.
  3. Prasad.L.M., “Strategic  Management”,  Fifth  edition,  Sultan  Chand  &  Sons, New Delhi, 2008.
  4. L.M.Prasad, “Strategic Management”, Sultan Chand & Sons, New Delhi, 2010.
  5. M.Jeyarathinam, “Strategic Management”, Himalaya Publishing House, Fourth Edition, 2012.

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