Chapter- Five

5.1 The Internal Assessment

The changes in the environment may create opportunities, which the organizations try to exploit
or may bring threats for the organizations, which the latter tries to control or neutralize.
However, in order to develop successful strategies to exploit such opportunities of control the
threats, analysis of an organization’s capabilities is important for strategy making which aims at
producing a good fit between a country’s resource capability and its external situation.
Many of the issues of strategic development are concerned with changing strategic capability
better to fit a changing environment. However, looking at strategic development from a different
perspective i.e. stretching and exploiting the organizations capability to create opportunities is
very essential and is called the Resource Based View (RBV) of strategy. That is all the resources
of the organization should mobilized to achieve the objectives.
Professionals from different organizations suggest that a firm’s overall strengths and weaknesses
and its ability to execute are often found more important to its performance than environmental
factors. Internal capabilities and process execution at time allow firms to gain competitive edge
over competitors even with relatively lesser resources and lesser advantageous position.
Relationship among the functional areas of business
Strategic management is a highly interactive process that requires effective coordination among
management, marketing, finance/accounting, production, R&D, and information systems. A
failure to recognize and understand relationships among the functional areas of business can be
detrimental to strategic management, and the number of those relationships that must be
managed increases dramatically with a firm’s size, diversity, geographic dispersion, and the
number of products or services offered.
Integrating strategy and culture: relationships among a firm’s functional business activities can
perhaps be exemplified best by focusing on organizational culture. Organizational culture can be
defined as “a pattern of behaviour developed by an organization as it learns to cope with its
problem of external adaptation and internal integration that has worked well enough to be
considered valid and to be taught to new members as the correct way to perceive, think, and
feel.”
5.2. Types of Resources
There are three types of resources-Assets, capabilities and competencies which have been
identified under Resource Based View (RBV) of the firm. Strategic thinkers explaining the RBV
suggest that the organizations are collection of tangible and intangible assets combined
capabilities to use those assets. These help organizations develop understanding of these three
types of resources and help us to know how a firm’s internal strength and weaknesses affect its
ability to compete. Strategic importance of Resources
1. Available resources: are those resources that are basic to the capability of any organization:
 Physical resources
 Human resources
 Financial resources
 Intellectual capital
2. Unique resources: unique resources as defined in strategy texts are those resources, which
critically underpin competitive advantage. Their ability to provide value in product is better than
competitor’s resources and is difficult to imitate. Some organizations have patented products of

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services that give them advantage; for some service organizations, unique resources may be
particularly the people working in that organization.
3. Core competencies: competency refers to the ability to perform. The difference in
performance between organizations in the same market is rarely explainable by differences in
their resource base, since resources can usually be imitated or traded. Superior performances are
actually determined by the way in which resources are deployed to create competences in the
organization’s activities.
Core competencies are activities or processes that critically underpin an organization’s
competitive advantage. They create and sustain ability to meet the critical success factors of
particular customer groups better than other, provide ways that are difficult to imitate.
Valuable asset capability or competence is due to the following:
 Scarcity: - this is a very basic test to understand its resource value. Just in case any
resource is widely available, then it’s not likely to be a source of competitive advantage.
 Inimitability: - a resource that is easy to imitate is of little competitive advantage b/c it
will be widely available from a variety of sources. Inimitability however does not last for
long and at some point competition matches or even betters any offering. Therefore,
firms should make effort which may temporarily limit imitation. Physical uniqueness,
causal ambiguity or scale deterrence are few ways how organizations attempt doing this.
 Durability: - hyper competitive market conditions have a tendency to make competitive
advantage less and less sustainable. Durability in such situations becomes a more
stringent test for valuing resources, capabilities and competencies.
 Superiority: - competencies are valuable only if they manifest themselves as competitive
advantages and these means that they are superior to those held by rivals. “Being good is
not enough and a firm must be better than its competitor.”
5.3. Quantitative and Qualitative Assessment
Since every organizations’ creation of wealth is the primary goal, any assessment has to focus on
measuring the variety of means that contribute to the creation of wealth. The creation of wealth
depends largely on providing superior value for customers and this is possible when the
organizations have efficient and effective operations with necessary capabilities. The required
capabilities depend on the employees, their skills and motivation levels.
Financial data is the most basic and universally accepted approach in assessing a firm. Financial
analysis emphasizes on the study of financial ratios (ratio analysis)
i. Profitability ratios
ii. Liquidity ratios
iii. Leverage ratios
iv. Activity ratios
Often it has been found that quantitative analysis alone is not sufficient to understand any
organization’s strengths and weaknesses. Particularly the factors related to human resources,
organizational culture and its temperament towards creativity and innovation are few which can
be understood only through qualitative information. Qualitative information also supplements
quantitative data in understanding basic concepts of what customers’ value and how they feel
about a given product.
5.4. Comparison Standards
In order to arrive at some meaningful conclusion regarding strengths and weaknesses, the
analysis should be supported by appropriate standards for comparison. The three commonly
accepted comparison standards are:

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a) Industry Norms
The industry norms compare the performance of an organization in the same industry or sector
against a set of agreed performance indicators. Data on industry norms are widely available and
can be found from several published sources. Using such data and comparing an organization
against others in its industry helps the organization understand its true position. For e.g., in the
case of the healthcare sector, such indicators can be; mortality index, doctors per 100 beds…etc.
The danger of industry norms comparison is that the whole industry may be performing badly
and losing out competitively to other industries.
B) Historical Comparisons
Historical comparisons look at the performance of an organization in relation to previous years in
order to identify significant changes. Organizations must endeavor to improve their performance
over time in order to remain competitive and overpower the performance of competitors. It must
try to beat its own best in future, which would call for continuous improvement. However, in
case of the historical comparison it also entails scope for complacency/satisfaction since the
organizations compare their rate of improvement over years with that of competitors and it is
possible that the latter may itself be operating at relatively lower average.
c) Benchmarking
Benchmarking compares an organization’s performance against ‘best in class’ performance
wherever that is found. Managers seek out the best examples of a particular practice in other
companies as part of an effort to improve the corresponding practice in their own firm. When the
search for best practice limited to competitors, the process is called competitive benchmarking.
Other times managers may seek out the best practices regardless of what industry they are in,
called functional benchmarking. Benchmarking
Provides the motivation and the means many firms need to seriously rethink how their
organizations perform certain tasks.
A comprehensive internal analysis of an organization’s strengths and weaknesses must however
utilize all three types of comparison standards. For instance, an organization can study industry
norms to assess where it stands in terms of number of complaints generated regarding defects
during guarantee period of a product. Then it could benchmark the organization that is best at
controlling the defects. Based on the benchmarking results it could implement major new
programmes and track improvements in these programmes over time using, historical
comparisons.
5.5. SWOT- Analysis
SWOT Analysis is astrategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a business venture. It involves specifying the objective of
the business venture and identifying the internal and external factors that are favorable and
unfavorable to achieving that objective. It summarizes the key issues from the external
environment and the internal capabilities of an organization those which become critical for
strategy development.SWOT analysis is based on the assumption that if managers can carefully
review such strengths, weaknesses, opportunities, and threats, a useful strategy for ensuring
organizational success will become evident to them.
Strengths
Two factors contribute to your strengths: ability and resources available.
Ability is evaluated on 3 counts:
1. Versatility: your ability to adapt to an ever changing environment.

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 2. Growth: your ability to maintain a continuing growth.
3. Markets: your ability to penetrate or create new markets.
The strength of resources has three dimensions:
1. Availability: your ability to obtain the resources needed.
2. Quality: the quality and up-to-dateness of the resources employed.
3. Allocation: your ability to distribute resources both effectively and efficiently.
Firm’s strengths are its resources and capabilities that can be used as a basis for developing a
competitive advantage. Example:
 Patents
 Strong brand names
 Good reputation among customers
 Cost advantages from proprietary know-how
 Exclusive access to high grade natural resources
 Favorable access to distribution networks
Weaknesses
Your weaknesses are determined through failures, defeats, losses and inability to match up
with the dynamic situation and rapid change. The weaknesses may be rooted in lack of
managerial skills, insufficient quality, technological backwardness, inadequate systems or
processes, slow deliveries, or shortage of resources. There are three possible outcomes to the
analysis of your weaknesses.1
1. Correction of an identified defect.
2. Protection through cover-up and prevention strategies to reduce the exposure of your
weaknesses.
3. Aggression to divert the attention from your weaknesses.
The absence of certain strengths may be viewed as a weakness. Example:
 Lack of patent protection
 A weak brand name
 Poor reputation among customers
 High cost structure
 Lack of access to the best natural resources
 Lack of access to key distribution channels

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 Opportunities
Opportunities are abundant. You must develop a formula which will help you define what
comes within the ambit of an opportunity to focus on those areas and pursue those
opportunitieswhere effectiveness is possible. The formula must define product/service, target
market, capabilities required and resources to be employed, returns expected and the level of
risk allowed.
Weaknesses of your competitions are also opportunities for you. You can exploit them in two
following ways:
1. Marketing warfare: attacking the weak leader's position and focusing all your efforts at
that point, or making a surprise move into an uncontested area.
2. Collaboration: you can use your complementary strengths to establish a strategic
alliance with your competitor.
The external environmental analysis may reveal certain new opportunities for profit and growth.
Example:
 An unfulfilled customer need
 Arrival of new technologies
 Loosening of regulations
 Removal of international trade barriers
Threats
External threats arise from political, economic, social, technological (PEST) forces.
Technological developments may make your offerings obsolete. Market changes may result
from the changes in the customer needs, competitors' moves, or demographic shifts. The
political situation determines government policy and taxation structure.
 Changes in the external environment also may present threats to the firm. Example:
 Shifts in consumer tastes away from the firm’s products
 Emergence of substitute products
 New regulations
 Increased trade barriers
Any organization must try to create a fit with its external environment. The SWOT-diagram is a
very good tool for analyzing the internal strengths and weaknesses a corporation and the external

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opportunities and threats. Organizations may use confrontation matrix as a tool to combine the
internal factors with the external factors.

Opportunities Threats
Strengths S – O Strategies S – T Strategies
Offensive Adjust
Make the most of these Restore strengths
Weaknesses W – O Strategies W – T Strategies
Defensive Survive
Watch competition Turnaround
closely

S – O Strategies: - pursue opportunities that are a good fit to the company’s strengths.
S – T Strategies: - identify ways that the firm can use its strengths to reduce its vulnerability to
external threats.
W – O Strategies: - overcome weaknesses to pursue opportunities
W – T Strategies: - establish a defensive plan to prevent the firm’s weaknesses from making it
highly susceptible to external threats.

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