The internal analysis, as a separate component of the strategic planning, involves collecting and analyzing relevant types of information on the organization’s resources and capabilities. The study of the internal environment must answer all resource related questions, and solve all resource management issues.
The analysis of the organizational resources is the most used instrument for the internal environment analysis. Following are the major methods and techniques of internal analysis.
- Value Chain Analysis
- Cost Efficiency Analysis
- Effectiveness Analysis
- Comparative Analysis
1. Value Chain Analysis
Value chain is defined as an organization's coordinated set of activities to satisfy customer needs, starting with relationships with suppliers and procurement, through production, selling and marketing, and delivery to the customer. Each stage of the chain is linked with the next stage and looks forward to the customer's needs and backwards from the customer as well. Each link in the value chain must seek competitive advantage, either by being cheaper than the corresponding link in competitor's chains, or by means of added value through superior quality or differentiated features.
A strategic tool to measure the importance of the customer’s perceived value is value chain analysis. Such analysis enables a company management to determine value creating process in market place, so it becomes essential for assessing competitive advantage.
The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer value accumulates along a chain of activities that lead to an end product or service. Porter describes the value chain as the internal processes or activities a company perform “to design, produce, market, deliver and support its product.” He further states that “a firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.”
Porter describes two major categories of business activities;
- Primary activities and
- Support activities.
Primary activities are directly involved in transforming inputs into outputs and in delivery and after-sales support. These are generally also the line activities of the organization. They include: - Inbound logistics—material handling and warehousing;
- Operations—transforming inputs into the final product;
- Outbound logistics—order processing and distribution;
- Marketing and sales—communication, pricing and channel management;
- Service—installation, repair and parts. Support activities support primary activities and other support activities. They are handled by the organization’s staff functions and include:
- Procurement—purchasing of raw materials, supplies and other consumable items as well as assets;
- Technology development—know-how, procedures and technological inputs needed in every value chain activity;
- Human resource management—selection, promotion and placement; appraisal; rewards; management development; and labor/employee relations;
- Firm infrastructure—general management, planning, finance, accounting, legal, government affairs and quality management. The value chain concept is helpful in understanding how value is created or lost. The value chain describes the activities within and around an organization which together create a product or service to offer in target market. It is specifically important and supportive to;
- Deployment of resources.
- Advocates the value of primary and support activities.
- Explains contribution from different activities.
- Attempts to understand how business creates customer value.
- Divide business and management activities.
2. Cost Efficiency Analysis
Cost efficiency analysis is a decision making tool which can be used to discuss the economic efficiency of a program or a project. The tool compares policies, programs or projects in order to identify the most appropriate one to achieve a result at least cost.
Cost efficiency in an organization can be achieved in a variety of ways:
- Economies of scale: It is cost reduction techniques by following ways;
- Bulk purchasing of inputs
- High volume of output
- Optimum capacity utilization
- Worldwide distribution network
- Better production or operation management.
- Supply costs: It consist of cost of inputs and inbound logistic. Lowering the supply cost is essential to get cost efficient result which can be achieved in following ways:
- Vertical integration
- Just-in-time method
- Supply chain management
- Management information system
- Efficient production methods, such as mass production as in the motor industry.
- Experience curves, which illustrate the rule that over a period of time the costs of production will decrease in relation to the number of units produced, as experience is gained in processes, material purchasing, etc.
3. Effectiveness Analysis
Effectiveness analysis is widely known as product feature analysis. Physical features of the product that creating the value to the customers is measured in effectiveness analysis. In general, aesthetic features of the product-looks, size, color, structure etc create value to the customers.
If a product meets customers requirement at expected cost by giving expected quality, it is said the product effectiveness. So, product analysis deals with following two dimensions;
- Customer requirement
- Value added by company
Customer requirement is satisfied, if the company offers them the product with aesthetic features, and their service expectations and price sensitivity.
Value addition to customers can be enhanced through extra quality and quantity of product, after sales service and communication the customers about the product features.
4. Comparative Analysis
Comparative analysis is a tool to measure the company's performance by comparing company's position with industry's norms and standards. This is used to see how the value system of an organization has changed over a period of time. It is carried out mainly by considering the history of the company itself or by comparing its performance with the norms of the industry within which it operates.
Comparative analysis is done to assess financial performance and sales effectiveness of the company. So, it is possible to identify by looking at financial ratios such as sales/capital and sales/employees and comparing current values with those of recent years. Comparing the company's position in terms of these factors with the norms for the industry helps to identify its relative position with respect to its competitors.
In order to develop strategic plans for future performance a company needs to analyze both its current and past performance. This is an integral part of assessing the company's strengths and weaknesses, from which to decide on its strategic capability. Organizational performance is an essential consideration, since the company must pursue strategies which it is capable of sustaining.
Three ways of approaching the analysis of a company's current and past performance are:
- Historical analysis of performance;
- Comparison with the relative performance of organizations in the same industry,
i.e. with industry norms; or - Benchmarking, i.e. a comparison against the best performers.
5. Historical Analysis
The analysis consists of looking back at how the company has performed in the past and by comparing its current performance with previous years in order to find out whether there have been any significant changes.
This form of analysis usually considers those areas of a company's performance which can be readily quantified, such as total sales, market share, financial ratios, profitability, etc.
The downside of this type of analysis is that, although it can identify changes of performance or trends in activities, it does not provide any reasons for them.
Comparison with Industry Norms
It is important for a comparison to be made between the company and other competitors in its industry and with the standards of performance which are accepted as being the industry norms.
The problem with this type of analysis is based on the difficulty of comparing different companies with their differences in resources, objectives and so on. As a consequence of these differences, what may be regarded as a competent performance for one company may be regarded as a poor one for another company with access to greater resources of finance, skilled personnel, etc. Comparison with industry norms does have the advantage over historical analysis, however, since it is not as insular.