Module 3

Learning Outcomes
1. Explain the relationship between organizations and environment
2. Classify the business environment as internal and external
3. Know about various internal environment factors of businesses

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4.2 Strategic Advantage Profile

A profile of strategic advantages (SAP) is a summary which provides an overview of the advantages and
disadvantages in key areas likely to affect future operations of the firm. It is a tool for making a systematic
evaluation of the strategic advantage factors which are significant for the company in its environment. The
preparation of such a profile presupposes detailed analysis and diagnosis of the factors in each of the
functional areas (Marketing, Production, Finance and Accounting, Personnel and Human Resources, R &
D). The relevant data for the critical areas may go as a supplement to the profile. The following Strategic
Advantage Profile relates to a food processing company in India. It started as a branch of a US corporation,
later became a 100% subsidiary, and now has 40% shareholding of the foreign enterprise. Many Indian
households are familiar with its consumer products: jelly, baking powder, custard powder, squash and soft
drinks concentrate. However, not many know about its industrial products- caramel coloring, adhesives,
starch binders and fillers.

Since the Strategic Advantage Profile is a summary statement of corporate capabilities, in summarizing the
functional competencies a comparative view needs to be taken in the light of external conditions and the
time horizon of projections. For example, while comparing the level of inventory holding, one may find it
to be relatively higher than that of competing firms; as such it should be regarded as a weakness. But if the
market demands show an increasing trend, apparent weakness should be considered strength.

In the preparation of SAP one must also reckon the probability of the strength or advantage continuing in
future and how long it can be equally alert and may bridge the gap sooner or later. Or, complementary
factors in some areas may be a drag on the company’s strength in other areas. A company may identify its
relative strength in the personnel area with highly skilled workmen and technical staff manning the
production department; however, its production facilities may be old and outdated. It is obvious that the
technical competence in the personnel area can hardly be regarded as a potential strength unless the
company removes the weakness of outdated production facilities. No doubt the company should recognize
the importance of its unique capabilities and capitalize the distinctive advantages rather than spreading
its resources thinly across a number of functional areas. At the same time, it must recognize the danger of
relying on strengths in a particular area without simultaneously reckoning the capabilities in other
interdependent units of activity. It is thus very well suggested that “a firm should develop a strategy over
time which revolves around an area of distinctive advantages, develop slack resources, and these can
evolve into new areas of strength when old ones falter.”

4.3 Organizational Appraisal

The process of observe an organizational internal environment to identify the strengths and weaknesses
that may influence the organization’s ability to achieve goals. A firm can exploit its opportunities
successfully, depending on its corporate strengths. It can be said that the corporate capabilities of the firm
become the focal point for its performance and survival. They play a crucial role, both in identifying the
strategy and its success. Corporate capabilities go beyond sales, profit and net worth. It is concerned with
the state of mind and outlook of the firm. Corporate strategy ultimately means a matching game between
environmental opportunities and organizational strengths to gain competitive advantage. Assessment of
organization’s strengths and weaknesses is also known as Corporate Appraisal.

The internal environment of an organization includes forces that operate inside the organization with
specific implications for managing organizational performance. Internal environmental factors, unlike
external environmental factors come from within. These factors, collectively defined both trouble sports
that need strengthening and the core competencies that the firm can build. An organization can better
analyze how much activity might and value or contribute significantly to shape an effective strategy by
systematically examining its internal environment.

The appraisal of the external environment of a firm helps it to think of what it might choose to do. The
appraisal of the internal environment, on the other hand, enables a firm to decide about what it can do.

What shall build a foundation for understanding the internal environment through an explanation of its
dynamics? This has been done by referring to the resource-based view of strategy. The resources,
behavior, strengths and weaknesses, synergy, and competencies constitute the internal environment , and
shall deal briefly with each of these aspects initially. All these together determine the organizational
capability that leads to strategic advantage.
Organizational capabilities could be understood in terms of the strengths and weaknesses existing in the
different functional areas of an organization. We shall consider six such areas: finance, marketing,
operations, personnel, information management and general management. For each of these, we shall
mention the importance factors influencing them and clarify the nature of the various functional
capabilities’ factors.

The various considerations involved in organizational appraisal are discussed next. We deal with the
factors that affect appraisal, the approaches adopted for appraisal, and the sources of information used to
perform organizational appraisal. With regard to the methods and techniques used for organizational
appraisal, we consider a range of factors grouped under the three headings of internal analysis,
comparative analysis, and comprehensive analysis. The application of these methods results in
highlighting the strengths and weaknesses that exist in different functional areas. The results of
organizational appraisal are structured through the preparation of an organizational capability profile and
a strategic advantage profile.

4.4 Dynamics of Internal Environment

The internal environment provides an organization with the capability to capitalize on the opportunities
or protect itself from the threats that are present in the external environment. Ultimately it is the fit that
takes place between the external and the internal environment that enables an organization to formulate
its strategy. We attempt to understand the internal environment of an organization in terms of the
organizational resources and behavior, strengths and weaknesses, synergistic effects, and competencies.

An organization uses different types of resources and exhibits a certain type of behavior. The interplay of
these different resources along with the prevalent behavior produces synergy or synergy within an
organization, which leads to the development of strengths or weaknesses over a period of time. Some of
these strengths make an organizational especially competent in a particular area of its activity causing it
to develop competencies. Organizational capability rests on an organization’s capacity and ability to use
its competencies to excel in a particular field.

1. The resources,
2. Behaviour,
3. Strengths and weaknesses,
4. Synergistic effects and
5. Competencies of an organization

Determine the nature of its internal environment. Exhibit-2 depicts a diagram showing the framework
that we have adopted for the explanation of the process of development of strategic advantage by an
organization. It is expected that the readers of this book are aware of these terms in general. However, we
shall explain each of these terms here to place them in the specific context of strategic management and
business policy.
4.4.1 Organizational Resources

The dynamics of the internal environment of an organization can be best understood in the context of the
resource-based view of strategy. According to Barney (1991), who is credited with developing this view of
strategy as a theory, a firm is a bundle of resources- tangible and intangible- that includes all assets,
capabilities, organizational processes, information, knowledge, and so on. These resources could be
classified as physical, human, and organizational resources. The physical resources are the technology,
plant and equipment, geographic location, access to raw materials, among others. The human resources
are training, experience, judgment, intelligence, relationships, and so on, present in an organization. The
organizational resources are the formal systems and structures as well as informal relations among
groups. Elsewhere, Barney has said that the resources of an organization can ultimately lead to a strategic
advantage for it if they possess four characteristics, that is, if these resources are valuable, rare, costly to
imitate, and non-substitutable.

4.4.2 Organizational Behavior

Organizational behavior is the manifestation of the various forces and influences operating in the internal
environment of an organization that create the ability for, or place constraints in the usage of resources.
Organizational behavior is unique in the sense that leads to the development of a special identity and
character of an organization. Some of the important forces and influences that affect organizational
behavior are: the quality of leadership, management philosophy, shared values and culture, quality of
work environment and organizational climate, organizational politics, use of power, among others.
The perceptive reader would note that what we are proposing here is a marriage of the hard side of an
organization- its resource configuration- with the soft side of behavior. The resources and behavior are
thus the yin and yang of organizations. What they collectively produce are the strengths and weaknesses.

4.4. 3 Strengths and Weaknesses

Organizational resources and behavior do not exist in isolation. They combine in a complex fashion to
create strength and weaknesses within the internal environment of an organization. Strength is an
inherent capability which an organization can use to gain strategic advantage. A weakness, on the other
hand, is an inherent limitation or constraint which creates a strategic disadvantage for an organization.
Financial strength, for example, is a result of the availability of sources of finance, low cost of capital,
efficient use of funds, and so on. Another example is of a weakness in the operations area which results
due to inappropriate plant location and layout, obsolete plants and machinery, uneconomical operations,
and so on. In the following sections, we will take up a detailed discussion of the strengths and weaknesses
in different functional areas within an organization.

Strengths and weaknesses do not exist in isolation but combine within a functional area, and also across
different functional areas, to create synergistic effects.

4.4.4 Synergistic Effects

It is the inherent nature of organizations that strengths and weaknesses, like resources and behavior, do
not exist individually but combine in a variety of ways. For instance, two strong points in a particular
functional area add up to something more than double the strength. Likewise, two weaknesses acting in
tandem result in more than double the damage. In effect, what we have is a situation where attributes do
not add mathematically but combine to produce an enhanced or a reduced impact. Such a phenomenon is
known as the synergistic effect. Synergy is the idea that the whole is greater or lesser than the sum of its
parts. It is also expressed as “the two- plus –two –is equal- to –five- or- three effect”.

4.4.5 Competencies

Based on its resources and behavior, an organization develops certain strengths and weaknesses which
when combined lead to synergistic effects. Such effects manifest themselves in terms of organizational
competencies. Competencies are specific qualities possessed by any organization that make them
withstand pressures of competition in the marketplace. In other words, the net results of the strategic
advantages and disadvantages that exist for an organization determine its ability to compete with its
rivals. Other terms frequently used as being synonymous to competencies are unique resources, core
capabilities, invisible assets, embedded knowledge, etc.
 Many organizations achieve strategic success by building distinctive competencies around the CSFs. Recall
that CFS’s are those factors which are crucial for organizational success. A few examples of distinctive
competencies are given below.

Superior product quality in a particular attribute, say, a two- wheeler, which is more fuel- efficient than its
competitors’ products.

Creation of a market niche by supplying highly- specialized products to a particular market segment

Differential advantages, based on the superior R&D skills of an organization not possessed by its
competitors

An organization’s access to a low-cost financial source like equity shareholders, not available to its
competitors

A distinctive competence is “any advantage a company has over its competitors because it can do
something which they cannot or it can do something better than they can”. It is not necessary, of course,
for all organizations to possess a distinctive competence. Neither do all the organizations, which possess
certain distinctive competencies, use them for strategic purposes.

4.4.6 Organizational Capabilities

Organizational capability is the inherent capacity or potential of an organization to use its strengths and
overcome its weaknesses in order to exploit opportunities and face threats in its external environment. It
is also viewed as a skill for coordinating resources and putting them to productive use. Without capability,
resources, even though valuable and unique, may be worthless. Since organizational capability is the
capacity or potential of an organization, it means that it is a measurable attribute. And since it can be
measured, it follows that organizational capability can be compared. Yet it is very difficult to measure
organizational capability as it is, in the ultimate analysis, a subjective attribute. As an attribute, it is the
sum total of resources and behavior, strengths and weaknesses, synergistic effects occurring in and the
competencies of any organization.

4.4.7 Strategic Advantage

Strategic advantages are the outcome of organizational capabilities. They are the result of organizational
activities leading to rewards in terms of financial parameters, such as, profit or shareholder value, and/or
non-financial parameters, such as, market share or reputation. In contrast, strategic disadvantages are
penalties in the form of financial loss or damage to market share. Clearly, such advantages or
disadvantages are the outcome of the presence or absence of organizational capabilities. Strategic
advantages are measurable in absolute terms using the parameters in which they are expressed. So,
profitability could be used to measure strategic advantage: higher the profitability better is the strategic
advantage. They are comparable in terms of the historical performance of an organization over a period of
time or its current performance with respect to its competitors in the industry.
4.5 Organizational Capability Factors

Capabilities are most often developed in specific functional areas, such as, marketing or operations, or in a
part of a functional area, such as, distribution or R&D. It is also feasible to measure and compare
capabilities in functional areas. Thus, a company could be considered as inherently strong in marketing
owing to a competence in distribution skills. Or a company could be competitive in operations owing to a
superior R&D infrastructure.

Organizational capability factors (or, simply, capability factors) are the strategic strengths and
weaknesses existing in different functional areas within an organization which are of crucial importance
to strategy formulation and implementation. Other terms synonymous with organizational capability
factors are: strategic factors, strategic advantage factors, corporate competence factors, and so on.

The following are the list of capabilities:

1. Financial Capability
2. Marketing Capability
3. Operations Capability
4. Personnel Capability
5. Information Management Capability
6. General Management Capability

4.5.1 Financial Capability

Financial capability factors relate to the availability, usage, and management of funds, and all allied
aspects that have a bearing on an organization’s capacity and ability to implement its strategies. Some of
the important factors which influence the financial capability of any organization are as follows:

Factors related to sources of funds. Capital structure, procurement of capital, controllership, financing
pattern, working capital availability, borrowings, capital and credit availability, reserves and surplus, and
relationship with lenders, bank and financial institutions.

Factors related to the usage of funds. Capital investment, fixed asset acquisition, current assets, loans and
advances, dividend distribution, and relationship with shareholders.

Factors related to the management of funds. Financial, accounting, and budgeting system; management
control systems; state of financial health, cash, inflation, credit, return and risk management; cost
reduction and control; and tax planning and advantages.
 Exhibit-3 Typical Strengths that Support Financial Capability

 Access to financial resources

 Amicable relationship with financial institutions High level of credit worthiness
 Efficient capital budgeting system
 Low cost of capital as compared to competitors High level of shareholder’s confidence
 Effective management control system
 Tax benefits due to various government policies.

4.5.2 Marketing Capabilities

Marketing capabilities factors relate to the pricing, promotion and distribution of products and services,
and all the allied aspects that have a bearing on an organization’s capacity and ability to implement its
strategies. Some of the important factors which influence the marketing capability of an organization are
as follows:

Product related factors- variety, differentiation, mix quality, positioning, packaging

Price-related factors- pricing objectives, policies, changes, protection, advantages

Place related factors- distribution, transport and logistics, marketing channels

Promotion related factors- promotional tools, sales promotion, etc.

Integrative and systemic factors- Marketing mix market standing, company image, marketing
organization, marketing system, marketing management information system, etc.

Exhibit-4 Typical strengths that support marketing capability

 Wide variety of products Better quality of products Sharply-focused positioning

 Low prices as compared to those of similar products in the market Price protection due to government
policy
 High quality customer service Effective distribution system Effective sales promotion
 High profile advertising
 Favorable company and product image
 Effective marketing management information system

4.5.3 Operations Capabilities

Operations capability factors relate to the production or services, use of material resources and all allied
aspects that have a bearing on an organization’s capacity and ability to implement its strategies.

Some of the important factors which influence the operations capability of an organization are as follows:

Factors related to production system- Capacity, location, layout, product or services design, work systems,
degree of automation, extent of vertical integration, etc.
Factors related to the operations and control system- Aggregate production planning, material supply;
inventory, cost and quality control; maintenance systems and procedures, and so on.

Factors related to the R&D system- Personnel, facilities, production development, patent rights, level of
technology used, technical collaboration and support, and so on.

Exhibit-4 Typical Strengths that Support Operations Capability

 High level of capacity utilization Favorable plant location

 High degree of vertical integration Reliable sources of supply
 Effective control of operational costs
 Existence of good inventory control system Availability of high caliber R&D personnel

4.5.4 Personnel Capabilities

Personnel capability factors relate to the existence and use of human resources and skills, and all allied
aspects that have a bearing on an organization’s capacity and ability to implement its strategies. Some of
the important factors which influence the personnel capability of organization are as follows:

Factors related to the personnel system. System for manpower planning, selection, development,
compensation, communication, and appraisal; position of the personnel department within the
organization; procedures and standards; and so on.

Factors related to organizational and employee’s characteristics. Corporate image, quality of managers,
staff and workers; perception about and image of the organization as an employer; availability of
developmental opportunities for employees; working conditions; and so on.

Factors related to industrial relations. Union management relationship, collective bargaining, safety,
welfare and security; employee satisfaction and morale; among others.

Exhibit-6 Typical Strengths that Support Personnel Capability

 Genuine concern for human resource management and development Efficient and effective
personnel
 The organization perceived as a fair and model employer Excellent training opportunities and
facilities
 Congenial working environment
 Highly satisfied and motivated workforce High level of organizational loyalty
 Low level of absenteeism
 4.4.4 Information Management Capability

Information management capability factors relate to the design and management of the flow of
information from outside into, and within, an organization for the purpose capacity and ability to
implement its strategies. Some of the important factors which influence the information capability of an
organization are as follows:

Factors related to acquisition and retention of information. Sources, quantity, quality, and timeliness of
information, retention capacity, and security of information.

Factors related to the processing and synthesis of information. Availability and appropriateness of
information formats, and ability to synthesize information.

Factors related to the retrieval and usage of information. Availability and appropriateness of information
formats, and capacity to assimilate and use information.

Factors related to transmission and dissemination. Speed, scope, with, and depth of coverage of
information, and willingness to accept information.

Exhibit-7 Typical Strengths that Support Information Management Capabilities

 Ease and convenience of access to information sources Widespread use of computerized information
system Availability and operability of high-tech equipment
 Positive attitude to sharing and disseminating information Wide coverage and networking of
computer system
 Presence of foolproof information security systems
 Presence of buyers and suppliers conversant with IT applications
 Top management’s understanding of, and support to, IT and its application within the organization

4.5.6 General Management Capability

General management capability relates to the integration, coordination, and direction of the functional
capabilities towards common goals, and all the allied aspects that have a bearing on an organization’s
capacity and ability to implement its strategies.

Some of the important factors which influence the general management capability of an organization are
as follows:

Factors related to the general management system. Strategic management system processes related to
setting strategic intent, strategy formulation and implementation machinery, strategy evaluation system,
management information system, corporate planning system, rewards and incentives system for top
managers, and so on.

Factors related to general managers. Orientation, risk-propensity, values, norms, personal goals,
competence, capacity for work, track record, balance of functional experience, and so forth.
 Factors related to external relationships. Influence on and rapport with the government, regulatory
agencies and financial institutions; public relation; sense of social responsibility, philanthropy, public
image as corporate citizen, and so on.

Factors related to organizational climate. Organizational culture, use of power, political processes, balance
of vested interests; introduction, acceptance and management of change; nature of organizational
structure and controls, and so on.

Exhibit-8 Typical Strengths that Support General Management Capability

 Effective system for corporate planning

 Control, reward and incentive system for top managers geared to the achievement of objectives
Entrepreneurial orientation and high propensity for risk-taking
 Good rapport with the government and bureaucracy Favorable corporate image
 Commonly being perceived as a good organization to work for Development oriented organizational
culture

4.6 Organizational Appraisal (internal appraisal, internal analysis, organizational analysis,

company analysis)

The purpose of organizational appraisal (also referred to as internal appraisal, internal analysis,
organizational analysis, company analysis, etc.) is to determine the organizational capability in terms of
the strengths and weaknesses that lie in the different functional areas. This is necessary since the
strengths and weaknesses have to be matched with the environmental opportunities and threats for
strategy formulation to take place. In organizational appraisal, the various forces and influences operating
within the internal environment of an organization have to be analyzed. These forces and influences are a
result of the organizational resources, behavior, synergistic effects, and the competencies of the
organization.

4.6.1 Factors Affecting Organizational Appraisal

The factors that affect organizational appraisal relate to the strategists, the organization, and to the
internal environment. The various characteristics of strategists- they matter so far as their general
management capability is concerned- affect the manner in which organizational appraisal would be done.

The ability of the strategists to comprehend complexity determines how well the different forces and
influences operating within the internal environment are analyzed
The size of the organization affects the quality of appraisal. Large organizations are usually more difficult
to appraise than smaller ones.

If the internal environment of an organization is vitiated owing to opposing political forces and power
games, the quality of appraisal is likely to suffer. A cohesive management team, on the other hand, is more
likely to appraise the organization better.

4.7 Profile- Method and Techniques used for Organizational Appraisal

The methods and techniques used for organizational appraisal can be identical to those used for the
performance evaluation of an organization. But there is an important difference between performance
evaluation and organizational appraisal. In evaluating performance the emphasis is on assessing the
current behavior of the organization with respect to its efficiency and effectiveness, and such an
assessment is generally of a short term nature. On the other hand, organizational appraisal is of a
comprehensive and long-term nature and the emphasis is not just on current behavior but also on what
the organization needs to do in order to gain the capability to compete in the market, take advantages of
the available opportunities, and overcome the threats operating in its relevant environment.

Keeping in view the differences between evaluation and organizational appraisal, the methods and
techniques used could be classified broadly in three parts as below.

4.7.1 Internal Analysis

The internal analysis of an organization deals with an investigation into its strengths and weaknesses by
focusing on factors that are specific to it. In contrast, as we will see a while later, comparative analysis
deals with an examination of the strengths and weaknesses of an organization in relation to its own past
record or with reference to its competitors.

Value Chain Analysis: This is a method for assessing the strengths and weaknesses of an organization on
the basis of an understanding of the series of activities it performs. Porter (1984) is credited with the
introduction of the framework called value chain.

Quantitative Analysis: Relying on numbers is a popular technique for assessing the performance of an
organization. Among number are the financial figures which are most often used for performance
evaluation, as well as, the assessment of strengths and weaknesses. (i) Financial Analysis- The traditional
methods used for evaluating financial performance cover various types of activities in different functional
areas within an organization. (ii) Non-financial quantitative analysis- The obvious advantage of
financial analysis is that all number can be expressed in terms of a common monetary unit, such as,
rupees, pounds or dollars.

Qualitative analysis: An organizational appraisal can be based primarily on qualitative analysis since it is
possible to measure and compare on a numerical or financial basis. Yet, as most strategists are aware,
quantification has its limitation.
1.7.2 Comparative Analysis

Examination of the strengths and weaknesses of an organization in relation to its own past record or with
reference to its competitors.

Comparative analysis thus forms the cornerstone of the assessment of the strengths and weaknesses of an
organization. It can be done in three ways: historical analysis, on the basis of industry norms, and by
benchmarking, all of which we have described below.

Historical Analysis: One way to compare performance and identify strengths and weakness is to start with
the historical analysis of one’s own organizational over a period of time Historical analysis is a good
measure of how well or badly an organization has progressed with respect to its own past performance.

Industry norms: The industry to which a business belongs is the most obvious choice for comparison with
regard to a wide range of parameters. A company might check whether its cost structure is comparable to
that of its competitors, or if the budget spending on advertising is equal to that of its nearest rival.

Benchmarking: A benchmarking is a reference point for the purpose of measuring. The process of
benchmarking is aimed at finding the best practices within and outside the industry to which an
organization belongs. The purpose of benchmarking is to find the best performers in an area so that one
could match one’s own performance with them and even surpass them.

1.7.3 Comprehensive Analysis

While it would be useful to use a range of analytical methods to evaluate the strengths and weaknesses of
a firm and to determine its capability, a better way is to use a combination of techniques as each one of
these have a different purpose and limitations.

Balance Scorecard: Among a newer technique used to measure the performance of an organization is that
of the balanced scorecard. The balance scorecard identifies four key performance measures as follows:

a. Customer perspective
b. Internet business perspective
c. Innovation and learning perspective Financial perspective

Each of these perspectives could be used individually; but using them in combination provides deeper
insights and a balanced approach to strategy formulation.

Key Factors Rating: A comprehensive method, which can be used in association with financial analysis, is
that of key factor rating.

Exhibit-9 Summarized Form of Organizational Capability Profile

 Financial capability factors
 Sources of funds
 Usage of funds
 Management of funds
 Marketing capability factors
 Product related
 Price related
 Promotion related
 Integrative and systematic
 Operations capability factors
 Production System
 Operational capability factors
 R&D systems
 Personnel capability factors
 Personnel system
 Organizational and employee characteristics
 Industrial relations
 Information management capability factors
 Acquisition and retention of information
 Processing and synthesis of information
 Transmission and dissemination of information
 General management capability factors
 General management system
 External relations
 Organizational climate