The emphasis on the industry environment and the firm’s competitive positioning in relation to its rivals was the dominant theme of the 1970s and most of the 1980s. The firm’s internal environment remained a relatively unexplored topic. Theorists believed that internal analysis is mostly concerned with issues of strategy implementation such as choice of a suitable structure system of control management style etc. During the late 1980s and early 1990s, interest in the role of strategy in building competitive advantage resulted in a shift off focus towards the internal aspects of the firm (also known as corporate appraisal or organizational appraisal).
Why Internal analysis?
Managers perform internal analysis to identify strengths to build on and weaknesses to overcome as they formulate strategies for competitive advantages. Over the years, research has shown that firm’s overall strengths and weaknesses and its ability to execute is more important to its importance than environmental factors. Even where the industry was unattractive and generally unprofitable firms that came out, with superior products enjoyed good profits. For example when TVS motor company parted ways with Suzuki after 19 years of co-existence, analysts had almost removed the company from their radar screens. In a highly competitive two wheeler market, they felt the company had very little steam left to get ahead; but with Victor a product of five years of R&D effort, TVS rode back to success with a vengeance and is still on strong. Bajaj auto is waging a relentless battle with foreign majors to wrest its crown back through a superior products range. Thanks to Aamir Khan’s can do attitude a simple film like Lagaan has created history in the Hindi film industry which of late had turned very unattractive due to a series of flop shows. Indian firms thus proved their worth under very trying circumstances though operating in tough, unattractive, non remunerative fields (auto components printing inks, optical media, where margins are not very far) in the recent past: e.g. Hindustan Inks (Rs 563 crore sales in 2002) Bharat Forge (Rs 473 crore sales in 2002); Moser Baer (Rs 678 crore sales in 2002). Essel Popack (Rs 600 crores sales in 2002 ) etc. Those who think Indian brands are disappearing should seriously look at what Titan is doing in the watch industry Maruti in the car industry, Taj and Oberoi in the hotel industry, Asian paints in the paints business and of course Reliance and Hindalco in the commodity businesses – Petrochemicals and Aluminium. A systematic internal analysis helps a firm:
1) To find where it stands in terms of resources, strengths and weaknesses
2) To exploit the opportunities that is in line with its capabilities
3) To assess the capability gaps and take steps to enhance its capabilities with a view to achieve its growth.
Resource Based Strategy:
The formulation of strategy usually begins with a mission statement that answers questions like: What is our business? Who are our customers? Which of their needs are we going to serve? In a dynamic world where customer preferences are flirting and the identity of customers and the technologies for serving them are fast changing a market focused strategy may not provide the stability and constancy of direction needed as a foundation for long term strategy. Hence, the need to define the firm’s strategy in terms of what it is capable of doing putting its internal resources and capabilities to best advantage.
Source: Strategic Management