Internal environment analysis of business


It is one thing to find attractive opportunities and another to be able to take advantage of them. Each business needs to evaluate its internal strengths and weakness.

Clearly, the business does not have to correct all its weaknesses, nor should it gloat about all its strengths. The big question is whether the business should limit itself to those opportunities where it possesses the required strengths or whether it should consider opportunities that mean it might have to acquire or develop certain strengths. For example, managers at Texas Instruments (TI) were spilt between those who wanted TI to stick to industrial electronics (where it has clear strength) and those who wanted the company to continue introducing consumer products (where it lacks some required marketing strengths).

Sometimes a business does poorly not because its people lack the required strengths, but because they do not work together as a team. In one major electronics company, the engineers look down on the salespeople as “engineers who couldn’t make it,� and the salespeople look down on the service people as “salespeople who couldn’t make it.� It is therefore critical to assess interdepartmental working relationships as part of the internal environmental audit. Honeywell does exactly this.

George Stalk, a leading management consultant, suggests that winning companies are those that have achieved superior in-company capabilities, not just core competencies. Every company must manage some basic processes, such as new-product development, sales generation, and order fulfillment. Each process creates value and requires interdepartmental teamwork. Although each department may possess specific core competence, the challenge is to develop superior competitive capability in managing the company’s key processes. Stalk calls this capabilities-based competition.

Goal Formulation

Once the company has performed a SWOT analysis, it can proceed to develop specific goals for the planning period. This stage of the process is called goal formulation. Managers use the term goals to describe objectives that are specific with respect to magnitude and time.

Most business units pursue a mix of objectives including profitability, sales growth, market share improvement, risk containment, innovation, and reputation. The business unit sets these objectives and then manages by objectives (MBO). For an MBO system to work, the unit’s objectives must meet four criteria:

1. They must be arranged hierarchically, from the most to the least important:

The business unit’s key objective for the period may be to increase the rate of return on investment. This can be accomplished by increasing the profit level and reducing the amount of invested capital. Profit itself can be increased by increasing revenue and reducing expenses. Revenue can be increased by increasing market share and prices. By proceeding this way, the business can move from broad to specific objectives for specific departments and individuals.

2. Objectives should be stated quantitatively whenever possible:

The objective “increase the return on investment (ROI)� is better stated as the goal “increase ROI to 15% within two years.�

3. Goals should be realistic:

They should arise from an analysis of the business unit’s opportunities and strengths, not from wishful thinking.

4. Objectives must be consistent:

It is not possible to maximize sales and profits simultaneously.

Other important trade-offs include short-term profit versus long-term growth, deep penetration of existing markets versus developing new markets, profit goals versus nonprofit goals, and high growth versus low risk. Each choice in this set of trade-offs calls for a different marketing strategy.

Many believe that adopting the goal of strong market share growth may mean having to forego strong short-term profits. For years, Compaq priced aggressively in order to build its market share in the computer market. Subsequently, Compaq decided to pursue profitability at the expense of growth. Most businesses can be growth businesses and can grow profitably. Success stories such as GE Medical, Allied Signal, Citibank, and GE Capital, all enjoying profitable growth can be cited as examples.