Organization's strategic capability

Internal analysis is concerned with looking at resources, the systems and processes utilized within the organization. Additionally, it is concerned with the organization's strategic capability, that is, what it will be able to do in the future. It is important to evaluate the importance of a company's resources, capabilities, and competencies to ascertain whether they are internal strategic factors- that are strength and weaknesses that will help determine the future of the company.

This can be done by comparing (1) the company's past performance, (2) its key competitors, and (3) the industry as a whole.

Porter proposes that a manufacturing firm's primary activities usually begin with inbound logistics (raw materials, handling and warehousing), go through an operations process in which product is manufactured, and continue on to outbound logistics (warehousing and distribution), to marketing and sales, and finally to service (installation, repair, and sale of parts).

Several support activities such as procurement, R&D, HR management, and firm infrastructure ensure that primary value chain activities operate efficiently and effectively.

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The systematic examination of individual value activities can lead to a better understanding of a corporation's strength and weaknesses. According to Porter, differences among value chains are key source of competitive advantage. In addition to usual business functions of marketing, finance, R&D, operations, HR, and IT, structure and corporate culture are also key parts of business corporation's value chain.

The organizational culture and management style are also important. Corporate culture shapes the behavior of people in a corporation, thus affecting corporate performance.

A strong culture should not only promote survival, but it should also create the basis for a superior competitive position by increasing motivation and facilitating coordination and control. A change in mission, objectives, strategies, or policies is not likely to be successful if it is in opposition to the accepted culture of a firm. It is also important when considering an acquisition.

The merging of two dissimilar cultures, if not handled wisely, can create some serious internal conflicts. There are three basic organizational structures. Simple structure has no functional or product categories and is appropriate for a small company with one or two product lines. Employees tend to be generalists. Functional structure is appropriate for medium-sized firms with several product lines in one industry. Employees tend to be specialists. Divisional structure is appropriate for a large corporation with many product lines in several related industries.

Strategic Business Units (SBUs) are a modification of the divisional structure. The idea is to decentralize on the basis of strategic elements rather than on the basis of size, product characteristics, and to create horizontal linkages among units previously kept separately. External analysis means analysis of the environment in which the organization is operating. There are many variables within a corporation's natural, societal, and task environments. Natural environment includes physical resources, wildlife, and climate that are inherent part of existence on Earth.

The societal environment is mankind's social system that includes general forces that can influence the organization's long-run decisions. These factors affect multiple industries and are economic forces, technological forces, political-legal forces, and sociocultural forces. The task environment includes those groups that directly affect a corporation and in turn, are affected by it: Governments, local communities, suppliers, competitors, customers, creditors, employees, interest groups.

A corporation's task environment is the industry within which it operates. Some important variables in societal environment: Economic: GDP trends, interest rates, money supply, inflation rates, unemployment levels, wage/ price controls, energy alternatives, energy availability and cost, disposable and discretionary income, currency markets, global financial systems Technological: Total government and industry spending for R&D, focus of technological efforts, patent protection, new products, internet availability, telecommunication infrastructure

Political-legal: Antitrust regulations, environmental protection laws, immigration laws, tax laws, foreign trade regulations, stability of government, attitudes towards foreign companies Sociocultural: Lifestyle changes, career expectations, consumer activism, growth rate of population, age distribution of population, life expectancies, birthrates, pension plans, level of education, living wage, health care The origin of competitive advantage lies in the ability to identify and respond to environmental change well in advance of competition.

No firm can successfully monitor all external factors. Choices must be made regarding which factors are important and which are not. Personal values and functional experiences of managers as well as current strategies are likely to bias both their perceptions and interpretations. This willingness to reject unfamiliar as well as negative information is called strategic myopia. Porter contends that a corporation is most concerned with the intensity of competition within its industry. The level of intensity is determined by basic competitive forces.

In carefully scanning its industry, a corporation must assess the importance to its success of each of five forces: threat of new entrance, rivalry among existing firms, threat of substitute products or services, bargaining power of buyer, bargaining power of suppliers. The stronger each of these forces, the more limited companies are in their ability to raise prices and earn greater profits. In the short-run, these forces act as constraints on a company's activities. In the long-run, however, through its choice of strategy, it may be possible to change the strength of one or more of the forces to the company's advantage.