Internal and External Environment

Internal and External Environment

SWOT analysis is a technique to analyze the internal and external environments of a firm. What are its advantages and disadvantages?

The SWOT analysis is an important tool for firms to gain useful information about the chances of their objectives by viewing all four elements either independently or in combination (Dess et al.). For instance, the threats that are identified in the business environment, like new regulations from the government concerning the design of a particular product, might alert owners of businesses that a more careful evaluation should be done on a proposed investment in a new production line. One disadvantage of the SWOT analysis is that it is subjective. Decisions should be based on comparable, relevant, and reliable data for a company’s performance to be significantly impacted. But SWOT analysis data collection is a subjective process reflecting the biases of those in charge of collecting data. Also, data input tends to be outdated relatively quickly.

What are the advantages and disadvantages of conducting a financial ratio analysis of a firm?

Financial ratio analysis is essential when a company wants to simplify its financial statements and allows the company owners to express financial position information as well as critical profitability in a few numbers (Dess et al.). For instance, the margin of the net profit summarizes the net effect of the company’s expenses and revenues. It enables the owners to have conclusive details about a company’s profitability without going through the income statements. However, on the downside, financial ratio analysis doesn’t provide directions on how a firm should invest its resources to improve its competitive edge in the industry.

Summarize the concept of the balanced scorecard. What are its main advantages?

The balanced scorecard is the system of strategic planning and management that firms use to communicate their potential accomplishments, align the day-to-day work done by everyone, and prioritize services, products, and projects (Dess et al.). The Balanced Scorecard is used to provide a powerful structure for strategy building and communication. The concept visualizes a business model that helps managers to reflect the cause-and-effect relationships among various strategic objectives. The main advantages of the balanced scorecard are that it enables a firm’s management to establish sustainable strategic plans and improves communication within an organization by outlining the most relevant information in a simple format.

Work Cited

Dess, Gregory. Strategic management: Text and cases. McGraw-Hill Education, 2013.

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SUMMARY REVIEW

Summary Exercise: answer/address three of the seven questions in a post with three substantive paragraphs.

Internal and External Environment

Summary:

In the traditional approaches to assessing a firm’s internal environment, the primary goal of managers would be to determine their firm’s relative strengths and weaknesses. Such is the role of SWOT analysis, wherein managers analyze their firm’s strengths and weaknesses as well as the opportunities and threats in the external environment. In this chapter, we discussed why this may be a good starting point but hardly the best approach to take in performing a sound analysis. There are many limitations to SWOT analysis, including its static perspective, its potential to overemphasize a single dimension of a firm’s strategy, and the likelihood that a firm’s strengths do not necessarily help the firm create value or competitive advantages.

We identified two frameworks that serve to complement SWOT analysis in assessing a firm’s internal environment: value-chain analysis and the resource-based view of the firm. In conducting a value-chain analysis, first divide the firm into a series of value-creating activities. These include primary activities such as inbound logistics, operations, and service as well as support activities such as procurement and human resource management. Then analyze how each activity adds value as well as how interrelationships among value activities in the firm and among the firm and its customers and suppliers add value. Thus, instead of merely determining a firm’s strengths and weaknesses per se, you analyze them in the overall context of the firm and its relationships with customers and suppliers—the value system.

The resource-based view of the firm considers the firm as a bundle of resources: tangible resources, intangible resources, and organizational capabilities. Competitive advantages that are sustainable over time generally arise from the creation of bundles of resources and capabilities. For advantages to be sustainable, four criteria must be satisfied: value, rarity, difficulty in imitation, and difficulty in substitution. Such an evaluation requires a sound knowledge of the competitive context in which the firm exists. The owners of a business may not capture all of the value created by the firm. The appropriation of value created by a firm between the owners and employees is determined by four factors: employee bargaining power, replacement cost, employee exit costs, and manager bargaining power.

An internal analysis of the firm would not be complete unless you evaluate its performance and make the appropriate comparisons. Determining a firm’s performance requires an analysis of its financial situation as well as a review of how well it is satisfying a broad range of stakeholders, including customers, employees, and stockholders. We discussed the concept of the balanced scorecard, in which four perspectives must be addressed: customer, internal business, innovation and learning, and financial. Central to this concept is the idea that the interests of various stakeholders can be interrelated. We provide examples of how indicators of employee satisfaction lead to higher levels of customer satisfaction, which in turn lead to higher levels of financial performance. Thus, improving a firm’s performance does not need to involve making trade-offs among different stakeholders. Assessing the firm’s performance is also more useful if it is evaluated in terms of how it changes over time, compares with industry norms, and compares with key competitors.

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SUMMARY REVIEW QUESTIONS

1. SWOT analysis is a technique to analyze the internal and external environments of a firm. What are its advantages and disadvantages?
2. Briefly describe the primary and support activities in a firm’s value chain.
3. How can managers create value by establishing important relationships among the value-chain activities both within their firm and between the firm and its customers and suppliers?
4. Briefly explain the four criteria for sustainability of competitive advantages.
5. Under what conditions are employees and managers able to appropriate some of the value created by their firm?
6. What are the advantages and disadvantages of conducting a financial ratio analysis of a firm?
7. Summarize the concept of the balanced scorecard. What are its main advantages?