EXTERNAL BUSINESS ENVIRONMENT
ARIZONA STATE UNIVERSITY
WPC 480 - STRATEGIC MANAGEMENT
WEEK 1
Before further discussing the external business environment, we will first explain the
definition of the business environment, types of environments faced by organizations, theories
about the external business environment, approaches to measuring the external business
environment, and analysis of the external business environment.
3.1 Definition of Business Environment:
The environment is everything that is outside the organization (Robbins 1994: 226).
Furthermore, Miles (1980: 195) states that to ascertain the organizational environment is quite
easy, "just take the universe, subtract the part that represents the organization, the rest is the
environment". However, the environment is not that simple to define. According to Smircich and
Stubbart, (1985); Mansfield, (1990) in Brooks and Weatherston (1997:4), the definition of
environment has intellectual problems, so researchers categorize it with different approaches. In
the context of strategic management, the environment is defined based on the proximity and
distance of the environment from the organization or directly and indirectly the environment
affects the organization. The environment closest to the organization or also called theask
environment, industry environment (Hitt et al., 2001: 22; Pearce & Robinson, 2000: 71), specific
environment (Robbins, 1994: 231) is the environment that directly affects the strategy, including
competitors, suppliers, customers and trade unions. Furthermore, the environment that indirectly
affects the strategy is also called the general environment (Hitt et al., 1995; Robbins, 1997),
remote environment (Pearce and Robinson, 2000). Furthermore, Robbins (1994,
Robbins (1994: 226-228) distinguishes the organizational environment into general versus
specific environments and actual versus perceived environments. Burns and Stalkers, (1961) in
Robbins (1994: 231) distinguishes the organizational environment based on the sources of
information it can provide, namely, which is stable and certain with a rapidly changing and
dynamic environment. Emery and Trist (1965) in Robbins (1994: 232) identify four kinds of
environments that organizations may face, namely placidrandomized, placid-clustered,
disturbed-reactive and turbulent fields. Pearce and Robinson (2000:71) distinguish the
environment into remote environment, industrial environment and operational environment.
Wheleen and Hunger (2000:9) distinguish between external environment and internal
environment.
The business environment is the environment that an organization faces and must be
considered in making business (corporate) decisions. The daily activities of the organization
include interactions with the work environment (Dill, 1958 in Brooks 1997: 5). This includes its
relationships with customers, suppliers, trade unions and shareholders. The business environment
plays a role in influencing the determination of organizational strategy.
3.2 Internal Environment versus External Environment:
The organizational environment can be divided into internal environment and external
environment (Wright etal., 1996: 4; Wheleen and Hunger, 2000: 8; Hitt, 1995: 6). The internal
environment consists of structure, culture, and resources (Wheelen & Hunger, 2000; 10). The
internal environment needs to be analyzed to determine the strengths and weaknesses that exist
in the company. Structure is how the company is organized with regard to communication,
authority and work flow. Structure is often also called the chain of command and is depicted
graphically using an organizational chart. Culture is a pattern of beliefs, expectations, and values
shared by members of the organization. Organizational norms specifically elicit and define
acceptable behavior for members of the organization top management to operative employees.
Resources are assets that are the raw materials for the production of organizational goods and
services. These assets can include a person's skills, abilities, and managerial talents such as
financial assets and factory facilities in functional areas. Peter et al. (1996:52) explain that:
"A firm's resources constitute its strengths and weaknesses. They include human resources (the
experience, capabilities, knowledge, skills, and judgment of all the firm's employees)
organizational resources (the firm's systems and processes, including its strategies, structure,
culture, purchasing/materials management, production/operations, financial base, research and
development, marketing, information systems, and control systems), and physical resources
(plant and equipment, geographic locations, access to raw materials, distribution networks, and
technology).
According to Peter et al., the company's internal environment is the firm's resources that
will determine the strengths and weaknesses of the company. These company resources include
human resources such as experiences, capabilities, knowledge, skills, and judgment of all
company employees, organizational resources such as company processes and systems,
including company strategy, structure, culture, material purchasing management,
production/operations, finance, research and development, marketing, information systems, and
control systems), and physical resources such as (plant and equipment, geographic location,
access to materials, distribution networks and technology). If the company can optimize the use
of these resources then, the three resources above provide the company with sustained
competitive advantage. Figure 3.1 below shows the route to sustained competitive advantage.
The external environment is the environment that is outside the organization and needs to
be analyzed to determine the opportunities and threats that the company will face. There are two
perspectives for conceptualizing the external environment. First, a perspective that views the
external environment as a vehicle that provides resources (Clark et al., 1994: Tan & Litschert,
1994). The second perspective views the external environment as a source of information. The
first perspective is based on the premise that the external environment is a vehicle that provides
resources that are critical to the survival of the firm (Tan & Litschert, 1994). This perspective
also implies the external potential to threaten the firm's internal resources. Strikes, deregulation,
changes in legislation, for example, have the potential to damage the internal resources of the
firm (Clark et al., 1994). The second perspective relates information to environmental
uncertainty. Environmental uncertainty refers to external environmental conditions that are
difficult to predict changes (Clark et al., 1994). This relates to the ability of organizational
members in decision making (Clark et al., 1994).
3.3. Theories about the External Business Environment:
The link between the external environment and the organization can be explained by
theories such as population ecology theory, contingency theory, and resource dependence theory.
The population ecology approach theory explains that the survival and success of the company is
determined by the characteristics of the environment in which the company is located (Child,
1997). This approach model implies that the external environment has a direct effect on company
performance regardless of the strategic choices made by the company (Wiklund, 1999).
Contingency theory states that the alignment between strategy and the external business
environment determines the survival and performance of the firm (Child, 1997; Lee & Miller,
1996). Contingency theory also means how strategic planning is able to meet the demands of the
environment, which if there is no alignment between strategic planning and the external business
environment can result in a decrease in performance and the emergence of an organizational or
corporate crisis (Elenkov, 1997).
The alignment between an organization's strategy and its external environment is the
focus of strategic management studies. This approach using contingency theory has the support
of many experts. Empirical evidence generally shows that companies that successfully align their
strategies with the external environment they face will show better performance than companies
that are less successful in aligning their strategies. (Beal, 2000; Elenkov, 1997).
3.4 Approaches to Measuring the External Business Environment:
There are two approaches to measuring the external business environment, namely
objective measurement environmental measures) and subjective / perceptual environmental
measures (Boyd et al., 1993). Measurement of the external business environment with an
objective approach is done by using industry data such as industry sales growth and industry
concentration ratio Boyd et al., 1993). While measuring the external business environment with a
subjective approach is done by using the attention and interpretation of managers as key
informants (key informants) of the environment faced by the company. This allows researchers to
describe the external business environment based on the perspectives of organizational members
in this case managers and top managers (Boyd & Fulk, 1996; Boyd et al., 1993).
There is much debate on whether the external business environment should be treated as
an objective reality or a perceptual phenomenon (Boyd & Fulk, 1996). The main point is not
whether the environment should be measured objectively or perceptually, but the issue of
relevance. In the decision making process, to study managerial behavior and actions as well as
strategic formulation and planning, subjective measures are more relevant (Boyd & Fulk, 1996).
While objective measures are relevant to understand and measure the external constraints faced
by firms and the quality of available opportunities (Boyd & Fulk, 1996; Boyd et al., 1993).
Objective measures are therefore more appropriate for researchers using the resource dependence
model and the population ecology approach. While the study of company actions such as in the
determination of corporate strategy is more appropriate to use measures based on perceptions
(Boyd et al., 1993). Measures based on perceptions are more important because perceptions can
shape managerial behavior which, in turn, will shape managerial behavior affect managerial
choice. Elenkov (1997) explains that managers' perceptions and interpretations of their
environment are the basis for strategic action. The above arguments support environmental
measurements based on perceptions (subjective measures), in this case the perception of
managers is methodologically valid, and has a level of accuracy that is not inferior to objective
measures.
3.5. Business Environment Analysis:
The business environment faced by the company needs to be analyzed, the intention is to
try to identify business opportunities (opportunities) that need immediate response and executive
attention, and at the same time directed at knowing business threats (threats) that need to be
anticipated. For this reason, in analyzing the business environment, management tries to identify
a number of key variables that are beyond the control of the company that are expected to have a
real influence. Business environment analysis seeks to determine the managerial implications,
both direct and indirect, of various external factors that have been identified as influencing the
company's prospects. With this, it is hoped that management will have a clear picture in
preparing the business strategies needed to anticipate the managerial implications posed by the
business environment.
Nowadays, proper recognition of the external environment is increasingly important
(Siagian, 2001; 63):
1. The number of influential factors is never constant but constantly changing,
2. The intensity of the impact varies,
3. The existence of external factors that are "surprises" that cannot be predicted in advance
no matter how carefully the "SWOT" analysis is carried out,
4. External conditions are beyond the organization's ability to control.
Management theory says that the analysis of the business environment consists of two
main components, namely the analysis of the macro environment and the industry environment
(competitive environment). The macro environment consists of economic forces, political and
legal forces, technological forces and social and cultural forces (Wheelen et.al., 2000: 13). All of
these forces in the macro environment have a direct influence on the prospects of the company,
but at the same time also have an indirect influence through the industrial environment
(Suwarsono, 2000; 23). This indirect influence can occur if each component of the macro
environment first affects the industrial environment before it in turn affects the company.
3.5.1. Macro Environment:
The macro environment is also called the social environment (Wheelen, 2000: 13),
distant environment (Pearce, 2000; 71), macro environment (Hill, 1998; 84). The social
environment includes general forces that are indirectly related to short-term organizational
activities but can and often do influence long-term decisions. The social environment in question
is (Wheelen, 2000: 13):
1. Economic Power
2. Technology Power
3. Legal-political power
4. Socio-cultural Power
Other authors such as Pearce divide the (remote) social environment into five;
(1) economic, (2) social, (3) political, (4) technological, and (5) ecological factors. The term
ecology refers to the relationship between people and other living things with the air, land, and
water that support their lives. Wheelen, (2003; 8) includes Pearce's ecological factors as part of
social and cultural forces. According to him, ecological factors are part of social and cultural
forces because social and cultural forces have considered ecological issues. Hill (1998; 84)
divides the macro environment into (1) political and legal environment, (2) macroeconomic
environment, (3) technological environment, (4) demographic environment, (5) social
environment.
There are six socio-cultural trends that can help determine the future. (1) Increasing
environmental concerns, (2) Growth of the senior market, (3) Small birth explosion, (4) Decline
of the mass market, (5) Distance and location of living, (6) Changes in households.Hitt and
Ireland (1997:40) divide the elements of the external environment as follows, which consists of
the general environment and the industrial environment.The general environment is divided into
economic, socio-cultural, technological, political / legal forces and demographic.
1. Political and Legal Power:
The direction and stability of political factors are important considerations for managers
in formulating corporate strategy. In developing countries political and legal forces have a real
influence on the success and failure of companies through the business opportunities and threats
they pose. Management needs to pay attention to the following aspects of political power such
as, state ideology, political stability, international relations, and the role of government. The
above aspects of political power basically affect the success or failure of companies in the
country.
The strength of the law also greatly influences the business strategy of the company. One
of the obstacles in the field of law in developing countries is the lack of independence of the law
and the frequent intervention of government executives. It is also often heard that the
implementation of legal decisions can also be influenced by money. Corruption and abuse of
authority are not strange thing. The weakness of legal institutions creates uncertainty and
uncertainty in business. However, at the same time, it also opens up opportunities for
entrepreneurs to implement all kinds of business strategies without the need to heed business
ethics.
2. Economic Power:
Economic forces relate to the nature and direction of the economic system in which the
company operates. In its strategic planning strategic planning every company must consider
economic trends and segments that affect its industry. Both at the national and international
levels, companies should consider the following; GNP trends, general availability of credit,
interest rates, inflation rates, unemployment rates, wage / price controls, devaluation /
revaluation, money supply levels of disposable income (Wheelen et. Al., 2003; Pearce, and
Robinson, 2001: 73). Siagian (2001:65) adds that the economic aspects that need to be
considered and taken into account in strategic planning include the following:
a. global developments in the economy
b. economic growth and environmental conservation
c. the presence of multinational corporations,
d. surprises in the energy sector, and
e. funding
3. Technology Power:
Technological advances that are developing today have been so rapid that they can
indirectly easily affect the market structure and company performance (Karhi et. al., 1997: 168).
The power of technology includes improvements in the field of science that is the basis of
technology and new technological innovations that provide opportunities and obstacles to the
company's business produced by the company. For example, advances in computers, robots,
lasers, satellite networks, fiber optics, and other related fields have provided great opportunities
for companies to make improvements to their operations.
Technological changes can occur outside the industry that is ultimately affected by the
change. For example, the development of the semiconductor industry, which was originally
unrelated to the watchmaking business, has provided an opportunity to make highly accurate
digital clocks at low cost. Technological changes require managers of companies in developing
countries to be careful in deciding on the right technology while taking into account adjustments
to the business environment. Technology that is usually labor-saving conflicts with the
availability of abundant labor.
4. Socio-cultural Power.
Social forces include traditions, values, social trends, consumer psychology, and society's
expectations of businesses. Tradition constrains social practices for a long period of time, ten or
even hundreds of years. For example, the Eid tradition provides business opportunities for
transportation, making Eid cards, Eid packages, entertainment and other related businesses.
Value is something that is highly valued by society. A society that upholds the education of its
family will have a big impact on the education business and businesses related to education.
Social trend can be see for example Population growth means an economically expanding
market for goods and services. Therefore, developing countries are potential markets for various
products from both third world countries and developed countries. The increase in population
also means the availability of abundant labor. As a result, the cost burden borne by producers
becomes lower, which isalso comparative advantage that developing countries have.
3.5.2 Industrial Environment:
According to Porter, there are 5 forces that affect competition in an industry: (1) the
threat of new entrants, (2) the bargaining power of suppliers, (3) the bargaining power of buyers,
(4) the threat of substitute products, and (5) competition within the industry. To design a good
strategy and to be able to occupy a competitive position in the industry, the company must be
able to minimize the impact of these five forces. Figure 3.4 below shows the competitive
situation in an industry (Pearce & Robinson, 2000; 86).
The competitive situation in an industry is determined by the five forces of competition
as seen in the table below. Figure 3.4. The five forces of competition together determine the
intensity of competition and profitability in the industry. The strength of competition will be the
basis for strategists in formulating corporate strategies whose goal is for companies to gain a
position in the industry that makes them survive. The following will discuss each of the above
competitive forces.
1.
Threat of New Entrants:
New entrants to an industry will bring new capacity, a desire to capture market share, and
often considerable resources. This may cause prices to fall or costs to rise, which in turn reduces
profitability. Companies that diversify through acquisitions into industries from other markets
often utilize their resources to grow.
The size of the threat of a new entrant depends on the existing entry barriers and the
reaction of existing competitors that the potential new entrant expects. If entry barriers are high
and the potential new entrant expects to face strong resistance from existing competitors, the new
entrant is clearly not a serious threat. There are six main sources of entry barriers (Porter, 1980:
7-13):
a. Economies of Scale.
b. Product Differentiation.
c. Capital Requirements.
d. Barriers Cost Not Because Scale (Cost Disadvantages Independent of Size).
e. Access to Distribution Channels.
f. Government Policy.
2.
Bargaining Power of Suppliers:
Suppliers can utilize their bargaining power over industry members by raising prices or
lowering the quality of the goods or services they sell. A strong supplier can therefore suppress
the profitability of an industry that is unable to keep up with rising costs by raising its own
prices. The conditions that make suppliers strong tend to be similar to those that make buyers
strong. A supplier group is said to be strong if the following are present:
a. Dominated by a few companies.
b. The supplier's product is unique or at least differentiated, or if there are switching costs.
c. Suppliers do not compete with other products in the industry
d. The supplier has the ability to integrate forward into the buyer's industry.
e. Industry is not an important customer for suppliers.
3.
Buyer's Bargaining Power:
Buyers or customers can also compete in the industry by pushing prices, demanding
better/higher quality or more satisfactory service and can act as competitors with each other, all
of which can reduce industry profits. A buying group is said to be strong if:
a. Buyers are concentrated or buy in large quantities (volume).
b. Products purchased from the industry are standardized or undifferentiated.
c. Products purchased from industry are an important component of the buyer's product and
are a considerable cost component.
d. The buyer receives a low profit. This will encourage buyers to reduce their purchase
costs.
e. Industrial products are not an essential part of the product or service quality of the buyer.
f. Industrial products do not generate savings for buyers.
g. Buyers have the ability to integrate back.
4.
Threat of Substitute Products:
By setting a ceiling price, substitute products or services limit the potential of an
industry. If the industry is unable to improve product quality or differentiate, its profits and
growth may be jeopardized. The more attractive the price alternatives offered by substitute
products, the tighter the industry's profit constraints. For example, the massive
commercialization of high-fructose corn syrup, a substitute for sugar, has been troublesome for
sugar producers today. Substitute products not only limit profits in normal times, but also reduce
the "gold mine" that the industry can achieve in golden times. Strategically viable substitutes are
those that (1) match the quality of industry products or (2) are produced by high-profit industries.
5.
Competition Intensity:
Competition among industry members occurs as they jockey for position using tactics
such as price competition, product introductions, and advertising wars. Such intense competition
stems from a number of factors:
a. Competition participants are numerous and balanced in terms of size and strength.
b. Sluggish industry growth.
c. The product or service is undifferentiated or requires no switching costs.
d. High fixed costs or perishable products invoke a strong desire to lower prices.
e. Large amount of capacity addition.
f. High exit barriers.
g. A big strategic bet.
INTERNAL ENVIRONMENT
The business environment is the environment that an organization faces and must be
considered in making business (company) decisions.The daily activities of the organization
include interactions with the work environment.This includes its relationship with customers,
suppliers, trade unions and shareholders.The business environment plays a role in influencing
the determination of organizational strategy.
The internal environment can be divided into internal environment and external
environment (Wheleen and Hunger, in Kuncoro, 2006).The internal environment consists of
structure, culture, and resources.The internal environment needs to be analyzed to determine the
strengths and weaknesses that exist in the company.
This section will explain the definition of the internal environment, the internal factors of
the company and the internal environmental analysis techniques.
4.1 Definition of Internal Environment:
According to Glueck and Jauch (1998: 162) internal environmental analysis is: "The
process by which strategic planners examine the company's marketing and distribution, research
and development, production and operations, company resources and employees, and financial
and accounting factors to determine where the company has important capabilities so that the
company takes advantage of opportunities in the most effective way and can handle threats in the
environment". Traditionally, aspects of the internal environment The company that should be
observed can be seen from several approaches. These approaches include:
a. Functional Approach:
In this approach, there are several key factors for many companies whose internal analysis
categorization is often directed at markets and marketing, finance and accounting, production,
human resources, and organizational structure and management.
1) Market and Marketing
In order to position the product in the market according to expectations, factors that need to
be considered include
Market share, after-sales service, ownership of information about the market, distributor
control, conditions of the marketing work unit, promotional activities, product prices, top
management commitment, customer loyalty and new product policies, besides that image
and prestige are also very important things to consider.
2) Finance and Accounting
Funds are needed for the company's operations. Therefore, factors that need to be taken
into account are: the company's ability to raise short-term and long-term capital, the burden
that must be borne in an effort to obtain additional capital, good relations with investors
and shareholders, financial management, working capital structure, product selling prices,
monitoring the causes of inefficiency and a reliable accounting system.
3) Production and Operation Activities
The company's production-operation activities can at least be seen from its adherence to the
principle of efficiency, effectiveness, and productivity. Therefore, the factors that need to
be considered are: good relationships with suppliers, a reliable logistics system, the right
location of facilities, the right use of technology, an organization that has a unified system,
financing, an innovative and proactive approach, the possibility of breakthroughs in the
production process, quality control and good service processes.
4) Human Resources
Humans are the most important resource for the company. Therefore, managers need to
make efforts to realize positive behavior among company employees. Various factors that
need to be considered include: clear measures of people management, skills and
motivation, productivity, and reward systems.
5) Management Information System
Strategic researchers need to analyze various aspects of management information systems,
including: aspects of software, hardware and brainware, in addition to input, process and
output in the form of information that suits the needs at each level of management.
b. Value Chain Technique:
The value chain consists of primary activities and supporting activities. Primary activities are
those involved in the physical creation of a product or service, its sale and delivery to the
buyer, and post-sale support. Supporting activities complement primary activities with
functions such as human resources, procurement, technology development and administrative
support.
Value added, sometimes called marginal, is the difference between collective cost and value
activities with the amount customers are willing to pay for the organization's products and
services.
From the analysis of these activities, the principle is to find the types of activities:
1) Activities that have a high potential to increase the added value and products or services
of an organization.
2) Activities that represent a significant or growing portion of costs in the organization A
value chain consisting of various activities can be described as follows:
The overall cost leadership strategy, which is a concept from Michael Porter, is done by
doing activities efficiently. With the efficiency of these activities, it is expected that the selling
price of the product will be lower. The problem is how to analyze efficient activities using the
Value Chains concept?
To conduct research using the concept of Value Chains, a contractor divides costs into
two types: contract costs and operating costs. Contract costs are the direct costs of working on
the project. In this concept, including contract costs are inbound logistics, .operations, outbound
logistics, procurement of goods, services and human resource management which are forced to
be partly included in the contract costs. Cost Operations are the company's fixed costs that must
be incurred, whether or not the company has a work contract. These include costs for company
infrastructure, marketing and sales, development and technology, as well as HR management for
salaries and staff costs and permanent labor salaries.
For analysis needs, at least data on contract costs, operating costs, and Profit/Loss for the
previous several periods are needed. The company should be able to process internal data into
the data needed in the Value Chains analysis.
The steps taken are:
1. Selecting activities, namely choosing the main and supporting activities that have the
lowest percentage of cost usage.
2. Changing the margin value, meaning by reducing costs. Then the profit margin becomes
larger raw for contract costs and operating costs.
Table 4.1 Composition of Value Chain Activities on Contract Cost (Million Rupiah)
1. Choosing an Activity:
From the value chain activities from 1998 to 2000, it can be seen that if a company uses
the lowest percentage of costs as shown in the table above, then it will be chose a profit margin
of 100% - 89.5% = 10.5% on contract costs and 100% - 90% = 10% on operating costs
2. Changing the Margin Value:
From the Profit and Loss Table data, it can be seen that the average operating gross profit
margin is 13%. If the company applies the smallest cost that has been done for a period of 3
years, the percentage of contract costs to contract revenue will decrease and 87% to 87 - (87% -
10.5) = 77.86% or a decrease of 9.14% so that the operating gross profit margin becomes 13% +
9.14% = 22.14%.
The data also shows that the operating profit margin (gross profit after deducting
operating expenses) is 6%. If the company implements the smallest cost ever for 3 years, the
previous average operating cost percentage of 7% will be reduced by ten percent (0.7%) to 6.3%.
As a result, the operating profit margin increases from 6% to 6.7%.
The conclusion from the results of the Value Chains analysis shows that if the company
performs the most efficient activities it has ever done, it can be predicted that contract costs and
operating costs can be reduced by 9.14% and operating costs by 0.7% so that total costs can be
reduced by 9.84%.
With this cost reduction, the profit margin becomes larger if the contract value remains
fixed. Or the company's competitive ability increases if the contract value is reduced, so that
ultimately the establishment of an overall cost leadership strategy can be implemented.
c. Learning Curve Technique:
Learning Curve is an analytical tool that states that the production cost per unit of a
product when measured with a fixed value of money will decrease by a certain percentage each
time work experience increases by two times.
The learning curve (LC) function graph can be depicted with a line equation.
Cn = C1 . n-1
Where
Cn = cost per unit of product n
C1 = cost per unit of 1st product .
n= work experience (cumulative production volume)
x= the cost reduction coefficient of the LC it owns.
The slope (k) indicates the magnitude of the effect of work experience on cost reduction, LC
which generally ranges from 100% (meaning there is no effect of work experience on production
costs) to 70% (the effect is large). Companies that have LC = 100% are usually labor intensive
companies, while capital-intensive companies usually have better LC.
Example:
If the company has LC = 70% and production in 1980 was 400 units with a production growth rate
of 3% per year and the cost of goods per unit in 1980 was Rp. 5,000, the production cost per unit of
the last product in 1981 can be calculated as follows:
d. Company Performance Evaluation Techniques:
The company's performance can be seen from the financial side based on financial
statements. Analysis of company performance from the financial side can be traced from various
sides. The steps taken to see the company's performance from the financial aspect are as follows:
1) Determine the financial data in a Balance Sheet and Profit and Loss Statement, and processed
using Trend Analysis of Balance Sheet and Trend Analysis of Profit and Loss. From the data,
the following changes or trends will be identified:
a) Liquidity, Solvency, and Rentability
b) Financial Ratio Analysis
c) Du Pont Analysis
d) Analysis of Sources and Uses of Working Capital
e) Discriminant Analysis (Z-score)
2) Create results Analysis, whether performance financial performance In addition, it is also necessary to
examine whether the ability to pay short-term debts is still good, the effectiveness of the company
using resources, the company's profitability, working capital and whether its financial condition is still
safe or already threatened with bankruptcy. In addition, it is also necessary to examine whether the
ability to pay short-term debt is still good, the effectiveness of the company using resources, the
company's profitability, working capital and whether its financial condition is still safe or is threatened
with bankruptcy.
4.2 Internal Environment Analysis:
Internal Environmental Analysis is a process to find the internal aspects/internal variables of
the company needed in dealing with its external environment and evaluate whether it is in a strong
or weak position.
It consists of several steps:
1. Identification of internal variables
It is a tool to determine the internal parts needed to build on the company's strengths and
weaknesses.
Find variables that need to be analyzed�study those variables.
Assessment results: information about the strengths and weaknesses of the
company�Strategic Advantages Profiles of the company
2. Evaluation and assessment of internal variables
The approach to identifying internal variables is:
a. Functional Approach
b. Competitive Advantage Approach
c. Value Chain Approach
d. PIMS (ProfitImpactof Marketing Strategy) Approach
e. McKinsey's 7 S Approach Other approaches:
a. Management approach: looking at the company profile based on processes ranging
from planning, organizing, directing and controlling.
b. Financial approach: knowing the weaknesses and strengths of the company by using the
analysis of key financial ratios such as liquidity, solvency, profitability, activity, sources
and uses of funds, and capital structure.
3. Summarize the results of the analysis
Approach to evaluating internal variables:
Internal variables obtained � evaluated� including strengths or weaknesses
The approach to assessing these variables is:
a. Comparative Approach to Performance and Competence with the past.
Looking at current conditions and comparing them with the company's past conditions
b. Product Evolution Approach
Comparing the current state of the company's variables with the requirements provided by
the concept of product evolution stages
c. Comparison Approach with competitors. Comparing variables internal variables that owned
by the company and compared with those of competitors.
d. Key Factors for Industry Success
Make an effort to find key variables that determine the success of the company.
Internal analysis to create a sustainable competitive advantage, each company needs to
increase its internal strength in dealing with competition. The competitive advantage needed is a
continuous advantage so that the company can survive and develop in its environment. This
advantage is commonly referred to as Sustainable Competitive Advantage (SCA).
To develop internal excellence there are 3 important internal environment components:
1. Resource
2. Capabilities
3. Core Competencies
Core Competencies are the basis of the development of the company's internal strengths.To
be able to achieve sustainable competitive advantage (SCA).The main factor forming these
Core Competencies is Capabilities.Capabilities are a set of resources that perform a
particular task or activity integratively and can be utilized by the company.
Company resources can be grouped into :
1. Tangible Resource.
Easy to identify and evaluate and can be seen in the financial statements. Ex: financial
resources, physical facilities, equipment and others.
2. Intangible Resource.
Something that is difficult to identify and evaluate such as technology, reputation, innovation
and creativity.
3. Human Resource.
The following is a summary of the internal factor analysis.
