Evaluation of internal environment

The next general step of the situational analysis is to introduce the internal environment of the enterprise. The goal is to analyze and gather information which describe in detail the utmost important institutional organizational resources and attributions. The enterprise might lay its strategic position upon this. Main areas of the internal evaluation are:

 Measurement of resources inside the organization

 Measurement of attributes inside the organization

Resources of the organization cover all elements of financial, and non-financial properties (equity, property rights, information system) which a firm have control over. This also include all material, and immaterial elements.

 Financial resources

 Operational resources

 Rights

 Management information system, databases

 Marketing resources

It’s necessary to identify resources and attributes in areas of

 Organizational resources

 Organizational structure

 Organizational culture

However, when coming to points of strengths and weaknesses we have to analyze them in connection with exact divisions of enterprise such as: products, operations, sales, marketing, financial situation, R&D, personal changes, organization. We search for answers from the following aspects consequently (figure 2.1).

Figure 2.1 Competition and Industry potential

Corporate competition Long-term Industry Potential

• Market share compared to competitors

• Access to decisive competing factors

• Profit margin compared to competitors

• Measures of additional services

• Market and technology knowledge

• Development of applied technology

• Quality of leadership

• Market size and growth rate

• Industry profit margins, and expected access

• Intensity of competition

• Seasonality and cyclicality

• Technology and capital requirements

• Social and environmental constraints

• Entry and exit barriers

Based on: Own Edit

A corporate diagnostic method is labeled as SWOT, which will be introduced in the interpretation of Szűcs and Nagy (2004). During a SWOT we categorize factors as strengths, weaknesses, opportunities and threats. Strengths are considered as inner resources and conditions inside an organization. Weaknesses are exactly the opposites of the latter, as they mean an absence of resources and attributes in the organization. Opportunities stand for external options, which can influence an organization in a positive direction, whereas threats can lead to negative results.

After categorizing factors under the four labels, a second step occurs, which is beyond understanding organizational situation. In case we position all relevant elements into SWOT categories we get a coordinate system from which we can identify dimensions necessary to define entrepreneurial strategy (figure 2.4).

Figure 2.4 SWOT-analysis as a strategy descriptor Based on: Szűcs & Nagy, 2004

For what we have resources for, and if external conditions are considered good we can bravely design an offensive strategy. But always be cautious with external opportunities, and weaknesses. We can only make changes in these line ups after resolving these issues with a well-defined preference. As speaking of strategies of weaknesses and non-favorable external conditions those are considered the best which does not waste resources on developing, but rather putting exiting or dismantling in priority. R&D in the intersection of threats and strengths considered to be risky, and need caution. Usually, these have relevance when offensive strategy does not exist.

Strategies derived from a SWOT must be analyzed in addition with risk factors also. Risk analysis is an indispensable part of the situational analysis. Risk is described as an uncertain event, or condition which has a negative effect on the organization. Questions of dependent and independent factors must also be addressed in addition with occurrence probability. Based upon these a classification system must be set up which can simulate the probabilities of occurrence, and related impacts.

Product life cycle is an important tool of strategy planning. Each cycle have strategic actions which are in connection with success factors (figure 2.2).

Figure 2.2 Characteristics of product life-cycle phases Based on: Roóz, 2001 In.: Kresalek, 2003

Portfolio models are used for the analysis of positioning business units, and products. These try to faithfully reflect market positions, performance, strengths and weaknesses through inner resources. A BCG matrix – also known as growth/excellence matrix – is the most common method of analysis (figure 2.5). The two main parameters of the BCG are relative market share and market growth rate. The preceding parameter tells about market position of competition, while the latter is about market potential. The attributes of the four field are the following.

Question marks: Means low market share and high market dynamics. Fields have different names occasionally such as: Troublesome child, or wild cat. Cost level is high. Products can be found at where the rate of growth is high, hence absence of cash can be high. It’s always a question for an enterprise that products being here are able to be transformed into “stars” or

“cash cows”, or their resources should be redistributed into different areas. If an enterprise choose to transform the before mentioned into “stars” they rather start investing in marketing, into the product, and lowering the price. Another option is to abandon the market. The decision is determined by available financial resources. If resources are abundant and plans are based on financial conditions staying on market becomes an option, otherwise in lack of resources exiting is the only fulfilling solution.

Stars: It’s described by high market share and market growth rate. The enterprise is in leading position. This leading position requires high cost in order to retain competitors but through sales activity a high level of cash flow is realized. The main strategic goal of the company is to maintain the distinctive advantages against competitors. Potential profit is high, but fast growth requires concentrated financial resources. Main movements are intensive advertising, introduction of new product variables, price reduction and increase of sales opportunities.

Cash Cows: It’s described by high market share and low growth rate. Both product, enterprise and the strategy behind it is a leading position on the market, but also they are in maturity or decreasing stage. Customers are loyal, and competitors are in background. Sales level is

constant, profitability is high due to stable costs. Products at this field generate high cash flow. From the strategic point of view the goal is to maintain the exploit of market opportunities, whiles transferring additional profits into different R&D activities.

Dogs: Low market share, low growth rate. Products of this field have low sales level, market is in decrease, or in late maturity stage. There is not enough customer and competitors are in ave. Cost disadvantages are significant and growth opportunities are limited. For these products only exit and reorganization can be the strategy.

Figure 2.5 BCG-matrix Based on: Mészáros, 2002 In.: Kresalek, 2003 and Kotler, 2000

The goal of enterprise is to establish a well balanced portfolio system. For this reason their aim of investment is to transform question marks into stars or cash cows, and to maintain highly profitable positions. Movements in the matrix ensures that the enterprise operation efficiently.

Control questions:

1. Describe the main elements of the business environment!

2. Enlist at least 5 methods, which are used for the evaluation of internal and external environment of an enterprise!

3. What PEST is used for? Describe its essence!

4. What method is used for the evaluation of the microenvironment? Describe its essence!

5. What SWOT is used for? Describe its essence!

6. Describe the characteristics of the product life-cycle stages!

7. Describe the BCG matrix, and its possible connections!

8. Describe the tasks which occur during an industry sector analysis.

Competence development:

1. How can deduce, or establish a strategy through a SWOT? What steps are to be taken in each stages of the life-cycle?

2. What strategic actions would you take during positioning a product?