ICAI Notes- Strategic Analysis: Internal Environment | Financial Management & Strategic Management for CA Intermediate PDF Download

 Page 1


 
 
 a
 
 
 
CHAPTER 
3 
 
 
LEARNING OUTCOMES 
STRATEGIC 
ANALYSIS: INTERNAL 
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Understand the importance of the internal environment in 
strategic analysis.  
? Explain the stakeholder view of the firm. 
? Identify and explain the strategic drivers. 
? Examine the role of firm-level resources and competencies in 
shaping the strategic advantage of the firm. 
? Integrate analyses of internal and external environments into 
SWOT and formulation of business level strategies.  
 
 
  
© The Institute of Chartered Accountants of India
Page 2


 
 
 a
 
 
 
CHAPTER 
3 
 
 
LEARNING OUTCOMES 
STRATEGIC 
ANALYSIS: INTERNAL 
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Understand the importance of the internal environment in 
strategic analysis.  
? Explain the stakeholder view of the firm. 
? Identify and explain the strategic drivers. 
? Examine the role of firm-level resources and competencies in 
shaping the strategic advantage of the firm. 
? Integrate analyses of internal and external environments into 
SWOT and formulation of business level strategies.  
 
 
  
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
 
 
a
a
 
 
3.2 
 
 
 
3.1 INTRODUCTION 
Strategic Analysis is equally important when it comes to internal environment 
assessment. 
Internal environment refers to the sum total of people – individuals and groups, 
stakeholders, processes- input-throughput-output, physical infrastructure- space, 
equipment and physical conditions of work, administrative apparatus- lines of 
authority & power, responsibility, accountability and organizational culture- 
intangible aspects of working- relationships, philosophy, values, ethics- that shape 
an organization’s identity.     
Strategic Analysis of Internal 
Environment
Key Stakeholders
Mendelow's 
Matrix
Strategic Drivers
Industry & 
Markets
Customers
Product/Services
Channels
Core Competency
SWOT Analysis
Porter's Generic 
Strategies
Cost Leadership
Differentiation
Focussed
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 3


 
 
 a
 
 
 
CHAPTER 
3 
 
 
LEARNING OUTCOMES 
STRATEGIC 
ANALYSIS: INTERNAL 
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Understand the importance of the internal environment in 
strategic analysis.  
? Explain the stakeholder view of the firm. 
? Identify and explain the strategic drivers. 
? Examine the role of firm-level resources and competencies in 
shaping the strategic advantage of the firm. 
? Integrate analyses of internal and external environments into 
SWOT and formulation of business level strategies.  
 
 
  
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
 
 
a
a
 
 
3.2 
 
 
 
3.1 INTRODUCTION 
Strategic Analysis is equally important when it comes to internal environment 
assessment. 
Internal environment refers to the sum total of people – individuals and groups, 
stakeholders, processes- input-throughput-output, physical infrastructure- space, 
equipment and physical conditions of work, administrative apparatus- lines of 
authority & power, responsibility, accountability and organizational culture- 
intangible aspects of working- relationships, philosophy, values, ethics- that shape 
an organization’s identity.     
Strategic Analysis of Internal 
Environment
Key Stakeholders
Mendelow's 
Matrix
Strategic Drivers
Industry & 
Markets
Customers
Product/Services
Channels
Core Competency
SWOT Analysis
Porter's Generic 
Strategies
Cost Leadership
Differentiation
Focussed
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT 
 
 
 
a
a
 
 
3.3 
In other words, the internal environment is specific to each organisation. It is based 
on its structure and business model and includes all stakeholders like top 
management, investors, employees, board of directors, investors, etc. 
Internal environment also involves understanding of the ethics, principles, work 
environment, employee friendliness, confidence of investors and other 
philosophical and cultural aspects of business, which aim for the success of the 
organisation. 
Thus, it is even more important to understand the internal environment from a 
strategic analysis perspective.  
3.2 UNDERSTANDING KEY STAKEHOLDERS 
Who are Stakeholders and how do we identify them? 
A firm may be viewed as a coalition of stakeholders- all those individuals and 
entities that have a stake in its success and can impact it as well. They may be the 
employees, shareholders, investors, suppliers, customers, regulators and so on. This 
view of the firm is in contrast to the earlier view of the firm that was considered to 
be an extension of the owners and shareholders alone.  
Thus, it may be reiterated that the stakeholders can be defined as any person/group 
of individuals, internal or external, that has an interest in, or impact on the business 
or corporate strategy of the organisation. They have the power to influence the 
strategy or performance of that organisation. 
Generally, stakeholders include management, employees, shareholders, customers 
and vendors. Additionally, other individuals and groups, such as governments, 
labour unions and local groups, which are often considered as stakeholders 
depending on their impact on the particular organisation. Each stakeholder or 
stakeholder group will be affected by the business strategy that the organisation 
chooses and implements. 
It is important to first identify the key stakeholders. Each stakeholder exerts a 
different level of influence and can have differing levels of interest in the 
organisation. For example, an organisation involved in healthcare innovation 
needs to have a long-term perspective about its return on investment (ROI) as there 
may be a long time between investment into research timelines and a commercial 
© The Institute of Chartered Accountants of India
Page 4


 
 
 a
 
 
 
CHAPTER 
3 
 
 
LEARNING OUTCOMES 
STRATEGIC 
ANALYSIS: INTERNAL 
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Understand the importance of the internal environment in 
strategic analysis.  
? Explain the stakeholder view of the firm. 
? Identify and explain the strategic drivers. 
? Examine the role of firm-level resources and competencies in 
shaping the strategic advantage of the firm. 
? Integrate analyses of internal and external environments into 
SWOT and formulation of business level strategies.  
 
 
  
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
 
 
a
a
 
 
3.2 
 
 
 
3.1 INTRODUCTION 
Strategic Analysis is equally important when it comes to internal environment 
assessment. 
Internal environment refers to the sum total of people – individuals and groups, 
stakeholders, processes- input-throughput-output, physical infrastructure- space, 
equipment and physical conditions of work, administrative apparatus- lines of 
authority & power, responsibility, accountability and organizational culture- 
intangible aspects of working- relationships, philosophy, values, ethics- that shape 
an organization’s identity.     
Strategic Analysis of Internal 
Environment
Key Stakeholders
Mendelow's 
Matrix
Strategic Drivers
Industry & 
Markets
Customers
Product/Services
Channels
Core Competency
SWOT Analysis
Porter's Generic 
Strategies
Cost Leadership
Differentiation
Focussed
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT 
 
 
 
a
a
 
 
3.3 
In other words, the internal environment is specific to each organisation. It is based 
on its structure and business model and includes all stakeholders like top 
management, investors, employees, board of directors, investors, etc. 
Internal environment also involves understanding of the ethics, principles, work 
environment, employee friendliness, confidence of investors and other 
philosophical and cultural aspects of business, which aim for the success of the 
organisation. 
Thus, it is even more important to understand the internal environment from a 
strategic analysis perspective.  
3.2 UNDERSTANDING KEY STAKEHOLDERS 
Who are Stakeholders and how do we identify them? 
A firm may be viewed as a coalition of stakeholders- all those individuals and 
entities that have a stake in its success and can impact it as well. They may be the 
employees, shareholders, investors, suppliers, customers, regulators and so on. This 
view of the firm is in contrast to the earlier view of the firm that was considered to 
be an extension of the owners and shareholders alone.  
Thus, it may be reiterated that the stakeholders can be defined as any person/group 
of individuals, internal or external, that has an interest in, or impact on the business 
or corporate strategy of the organisation. They have the power to influence the 
strategy or performance of that organisation. 
Generally, stakeholders include management, employees, shareholders, customers 
and vendors. Additionally, other individuals and groups, such as governments, 
labour unions and local groups, which are often considered as stakeholders 
depending on their impact on the particular organisation. Each stakeholder or 
stakeholder group will be affected by the business strategy that the organisation 
chooses and implements. 
It is important to first identify the key stakeholders. Each stakeholder exerts a 
different level of influence and can have differing levels of interest in the 
organisation. For example, an organisation involved in healthcare innovation 
needs to have a long-term perspective about its return on investment (ROI) as there 
may be a long time between investment into research timelines and a commercial 
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
 
 
a
a
 
 
3.4 
outcome. While, shareholders, whose main concern is quick profits, may be more 
hesitant to support the organisation spending funds on something that they may 
not see the return in the near future.  
Since the expectations of key stakeholders can influence the organisation’s 
strategy, a clash of objectives may have unfavourable consequences for the 
organisation. 
Example of Key Stakeholders and their requirements for an OTT Platform 
Stakeholders Requirements 
Shareholders ? Innovation and continuous creative 
content 
? Total shareholder return (RoI) 
? Corporate social responsibility 
? Top rankings of the organisation 
? Highest market share  
CEO and Board of Directors ? Prestige 
? Market share 
? Revenue and profit growth  
? Market rankings 
Major Vendors (Production Houses) ? Growth 
? Stability of ordering  
? Stable margins 
Consumers (Viewers) ? New content - Innovation 
? Better deals - Pricing Benefits 
? Value for money 
? Continuous supply 
Employees ? Wages and benefits 
? Stability of employment 
? Pride of working for a reputed 
organisation 
© The Institute of Chartered Accountants of India
Page 5


 
 
 a
 
 
 
CHAPTER 
3 
 
 
LEARNING OUTCOMES 
STRATEGIC 
ANALYSIS: INTERNAL 
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Understand the importance of the internal environment in 
strategic analysis.  
? Explain the stakeholder view of the firm. 
? Identify and explain the strategic drivers. 
? Examine the role of firm-level resources and competencies in 
shaping the strategic advantage of the firm. 
? Integrate analyses of internal and external environments into 
SWOT and formulation of business level strategies.  
 
 
  
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
 
 
a
a
 
 
3.2 
 
 
 
3.1 INTRODUCTION 
Strategic Analysis is equally important when it comes to internal environment 
assessment. 
Internal environment refers to the sum total of people – individuals and groups, 
stakeholders, processes- input-throughput-output, physical infrastructure- space, 
equipment and physical conditions of work, administrative apparatus- lines of 
authority & power, responsibility, accountability and organizational culture- 
intangible aspects of working- relationships, philosophy, values, ethics- that shape 
an organization’s identity.     
Strategic Analysis of Internal 
Environment
Key Stakeholders
Mendelow's 
Matrix
Strategic Drivers
Industry & 
Markets
Customers
Product/Services
Channels
Core Competency
SWOT Analysis
Porter's Generic 
Strategies
Cost Leadership
Differentiation
Focussed
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT 
 
 
 
a
a
 
 
3.3 
In other words, the internal environment is specific to each organisation. It is based 
on its structure and business model and includes all stakeholders like top 
management, investors, employees, board of directors, investors, etc. 
Internal environment also involves understanding of the ethics, principles, work 
environment, employee friendliness, confidence of investors and other 
philosophical and cultural aspects of business, which aim for the success of the 
organisation. 
Thus, it is even more important to understand the internal environment from a 
strategic analysis perspective.  
3.2 UNDERSTANDING KEY STAKEHOLDERS 
Who are Stakeholders and how do we identify them? 
A firm may be viewed as a coalition of stakeholders- all those individuals and 
entities that have a stake in its success and can impact it as well. They may be the 
employees, shareholders, investors, suppliers, customers, regulators and so on. This 
view of the firm is in contrast to the earlier view of the firm that was considered to 
be an extension of the owners and shareholders alone.  
Thus, it may be reiterated that the stakeholders can be defined as any person/group 
of individuals, internal or external, that has an interest in, or impact on the business 
or corporate strategy of the organisation. They have the power to influence the 
strategy or performance of that organisation. 
Generally, stakeholders include management, employees, shareholders, customers 
and vendors. Additionally, other individuals and groups, such as governments, 
labour unions and local groups, which are often considered as stakeholders 
depending on their impact on the particular organisation. Each stakeholder or 
stakeholder group will be affected by the business strategy that the organisation 
chooses and implements. 
It is important to first identify the key stakeholders. Each stakeholder exerts a 
different level of influence and can have differing levels of interest in the 
organisation. For example, an organisation involved in healthcare innovation 
needs to have a long-term perspective about its return on investment (ROI) as there 
may be a long time between investment into research timelines and a commercial 
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
 
 
a
a
 
 
3.4 
outcome. While, shareholders, whose main concern is quick profits, may be more 
hesitant to support the organisation spending funds on something that they may 
not see the return in the near future.  
Since the expectations of key stakeholders can influence the organisation’s 
strategy, a clash of objectives may have unfavourable consequences for the 
organisation. 
Example of Key Stakeholders and their requirements for an OTT Platform 
Stakeholders Requirements 
Shareholders ? Innovation and continuous creative 
content 
? Total shareholder return (RoI) 
? Corporate social responsibility 
? Top rankings of the organisation 
? Highest market share  
CEO and Board of Directors ? Prestige 
? Market share 
? Revenue and profit growth  
? Market rankings 
Major Vendors (Production Houses) ? Growth 
? Stability of ordering  
? Stable margins 
Consumers (Viewers) ? New content - Innovation 
? Better deals - Pricing Benefits 
? Value for money 
? Continuous supply 
Employees ? Wages and benefits 
? Stability of employment 
? Pride of working for a reputed 
organisation 
© The Institute of Chartered Accountants of India
STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT 
 
 
 
a
a
 
 
3.5 
3.2.1 Mendelow’s Matrix 
The Mendelow Stakeholder matrix (also known as the Stakeholder Analysis matrix 
and the Power-Interest matrix) is a simple framework to help manage key 
stakeholders.  
Managing a project is extremely complicated as it involves managing the 
competing interests of various stakeholders. Who needs to know what and when, 
who needs to give their feedback and who has the final approval can be confusing. 
However, managing stakeholders is critical to the success of a project. This is where 
a stakeholder analysis matrix i.e. Mendelow’s Matrix can help. 
Mendelow suggests that one should analyse stakeholder groups based on Power 
(the ability to influence organisation strategy or resources) and Interest (how 
interested they are in the organisation succeeding). A thing to remember is that all 
stakeholders may seem to have lots of power and organisation may hope they 
would have lots of interest too. But in reality, some stakeholders will hold more 
Power than others, and some stakeholders will have more Interest than others. For 
example, a big shareholder is likely to have high power and high interest in the 
organisation, whereas a big competitor would have high power to impact strategy, 
but potentially less Interest in success of rival organisation. 
Developing a Grid of Stakeholders 
Mendelow’s Matrix is based on Power and Interest. It suggests to identify which 
stakeholders are incredibly important. Metrics to define the importance being High 
Power and High Interest which management would need to manage closely, while 
investing a lot of time and resources.   
For example, the CEO is likely to have more Power to influence the work and also 
high interest in it being successful. Keeping them informed almost daily should be 
a priority.   
© The Institute of Chartered Accountants of India