Concepts of Internal and External Analysis

The aim of this paper is to compare and contrast the internal and external environment of strategic management of the process. In this paper, the concepts of internal and external analysis will be discussed from the expert’s point of view. After that, Differences and similarities of the internal and external analysis will be given. In the end, the relationship between the business environment and analysis model will be discussed (Welford, 2016).

The aim of internal environment analysis is to identify the internal factor such as strength, weakness, opportunity, and the threat of the company. It provides the recommendation and suggestions on how the company could use and take advantages of its strength or improve its weakness. External environment analysis aim is to analyse the external factor such as political, legal, technical and economical.  It helps to identify the barriers to operate in the future. External environment analyse the economy as a whole, the internal environment analyse resources within the organisation. Internal environment and external environment analysis are used to analyse the resources to make sure the company future profitability, growth and competitiveness of the company (Hill, Jones, and Schilling, 2014).

According to the Eikeland and Skjærseth, (2016), the internal environment is a corporate environment which has a directly affect the organisation. Company’s owners have to analyse the internal factor which affects the company such as strength, and weakness. These factors help the company to determine that the company ability to avoiding the threat and take the advantages of exciting opportunities. Internal environment analysis includes the resources, capabilities and competencies held by the company. It is important for the company to sustain the competitive advantages which is done by analysis the internal environment. The resources of the company can analysis by the resources which can be divided into the 3 parts of the company. These are 1. Assets which are visible like raw material, financial resources, and computers 2. Invisible assets are brand, reputation, and moral enterprises; 3. The capability of an organisation. It is a way to analyse the internal environment of the company. Porter introduces the new method to analyse the internal environment which is known as Value Chain analysis. There are many methods and tools to analyse the internal environment but the functional analysis is the simplest method to analyse the company. It can be said that the company resources can be set according to the company profile and functions such as marketing, finance, human resources, operations, information system and corporate culture.  According to the Dobbs, (2014), internal factor includes the financial aspects, technical aspects, and marketing aspects.  The research of internal environment includes Marketing, finance, operations, information system and human resources.

Differences and Similarities of Internal and External Analysis

The external environment refers to the events outside of the company which affects the company. Many companies are operating in the international market not only the domestic market. The external factor of the other countries can also affect the company like changes in technology, changes in political policies, changes in legal policy of the country. Policies and laws affect the country market environment which affects the company and create the problem for the company for making the selection such as where and how the company competes or operate. The company should aware of these factors to the impact of the reality of this environment. It is important to analyse the external factor for the decision makers. According to Ottman, (2017), Decision makers should know about the competitive position of the company in making the decisions. According to the Epstein, (2018), the external environment divided into two parts with the name of the social environment and work environment. Social environment includes the general power of the government which is made for the short period but it affects the company in long-term decisions like economic forces of the exchange of material, energy and money, Power of technology which is used for problem-solving. Work environment includes the factors that affect the organisation directly this includes the government, local communities, special interest groups and trade associations. The external environment divides into three components these are the general environment, industrial environment, and competitive environment. The main external factors which affect the company are the legal, socio, political, technological, economic and environmental. The company has many threats and group of a factor that affect the company such threat of competitors, the threat of substitute, the threat of new entrants, bargaining power of buyers and the bargaining power of suppliers.  The company should know about their competitors by analysing the competitor is called the competitor analysis. According to the Porter, and Heppelmann, (2014), external environment includes the remote environment, industrial environment, and operating environment.  According to Grant, (2016), the external environment is classified into the legal, technological, economic and competitive environment. The external environment includes the microenvironment and microenvironment. The macro environment includes the factors which are difficult to control because it is beyond the limit of the company management and Microenvironment includes the factors which are controllable and within the company management. The company uses the tools for the analysis of the external environment which is PEST and Porter’s five forces framework (Tietenberg, and Lewis, 2016).

Relationship between Business Environment and Analysis Model

The internal and external environment of the strategic management process is similar to each other. For analysing the business environment, the internal and external environment is analysed. For making the decision the company analyse both environment internal as well as the external environment (Marttunen, Lienert, and Belton, 2017). The internal environment of strategic management process analyses the Strength and weakness of the company, external environment of strategic management process also analyse the bargaining power of buyer which is also the strength of the company. Internal environment analyse the threat of the company as same as the external environment also analyse the threat of the new entrants, competitors, and the substitute. The internal environment is used by the big companies as same as the external environment is also used by the big companies to analyse the external environment. The internal environment of strategic management of process helps the company to reduce the threat and use the strength. The external environment of strategic management of process helps to analyse the competitor behaviour and the substitute companies to reduce the threat of the company. The external environment is analysed by the tools, the internal environment of the company is also analysed by the tools and models. The external environment uses the PESTLE and Porter’s five force framework to analyse the environment. The internal environment uses the SWOT model to analyse the internal environment. The internal and external environment has the common objective to analyse the environment. To achieve the success or to reduce the competitors are the main objectives of the company. Internal and external analysis of the company is used for the common purpose that is to analyse the environment and reduce the weakness and grab the opportunity. Internal and external analysis of the company shows the financial position of the company (Ketata, Sofka, and Grimpe, 2015).  Hence, the purpose of internal and external environment analysis is similar and it can be used by the company is also similar. Internal and External analysis of the company helps the company to achieve the success or to maintain the good image in the market.

There is a difference between the internal and external environment. The internal environment contains the factors which affect the organisation indirectly but the external environment contains those factors which directly affect the internal environment. Internal environment factors affect indirectly to the company but external environment factors affect them directly to the company. Within the organisation, factors affect the company is called internal environment and the factors within the economy affect the organisation is called the external environment (Wheelen, et al., 2017)

Tools for Analysing Internal and External Environment

Internal environment includes the Strength, weakness, opportunity and threat factors but the external factor includes the Political, socio, technological, legal and environmental factors. SWOT Analysis and VRIO framework is used in analysing the internal environment. To analyse the external environment, PESTLE Analysis and Porter’s five forces framework is used to analyse the external environment. Internal environment affects the company but the external environment factors affect the many companies or multinational companies. Environment change, environment capacity and the scarcity of the resource is the behaviour of the external environment and the threat of the competitors and substitute are the factors of the internal environment. The external environment helps to analyse the threat of new entrants, the threat of substitute product, and it also analyse the competitor. The internal environment helps to analyse the strength, weakness, opportunity, and threat of the company. PESTLE Analysis and Porters five forces framework analyse the external environment which is helpful for the small companies as well as multinational companies. But the internal environment analysis tools such as SWOT Analysis and VRIO Framework helps to analyse the internal environment which is used by the smaller companies.  Analysis of the external environment is cost effective as well as the time-consuming. External environment analyses the economy as a whole which consumes more time for analysing but the internal environment consume the less time for analyses the environment. The internal environment of the company analyse the company factors only but external environment analyse the economic factors as well as company factors (Schaltegger, and Burritt, 2017).

 Models help the company to analyse the business environment these are SWOT Analysis, VRIO Framework, PESTLE analysis, and Porter’s five force framework. Factors of external environment have a positive impact on the internal environment. For example- Competitor analysis helps the organisation to control its threats and use strength to compete with the competitors. External environment analysis helps the company to improve its internal environmental policies. With the internal analysis, the threat of the new entrants and substitute of the product is analysed by the company. Hence it has been seen that the analysis of the external environment can be analysed with the internal environment analysis information (Schaltegger, and Wagner, 2017). Internal environment analysis means the strength and weakness of the company, which helps the company to analyse the external environment and same as the external environment help the internal environment to analyse. Analysis of external factor such as the political, legal, technical, environmental and economic helps the company to make the policies of the company.  Political and legal external factor helps the company to make the internal policies to reducing the threats. The threat of the company can easily reduce by comparing the internal and external analysis data of the company. Internal environment and external environment are interlinked to each other which help to reduce the threats and make the opportunities to grab the market. Social factor of external analysis describes the strength and opportunities of the company. Internal analysis of the resources helps to analysis the competitor’s threat and the threat of substitute. Bargaining power of buyer and suppliers can be reduced by analysis the strength and opportunity of the company. Thus, it is observed that the internal and external environment is depended on each other (Hair, 2015).

Conclusion

From the above analysis, it has been concluded that the internal and external environment of the strategic management process is similar in nature. The internal environment of the strategic management process is an analysis of the internal factor of the company which directly affect the company and the external environment is the analysis of the external factors who indirectly affect the company.  The different author has the different point of view for the internal and external analysis. For the internal and external analysis, the company used the tools. SWOT Analysis and VRIO Framework are the tools used for analysing the internal factor and Pestle and Porter’s five force framework is used to analyse the external environment of the company. There is a similarity between the internal and external analysis, the purpose of the external and internal analysis is the same. It has common objectives to grab the market or to reduce the threats (Wulf, 2016). But there is some difference between the external and internal environment analysis of the company. Internal analysis of the company is used to analyse the internal environment and external environment analysis is used to analyse the external environment of the company. With the use of the models and frameworks business environment is analysis. To take the advantage of strength and improve weakness, Company can easily use the internal analysis models. To identify the barriers in the organisation, company use the external analysis tools these are Pestle and Porters five forces framework. It has some differences but the purpose to reduce the threat and grab the market is similar. It helps the company to achieve the goals and objective by analysing the environment. The company will achieve the target and expand the business in the other market with the help of external and internal analysis.

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