Internal Capability Analysis

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When developing strategies, organizations must consider the external environment and the internal environment. Internal environments consist of all the factors within an organization that impact strategy formation. These factors include the company's structure, culture, leadership, management practices, and policies.

What is Capability?

Capabilities are a set of resources that can be used to meet a business's needs. They include physical assets such as buildings, equipment, inventory, employees' skills and knowledge, and organizational structures and processes. The term "capability" is often used interchangeably with the terms "resource" or "asset." A resource may have one or more capabilities. For example, a building has the ability to house people but also includes office furniture and supplies.

In this post, you will learn how to analyze internal capabilities and their relationship to strategic planning. You will examine the different types of internal capabilities and how they relate to each other. Finally, you will identify ways to improve your internal capabilities.

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Types of Internal Environments

Organizations can increase their effectiveness by improving their internal environments. This requires understanding the organization's current state and identifying areas where improvement is needed.

To begin, let us discuss the different types of internal environments and analyze these factors in relation to strategy formation.

Human Resources Environment

What unique advantages the organization has regarding human resources? The HR environment consists of the various aspects of the organization that affect its performance. It includes the following:

• Human capital—the organization's workforce, including employees, managers, supervisors, and executives

• Organizational culture—a shared set of values, beliefs, customs, traditions, and attitudes held by members of the organization

• Leadership style—how leaders guide and motivate others

• Management practices—how the organization manages itself

• Policies—rules and regulations governing behaviour

A good understanding of the organization's HR environment enables it to make informed decisions about its future.

Facilities Environment

The facilities environment refers to the physical infrastructure available to support operations. It includes the following components:

• Buildings—where work takes place

• Equipment—tools and machinery used for production

• Inventory—materials that need to be on hand

• Supplies—items required for daily operation

Operational Environment

The operational environment consists of the services provided by the organization. These are skills, attitudes and technologies which differentiate the organization from its competitors. These emerge over time, and sometimes organizations are not even aware of these. It includes the following elements:

• Operations—all activities involved in providing products and services

• Processes—ways of doing things

• Procedures—guidelines for performing tasks

• Technology—systems and tools used to perform functions

Each of these elements affects the organization's performance. Understanding them helps the organization better manage its operations.

Relationship between Internal Environments

An effective strategy must take into account all three of these environments.

For example, if an organization wants to reduce costs, it should consider whether it could do so by reducing staff levels or cutting back on some of its facilities. Then it should determine which of those two options would help achieve the company's long-term vision.


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The following questions guide the analysis of internal capabilities.

• What are the internal capabilities?

• What are the strengths and weaknesses of each type of internal capability?

• How does the organization use its internal capabilities?

• Are there any gaps between what the organization wants to achieve and what it actually achieves? Why might this be so?

• How could the organization improve its internal capabilities? What would it take for the organization to achieve its goals?


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