When you’re developing a business strategy, then it requires you to analyze various internal and external factors that are impacting the company. The internal analysis especially allows you to find out the growing areas and gain a competitive advantage. You have to know the in-depth knowledge and inner-functionality of the company while conducting the internal analysis. Today, we’ll discuss what is internal analysis; its importance, tools, and how to conduct it in detail with examples.
What is Internal Analysis?
Internal analysis is the process of analyzing various internal components of the company both tangible and intangible like; company’s processes, assets, and resources. It helps the decision-makers of the company to determine the growing areas and develop a business plan and practical business strategy.
While developing the business strategy of the company, the management often uses both internal/external analysis in order to see the full picture of the company that how it’s operating.
Importance of Internal Analysis
Internal analysis is a great tool for companies to improve their main functions. Some of the reasons why internal analysis is important are as follows;
- Strengths and Competencies. You find out the internal strengths and competencies of the company like brand loyalty, brand recognition, and other resources. The company can use its strong points in order to strengthen its market position.
- Organizational Weaknesses. It also helps you to point out the weaknesses of the company like poor internal communication network, usage of obsolete technology, and limited employee training program. Such small weaknesses may seem insignificant, but they would slow down the company’s growth and decrease the overall profitability.
- Know your Business Opportunities. It allows you to see the opportunities available to your business, and working on those opportunities would result in the growth of the company both internally and externally. It could be like launching a new product in the market or updating the computer system.
- Find out Possible Threats. The internal analysis also studies the potential external threats that could hamper the company’s growth. It’s important to mention it here that the threat usually comes from external sources. You can exploit the opportunities if you minimize the weaknesses and focus on the strengths.
- Competitive Viability. It allows you to find a small niche in the bigger market that would help you to differentiate yourself from the competitors. It usually takes a lot of time.
Internal Analysis Tools
Businesses and companies use different analysis tools, strategies, objectives, and frameworks to recognize the main information about the structure, resources, and processes. Some of the main internal analysis tools are as follows;
As the name implies, the gap analysis recognizes the difference between the company’s existing operations and its goals. The reason for conducting gap analysis is to point out the weak elements in the company. However, it allows the management to see the non-performing areas of the company like production, planning, or resource allocation; and to check whether the company is performing to its full potential or not.
The strategy evaluation discusses the results and implementation of strategic plans. It’s significant for the company to conduct strategy evaluation regularly during or after the implementation. For instance, you can evaluate the performance of your company quarterly, semi-annually, and annually, or as the result of implementation. It comprises of analyzing the company’s goals and checking whether it has achieved them or not.
The swot analysis is a very famous and common business analysis tool, and it offers you both internal and external analysis of the company. The term swot analysis comprises four main elements; strengths, weaknesses, opportunities, and threats.
A swot analysis offers you an opportunity to see the potential opportunities in the market and how you can exploit them. It also allows you to determine and minimize the internal weaknesses in order to decrease the possibility of threat.
For instance, swot analysis helps you to find out the strengths of your company like organizational capabilities and talented employees. Its weakness is that it depends on scarce raw materials and problematic supply chains. Like, the growth of Amazon threatens your business, and it allows you to exploit the opportunity of low-interest rates.
VRIO analysis is a great tool for analyzing a company’s internal environment. Here you study various internal resources of the company and categorize each of them based on their contribution to the company.
For instance, if you’re planning to build a strategy in order to achieve a competitive edge, then you should consider using the VRIO analysis tool.
OCAT (organization capacity assessment tool) is for non-profit organizations to study the internal environment. It analyzes the following internal dimensions of the company;
- Adaptation and innovation
- Shared values and culture
- Organizational structure and infrastructure
- Business process
- Communication and marketing
- Staff, board, and leadership
- Strategy and aspiration
McKinsey 7S Framework
McKinsey 7S framework is a famous tool for companies that plan to align their processes and departments. You can use this framework to determine the gap between the current state of affairs and the future proposed state. It allows you to study 7 internal aspects of the company that you can use to achieve its goals. They’re as follows;
- Shared values
Core Competency Analysis
The core competency analysis tool assists businesses and companies to develop a strategy in order to gain a competitive edge. It allows you to recognize your core competencies like skills, knowledge, and resources that are adding unique value to the customers. After that, you can develop a strategy based on the key points that your company is good at and what it offers to the customers.
How to Conduct an Internal Analysis
Here are some of the following steps in how to conduct an internal analysis;
Define your Objectives
First of all, you have to define your objectives and reasons for performing an internal analysis. The objectives could be finding ways to lower the internal expenses and looking for new opportunities. You should know in the beginning what you’re planning to learn from the internal analysis. When you have a clear mindset, then you can find the most relevant data.
Choose the suitable Framework
You should choose the most suitable framework for the analysis. It’s because some frameworks are good at the company’s development, and others are good at finding weaknesses. You should review different frameworks based on your company’s needs and requirements.
Do Your Research
You should collect information from various sources like the company’s growth, competencies, and resources. It could be checking the company’s equipment, finances, and interviews.
Use the Framework
You should present the data based on your selected framework. For instance, you’re using the framework of swot analysis, and then you should separate present information in terms of strengths, weaknesses, opportunities, and threats.
Select Your Priorities
After putting the information in the framework, you should analyze it and compare it with the company’s goals. For instance, if your goal is to amplify the tech capabilities of the company, then you should check what type of resources and equipment you need.
You should implement your plan based on the findings in order to meet your goals. If it requires the purchase of new assets, training of employees, or replacement of machinery, then you should do it.