Internal Analysis Definition
Internal analysis can be defined as a comprehensive assessment of the internal factors within an organization. While any examination of a company can technically be called an internal analysis, when used in a strategic management context, the term refers to the application of well-recognized tools of internal analysis such as SWOT analysis, VRIO framework, and Value Chain Analysis.
How Important is Internal Analysis?
Internal analysis is very important because the findings from this analysis help with better decision-making. It helps explore the landscape for strategy planning through better situational awareness. However, it is necessary to also understand that internal analysis is usually not sufficient on its own for strategic management. It needs to be paired with external analysis of the environment as well in order to have a full picture of how to consolidate the position of the company in relation to the competition. These two forms of analysis together are an important part of any strategic plan, as mentioned in our strategy checklist.
What are Examples of Internal Factors?
If you are not sure what comes under internal environment of companies, the fact that this is also called an ‘inside-out’ approach should give you a clue. So, any analysis in which we look at what a company already has would come under the broad scope of internal analysis. Here are some examples of what is included in the internal environment.
- Physical assets (like location, raw materials, land, building, plant & machinery, vehicles etc.)
- Financial resources (like budget, cashflow, borrowing capacity, internal fund generation etc.)
- Human resources (like training, experience, commitment, loyalty etc.)
- Patents (like process, utility, copyrights, trademark etc.)
- Reputation (like goodwill, brand recognition, brand loyalty etc.)
- Technological capabilities (like information systems, technical know-how, research & development etc.)
- Operational capabilities (like manufacturing skills, optimized processes, supply chain, logistics etc.)
- Strategic Business Units (like different product lines and their profitability)
- Organizational culture (like leadership style, organization learning etc.)
- Organizational structure (like hierarchy, communication etc.)
- Other competitive advantages (like licenses, partnerships, strategic positioning etc.)
As you can tell, some factors are tangible and measurable, while others are intangible. It is often argued in strategic management literature that the intangible resources and capabilities are often the sources of sustainable competitive advantages. The specific internal analysis framework to be used for a case should be chosen based on the specific type of internal factors that need to be examined.
What are the Internal Analysis Tools used in Strategic Management?
Here’s a list of some common tools and frameworks used for internal and external analysis. Each of these tools of internal assessment has some specific purpose and looks at certain internal factors. Hence, students and practitioners of strategic management need to reflect on the aim or goal for which they are conducting the internal analysis and choose the appropriate framework accordingly.
|Framework||What is its purpose?||Type of Internal Factor Assessed|
|SWOT||Summarize a company’s ability in terms of its strengths and weaknesses (in addition to identifying external opportunities and threats)||Broad in scope and can include anything|
|VRIO||Categorize the internal resources of a company and assess whether they represent sources of sustained competitive advantage||Resources and capabilities|
|Distinctive Competencies||Evaluation of internal strengths that also meet market needs (hence, this requires a consideration of external factors as well)||Resources and capabilities|
|Value chain analysis||Assess the value-creating internal functions within a company and how well they relate to each other||Internal business functions and processes (Marketing, Operations, HR, R&D etc.)|
|McKinsey 7S||Align internal resources, processes, and approaches to achieve better results. You can see an example of using this tool here.||Human resources & skills, organizational culture & structure, systems & strategy|
|Boston Consulting Group (BCG) Matrix||Identify and categorize the different lines of business within a company to prioritize resource allocation||Strategic Business Units (SBUs), which are different lines of business within the same company|
|Mission, vision, objective and values||Identify the purpose of the organization and communicate to stakeholders for realizing the expected outcomes||This should be evident from the obvious name|
|Balanced Scorecard||Metric-based evaluation of a company’s performance to identify areas for improvement (also comes under external analysis)||Business processes, financial results, internal learning, continuous improvement|
|Internal Factor Evaluation (IFE)||Quantitative evaluation of the strengths and weaknesses of a company||Broad in scope|
|Business model canvas||Visualizing the business model of company with a broad overview of key components||Value proposition, infrastructure, customers, and financial variables|
How do you Analyze the Internal Environment of a Business?
When you analyze the internal environment of a business, you should do the following.
1. Define the Need for Internal Analysis
With any task, you need to understand the rationale or aim behind why you are doing it. In the same way, when doing an internal factor analysis, the first step is to define your objective. You could determine this based on any explicit instruction based on the company’s profile or assignment brief. If the internal analysis approach is not specified or left vague, think about questions like the following.
- Why is internal evaluation is needed for this project?
- What is my client or tutor expecting?
- What kind of internal information needs to be analyzed so that the objective can be met?
2. Identify Suitable Internal Analysis Framework
As mentioned earlier, each tool has a specific purpose. So, based on your reason for doing an internal analysis, choose the right tool from the table in the previous section. For instance, when the aim is to get a general understanding of what a company does well and what it doesn’t, the most commonly used tool is SWOT analysis. The use of SWOT for internal environment evaluation is so common because it is broad in scope. On the other hand, if the goal of internal analysis is to evaluate the effectiveness of a company’s operations, a value chain analysis may be more appropriate.
3. Conduct Research on the Company
The next step is to start collecting relevant information about the company which you can use for your assignment. When gathering information for this purpose, keep the components of your selected framework in mind. For instance, if your chosen tool is SWOT, when reading news articles, research papers or press releases about the company, try to take rough notes on which pieces of information can be categorized under strengths or weaknesses.
4. Apply the Information in the Framework
Based on the previous steps, you should now have a rough outline of the framework filled with relevant information. Try to apply some critical thinking and make connections between the individual pieces of information.
For a practical example which shows the application of internal analysis of a company, please take a look at our strategy case study on KFC’s success in China.
Common Mistakes in Internal Analysis
1. Listing general information without meaningful insights
When doing internal analysis, many students include sweeping statements or broad generalizations. Most teachers will dock you points for poor research if you do this, especially if you are in a strategic management course. This is because the aim of internal analysis to set the groundwork for further analysis and strategic planning. This means if your internal analysis section is good, it’s going to be much easier for you to write the rest of your paper. So try to avoid the mistake of just listing generic points without touching on the contextual importance of those points.
Here’s an example. It’s a well-known fact that Tesla has a strong R&D team, but you shouldn’t just list this point without context. Instead, you should try to also mention the implication of this strength. So, a better way to phrase it would be to state that Tesla has a strong R&D team which gives it an edge in new product development and innovation.
2. Failure to understand the meaning of ‘strengths’ and ‘weaknesses’
One of the things which stumps students is what these terms actually signify. Strengths are the things which a company does well, while weaknesses are those that it does not do too well. Hence, you should be looking at factors which are specific to the organization that you are analyzing (at least to a certain extent). This means that strengths or weaknesses which are applicable to most competitors of that company as well do not make for good points.
Another point to note is that a strength may not always be beneficial as it may require a lot of resources to maintain. Similarly, weakness does not necessarily have to be a liability. On the contrary, some companies make a conscious decision not to obtain certain organizational capabilities if they do not consider it a critical success factor.
For instance, one of the weaknesses of Apple (compared to Samsung in the mobile phone market) is that it does not offer any lower priced product offerings. However, this is by design, because Apple does not wish to dilute its brand image as a producer of premium quality mobile phones. In other words, maintaining its strength of brand recognition and association with better build quality is more critical for the company than chasing after low profit margins in the cheap phones sub-segment of the market.
3. Not interlinking the discovered information
You should also get into the habit of interlinking your different points to write more compelling assignments which will get you better grades. For example, let’s say you wrote down under the strengths section of your SWOT analysis of Apple that the company has strong product design capabilities. You can link this strength to another strength, which is the fact based on this strength, the company is able to charge a higher price point, resulting in better profit margins for each unit that it sells.
4. Neglecting internal analysis findings when making recommendations
Some people do an internal analysis just to tick a checkbox and don’t look back on it when moving on to the next part of the project in which recommendations are to be made. If you have put some time and effort into doing an internal analysis, why would not use that! Always try to link back to the ideas formulated during internal analysis to other parts of your paper, particularly the findings and discussion sections.
5. Forgetting the purpose of internal analysis
It is important to understand that internal analysis is only one piece of the puzzle. External analysis of the environment is an equally important part for exploring strategic management initiatives. So, do not use internal analysis to directly make strategy recommendations. To explain this further, we often seen students trying to pass off identified weaknesses as areas that the company should focus on, or directly using identified opportunities to suggest a strategic direction for the company. This isn’t what the internal analysis section is meant for. Instead, stick to identification of objective facts that could be significant for the strategy planning (which would follow later).