What is an Internal Analysis?
An internal analysis examines an organization’s internal environment to assess its resources, assets, characteristics, competencies, capabilities, and competitive advantages. In short, it allows you to identify your organization's strengths and weaknesses, which can help management during the decision-making, strategy formulation, and execution processes.
This article will look at why an internal analysis is a key ingredient in any effective strategy and provide insight into the tools you can use to conduct one yourself.
- Gap Analysis
- Strategy Evaluation
- SWOT Analysis
- VRIO Analysis
- McKinsey 7S Framework
- Core Competencies Analysis
How are Internal & External Analyses connected?
Every internal analysis should be accompanied by an external analysis, which evaluates the external environment and external factors that influence the organization. The combination of both an internal & external scan is key in gaining a holistic picture of the organization's environment and developing a strategy that will allow your organization to succeed.
The internal/external scan should always be undertaken before the actual creation of your strategy begins. If you're in the process of creating a new strategic plan and have skipped this step, we'd recommend pausing and completing an internal/external scan first. You can then move back into the strategy creation process with confidence.
If you're not sure where to begin, a great tool for conducting an external environmental scan is Porter's 5 Forces or PESTEL. These frameworks will help you analyze your organization's environment and the different factors that will affect your profitability and growth prospects. You'll then be able to adjust your strategy accordingly.
Why Conduct an Internal Analysis?
An internal analysis will highlight an organization's internal strengths and weaknesses in relation to its competencies, resources, and competitive advantages. Once complete, the organization should have a clear idea of where it's excelling, where it's doing okay, and where its currents deficits and gaps are. The analysis will arm management with the knowledge to make full use of its strengths, expertise, and opportunities. It also allows management to develop strategies to mitigate any threats and compensate for identified weaknesses and disadvantages.
Suppose you wait to begin your strategy formulation until after you've completed your analysis. In that case, you will ensure your strategic plan has been formulated to take advantage of your strengths and opportunities as well as to offset or improve weaknesses and reduce threats, such as those from rivals and competitors. Your organization can then be confident that you're funneling your resources, time, human capital, and focus effectively and efficiently.
Internal Analysis Tools
Before undertaking an internal analysis, you'll need to decide which tools you'd like to use to conduct the analysis. Many tools and frameworks exist and each is valuable for a certain purpose. To help you choose the right tool, we've compiled a list of some popular and effective internal analysis tools with a description of what each of them will help you achieve.
GAP analysis is an internal evaluation tool that allows organizations to identify performance deficiencies. A GAP analysis helps you compare your current state to your desired future state, identify and understand the gaps that exist between the two states, and then create a series of actions that will bridge those gaps. This is important because it helps management identify if their organization is performing to its potential, and if not, why. In addition, this helps to pinpoint flaws in resource allocation, planning, production, etc.
While other internal analysis tools, such as SWOT analysis, offer a more comprehensive study of the internal environment, GAP analysis can be more targeted towards fine-tuning a single process instead of the company as a whole.
A strategy evaluation analyses the results of a strategic plan's implementation. It's useful to undertake a strategy evaluation at regular intervals during your strategic implementations. For example, you might opt to conduct an evaluation every six months, every year, or at the conclusion of your implementation. The strategy evaluation process involves looking back at the goals in your strategic plan and assessing how well your strategic management initiatives fared in achieving them. If you're looking for a thorough guide on how to conduct a strategy evaluation, check out our article on the topic.
The SWOT analysis is one of the most well-known and most common business analysis tools around. It gained popularity thanks to its simplicity (it covers both an internal and external analysis), but it's also known for its efficacy. The name SWOT is derived from the factors in its grid (strengths, weaknesses, opportunities, and threats), which form the SWOT matrix.
This tool can be used to create a sustainable niche in your market and grow your market share. The SWOT analysis allows organizations to uncover the external opportunities they have the strength to exploit while simultaneously minimizing the internal factors that cause weaknesses. It also helps to reduce the risk of impending threats. Using this tool, organizations are able to distinguish themselves from competitors by understanding their unique capabilities and sources of competitive advantage, which can help them compete in their given marketplace.
For example, a SWOT analysis may uncover that some of a company's strengths are its talented employees and strong organizational capabilities, that its greatest weakness is its reliance on problematic supply chains and scarce raw materials, that it has an opportunity to take advantage of low interest rates, but that the growth of Amazon threatens it. The company can then use this analysis to develop strategic alternatives that will help it meet its goals.
The VRIO framework is a great tool for assessing an organization's internal environment. It looks at an organization's internal resources and categorizes each based on the overall value it contributes to the organization. VRIO is a framework that allows organizations to identify their competitive advantages and promotes the development of consistency to turn them into sustainable competitive advantages.
If you're looking to develop a strategy that builds on your organization's competitive advantage, but you've yet to define what that is, VRIO analysis is the tool you need. check out the article we wrote earlier on the VRIO framework. It walks through how you can use it to not only identify competitive advantages in your own organization but to transform them from short-term competitive advantages into sustained ones.
The Organizational Capacity Assessment Tool was designed for non-profit organizations looking to assess their internal environments. OCAT assesses how well your organization performs across 10 internal dimensions, including:
- Leadership, Board & Staff
- Marketing & Communications
- Business Processes
- Infrastructure & Organizational Structure
- Culture and shared values
- Innovation and adaptation
The results of the assessment help non-profits evaluate and improve their organizational capacity.
McKinsey 7S Framework
Another popular and battle-tested tool is the McKinsey 7S Framework. McKinsey 7S is ideal for organizations looking to improve alignment between departments and processes. The model can be used to assess an organization's current state in comparison to a proposed future state and evaluate the gaps and inconsistencies between them. McKinsey 7S prompts you to analyze seven internal aspects of your organization that should be aligned if your organization is going to reach its full potential. The seven elements are:
- Shared Values
If you'd like to learn more about the tool, check out this article we found. It gives a detailed walk-through of the entire model and how you can use it.
Core Competencies Analysis
The core competency analysis is an internal analysis tool that helps organizations create strategies that move them ahead of their competitors. The basic premise of the analysis is to identify the organization's core competencies — the combined resources, knowledge, and skills of an organization that create unique value for its customer. Once organizations have identified their core competencies, strategies can be created to focus on only what the organization does well and what provides unique value to the customer. Compared to other types of analyses, this one puts a greater emphasis on intangibles instead of focusing solely on tangible resources. Check out this article to learn how to perform a core competency analysis.