If you want to create a successful business strategy, you need to thoroughly understand your organization.
Many leaders believe they do and create strategies based on assumptions instead of research and actual findings. Such strategies are often a waste of time and money. They never get executed as they’re not in tune with internal factors.
We’re here to make sure that doesn’t happen and to establish solid foundations for your strategy. First, let’s make sure we’re on the same page.
What is internal analysis?
An internal analysis examines an organization’s internal components to assess its resources, assets, characteristics, competencies, capabilities, and competitive advantages. This helps management during the decision-making, strategy formulation, and execution processes by identifying the organization's strengths and weaknesses.
So simply put, an internal analysis enables a firm to determine what the firm can do. Internal analysis in strategic management should serve as the foundation of any business strategy, and we’ll show you how to conduct one and which tools you have at your disposal to conduct an internal assessment in strategic management.
An overview of internal analysis tools
- Gap Analysis
- Strategy Evaluation
- SWOT Analysis
- VRIO Analysis
- McKinsey 7S Framework
- Core Competencies Analysis
- + Download our Free Internal Analysis Toolkit! This contains excel templates of all of the above tools!
Are internal analysis & external analysis connected?
Internal environment analysis and external analysis are like yin and yang. Doing one without the other paints an incomplete and one-sided picture.
Evaluating the external environment, your market, and industry conditions highlight potential opportunities and threats.
Evaluating the internal environment, company’s assets, and capabilities highlights organizational weaknesses and strengths.
Combining both findings gives you a broader perspective and a holistic picture of your organization's situation. Both are needed if you want to create a winning business plan that takes into account internal and external factors.
When should you conduct internal and external analysis?
Internal and external scans should always be done before you start developing your strategy.
If you're in the process of creating a new strategic plan and have skipped this step, pause and complete the internal and external scans first. As the saying goes - better late than never. You can then confidently continue the strategy creation process and correct any potential misassumptions.
If you're unsure where to begin, great tools for conducting an external scan are Porter's 5 Forces and the PESTEL framework. These frameworks will help you analyze your organization's environment, trends, and different external factors that will affect your profitability and growth prospects.
You'll then be able to adjust your strategy accordingly.
Why conduct an internal environment analysis?
An internal analysis highlights an organization's 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 current deficits and gaps are. The analysis gives management the knowledge to leverage the organization’s strengths, expertise, and opportunities. It also enables management to develop strategies that mitigate threats and compensate for identified weaknesses and disadvantages.
When your business strategy is based on real findings and not assumptions, you can be confident that you're funneling your resources, time, human capital, and focus effectively and efficiently.
Internal analysis tools
Before conducting an internal analysis, you need to decide what tools you will use.
There are many tools and frameworks, and each one can be valuable - but each one is also best for a specific purpose. To help you choose the right framework, we've compiled a list of some of the most popular and effective ones, together with descriptions of what they’ll help you achieve.
GAP analysis is an evaluation tool that allows organizations to identify performance deficiencies and internal weaknesses.
It’s a simple and practical framework. It helps you compare your current organizational state to your desired future state. It helps you identify and understand the gaps between the two states and makes it easier to create a series of actions to bridge those gaps.
GAP analysis helps management identify if their organization is performing to its potential, and if not, why. In addition, it helps to pinpoint flaws in resource allocation, planning, production, etc.
Why choose the GAP analysis framework
While other internal analysis tools, such as SWOT analysis, offer a more comprehensive study of the internal environment, GAP analysis is a better framework for fine-tuning a single process (or a selected few) instead of the company as a whole.
A strategy evaluation analyzes the results of a strategic plan's implementation.
It's useful to conduct a strategy evaluation regularly to see if everyone understands and acts according to your business strategy. You might want to conduct such an evaluation every six months, every year, or after a revamped business strategy implementation. It mostly depends on the number of changes you’re trying to implement.
The strategy evaluation process involves looking back at the goals of your strategic plan and assessing how well your strategic management initiatives fared in achieving them.
Why choose the Strategy evaluation framework
Strategy evaluation shows how your strategy implementation process fares against “business as usual”. You might have created a great strategic plan, but it's of no use if it’s not being executed. Use this framework to align your strategy with your company’s culture.
SWOT analysis is one of the better-known and most commonly used business analysis frameworks.
It’s popular due to its simplicity (it covers both an internal and external analysis) and its efficacy. Its name is derived from the four factors that form the SWOT matrix:
- Strengths (internal)
- Weaknesses (internal)
- Opportunities (external)
- Threats (external)
SWOT analysis can uncover a sustainable niche in your market and grow your market share. It allows organizations to discover external opportunities they can exploit while simultaneously identifying internal factors that cause weaknesses. It also helps to reduce the risk of impending threats.
Here’s a simplified SWOT analysis example of Starbucks:
- Global leader in coffee and beverage retailing.
- Strong brand equity and great brand recall.
- One of the largest coffee houses globally, which allows it to price its products for the middle-income group.
- Heavy dependence on coffee beans.
- Criticized in the past for procuring coffee beans from impoverished third-world farmers.
- The price is still costly for many working consumers.
- Should expand to the tier-II cities of the emerging countries in order to further increase its customer base.
- Should expand its product portfolio to venture into the full spectrum food and beverage business.
- Profitability is always at the mercy of the rising prices of coffee beans and the supply network.
- Strong competition from the local coffeehouses and specialty stores that offer similar products at a cheaper price.
Starbucks or any company can then use such analysis to develop strategic alternatives that will help it meet its goals.
Why choose the SWOT analysis framework
It helps organizations distinguish themselves from competitors by understanding their unique capabilities and sources of competitive advantage, which can help them compete in their given marketplace. If SWOT analysis seems like the framework you need, check out our SWOT template here.
The VRIO framework is a great tool for assessing an organization's internal environment.
It looks at an organization's internal resources and categorizes them based on the overall value they contribute to the organization. VRIO is a framework that helps you create sustainable competitive advantages.
It enables you to identify your unique strengths and transform them from short-term competitive edges into sustainable performance drivers. Our VRIO framework guide shows you exactly how to do it.
Why choose the VRIO analysis framework
If you're looking to develop a strategy that builds on your organization's competitive advantage, VRIO analysis is the tool you need. It will give you a deeper understanding of your assets and your organization’s added value.
The Organizational Capacity Assessment Tool was designed for non-profit organizations looking to analyze their internal environments.
OCAT assesses how well your organization performs across the following 10 internal dimensions::
- 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.
Why choose the OCAT framework
OCAT dives deeper into organizational structure and internal state than most other frameworks. Its power lies in translating organizational capacities into strategies that boost organizational performance to a new level.
McKinsey 7S framework
Another popular and battle-tested tool is the McKinsey 7S Framework.
McKinsey 7S is ideal for organizations looking to determine the state of alignment between departments and processes. The model can assess an organization's current state compared to a desired future state and evaluate the gaps and inconsistencies between them.
McKinsey 7S prompts you to analyze seven internal aspects that should be aligned if your organization is to reach its full potential. These seven aspects are:
- Shared Values
Why choose the McKinsey 7S framework
This framework provides an honest view of the organization’s internal alignment. It examines various internal elements from the company’s culture to its staff, leadership capabilities, and process efficiency.
Core competencies analysis
The core competencies analysis helps organizations shape their unique advantage, which can help them overtake the competition.
The basic premise of the analysis is to identify the organization's core competencies — the combined resources, knowledge, and skills of an organization that provide unique value for its customer. Once an organization has identified its core competencies, it can implement strategies that focus specifically on its strengths and the added value it provides.
Why choose the Core competencies analysis framework
Compared to other types of analyses, this one puts a greater emphasis on intangibles instead of focusing solely on tangible resources. It focuses on unique advantages that also make strategic sense. Check out this article to learn how to perform a core competency analysis.
Internal analysis in strategic management
Conducting internal analysis is the first step towards creating an effective strategic plan. What follows? We’ve got you covered! We’ve prepared a detailed step-by-step on how to create a strategic plan based on our experience and best practices.
If you’re just looking for some inspiration, download our free strategic planning template below to start building your strategy!