Internal analysis

Internal analysis
See also
Strategic management principles Aggressiveness strategy Strategic management Strategic position Benefits of strategic management EFE matrix ASTRA analysis Market opportunity Importance of swot analysis

Internal analysis or analysis of the internal environment of the company is one of the most important strategic analysis method. It incorporates many management techniques developed in areas of process management, organizational development, knowledge management, information systems, and so on. Most common internal analysis methods are:

• SWOT analysis
• TOWS analysis
• Company situation analysis
• Strategic gap analysis
• Knowledge gap analysis
• Financial analysis
• Human resources analysis
• Program of global activity of the company
• Production system analysis
• R&D activities analysis
• EFQM model

The main task of internal analysis is to examine the situation in the company, assess the strengths and weaknesses and the forecast the company's resources. In order for a company to survive in the market, it needs to grow and achieve it is goals. The basis for achieving this is a good organization, effective planning of activities for the nearest period and knowledge of the target market. This analysis is crucial in the management of a company.

Strengths and weaknesses of the company

For more effective results and in getting closer to the realization of goals, the knowledge of weaknesses and strengths of company will certainly help, which is also one of the elements of internal analysis. It is worth making such analysis periodically, because thanks to it, the company can improve its results and its good points. Lack of well qualified staff, poor organization at work or lack of resources are some of the factors which negatively influence the development of the company. Through internal analysis, we are able to determinate what should be corrected, how to adjust funds to maintain liquidity. SWOT analysis is one of the elements of internal analysis, and speaks more precisely about it.

Internal analysis evaluates the situation in the scope of:

1. Human resources - assessment of factors important for proper human management,
   • The employee's satisfaction is cursed by the work. If the management knows how to manage the staff and how to select creative employees and if it takes care of their needs and personal development, this will result in a better company performance. Again, the company gains a reputation and becomes a stronger competitor to other companies.
2. Company / financial resources - assessment of financial liquidity,
   • The better the company has financial background, the more credible, competitive and can stay relatively longer on the market than companies with smaller capital.
3. Technological resources - what capacity production a given company has.

Performing such researches allows, among other things or to outline the next goals of the company.

Difference between internal analysis and external analysis

Internal analysis therefore examines all phenomena that occur inside the company. It examines whether the company has a chance to stay on the market or the way of managing employees is effective, whether the available resources are sufficient for the development of the company and helps to maximize the advantage over competitors. However, external analysis allows to determinate what kind of threats and chances a given company has on the market, helps to define the phenomena that can affect a company, the economic, demographic or social situation is also important, because they have a strong impact on the company and are closely related to them.

Examples of Internal analysis

• SWOT Analysis: SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. This method is used to identify and evaluate the internal and external factors that could affect the success of a business. It helps to analyze the competitive environment, evaluate the competitive position of the company, identify potential opportunities and threats, and develop strategies to capitalize on the strengths and minimize weaknesses.
• Internal Process Analysis: This method is utilized to analyze the internal processes and systems of a company. The goal of internal process analysis is to identify areas for improvement in order to increase efficiency and reduce costs. It involves analyzing the current processes, identifying inefficiencies, and proposing changes to maximize efficiency.
• Business Model Analysis: Business model analysis is used to evaluate the current business model of a company and to identify areas for improvement. It involves analyzing the current business model and its components, such as market segmentation, pricing strategies, distribution channels, and promotional activities. The goal of business model analysis is to develop a strategic plan that will help the company to remain competitive and profitable.
• Benchmarking: Benchmarking is a process of measuring a company’s performance against that of its competitors. It involves analyzing competitors’ products, services, and processes, and comparing them to the company’s own. This helps to identify areas where the company can make improvements and become more competitive.
• Resource Analysis: Resource analysis involves analyzing the resources of a company, such as its financial resources, personnel, and technology. This helps to identify areas where the company needs to invest in order to increase productivity, reduce costs, and improve efficiency.

Advantages of Internal analysis

• Internal analysis helps to identify the strengths and weaknesses of a company which can be used to develop strategies to increase performance. It also helps to identify organizational problems and provide solutions to improve efficiency.
• Internal analysis can provide insights into the cost structure of a company and help to identify cost reduction opportunities.
• It can also be used to identify areas for improvement in employee performance and morale.
• Internal analysis can help to assess the resources and capabilities of a company and how they can be used to develop competitive advantage.
• It can be used to identify core competencies and sources of competitive advantage.
• Internal analysis can help to identify risks and develop strategies to mitigate them.
• It can also help to identify potential collaborations that can help a company to grow and develop.

Limitations of Internal analysis

1. *Limited perspective: Internal analysis only looks at the internal environment of the company and overlooks external factors such as market trends, competition, and customer needs.
2. *Subjective data: Internal analysis is often based on subjective data such as employee opinions and management appraisals. This can lead to inaccurate or incomplete information.
3. *Faulty Assumptions: Internal analysis can be based on faulty assumptions which can lead to incorrect or misleading conclusions.
4. *Time consuming: Internal analysis can be time consuming as it involves collecting and analyzing large amounts of data from multiple sources.
5. *Organizational bias: Internal analysis can be biased by the interests of the organization, which can lead to strategic decisions that are not in the best interests of the company.

Other approaches related to Internal analysis

• SWOT Analysis: SWOT Analysis is a tool used to evaluate the strengths, weaknesses, opportunities, and threats of an organization. It helps organizations in understanding the internal and external environment of the organization, identify and monitor changes in the environment, and determine the impact of these changes on their strategy.
• PEST Analysis: Pest Analysis is a tool used to identify and analyze the political, economic, social, and technological factors that may affect a business or industry. It helps organizations in understanding the external environment and its impact on the organization.
• Benchmarking: Benchmarking is a process of comparing an organization’s performance against other organizations in the same industry. It helps organizations to identify areas where improvements can be made and where they are lagging behind in comparison to their competitors.
• Value Chain Analysis: Value chain analysis focuses on the activities within an organization that create value. It helps in identifying which activities are most important and which ones can be improved or eliminated.
• Five Forces Analysis: Five Forces Analysis is a tool used to assess the competitive environment of an organization. It helps organizations in understanding the competitive environment and its impact on the organization.

In summary, Internal analysis is an important strategic analysis method that helps organizations in understanding the internal and external environment of the organization, identify and monitor changes in the environment, and determine the impact of these changes on their strategy. Other approaches related to Internal analysis are SWOT Analysis, PEST Analysis, Benchmarking, Value Chain Analysis, and Five Forces Analysis.

References

• Segev, E. (1989). A systematic comparative analysis and synthesis of two business‐level strategic typologies. Strategic Management Journal, 10(5), 487-505.
• Michael E.Porter (1979). Forces governing competition in an industry. How Competitive Forces Shape Strategy, 134.
• Michael Armstrong (2006).Strategies for improving organizational effectiveness. Strategic Human Resource Management A Guide To Action, 103-105.

Footnotes

Author: Kamila Wronkowska