An internal analysis examines your organization’s internal environment in order to assess its resources, competencies, and competitive advantages. Performing an internal analysis allows organizations to identify their strengths and weaknesses. This knowledge aids the strategic decision making of management while they carry out the strategy formulation and execution process.
Here at Cascade, we’re heavily focused on the strategy formulation process, and we’ve already written extensively on such – from the starting point of an inspiring vision statement all the way through to developing your strategic objectives, KPIs, and goals. However, before you can properly formulate your strategy, you need to undertake a scan of your internal and external environment. This article will look at why an internal analysis is a key component to creating an effective strategy, and explore some of the tools you can make use of while conducting your internal analysis. We only briefly touch on the external analysis in this article, though it is just as critical to the process. We’ll be covering an external analysis in a later post (subscribe to our newsletter to find out when).
Internal & External Analysis
Accompanying an internal analysis should always be an external analysis – which scans the external environment of 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. The framework will help you analyze your industry’s attractiveness and likely profitability and help you understand the forces in your industry that can affect your profitability. You’ll be able to adjust your strategy accordingly.
Why Conduct an Internal Analysis?
As mentioned above, an internal analysis will highlight an organization’s strengths and weaknesses in the areas of their competencies, resources, and competitive advantage. Once complete, the organization should have a clear idea of where they’re excelling, where they’re doing ok and where current deficits and gaps lie. The analysis will arm management with the knowledge to exploit their strengths and opportunities. It also allows management to develop strategies to mitigate any threats and compensate for identified weaknesses.
Beginning strategy formulation after this analysis will ensure the strategic plan has been formulated to take advantage of strengths and opportunities, and offset or improve weaknesses & threats. Your organization can then be confident that you’re funneling your resources, time, and focus effectively and efficiently.
What tools should you use?
Before undertaking an internal analysis, you’ll need to decide which tool(s) 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 a few popular and effective internal analysis tools with a description of each below:
The SWOT analysis is one of the most well known and used business analysis tools around. It gained popularity due to its simplicity (covers both an internal and external analysis), though equally for its effectiveness. The name SWOT is derived from the factors in its grid, namely – Strengths, Weaknesses, Opportunities, and Threats.
This tool can be used to create a sustainable niche in your market. The SWOT analysis allows organizations to uncover the opportunities they have the strength to exploit, and minimize their weaknesses and the risk of impending threats. Using this tool, organizations are able to distinguish themselves from competitors and successfully compete in their given marketplace.
The Organizational Capacity Assessment Tool was designed for non-profit organizations looking to assess their internal environment. 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. To use the tool, check out this free online survey which allows you to measure how your non-profit is performing.
The VRIO framework is a great tool for specifically assessing an organization’s internal environment. It looks at the different internal resources of an organization and categorizes each based on overall value to the organization. VRIO is a framework that allows organizations to identify their competitive advantages and promotes the development of these competitive advantages to sustainable competitive advantages.
If you’re looking to develop a strategy that builds on your organization’s competitive advantage, but you’re 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 turn those competitive advantages into sustained competitive advantages.
McKinsey 7S Framework
Another highly popular and battle-tested tool is the McKinsey 7S Framework. McKinsey 7S is ideal for organizations looking to improve the alignment between departments and processes. The model can be used to assess an organization’s current state, as well as a proposed future state, and the gaps and inconsistencies between them. McKinsey 7S prompts you to analyze 7 internal aspects of your organization which need to ultimately be aligned for your organization to truly compete and be successful. The model’s 7 elements include:
- Shared Values
If you’d like to learn more about the tool, check out this article we found. It gives a detailed walkthrough of the entire model, and how to use it.
Core Competencies Analysis
The core competency analysis is an internal analysis tool which 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 creates unique value to their customer. Once organizations have identified their core competencies, strategies can be created to focus on only what the organization does well and provides unique value to the customer. Check out this article to learn how to perform a core competency analysis.
Hopefully this post has given you some insight as to the importance of conducting an internal analysis prior to your strategy formulation process, and the different tools you can use to solve your business problem. In the coming weeks we will also cover the external analysis and the different tools you can use to perform one.
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