What do you mean by internal analysis discuss the importance of internal analysis in strategy formulation understand?

Strategic management is a popular method for running businesses which involves an analytical approach to setting goals and managing resources. Like strategic planning, strategic management often involves a good dose of business analysis. Broadly speaking, this business analysis can be categorized as either internal or external.

In this short guide, we’ll walk you through the differences between internal and external analysis and show you how you can use SWOT and PESTLE models to accomplish both.

Internal Analysis for Strategic Management

What Is Internal Analysis?

Let’s start with internal analysis. As the name suggests, internal analysis focuses on evaluating all aspects of the organization itself. Although internal analysis can sometimes take into account the actions of external organizations or market-wide shifts, it is largely related to the inherent traits of the organization at hand.

For example, internal analysis can allow you to identify both strong and weak aspects of your organization, without taking into account the performance of external organizations.

Here’s another way to think about internal analysis: if your organization was the only one that existed — meaning your organization had no competition — and your business environment was entirely neutral — meaning it didn’t in any way affect your organization — then what factors would you consider when analyzing your organization?

Why Is Internal Analysis Important?

In the context of strategic management, internal analysis is crucial for a few reasons. Your organization might be spending too much in some areas due to internal inefficiencies, or, alternatively, your organization could be leaving money on the table. The only way to reveal these things — and get a true understanding of how resources are being used in your organization — is by means of internal analysis.

Why Use SWOT as a Tool?

The SWOT model is an excellent tool for internal analysis, since it encourages you to think about your organization and only your organization. The acronym SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, which are the four factors you take into account during SWOT analysis as you create the SWOT table.

As you can see, the first two of these factors — Strengths and Weaknesses — are very much internal. Neither your competitors nor your external business environment can affect what your organization does well and what your organization does poorly: those things are entirely up to you.

With the latter two factors — Opportunities and Threats — you could argue that SWOT analysis doesn’t have an entirely internal focus. However, that simply depends on how you use it. If you choose to ignore external factors (such as competitive rivalry, material costs, or government regulations), the Opportunities and Threats categories can still provide valuable insight to the internal aspects of your organization, in the context of strategic management.

Getting Started with SWOT

SWOT analysis is as easy as it sounds: listing and evaluating the Strengths, Weaknesses, Opportunities, and Threats affecting your organization. Trying to come up with these factors isn’t always so easy; it takes a lot of brainstorming.

For more information, be sure to read our complete guide to conducting a SWOT analysis.

External Analysis for Strategic Management

What Is External Analysis?

Let’s switch gears and talk about external, or environmental, analysis. Unlike internal analysis, external analysis is less about the organization itself, and more about its business environment (including its competitors). Again: the term is mostly self-explanatory — looking at external business analysis factors instead of internal ones.

So, what exactly would an example of an external factor be? The number of new competitors entering your industry, the cost of materials used to manufacture your products, or the regulatory frameworks set out by governments — these are all examples of variables which are out of your organization’s control, and should be taken into account in external analysis.

One helpful way to tell whether a business analysis factors is external or not is to ask “does this factor apply to other organizations?” For example, an increased tax rate applies all organizations — not just yours — so you know it’s an external factor.

Why Is External Analysis Important?

As you might expect, external analysis is also very important in the context of strategic management. When evaluating your organization’s goals and resources, you absolutely need to look at the surrounding business environment. In a perfect world, it would be enough just to look inside your organization; in the real world, you need to be conscious of external forces that might affect your business’ operations and throw you off course.

Why Use PESTLE as a Tool?

For analyzing external factors, the PESTLE model should be your tool of choice. PESTLE stands for Political, Economic, Sociocultural, Technological, Legal, and Environmental, which are the six categories of environmental factors you should take into account during business analysis (like in strategic management).

If you look closely, you’ll see that these almost all of the factors that fall into these six categories aren’t inherently related to your organization, but are related to the overarching business environment:

• Political. How are government decisions influencing your organization?
• Economic. How is the local or global economy influencing your organization?
• Sociocultural. How are changes in social and cultural norms influencing your organization?
• Technological. How is the advancement, presence, or lack of technology influencing your organization?
• Legal. How are legal issues influencing your organization?
• Environmental. How is the environment influencing your organization?

Getting Started with PESTLE

Similarly to SWOT analysis, using PESTLE analysis is surprisingly easy. Simply categorize the external factors affecting your business as Political, Economic, Sociocultural, Technological, Legal, or Environmental.

The challenge is finding those factors in the first place. It’s helpful if you have some experience in your industry, which would give you a headstart on where to look. Otherwise, you’ll need to do a lot of brainstorming and trawl through plenty of reports to find out which factors really affect your organization.

For more information on carrying out an external analysis like this, be sure to read our three-step guide to PESTLE analysis.

Internal and External Analysis in Strategic Management: Final Thoughts

Strategic management is a powerful way to run businesses. As a result of this approach’s inherently analytical nature, it’s important that you use both internal and external business analysis tools to make managerial decisions. You can do so by using the popular models of SWOT and PESTLE, which we have come to know and love in the world of business analysis.

Image by Michal Jarmoluk

You can’t move your business forward if you don’t know where it is now, so it’s important to regularly complete an internal analysis to get a handle on its overall health.

In this article, you’ll learn about what an internal analysis is, why it’s important, and how to conduct one.

• Companies perform internal analyses to determine their assets, opportunities, and threats.

• There are a variety of internal analysis frameworks companies use, but the SWOT framework is one of the most common and overarching.

• An internal analysis gives you an accurate view of your company’s health so you can remedy its weak spots and capitalize on its strong points.

An internal analysis is a method for determining a company’s assets, opportunities, and threats. It’s useful for identifying what has worked well and what could be modified to create a better result in the future.

There are varying structures that businesses can take on in conducting internal analysis to reach a useful conclusion. One of the most popular frameworks for conducting an internal analysis is a SWOT analysis.

It is an overarching examination of how a company functions as a whole and the skills of the employees within it. This kind of analysis is useful for getting a comprehensive picture of your organization’s performance that can be used as a jumping-off point for evaluating more in-depth details.

This is the internal analysis framework that we’ll be focusing on in this article, but other frameworks that you could use include:

• GAP Analysis

• Strategy Evaluation

• VRIO Analysis

• OCAT

• McKinsey 7S Framework

• Core Competencies Analysis

The internal analysis acts as a check-up for your company’s health. It gives key insights into the areas you are excelling in and tells you where there might be problems. Without conducting an internal analysis, you’re left in the dark, and that could make your company suffer dearly in the future.

You need details on your organization’s competency because it outlines opportunities for improvement and makes you aware of possible threats in advance. Your team can use this information to develop strategies for success and growth.

In addition to determining company cost and opportunity statistics, internal analysis establishes a baseline for individual employee competencies. This is important for evaluating their performance for strengths and weaknesses.

Once you’ve decided to use a process of internal analysis to gain into your organization’s abilities and potential threats, you next need to figure out what framework you’d like to use. If you have no prior standard for how your team is performing, it’s probably best to start with a SWOT analysis. This technique will gauge your overall strengths, weaknesses, opportunities, and threats.

Consider the following steps for implementing a successful SWOT analysis.

1. Outline an analysis strategy for each component. A SWOT analysis is broken down into four elements (strengths, weaknesses, opportunities, and threats). To comprehensively check all of these boxes, you’ll need to approach each component of the process individually. You’ll need a different mindset to assess strengths than weaknesses.

   Each step of the SWOT process is based on considering these aspects from an objective lens.

2. Determine an objective. Every analysis needs a question that’s looking to be answered. Before proceeding with a SWOT analysis, you need to think about what your team’s objective is.

   Perhaps you’re interested in learning more about where your company is falling short in productivity so you can figure out a strategy for combating this issue in the future. Or, you want to consider opportunities for improving employee’s hard skills.

   Hone in on your objective and run with it.

3. Conduct research. Research is a crucial part of conducting a successful internal analysis. You need to gather credible information about the industry standards before you can consider your business in relation to your competitors.

   Conducting useful research for company evaluation can be done in a few ways. Using the old school method of search engines and local statistics can help get basic information on trends in the field. The news can also be helpful in a similar capacity.

   You can take the research a step further by organizing market research. This can be a little more time and budget consuming, but it’ll give you much more detailed information about your position in the market and customer preference. In this same regard, you can utilize your team’s experience and opinions to gain insight.

4. Elect a facilitator. Electing a facilitator for your SWOT analysis is an optional step in the process. The benefit of putting a facilitator in charge of the proceedings is that they can provide an objective organization to the proceedings.

   A person in a supervisory position will often be very invested in the organization, making for a biased opinion of strengths and weaknesses.

5. Brainstorm your company’s strengths. Once you’ve accomplished all the preliminary steps to completing a SWOT internal analysis, you can begin analyzing your team for each component of the process. The first element to start with is thinking about your company’s strengths based on your knowledge from research.

   This stage of the process doesn’t have to be conclusive. Brainstorming a general list of what you believe your organization is doing well will be sufficient.

   Strengths can refer to several things within your company. Individual employee’s impressive performance can be concluded as a strength. Having your business be in a location that sees lots of daily traffic is a broader company strength.

   Some other examples of company strengths could include:

   • Leading in innovation

   • Efficiency

   • Financial resources

   • Location

   • Product quality

   • Outstanding marketing

6. Discuss company weaknesses. While it may be a less pleasant subject matter than your organization’s strengths, it’s just as essential to discuss weaknesses during an internal analysis. Weaknesses are things that allow your competitors to get ahead of you and limit positive growth.

   You should keep track of the weaknesses you uncover to assess your improvement in these areas over time. When you later resolve an issue that you discovered during an internal analysis, it can motivate your team to continue their efforts.

   Examples of company weaknesses could include:

   • Poor customer service

   • Budgeting oversights

   • Lack of employee morale

   • Lack of consumer recognition

   • Bad quality products

   • Inefficiency

7. Consider opportunities for growth. The way a business grows is by considering the unique opportunities that its competitors haven’t utilized. They differ from strengths in that they suggest a course of action for attaining success, rather than qualities your team already possesses. Opportunities may be a little ambiguous and take some effort to foster success.

   For example, your company could consider implementing a tuition reimbursement program into the benefits package for your employees to encourage your team to seek additional education. This can act as an opportunity for growth because it improves your team’s skills and increases employee satisfaction by supplying extra benefits.

   Think about opportunities that are relevant to your industry that could potentially benefit your company.

   Examples of opportunities include:

   • Creating an updated line of products

   • Breaking into a new market

   • Expanding your brand

   • Investment opportunities

   • Improving pricing and lowering costs

8. Assess possible threats. Threats are the external factors that can damage or hinder your business’s capacity for success. It’s best practice to get ahead of problems by considering them in advance while they’re still at this early threat stage. Your research should come in handy when discussing possible threats that could affect your company.

   Examples of possible threats include:

   • A close, local competitor opening

   • Inability to recruit talent for vacant roles

   • Shortages of supplies

   • An innovative new product in your field hitting the market

   • New laws or regulations in your field

9. Decide on your priorities. Once you’ve formulated lists of your strengths, weaknesses, opportunities, and threats, you must prioritize the collection. Hopefully, you’ve been keeping a written record of each element’s subsidiaries because it’ll make it much easier to prioritize.

   It’s impossible to deal with every single idea you’ve come up with. It’ll probably burn out your team without any notable results if you try. That’s why prioritization is essential.

   When it comes to your team’s strengths and opportunities, decide which of these you’d like to focus more energy on continuing. On the other hand, when prioritizing your weaknesses and potential threats, think about which ones could cause more imminent damage.

   Create a new ordered list for which issues you’re going to tackle first and the opportunities you’re going to focus on. This will be your blueprint for enacting positive change and forming an effective strategy.

10. Institute a strategy. The final step to running an internal SWOT analysis on your company or a specific team is to develop and institute a strategy. This plan should be about tying together all the components you’ve previously discussed.

    Analyzing your organization’s pros and cons usually leads to a path of how to use one to combat the other. For example, identifying how your team demonstrates a particular strength can help deal with an impending threat.

    The strategy is personal to the assets your team has to work with and the specific challenges you’re facing. You need to have an open discussion, preferably with a facilitator on standby, about how to proceed with the new information you’ve gathered using internal analysis.

11. Follow-up. While investing in your company’s growth by conducting an internal analysis is an excellent start to improving your business, it is just that: a start.

    An internal SWOT analysis is the beginning of your organization’s journey towards improving itself in various areas. Simply stating your team’s statistics and formulating a strategy without ever taking action won’t help your company.

    It requires continuously following up to see where you’re at in addressing your top prioritizations. You need to rejoin your team after a reasonable amount of time to elicit change and determine how implementing your strategy worked out.

    If you find that issues have been checked off your list or that opportunities are coming to fruition, then it means that your improvement plans are working. If you aren’t having these results, it could be time to discuss a new course of action.

    Improving a business is a system of trial and error. Don’t be discouraged if you have to go back to the drawing board and develop an updated strategy.

1. What are internal analysis methods?

   Internal analysis methods include:

   • SWOT Analysis

   • GAP Analysis

   • Strategy Evaluation

   • VRIO Analysis

   • OCAT

   • McKinsey 7S Framework

   • Core Competencies Analysis

2. What is internal and external analysis?

   Internal analysis involves looking at a company and how it’s running while external analysis involves looking at the overall market or industry.

   Good internal analysis likely includes relating the company’s operations to the rest of its competitors and the overall market, but it’s mainly focused on the health of the company itself.

   External analysis, on the other hand, is focused on the health of and trends in the industry and market surrounding the company.

3. What are the components in internal analysis?

   The components in internal analysis include:

   • Assets

   • Liabilities

   • Opportunities

   • Threats

   Different internal analysis frameworks will add or subtract to these components, but these are the core issues an internal analysis should look at.