Why is an Internal Analysis Important for Your Business

Siddharth Sharma

August 31, 2020

“A lion raised by the sheep will never know its true potential unless it looks within.” These words said by my grandfather always stay with me. “The answers lie within,” he would say. I concur with his views, and introspection has helped me to see through situations innumerable times.

The same is true for businesses. A company or a business that consciously does internal analysis is likely to be more self-aware and design strategies for its growth accordingly. Internal analysis is an assessment of a firm’s capabilities and competency, which results in competitive viability. Though internal analysis is an inward-looking practice, it can surely not be done in isolation. The insights gained from it will only make sense in light of market and competition.

Relative Resource Position

Let us try to understand the importance of internal analysis and dive deeper into the insights you can draw from it. The most crucial element of any business is its resources, human resource, raw material, machinery, processes, capital, etc. The internal analysis helps you in determining your relative resource position vis-à-vis your competitors. Let us say you found out that the productivity of your employees in a particular department is 15% lower as compared to your competitors. On further investigation, you find out that it might be because the competitors use much-advanced tools or technology or hire better-skilled resources. By knowing this, you can do a quick cost-benefit analysis to determine if you need to take some actions on this or not. If so, this forms a part of your internal training or hiring strategy. A proper understanding of the company’s relative resource position thus helps you to formulate and modify strategies to exploit the positives and improve poorly performing resources.

Relative Cost Position

Another internal factor affecting business that you can identify by internal analysis is the business’s relative cost position. It makes your company aware of its expenses and ability to acquire resources to deliver superior value to your consumers. I cannot stress enough how critical these insights could be while designing long-term and short-term strategies for the firm. For example, your internal analysis may show that the cost per unit of manufacturing a product is 20% lower than the industry average. This could be because of the economies of scale, superior manufacturing technology, lower raw material cost, etc.

On the other hand, let us say the internal analysis shows that your operational cost is 10% more than the industry average. This could be because of the poorly managed supply chain, mismanagement of network partners, poor inventory management, etc. Once fully informed of your cost position, you as a business can then decide if you wish to pass on the benefits (if any) to your stakeholders or if you wish to invest in developing the low performing elements, say, supply chain here. Carefully considered, these insights can help you better understand your business and design your strategy meticulously. The internal analysis of a company, if continued, can also give your business a competitive edge in the market.

The internal factors affecting business like relative resource position, relative cost position, and all other pertinent ones, further help you understand the quality of products or services that you deliver compared to your competitors in the market. The importance of internal analysis can be extended to the complete value chain end to end, from acquiring the raw material to the ability to serve customers and customer experience. All these are paramount for the growth and success of the business. It would be best if you did the internal analysis of a company before any business strategy formation. Once you know where you stand vis-à-vis your competitors in the marketplace, only then can you understand the importance of internal analysis to reach your goals.

So, why is internal analysis of a company important for your business, you ask? Well, so that you know for sure if you are a lion or a sheep or maybe a Pokémon. That would be pretty cool, wouldn’t it? Hopefully, the article gives you some insight into the importance of internal analysis before your strategy formulation process and the different tools to solve your business problem. Moreover, for me, getting a real understanding of deployed resources in the organization was through the Indian Institute of Management Udaipur’s strategic planning course.

About the Author:

Siddharth is an MBA graduate from the Class of 2020 at IIM Udaipur. His area of interest is strategy and analytics and everything in between. His current tech space work gives him the opportunity to bring his engineering and business knowledge together and contribute to the firm in the field of analytics and AI. He authored a book in 2016 titled ‘Love and Beyond…’ which was loosely based on his student life in engineering college. Inclined towards teaching, Siddharth was a teacher for a couple of years in his life and mentors students. You can connect with him on LinkedIn