Internal and External Analysis

 

Igor Ansoff born in 1918, known as  Father of Modern Strategic Thinking, published, in 1965, his book Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion  by McGraw-Hill. Prior to the publication of this book, senior managers had little knowledge on how to plan or make decisions on the future of the company. Planning methods then were based on an extended budgeting system, and projecting it several years into the future. They paid little attention to strategic challenges. Ansoff advocated that in developing strategy, the managers must anticipate future environmental challenges to an organisation, and come up with strategic plans to counter these challenges.

The book introduced the concept of “synergy” to a wider audience for the first time. He summed up synergy as “the 2+2 = 5” effect. In later writings, he refined synergy as “any effect which can produce a combined return on the firm’s resources greater than the sum of its parts.”

In a paper in Milestones in Management Vol 5, explained his Strategic Success Paradigm which was a result of 15 years of research:

1.      “There is no universal success formula for all firms.

2.      The driving variable which dictates the strategy required for the success of a firm is the level of turbulence in its environment.

3.      A firm’s success cannot be optimised unless the aggressiveness of its strategy is aligned with the turbulence in its environment.

4.      A firm’s success cannot be optimised unless management capability is also aligned with the environment, and

5.      The key internal capability variables which jointly determine a firm’s success are: cognitive, psychological, sociological, political, and anthropological.”

 

His other books on strategy include: Strategic Management, Macmillan, 1979 and Implanting Strategic Management 2nd edition, Prentice Hall, 1990. He passed away in 2002.

The internal/external scan should always be undertaken before the actual creation of your strategy begins. Suppose you wait to begin your strategy formulation until after you've completed your analysis. In that case, you will ensure your strategic plan has been formulated to take advantage of your strengths and opportunities as well as to offset or improve weaknesses and reduce threats, such as those from rivals and competitors. Your organization can then be confident that you're funneling your resources, time, human capital, and focus effectively and efficiently.

 

Internal Analysis

An internal analysis will highlight an organization's internal 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 currents deficits and gaps are. The analysis will arm management with the knowledge to make full use of its strengths, expertise, and opportunities. It also allows management to develop strategies to mitigate any threats and compensate for identified weaknesses and disadvantages.

The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market.

The following area analyses are used to look at all internal factors effecting a company:

• Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis
• Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties

An internal analysis examines an organization’s internal environment to assess its resources, assets, characteristics, competencies, capabilities, and competitive advantages. In short, it allows you to identify your organization's strengths and weaknesses, which can help management during the decision-making, strategy formulation, and execution processes.

An internal analysis is the thorough examination of a company's internal components, both tangible and intangible, such as resources, assets and processes. It helps the Company decision-makers accurately identify areas for growth or revision to form a practical business strategy or business plan.

Why Conduct an Internal Analysis?

Internal analyses help business leaders identify ways in which they can improve company functions. A few of the most important reasons to conduct an internal analysis include identifying:

• Company strengths
• Structural weaknesses
• Business opportunities
• Possible threats
• Viability in the marketplace

Company strengths

Strengths might include the quality of the employees, the availability of necessary resources or consumer brand recognition. Strengths help companies increase their overall success and viability and using an internal analysis is effective for identifying strengths.

Structural weaknesses

Internal analyses can help find a company's weaknesses, which might be factors like lack of effective training, old or out-of-date technology or poor interdepartmental communication. Weaknesses might have minor company impacts like slowing the spread of internal information or major consequences like the loss of income.

Business opportunities

Another benefit of an internal analysis is identifying opportunities for the business. Opportunities for a company usually include areas for growth both internally and externally. Examples might include updating the computer system or introducing a new product to the market.

Possible threats

Often, threats come from external sources. However, identifying external threats as a part of an internal analysis can help companies prepare for them by optimizing business strengths, improving weaknesses and creating new opportunities for growth.

Viability in the marketplace

One of the most valuable benefits of an internal analysis is finding a specific niche within the larger market to set the company apart from competitors. Often, this is the long-term goal of conducting an internal analysis.

Tools used in Internal Analysis

Companies can choose from a variety of frameworks for conducting an internal analysis. Each uses slightly different tools, strategies and objectives to identify key information about the internal processes, resources and structures of the business. A few of the most common examples of internal analysis frameworks include:

• Gap analysis: A gap analysis identifies the gap between a business goal and the current state of operations. Companies use gap analyses when they need to identify weaknesses in the business.
• Strategy evaluation: A strategy evaluation is an ongoing internal assessment tool used at regular intervals to establish if a company is meeting its objectives as outlined in a business strategy or plan.
• SWOT analysis: A SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis helps to give companies a broad overview of all internal functions. SWOT analyses are ideal for evaluating the full range of a company's abilities.
• VRIO analysis: A VRIO (Valuable, Rare, Inimitable and Organized) analysis helps organize business resources. It is ideal for assessing and categorizing a company's resources.
• OCAT: An OCAT (Organizational Capacity Assessment Tool) assesses internal performance in a variety of specific dimensions. Companies can use the OCAT to establish specific areas of strength or growth.
• McKinsey 7S framework: The seven S's are strategy, structure, systems, shared values, skills, style and staff. The McKinsey 7S framework ensures that businesses align these seven elements for maximum success.
• Core competencies analysis: The core competencies analysis identifies the unique combination of qualities that separates the business from competitors. It's best used when determining ways to improve business operations over a direct competitor.

 

Every internal analysis should be accompanied by an external analysis, which evaluates the external environment and external factors that influence 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. 

External Analysis

Strategic management includes understanding Strategic Choices for the future and managing strategy in action (Johnson et al.., 2008). Strategic position identifies the impact of External Environment, Strategic capability and Expectations and Influence of stakeholders on strategy

An external analysis (or environmental analysis) is an objective assessment of the changing world in which an enterprise operates, in order to have an ‘early warning system’ for identifying potential threats and opportunities. Change is a certainty, and for this reason business managers must actively engage in a process that identifies change and modifies business activity to take best advantage of change. That process is strategic planning.  In the external environment analysis, the manager SCAN for any signal of change in trends in general environment, MONITOR the changes to see if these occur from the predicted scanned ones, FORECAST the consequences based on the monitoring of the changes and trends), ASSESS (the significances of the timing of the changes etc.

All businesses and organisations operate in a changing world and are subject to forces which are more powerful than they are, and which are beyond their control. Just as a ship at sea is subject to powerful natural forces of which it needs to be aware and deal with, organisations are influenced by forces in their external business environment.

 

External environment analysis is a key input into strategy formulation. To begin the discussion on external analysis, we must define two terms:

• Industry is a group of companies offering products or services that are close substitutes for each other. Examples of an industry include soft drinks, mobile phones, and sportswear.

 

• Market segments are distinct groups of customers within a market that can be differentiated from each other based on individual attributes and specific demands. Market segments can be separated by characteristics such as geography, demography, and behavior.

 

External analysis means examining the industry environment of a company, including factors such as competitive structure, competitive position, dynamics, and history. On a macro scale, external analysis includes macroeconomic, global, political, social, demographic, and technological analysis. The primary purpose of external analysis is to determine the opportunities and threats in an industry or any segment that will drive profitability, growth, and volatility. To keep the business ahead of the competition, managers must continually adjust their strategies to reflect the environment in which their businesses operate. 

 

A business external analysis helps you stay on top of trends and events in your industry that may affect your company, but are out of your control. The External Analysis examines opportunities and threats that exist in the environment. External environment analysis is a primary study and analysis of macro-environmental forces, industry analysis and competitor analysis in purview of an organization’s growth. Macro-environmental forces are dimensions in the broader society which influence the firms within it. It focuses on the future probability of events. Industry environment includes set of contingencies which have a direct influence on the firm’s action and response. It focuses on the factors influencing the profitability of a firm within an industry while competitor analysis focuses on predicting/ anticipating the competitor’s dynamism in action, responses etc.

Elements of an External Analysis

Businesses should complete individual analyses of the following elements to conduct an external analysis successfully:

• Macro Environment – PEST/PESTEL analysis, Key Drivers analysis, Scenario Analysis yield required information on macro-economic variables impacting the business
• Micro Environment – Porters 5 Forces Analysis, Industry Life cycle Analysis, Competition Cycle Analysis are some useful tools
• Competition Analysis – Strategic group mapping gives insight into dominant groups that have impact on the business
• Market Analysis – The Customer need of current and emerging are examined to fix gaps for long term benefits.

Any business strategy needs to take account of all these forces so that opportunities and threats can be identified and the organisation can navigate its way to success by matching its internal strengths to external opportunities. 

Benefits of External Analysis

Conducting an external analysis can provide many benefits to a business. Here are a few common benefits:

Encourages business growth into new areas

External analyses can benefit businesses by encouraging them to be proactive in how they operate their company. For example, if a retail company sees a trend in free trade clothing among the public, this might help them decide to expand their business model to include the sale of free trade products.

Helps anticipate and adapt to change

External analysis helps businesses adjust to potential changes within their industry that could save their business. For example, a catering company changes the way they store their food products to comply with new FDA regulations. This helps them maintain their status as a catering service.

Creates opportunities to rise above the competition

Conducting an external analysis can help businesses identify operational elements that they could change or improve to set them apart from their industry competitors. For example, a staffing solutions firm identifies that they provide the same staffing solutions as their competitors: marketing, business administration and IT.

However, they could surpass their competitors in clientele by expanding their business to include staffing for the trade professions and healthcare facilities.