Don’t hesitate to carry out an internal analysis of your company

You need to monitor your company’s state of health in order to ensure that it continues to perform well in the future. Performing an internal analysis provides you with a full overview of your company’s situation so that you can choose the appropriate strategy. What is an internal analysis and how should you go about it? Here are a few ideas.

What is an internal analysis

As an entrepreneur, you may tend to concentrate on the state of the market around you, your competitors, or the potential impact of political and economic decisions on your business. These are all very important issues. However, it is just as essential to consider the internal health of your company. A good strategy requires you to manage your company’s overall environment, both internal and external.

In this article, we will take a look at the internal analysis of a business, i.e. the procedure for identifying and assessing all of the resources and skills at its disposal: it financial capacity, human and material resources, know-how, strengths and weaknesses, etc.

Why should you carry out an internal analysis of your company?

An internal analysis provides a precise overview of your company’s current situation. It helps you to better understand how it works, to identify the reasons for its success and its performance drivers as well as the causes of its difficulties and the factors hindering its growth.

It is a key tool if you are thinking about making operational changes, getting new investors onboard or assessing its value with a view to selling.

The information gathered in this process will enable you to develop or optimise a strategy suited to the reality of your company. This represents a useful decision-making aid to help you achieve your objectives.

How to carry out an internal analysis

There are a number of ways of carrying out an internal analysis. That said, the principle is always to verify the different aspects that make up your business by combining a number of approaches, in order to arrive at a precise analysis. Let’s review the key stages in such an analysis.

This in-depth examination enables you to identify the advantages requiring promotion, the resources for exploitation and any optimisation that is needed in your company.

• • Assess your organisation’s financial situation. Inspect your company’s finances (balance sheet, profit and loss account), its cash position, financing capacity, working capital requirement, etc. Don’t forget to assess its level of indebtedness. The aim is to determine the profitability of your business, and to identify any drivers for improvement and potential growth opportunities. Consider the seasonality of the business and compare the trend over the last three to five years.
  • Itemise your company’s equipment. Check the status of your company’s production equipment (buildings, vehicles, tools, IT park, etc.). Pinpointing what needs replacing or acquiring will help plan for future expenditure.
  • Analyse your human resources. Draw up an inventory of the skills, qualifications, strengths and weaknesses of your employees. This will enable you to assess the level of expertise within your company, to take advantage of its know-how more efficiently, and to direct your recruitment and training policies on the basis of your growth targets.
  • Inspect your company’s intangible resources. Examine the intangible resources which have an influence on your company’s performance:

• • • Brand image: How well-known are you? Do you have a good reputation? Do you have a loyal client base? Etc.
    • Technology: Does the company have any patents or certificates? Does it have the capacity for innovation? Etc.
    • Organisation: How is your management structured? What are your company’s operating procedures? Etc.
    • Corporate culture: Are the company’s operations underpinned by identified values? Are there any socio-cultural specifics? Etc.

This in-depth examination will enable you to identify the advantages requiring promotion, the resources for exploitation and any optimisation that is needed in your company.

The VRIO (…) method helps you to assess whether you can use your company’s internal capabilities to distinguish yourself from the competition.

There are many tools available to carry out your internal analysis

You can use a number of strategic tools to help to refine your initial internal analysis. Here are four examples of the many procedures that exist:

> Porter’s Value Chain

A strategic management tool, the value chain helps identify activities that generate the most value in order to promote high-performing commercial processes. By emphasising the business activities which distinguish the company from its competition, the value chain helps identify the growth drivers for value added in order to strengthen its future performance. This technique breaks down the process of internal production.

You should divide your company’s business activities into two categories: “primary” activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and “support” activities (procurement, human resource management, technology development, infrastructure). You must then identify the activities that generate the most value for your company and those with a negative impact on its performance.

You can then decide to allocate resources differently, advertise massively in an area that distinguishes you from your competition, or outsource unprofitable activities. The aim is to distinguish yourself from your competitors and capitalise on the value added of your company.

> The VRIO method

The VRIO (Value, Rarity, Imitability, Organisation) method completes Porter’s Value Chain model. It helps you to assess whether can use your company’s internal capabilities to distinguish yourself from the competition.

Take each of your company’s resources (tangible and intangible) and core competencies and ask yourself:

• • Value: Does it add value to my company and the market?
  • Rarity: Is it rare in the market?
  • Imitability: Can it be easily copied?
  • Organisation: Is my company capable of fully exploiting this resource or competence?

The answers to these questions will enable you to position yourself versus the competition, assess the company’s key business activities and its potential growth axes.

The Boston Consulting Group (BCG) Matrix is used to measure the potential profitability and growth of your company by analysing your portfolio of products and/or services.

> The BCG Matrix

The Boston Consulting Group (BCG) Matrix is used to measure the potential profitability and growth of your company by analysing your portfolio of products and/or services. It analyses how products and services are positioned in the context of market attractiveness (market growth rate) and the competition (market share).

Divide your products and/or services into four categories:

• • Cash cows (high market share, low market growth): profitable products with a strong competitive position in a mature market.
  • Stars (high market share, high market growth): product leaders in a growing market.
  • Question marks (low market share, high market growth): products in a promising market where the future is uncertain due to the competitive situation.
  • Dogs (low market share, low market growth): products with low profitability.

This tool encourages you to adapt your products and services to market changes. You may therefore decide to invest more in certain products, to maintain others and even to abandon some.

> The Ishikawa diagram

This “fishbone” or “cause-and-effect” diagram identifies the causes of a problem.

Start by describing the problem precisely, then draw up a list of the potential causes. Then allocate these to one of the five generally identified categories (the “5 Ms”) and ask yourself if the cause of the defect is derived from:

• Manpower: employees, attitude, know-how, etc.
• Materials: materials used, quality, etc
• Machinery: equipment, tools, software, etc.
• Methods: production techniques, project management, etc.
• Medium: competition, external environment, etc.

Depending on the type of company, you can replace some of these causes with others such as Management or (financial) Means, etc. Then place these causes in a hierarchy, ranking them according to their influence on the problem identified and your ability to influence it. This will help you to prioritise your efforts to resolve the issue.

An internal analysis is not enough to assess the state of health of your company and direct your strategy appropriately. You will also need to carry out an external analysis.

Carry out a SWOT analysis for your internal and external analysis

An internal analysis is not enough to assess the state of health of your company and direct your strategy appropriately. You will also need to carry out an external analysis. A SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a strategic assessment that provides an overview of the company from an internal and external perspective.

From an internal perspective, concentrate on the strengths and weaknesses of your company (review your products, services and image, and your financial, human and material resources, etc.). Then take a look at the external opportunities (a market that you do not currently exploit, a trend, etc.) and threats that may negatively impact your company (a change in legislation, technology trend, competitor, etc.).

This analysis will help you to highlight and properly exploit your advantages, whilst also identifying the areas requiring improvement.

Lastly, do remember that an internal and external analysis of your company are complementary tools. They should be carried out regularly in order to adapt your strategy to constant market changes. Good luck!