Definition: 

Internal analysis identifies your company’s competitively advantaged or disadvantaged resources and capabilities that cause your profits and revenues to differ from those of the industry average.

• What it is: Internal analysis is the process of identifying what capabilities and resources your company has and how they differ from those of competitors. Once the capabilities and resources are identified, you still have to determine if differentiation from your competitors is sustainable and whether the sustainable resources and capabilities can be leveraged into an advantaged strategy. The internal analysis uses those resources and capabilities to identify strategic options that will leverage those capabilities and resources into a sustainable competitive advantage.

• What it does: It identifies the sources of differentiation from competitors within the industry and provides the information necessary to build a sustainable competitively advantaged strategy in the industry that could create superior profits and revenues.

Uses:

• How it is used: The internal analysis identifies the capabilities and resources of the firm and compares them to competitors to determine if they provide the opportunity for a sustainable competitive advantage. The advantage provided by differentiated capabilities and resources can be determined using a VRIO analysis as described below:

• Does it allow the customer to lower their cost of doing business to give them an advantage?

• Does it allow a customer to differentiate their product offerings to allow them to charge more for their products?

• Is the capability or resource valuable to the customers in the industry?

• Are their few or none of the competitors in the industry that can match those capabilities or resources?

• Can the competitors quickly and inexpensively imitate the same outcome as the capabilities or resources, or will it be very expensive for them?

• Is my company organized totake advantage of the capabilities and resources that provide the competitive advantage?

• Where: Internal analysis can be done at the corporate level, the division or business level, or even at the product level. The strategist will determine the level that will provide the greatest insights for the organization. We normally complete the internal analysis at the level where the management team can act independently of other products, businesses or organizations in the company.

• Why: We cannot be sure we are achieving the maximum value from our resources and capabilities if we do not complete an internal analysis. Internal resources and capabilities have more impact on our profitability than the external industry in which we operate. Companies in an unprofitable industry with successful internal analysis can make more profit than companies in a highly profitable industry that do not leverage their internal analysis.

Limitations:

• Where it shouldn't be used: There is no place where it should not be used.

• Any restrictions: Trying to create an independent strategy using internal analysis with a business unit that can not act independently from other business units will not work.  For example, my business unit is using the off-grade materials from another unit to leverage it as a low-cost raw material. But if the other business unit fixes their process, eliminating the off-grade material source, they destroy my source of competitively advantaged raw materials. Making my competitive advantage unsustainable.

• Warnings: Be sure to check the sustainability of your resources and capabilities by using the VRIO analysis.

Step-by-Step Process:

• Gather data: Using a company value chain template (see Templates and Examples), identify the key resources and capabilities your company uses to run your business and serve your customer.

• Create a list of the resources and capabilities.

• Determine which ones are unique or for which you are competitively advantaged or disadvantaged compared to your competitors.

• Identify the source of the differentiation of resources and capabilities or what makes you advantaged or disadvantaged.

• Analyze the data: Determine where there are sources of sustainable advantage for you.

• Complete a VRIO analysis on each resource and capability or groups of resources and capabilities that are potential sources of competitive advantage.

• Determine whether you can overcome any sources of disadvantage, or leverage sources of advantage.

• Are there opportunities to create new resources or capabilities that could be used for sustainable competitive advantage

• Interpret the results: Identify sources of sustainable competitive advantage, and formulate a variety of strategic options that could leverage your sustainable competitive advantages.

• Present results: Present the resources and capabilities as well as their level of sustainability. Present the various strategic options you considered, as well as the selected strategy and the reasons it was selected over the other options.

 The following presentation is a more complete description of the steps involved in an internal analysis: Internal Analysis of the Company

Template for Capturing Data:

• Internal Analysis Checklist

Output Representation and Recommendations:

See the example below for an example of a presentation style.

Examples:

• Ryanair Example

Additional Resources:

• Why Internal 

• Internal & External Analysis