Internal analysis: strengths and weaknesses you can prove, and the capabilities that give you an edge

Ask a management team for its strengths and you get the same list almost everywhere: quality, service, flexibility, committed people. Customers would probably agree, and so would the customers of every competitor. An internal analysis earns its place only when each strength and weakness is backed by evidence and compared with something: your own past, your industry or a specific rival.

This step looks inward, but it does not stand alone. The ranked opportunities and threats from step 2 tell you which internal findings matter. A weakness that touches none of them can wait; a strength that meets your biggest opportunity deserves all your attention. The example remains Norvane Building Services, the fictitious installer with 35 staff deciding between new-build projects and maintenance and retrofit work.

Four angles for an internal analysis

Financial performance: start with the figures

Cover at least three years, so you see a trend and not a snapshot, and split the figures by product, service or customer group. Totals hide the story. The method is explained in financial analysis for strategy. Norvane's split looked like this.

Fictitious Firmfocus example. Three years earlier the operating margin was 6.8%. Amounts in euro; the logic works in any currency.

The split changed the conversation. New-build brought in 44% of revenue but only 18% of contribution (€176,000 of €966,000). Clients on new-build projects also paid after 68 days on average, against 24 days on maintenance contracts, so the same revenue tied up almost three times as much cash. In the profit and cost benchmark, Norvane's staff costs as a share of revenue were close to those of similar installers; its materials and subcontracting costs were higher, almost entirely because of new-build work.

Activities: where is value created, and where does it leak?

Michael Porter introduced the value chain in Competitive Advantage (1985). It splits a business into primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (firm infrastructure, human resources, technology development and procurement). Harvard's Institute for Strategy and Competitiveness describes these activities as the basic units of competitive advantage: they are where costs arise and where customers see a difference. See Porter's value chain for the full model.

At Norvane the maintenance chain worked well: planned visits, most faults fixed on the first call, clear reports for landlords. On new-build sites value leaked through waiting time while other trades finished, rework after late design changes and long payment terms set by the main contractor.

Capabilities: what is genuinely hard to copy?

C.K. Prahalad and Gary Hamel proposed three tests for a core competence: it gives access to a wide variety of markets, it contributes clearly to what customers value, and it is difficult for competitors to imitate. Jay Barney's criteria look at resources: a resource supports a lasting advantage when it is valuable, rare, hard to imitate and hard to substitute. The VRIO framework that grew out of this work asks four questions, with the last one about whether the organisation is set up to use the resource. More on both in core competences and VRIO.

Fictitious Firmfocus example.

The surprise was the second row. Norvane held years of service history on the heating systems of its clients' buildings, but used it only to plan maintenance. For a landlord preparing a retrofit programme, that data is exactly what is needed to decide which buildings to tackle first.

Organisation and people

The McKinsey 7S model, set out by Robert Waterman, Tom Peters and Julien Phillips in Business Horizons (1980), reminds you that strategy, structure and systems only work together with shared values, style, staff and skills. The McKinsey 7S model page explains how to use it. For most smaller firms four points carry the weight.

• Key-person dependence: at Norvane, Ines personally held four of the six landlord relationships.
• Employer position: staff turnover, absence and how long vacancies stay open; Norvane had three technician vacancies open for more than ten months and overtime at about 11% of hours.
• Decision-making: who decides what, and how quickly.
• Information: whether you can see margins per job and per client without a week of spreadsheet work.

Who do you compare yourself with?

Choose benchmarks that face the same customers and conditions: similar size, similar services, similar region. Comparing a regional installer with a national group tells you little. Compare with your own past too: a margin that falls while the industry's holds steady points to a cause inside the business. Add one comparison from outside your industry when a newcomer could enter from there, such as an energy company offering heat pumps on subscription. The industry figures give you the averages for your sector as a starting point.

What the internal analysis delivers

Fictitious Firmfocus example. These four findings go on to the SWOT; the key-person risk is noted for the execution plan.

Small business or larger organisation

Pitfalls in the internal analysis

• Strengths without evidence: "good service" is a claim until a figure or a customer quote supports it.
• The wrong benchmark: comparing with firms of another size or model makes you look better or worse than you are.
• Every deviation is a weakness: some differences are a deliberate choice that pays back.
• Strengths everyone has: if every rival has it, it is a condition for playing, not an advantage.

Strengths and weaknesses with evidence, plus a ranked list from outside: that is the material for step 4a, the SWOT analysis and confrontation matrix. See the strategy process in five steps for the whole route and Strategy for everything else.