Welcome to Internal Analysis!
Ever wonder why some businesses seem to know exactly what they are doing while others stumble? It’s often because the successful ones take the time to "look in the mirror." In this chapter, we explore how a business analyses its own internal position. Before a manager can decide where to go (Strategy), they need to know exactly where they are right now.
We will break down how businesses use data and tools like SWOT analysis to understand their strengths and weaknesses. Don't worry if some of the financial or data parts seem a bit heavy—we will take them one step at a time!
1. The Starting Point: Mission, Objectives, and Strategy
Before looking at data, we need to understand the "Big Picture." Every business has a reason for existing and a plan for the future.
Mission Statements
A mission statement is a brief description of a business's fundamental purpose. It answers the question: "Why are we here?" It isn't just about profit; it's about the value they provide to customers and society.
Objectives and Strategy
Once a business has a mission, it sets objectives (specific goals like increasing profit by 10%) and a strategy (a long-term plan to achieve those goals). Managers must ensure their internal decisions match these goals.
Important Concept: Short-termism vs. Long-termism
Some businesses focus only on "Short-termism"—making a quick profit right now. Others focus on "Long-termism"—investing in research or staff training that might cost money now but will make the business much stronger in five years. Think of it like studying: watching a movie is fun now (short-term), but studying helps your future career (long-term).
Key Takeaway:
A business's internal analysis must always check if the current operations are helping it achieve its long-term mission and strategy.
2. SWOT Analysis: The Internal View
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. For this chapter, we focus mainly on the Internal parts: Strengths and Weaknesses.
Strengths (Internal)
These are things the business is good at. They are under the business's control.
Examples: A famous brand name, highly skilled workers, or owning the latest technology.
Weaknesses (Internal)
These are areas where the business is struggling. These are also internal and can be fixed by the business.
Examples: Poor cash flow, old machinery, or unhappy employees.
Quick Tip: If you can't decide if something is a Strength or an Opportunity, ask yourself: "Does this exist inside the business?" If yes, it's a Strength. If it's a gap in the market outside the business, it's an Opportunity.
Strategic vs. Tactical Decisions
Internal analysis helps managers make two types of decisions:
1. Strategic Decisions: Long-term, high-risk, and affect the whole business (e.g., deciding to start a new business or take over a competitor).
2. Tactical Decisions: Short-term, lower-risk, and often deal with day-to-day things (e.g., a "Buy One Get One Free" sale to clear stock).
Key Takeaway:
SWOT analysis is a tool that helps managers turn internal knowledge into strategic action.
3. Analysing Functional Performance (The Data)
To really know how a business is doing internally, we look at the numbers. We call these Key Performance Indicators (KPIs). Each department (function) has its own data.
Marketing Data
How well are we selling? Managers look at:
• Sales Volume: The number of items sold.
• Sales Value: The total money made from sales.
• Market Share: Our sales as a percentage of the total market sales.
Operations Data
How efficient is our "transformation process" (turning inputs into outputs)?
• Labour Productivity: How much each worker produces.
• Capacity Utilisation: How much of our maximum possible output we are actually using.
Formula: \( \frac{\text{Actual Output}}{\text{Maximum Possible Output}} \times 100 \)
Human Resources (HR) Data
How are the people doing?
• Labour Turnover: The percentage of staff leaving the business.
Formula: \( \frac{\text{Number of staff leaving}}{\text{Average number of staff employed}} \times 100 \)
• Employee Engagement: How motivated and committed the workers feel.
Financial Data
This is often the most important internal "health check."
• Gross Profit Margin: \( \frac{\text{Gross Profit}}{\text{Revenue}} \times 100 \)
• Operating Profit Margin: \( \frac{\text{Operating Profit}}{\text{Revenue}} \times 100 \)
• Return on Investment (ROI): This shows how much profit is made compared to the money put in. A higher percentage is better!
Key Takeaway:
Data allows managers to be objective. Instead of just "feeling" like the business is doing well, they can prove it with KPIs.
4. Stakeholder Mapping: Who Matters?
A business isn't just numbers; it's made of people. Stakeholders are anyone with an interest in the business (owners, employees, customers, the local community).
When analysing the internal position, managers use Stakeholder Mapping to decide how to manage these groups based on two things:
1. Power: How much can they change the business?
2. Interest: How much do they care about a specific decision?
Common Conflict: Owners usually want high Profit (Internal goal), but Employees might want higher Wages (which reduces profit). Part of internal analysis is finding a balance between these conflicting needs.
Key Takeaway:
Managing the internal position means keeping stakeholders happy, or at least understanding who has the power to stop your plans!
Quick Review: Avoid These Common Mistakes!
• Don't confuse Profit and Cash: Profit is the "reward" for risk over a period of time; Cash is the actual money in the bank today. A business can be profitable but still fail because it ran out of cash!
• Internal vs. External: Remember that Strengths/Weaknesses are internal (inside the company), while Opportunities/Threats are external (outside in the market).
• Math Reminder: When calculating margins or turnover, always remember to multiply by 100 to get a percentage!
Don't worry if this seems like a lot of formulas to remember. The more you practice using them to tell a "story" about a business, the easier they become. You're doing great!