Internal firm analysis examines the internal resources and capabilities of the firm – the tangible and intangible resources that allow the company to compete. Systematic analysis, such as the VRIO framework gives consideration of which resources are likely to provide the basis of a sustainable competitive advantage. This article explores three important reasons for conducting internal analysis.
Reason 1: Your resources and capabilities underpin your firm
The first reason why internal firm analysis is important is that the resources and capabilities of the company underpin its success. Your ability to compete in a particular market is dependent on being able to fulfill market expectations based on the capabilities of the organization. Your ability to be distinct from other firms, giving customers a specific reason to purchase from your company, is dependent on your resources. While a market orientation is important to identify new opportunities, an awareness of the internal capabilities of the organization is important in actually being able to fulfill those expectations.
Reason 2: Need for alignment between the resources
The net reason why internal firm analysis is important is that it is important that the resources within an organization are aligned with one another. The different parts of the firm should support one another – each pulling in the same direction. This requires awareness of the capabilities of the firm – with conscious effort required to coordinate the resources and achieve alignment between the different parts of the firm.
Reason 3: Leading requires continual investments
A final reason why internal resources analysis is important is that a focus on internal resources and capabilities is important to ensure continual investments. Becoming a true leader in a particular market requires superior internal capabilities. Achieving this requires sustained investments to achieve leadership. Without an awareness of internal resources it is a lot less likely that the firm will make the necessary sustained investments to attain a leadership position.