Strategic Marketing: Internal Environment Analysis

 

Alexey Cherkasov

After you finished the Environmental Analysis, it is time to go to the internal analysis of your company.

The analysis of the internal environment of the company is the analysis of strengths and weaknesses, as well as the assessment of the potential that the company can count on in the competitive struggle to achieve its goals.

The main objectives of the analysis are to determine the factors and causes of the strengths and weaknesses of the organization.

One of the tools for internal analysis is ABC analysis.

ABC analysis is a method that allows classifying the resources of the company according to their degree of importance. This analysis is one of the methods of rationalization and can be applied in the field of activity of any enterprise.

It is based on the Pareto principle – 20% of all goods give 80% of turnover.

The essence of this analysis is to select data and divide it into three categories according to importance. At the same time, completely different indicators can be taken as a basis.

ABC analysis

ABC analysis gives you an opportunity to focus on tracking the most important sampling indicators for a company in order to increase the efficiency of both the management and operation of individual departments and the company as a whole.

Such analysis allows you to determine cumulatively the value shares of each of the goods sold, or the contribution of a particular company to the total turnover. Cost shares are calculated from their total cost of implementation for a specific period of time.

When conducting an ABC analysis, it is worth considering a number of factors:

• Include homogeneous groups in the analysis (comparing such groups as distributors and end users, as well as large consumers, should be done carefully)
• Select the correct interval for evaluation (month, quarter, year)
• Take into account the novelty (product, customer, supplier)

Usually carrying out an ABC analysis consists of the following steps:

1. Definition of objects of analysis (products, customers, suppliers)
2. Definition of analysis objectives. What we need the data for.
3. Ranking of objects in descending order of parameter value.
4. Calculation of the share of the parameter from the total amount with the cumulative total.
5. Definition of groups A, B, and C.

Data is usually divided into the following proportions:

• A – important, 20% (of goods, customers) give 80% (of sales, turnover)
• B – necessary, 30% (of goods, customers) give 15% (sales, turnover)
• С – unimportant, 50% (of goods, customers) give 5% (of sales, turnover)

One of the most important tools for the internal analysis of a company is to study its own clients, including their satisfaction with the services and products of the company, as well as their willingness to recommend the company to their colleagues and partners.

In order to determine the level of consumer loyalty, Frederick Reichheld proposed a unique method. In 2003, in his article The One Number You Need to Grow published in the Harvard Business Review, he proposed a method for determining consumer commitment to a product, company, or brand.

The method is called NPS (Net Promoter Score), and it can be described as “the index of readiness to recommend.” This index is also used to assess readiness for continuous purchases.

The research method consists of the following steps:

• The company’s clients have to answer the question “What is the probability that you would recommend a company/product/ brand to your friends/acquaintances/ colleagues?” On an 11-point scale, where 0 corresponds to the answer “I will not recommend it in any way”, and 10 – “I will definitely recommend.”
• Based on the estimates obtained, all consumers are divided into 3 groups: 9-10 points – product/brand promoters, 7-8 points – neutrals or passives, 0-6 points – critics (detractors).
• Then you calculate the index

Net Promoter Score Calculation Formula

After the data on external and internal analysis have been obtained, it is necessary to conduct a SWOT analysis.

The SWOT analysis is a method of strategic planning, which consists of identifying the factors of the internal and external environment of an organization and dividing them into four categories:

• Strengths
• Weaknesses
• Opportunities
• Threats

Strengths and weaknesses relate to factors of the internal environment of the company, while opportunities and threats relate to the external environment factors of the company.

SWOT Analysis Matrix

In the first case, the company can control and influence factors on its own, in the second case, the factors do not depend on the company’s actions, and it has to adapt to them.

Thus, a SWOT analysis is carried out in the following several steps:

a) Assessing the strengths and weaknesses of the company

The first stage allows you to identify the strengths and weaknesses of the enterprise. In order to accurately identify them, you must:

1) Prepare a list of criteria to evaluate the company
2) For each criterion to identify strengths and weaknesses
3) Identify the most important strengths and weaknesses in order to put them in the matrix of the SWOT analysis

b) Assessment of market opportunities and threats

The second stage allows you to evaluate the market. An assessment of the situation outside the company is carried out to identify opportunities, as well as to avoid potential threats. The method of identifying market opportunities and threats is similar to the method of identifying the strengths and weaknesses of a company:

1) Prepare a list of criteria to assess the market
2) For each criterion, we compile a list of opportunities and threats
3) The most important opportunities and threats go into the matrix

c) Comparison of the data obtained

At the third stage of the analysis, it is necessary to compare the obtained data on the strengths and weaknesses of the company, as well as the opportunities and threats from the market. This stage provides an opportunity to assess the future development of the company’s activities.

• How to use company strengths for market opportunities
• How can the company’s weaknesses affect it
• Avoiding market threats with company strengths
• What are the threats under the influence of the weaknesses of the company should be constantly kept in control

The main task of the SWOT analysis is a structured description of the situation regarding which you need to take a decision. The conclusions drawn from it are descriptive without recommendations and prioritization.

To obtain the most complete result from the SWOT analysis, you have to prepare options for actions that are formed on the basis of the intersection of the matrix fields. It is necessary to analyze all combinations of external and internal factors.

Possible combinations of the SWOT model

The SO field shows which strengths need to be used in order to gain value from opportunities in the external environment.

The WO field shows the possibilities of the external environment for an organization to overcome existing weaknesses.

The ST field shows which forces need to be used to eliminate the threats.

The WT field shows which weaknesses need to be eliminated in order to try to prevent an impending threat.

And after you are through with the internal analysis you go to the last but not least step of your strategic marketing.

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ABC analysis

 ABC analysis is one of the options for analyzing the internal environment of the company. With the help of ABC analysis, you can divide a large amount of data into three groups based on their significance. This will help you clearly see which positions are key for you, as well as identify the strengths and weaknesses of your company. Thanks to its universality, you can apply the ABC analysis method to almost any field of activity.

Select a Goal

The purpose of the analysis is what your research is aimed at. At this stage, you choose what you should come to as a result of the analysis. You set goals by each company according to their needs, for example: profit growth, inventory optimization, cost reduction, increasing customer loyalty, etc.

Select the Object of ABC Analysis

At this stage, we determine what exactly we will analyze, that is, we choose the type of ABC analysis, and depending on the selected type of ABC analysis, we make a list of objects, for example:

• ABC analysis of sales – list of customers
• Of assortment – product assortment list
• Inventory – inventory list
• ABC analysis of purchased goods – list of purchased goods
• Analysis of supplier – list of suppliers, etc.

Usually, such lists you can generate from internal automated systems of companies.

Definition of the Parameter

Here we define the indicator by which the object will be analyzed. Depending on the type of ABC analysis, this can be: the amount of sales, margin profit, turnover of the product group, the average inventory, the cost of purchased raw materials, the average settlement period, the average debt, etc.

Ranking

Now we need to sort our list according to the selected parameter in descending order. For example, for ABC analysis of sales with the sales amount parameter, we sort the list from the customers with the highest volume of purchases to the lowest. Then we calculate the total amount for the selected parameter, in our case, the sales amount, and calculate the share of each list item in the total amount. After that, we calculate the share of the sales amount from the total sales amount with a cumulative total. The share with the cumulative total is calculated by adding the parameter to the sum of the previous parameters. For the last item in the list, the cumulative share will be 100%.

Definition of Groups A, B, C

After we have done the ranking of our list, we need to divide it into groups. The definition of groups is based on the Pareto Principle: 20% of the effort provides 80% of the result. In accordance with this, groups in ABC analyses are divided into three types:

A: 80% of sales are provided by 20% of customers. The upper limit of group A is the first position of the list. The lower limit is the percentage of the selected parameter closer to 80% (cumulative total).

B: 15% of sales is provided by 30% of customers. The next position after the lower limit of group A will be the upper limit of group B. And the lower limit of group B will be the position with a cumulative total closer to 95%.

C: 5% of sales provide 50% of customers. The positions of group C, respectively, are all the remaining positions after the lower limit of group B.

You can replace the sales and customers metrics with the ones that are right for you. It is worth noting that the boundaries of the 80% -15% -5% groups can be changed and can be set individually by each company.

Analysis

Once we have divided the list into groups, we can analyze the data and make a decision about each group. The decision will also depend on the purpose of the analysis.

Group A is important. This type of resource should be controlled and monitored, as it is the main source of profit for the company. You should allocate maximum investments for this group. The success of group A is to be analyzed and transferred to other categories.

Group B is necessary. This type of resources is also important for the company, as it brings a stable profit, which allows the company to exist. Investments in this type of company’s resources are not significant and are only necessary to maintain the existing level.

The group C is unimportant. This type of resource usually does not bring much income. Analyzing this group, it is necessary to understand the reason for the low return from this category. If the cause can be eliminated and it is possible to transfer the resource to a higher category, then it is worth trying to do so. If this resource bears only losses, then it is better to get rid of it.

Despite the simplicity of the ABC analysis, it is important to observe certain conditions when compiling it, otherwise the data obtained may not correctly reflect the current state of affairs.

• it is necessary to include similar groups in the analysis
• you must select a specific time interval
• it is necessary to take into account the novelty (customer, product, supplier)

To make it easier for you I’ve prepared the ABC Analysis template which you can download in the Resources section of the website. Now you can run ABC analysis in no time using Apple Numbers template or Microsoft Excel template. You just need to fill in your data instead of what I used.

To find more marketing analysis tips go to Marketing Analysis section of the website.

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