The integrated navigation system (INS), vital in aerospace and ocean exploration, faces challenges in reliability analysis due to its complex operational environment. Addressing this, the finite degradation structures (FDS) method was employed for a thorough examination of the multi-state integrated navigation system. Initial steps involve transforming component fault modes into a state space using the failure mode and effect analysis (FMEA) method. Subsequently, an abstraction operation establishes the relationship between component states and system states, forming the required FDS model. This model serves as the basis for critical scenario analysis and calculation of reliability indicators. Through this systematic approach, the occurrence probability of various system states can be computed and the sensitivity of individual component states can be assessed. The identifications of the weak points and the degradation boundaries of the system are well demonstrated with illustrative case studies. These results can be seen as insights to guide reliability decisions, including the development of system maintenance strategies and risk prevention schemes.