Chapter 5 Internal Analysis Objective : to evaluate how the company is doing to direct its efforts in the most efficient and effective manner.
The situational analysis is the general term used for the examination of the business and the environment in which the company operates – the internal and environmental analyses.
In order to determine sound strategies for the firm, after the environment is analyzed, the internal analysis must be conducted which is the subject of this chapter.
Internal Analysis “ Company Profile”
The purpose of the internal analysis is to evaluate how the company is doing, so that its efforts can be directed in the most effective and efficient way.
It includes the in-depth examination and assessment of the company’s performance and competitive position in each key functional area – marketing, operations, human resources, administrative and strategic management, finance/accounting and other applicable organizational concerns to evaluate the complete picture of the overall operation.
Strengths & Weaknesses
The main goal of the internal analysis is to perform a detailed analysis of the company to expose its strengths and weaknesses.
Secondarily, its minor strengths (major and minor strengths are together referred to as capabilities), minor weaknesses (both minor and major weaknesses can be referred to as limitations) and its neutral performance areas.
Focus of the Analysis
The first focus of the analysis is to maximize strengths by matching them to the most beneficial opportunities. Second, the company decides what action it will take regarding the perceived or actual weaknesses (whether it is possible to correct them, or worth the time and effort).
The tendency is to focus on taking advantage of opportunities with appropriate strengths, rather than correcting weaknesses (however, should be conducted with caution).
The common approach to begin the analysis is with a historical review of the firm’s past accomplishments. Did it successfully implement or achieve its mission, objectives, strategies and tactics?
The key concerns for the internal analysis are;
Organization and content
Standards for measurement
Who will prepare the analysis
Organization and Content
The analysis is generally structured around functional areas (for a restaurant, organization of internal analysis would be as dining room, kitchen, personnel, management, marketing, finance/accounting, research/development). Since issues affect more than one functional department, the majority of the problems (e.g. food cost percentage; could be the responsibility of marketing, finance/accounting and operations departments) are solved through cross-functional efforts.
Companies develop customized internal audit forms to grade or measure key performance areas.
The internal analysis should cover all relevant issues that can have impact on future decisions and actions.
These are the skills and assets required to be successful in any industry. The most critical of these are known as strategic internal factors, strategic competencies or critical success factors which would include profitability, customer satisfaction, employee satisfaction, and service gaps.
Strategic Internal Factors
Long-term profit is the main determinant of managerial ability. The assumption is that, if the business is showing long-term profit, it must be satisfying the customer.
The hurdle rate (compensation for degree of risk) should also be considered. It is the return necessary before an investment can be considered (can be calculated by adding the return from a risk-free investment, plus a return based on the perception of the risk).
Sales (revenues) and cost (expenses) figures (from the income statement) are also important to visualize, since they are the key areas of performance that influence profit. The higher the sales and lower the costs, the greater the profit.
The most important means of maximizing sales in hospitality are; excellence in relative perceived product/service quality (RPPQ), consistent product/service quality, relative perceived value (RPV), cleanliness, a pleasant interpersonal and physical atmosphere, effective and efficient promotional efforts, and overall image.
After profit, the most important strategic internal factors are customer and employee satisfaction.
Because of the life-time value of customers, keeping them satisfied plays a key role in success.
RPPQ; the key requirement to satisfying customers is expressed as Relative Perceived Product Quality which must be better than the competitors’. What is necessary to satisfy the customer?
To answer this question, internal analysis about how well the company is currently satisfying the customer, finding out what the customer expects today and in the near future (customer analysis), assessing primary competitors' performance are helpful.
Customer satisfaction consists of the experience gained from technical factors (the food; its efficient delivery; a pleasant, clean room; no excessive waits for check-in or check-out; and a safe environment) and the human side how the experience made the customer feel. Special treatment of everyone (including both the new and regular customers) is also an important factor.
The service provider who caters to the needs of customers has the greatest impact on profit. Therefore, they should be treated in a manner that keeps them interested in satisfying the customer and staying with the company.
The assumption is that satisfied employees are more likely to take care of customers.
The Service Profit Chain : service quality orientation of management, employee satisfaction, employee retention, delivery of service quality, customer satisfaction, customer retention, profit.
A form of gap analysis may be carried to identify customer service gaps or critical areas of the business where performance may be falling short.
The decision makers must first develop perceptions of what the customer wants (customers may have perceptions gathered from personal needs, past experience and external communications). They then must translate this into strategies, policies and action plans. Finally, the company must deliver a product and service and external communications that meet the customer’s expectations.
Service Gaps may be present in one or more of the following ways;
Gap 1: difference between what management thinks customer wants and what the business delivers
Gap 2: difference between what management thinks consumer wants and quality standards (translation of perceptions into standards)
Gap 3: difference between standards and performance (customer’s experience and the business’ delivery)
Gap 4: difference between performance and what is promoted (external communications)
Gap 5: difference between expectation and experience
Standards for Measurement
Naturally, an unreasonable amount of time can not be spent on hundreds details. So that the attention should be on identifying;
the areas where company performs as well as or better than primary competitors
how customers think. The difference between absolute product quality and relative perceived product quality.
Strength and Weakness Analysis
There are some certain factors to consider to improve the accuracy of measurement of internal analysis. These include;
In order to increase the specificity of measurement, each strength and weakness would be prioritized according to its perceived importance. A further way to do would be grouping strengths and weaknesses according to some categories as the ones must be addressed immediately, would be dealt with as time permits, would possibly be ignored.
Major strength, minor strength, neutral, minor weakness and major weakness would be recommended to improve the accuracy of the internal analysis.
Strength (or Major Strength) ; can be determined by looking at the advantages relative to competitors or the capabilities of the company (they include the assets both tangible and intangible – financial condition, buildings, product or service quality, brand equity, customer loyalty , location etc and skills - intangibles, activities and knowledge – strategic planning and implementation, corporate culture, quality of employees etc.)
Minor strength ; are the areas where the company’s performance is above average or adequate to keep the company competitive. Its position may not be adequate to deserve being included in major strength. E.g. a décor that is acceptable or food quality that is slightly better than average. The problem is that they may not
be enough to attract competitors’ customers or to increase the frequency of visits or average amount spent by regular customers.
Neutral ; an area of average ability or position. Some areas are neither a strength nor a weakness. If the internal analysis shows that some improvement is needed, then the factor should be recognized as a minor weakness.
Minor weakness ; any area that does not represent a serious weakness but hinders the ability of the firm to perform at the desired level – something that could not be considered as neutral.
Weakness (or major weakness ); the opposite of a strength, important disadvantages that hinders the firm’s strategic efforts at keeping or gaining a desired competitive position.
There are several options in assessing what should be done about a weakness;
Do not take corrective action; if the weakness does not affect overall performance. Address it as a long-term objective.
Give serious thought; if the weakness represent a skill or asset necessary to pursue a critical opportunity or minimize a major treat
Locating the true weakness is sometimes difficult. The goal should be identifying the primary goal by looking at the symptom of the problem. Once the cause is corrected, the symptoms disappear.
Companies can develop customized forms to record and rank their strengths and weaknesses. Each company would select the areas to evaluate based on its priorities and past internal analysis.
Each factor can also be rated based on its importance to the success of the functional department or the business.
Performance/importance matrix may be used to determine what actions could be taken based on the company’s performance in an area and the importance of that area.
(weakness) “Performance” (strength)
Performance/Importance Matrix A. B. Keep up Concentrate the good here work C. Low D. Possible Priority overkill
Who will prepare the internal analysis?
Regardless of who prepares the internal analysis, there will be some type of bias involved.
The basic options are to use inside individuals or groups , use outside consultants , and have customers complete surveys or comment cards.
The advantage of inside people is that they know the business; the advantage of external consultants are that they tend to be more objective.
Customer surveys should be a constant sources of information on performance, however they cannot measure every aspect of the business (e.g. finance).
Strategic analysis consists of;
determining what factors in the company’s situational analysis are important
deciding which of those factors may have the greatest impact on the firm’s future
analyzing these important factors to determine possible corporate, business, or functional level strategies.
Strategic analysis consists of the SWOT analysis and the strategic analysis questioning sequence.
SWOT analysis involve the careful review of internal analysis for strengths and weaknesses and the environmental analysis for opportunities and threats that might or will impact the short-and long-term future of the firm.
Purpose of the SWOT analysis is to select the opportunities to pursue, threats to defend against and weaknesses to correct.
In doing so, the company’s abilities, the trends in the marketplace (customer’s demands and competitors’ strategies) are especially important.
Strategic Analysis Questioning Sequence
SWOT analysis usually revolve around details of the internal, customer, and competitor analyses.
SWOT analysis simply presents a focused summary of the business’s database of available information so that better decisions can be made. However, there may be too much information to analyze.
How do companies distinguish between what is important and what is not? Managers use “models” to simplify the decision-making process.
Strategic Analysis Questioning Sequence Model
Market position – 1. What is the firm’s current market position?
SWOT factor analysis – 2. What are the key SWOT factors that must be evaluated in the plan? 3. What are the implications of the key SWOT factor or groups of factors being considered?
Historical experience with key SWOT factors – 4. Have existing strategies related to key SWOT factors been effective?
Future alternative strategies – 5. What alternative or optional strategies should be considered?
Viability of strategic alternatives – 6. Are the strategic alternatives compatible with the firm’s competitive environment? 7. Does the strategy place realistic demands on the abilities of the firm? 8. Is strategy worth pursuing? 9. How will competitors react?
Probable strategic direction – 10. What should be the primary strategic thrusts for the next planning period?
First the company must have a reasonable idea of how it is seen by its current customers, before it attempts to use opportunities available and decides on the appropriate strategy change.
Position 1 : a leader in the market;
Position 2 : somewhat ahead of the market; Position 3 : meeting current market demand; Position 4 : slightly behind market demand; Position 5 : seriously behind market demand.
SWOT Factor Analysis
In judging the importance of SWOT factors, prioritization, impact/immediacy analysis, or confidence assessment can be utilized.
Prioritization helps the company to focus its efforts in areas that will produce the best results. A general strategic option matrix would be used for this purpose.
Impact/Immediacy matrix is helpful in determining the importance of a threat, opportunity, strength or weakness to assess its potential.
Confidence is about the likelihood of the event to occur.
General Strategic Option Matrix Depending on Pursue the severity if worthwhile of the threat, use available abilities to defend against it Correct if Depending on the worthwhile, pursue severity of the or select another threat, correct any opportunity weaknesses necessary to defend against the threat
Category 1 Category 3
- Probable event, - Could be serious
take appropriate but will not likely
action occur in near future
- Incorporate into - Review a minimum
annual plan of once per year or as appropriate
Category 2 Category 4
- Incorporate into - Be aware of factor
annual or long term - Review each year,
Plan or more often,
Prioritize based on during planning
Future Alternative Strategies
They will be developed from a screening of the SWOT analysis for potential profitable opportunities, strengths that should be maximized, weaknesses that must be corrected, and threats that should be avoided or defended against.
For example, if the company has certain exceptional strengths (competitive advantages), it can develop strategies to extract the greatest value from them. Or, when a firm’s strengths are not considered worthwhile, the company can direct its effort to fill a niche not currently being addressed in the market.
Locating Optional Strategies
The search for strategies is (1) analytical, (2) creative, (3) incremental, (4) political.
Creativity, some forms;
Attribute listing : listing various attributes the customer is looking.
Forced relationship : select any stimulus word, list the characteristics of that word, then determine which of those words have any possible relationship to the firm’s strategies. E.g. plate appearance – brighter, more colorful.
Fantasy technique : the person sits in a comfortable, quite place, and visualize himself in a setting e.g. as a customer going through the hotel or restaurant, while sensing all the smells, sounds, decor etc. the insights are used to develop possible improvements, modifications and innovations.
Heuristic ideation technique (HIT ): utilizes a matrix to establish possible relationships. On the vertical side, there would be entrees in the restaurant; on the horizontal side, there should be various styles of serving pieces that are available. It is commonly used to develop new menu items.
Collective notebook method : simply having a small notebook at all times to write ideas as they come.