Chapter 5Chapter 5

Internal AnalysisInternal AnalysisObjectiveObjective: to evaluate how the company is doing to : to evaluate how the company is doing to direct its efforts in the most efficient and effective direct its efforts in the most efficient and effective

manner.manner.

Situational AnalysisSituational Analysis

The situational analysis is the general The situational analysis is the general term used for the examination of the term used for the examination of the business and the environment in which business and the environment in which the company operates – the internal and the company operates – the internal and environmental analyses. environmental analyses.

In order to determine sound strategies In order to determine sound strategies for the firm, after the environment is for the firm, after the environment is analyzed, the internal analysis must be analyzed, the internal analysis must be conducted which is the subject of this conducted which is the subject of this chapter.chapter.

Internal AnalysisInternal Analysis““Company Profile”Company Profile”

The purpose of the internal analysis is to The purpose of the internal analysis is to evaluate how the company is doing, so that its evaluate how the company is doing, so that its efforts can be directed in the most effective and efforts can be directed in the most effective and efficient way. efficient way.

It includes the in-depth examination and It includes the in-depth examination and assessment of the company’s performance and assessment of the company’s performance and competitive position in each key functional area competitive position in each key functional area – marketing, operations, human resources, – marketing, operations, human resources, administrative and strategic management, administrative and strategic management, finance/accounting and other applicable finance/accounting and other applicable organizational concerns to evaluate the organizational concerns to evaluate the complete picture of the overall operation. complete picture of the overall operation.

Strengths & WeaknessesStrengths & Weaknesses

The main goal of the internal analysis is to The main goal of the internal analysis is to perform a detailed analysis of the company perform a detailed analysis of the company to expose its strengths and weaknesses.to expose its strengths and weaknesses.

Secondarily, its minor strengths (major Secondarily, its minor strengths (major and minor strengths are together referred and minor strengths are together referred to as capabilities), minor weaknesses (both to as capabilities), minor weaknesses (both minor and major weaknesses can be minor and major weaknesses can be referred to as limitations) and its neutral referred to as limitations) and its neutral performance areas. performance areas.

Focus of the AnalysisFocus of the Analysis The first focus of the analysis is to The first focus of the analysis is to

maximize strengths by matching them to maximize strengths by matching them to the most beneficial opportunities. Second, the most beneficial opportunities. Second, the company decides what action it will the company decides what action it will take regarding the perceived or actual take regarding the perceived or actual weaknesses (whether it is possible to weaknesses (whether it is possible to correct them, or worth the time and effort).correct them, or worth the time and effort).

The tendency is to focus on taking The tendency is to focus on taking advantage of opportunities with advantage of opportunities with appropriate strengths, rather than appropriate strengths, rather than correcting weaknesses (however, should be correcting weaknesses (however, should be conducted with caution).conducted with caution).

Key Concerns Key Concerns The common approach to begin the The common approach to begin the

analysis is with a historical review of the analysis is with a historical review of the firm’s past accomplishments. Did it firm’s past accomplishments. Did it successfully implement or achieve its successfully implement or achieve its mission, objectives, strategies and mission, objectives, strategies and tactics?tactics?

The key concerns for the internal The key concerns for the internal analysis are;analysis are; Organization and content Organization and content Standards for measurementStandards for measurement Who will prepare the analysisWho will prepare the analysis

Organization and Organization and ContentContent

The analysis is generally structured around The analysis is generally structured around functional areas (for a restaurant, organization functional areas (for a restaurant, organization of internal analysis would be as dining room, of internal analysis would be as dining room, kitchen, personnel, management, marketing, kitchen, personnel, management, marketing, finance/accounting, research/development). finance/accounting, research/development). Since issues affect more than one functional Since issues affect more than one functional department, the majority of the problems (e.g. department, the majority of the problems (e.g. food cost percentage; could be the responsibility food cost percentage; could be the responsibility of marketing, finance/accounting and operations of marketing, finance/accounting and operations departments) are solved through cross-departments) are solved through cross-functional efforts. functional efforts.

Companies develop customized internal audit Companies develop customized internal audit forms to grade or measure key performance forms to grade or measure key performance areas.areas.

The internal analysis should cover all The internal analysis should cover all relevant issues that can have impact on relevant issues that can have impact on future decisions and actions. future decisions and actions.

These are the skills and assets required These are the skills and assets required to be successful in any industry. The to be successful in any industry. The most critical of these are known as most critical of these are known as strategic internal factors, strategic strategic internal factors, strategic competencies or critical success factors competencies or critical success factors which would include profitability, which would include profitability, customer satisfaction, employee customer satisfaction, employee satisfaction, and service gaps. satisfaction, and service gaps.

Strategic Internal FactorsStrategic Internal Factors

Long-term profit is the main determinant of Long-term profit is the main determinant of managerial ability. The assumption is that, managerial ability. The assumption is that, if the business is showing long-term profit, if the business is showing long-term profit, it must be satisfying the customer.it must be satisfying the customer.

The hurdle rate (compensation for degree The hurdle rate (compensation for degree of risk) should also be considered. It is the of risk) should also be considered. It is the return necessary before an investment can return necessary before an investment can be considered (can be calculated by adding be considered (can be calculated by adding the return from a risk-free investment, plus the return from a risk-free investment, plus a return based on the perception of the a return based on the perception of the risk). risk).

ProfitabilityProfitability

Sales (revenues) and cost (expenses) figures Sales (revenues) and cost (expenses) figures (from the income statement) are also (from the income statement) are also important to visualize, since they are the key important to visualize, since they are the key areas of performance that influence profit. areas of performance that influence profit. The higher the sales and lower the costs, the The higher the sales and lower the costs, the greater the profit.greater the profit.

The most important means of maximizing The most important means of maximizing sales in hospitality are; excellence in relative sales in hospitality are; excellence in relative perceived product/service quality (RPPQ), perceived product/service quality (RPPQ), consistent product/service quality, relative consistent product/service quality, relative perceived value (RPV), cleanliness, a pleasant perceived value (RPV), cleanliness, a pleasant interpersonal and physical atmosphere, interpersonal and physical atmosphere, effective and efficient promotional efforts, effective and efficient promotional efforts, and overall image.and overall image.

Customer SatisfactionCustomer Satisfaction

After profit, the most important strategic After profit, the most important strategic internal factors are customer and employee internal factors are customer and employee satisfaction. satisfaction.

Because of the life-time value of customers, Because of the life-time value of customers, keeping them satisfied plays a key role in keeping them satisfied plays a key role in success.success.

RPPQ; the key requirement to satisfying RPPQ; the key requirement to satisfying customers is expressed as Relative Perceived customers is expressed as Relative Perceived Product Quality which must be better than Product Quality which must be better than the competitors’. What is necessary to satisfy the competitors’. What is necessary to satisfy the customer? the customer?

To answer this question, internal analysis about To answer this question, internal analysis about how well the company is currently satisfying the how well the company is currently satisfying the customer, finding out what the customer expects customer, finding out what the customer expects today and in the near future (customer analysis), today and in the near future (customer analysis), assessing primary competitors' performance are assessing primary competitors' performance are helpful. helpful.

Customer satisfaction consists of the experience Customer satisfaction consists of the experience gained from technical factors (the food; its gained from technical factors (the food; its efficient delivery; a pleasant, clean room; no efficient delivery; a pleasant, clean room; no excessive waits for check-in or check-out; and a excessive waits for check-in or check-out; and a safe environment) and the human side how the safe environment) and the human side how the experience made the customer feel. Special experience made the customer feel. Special treatment of everyone (including both the new treatment of everyone (including both the new and regular customers) is also an important and regular customers) is also an important factor.factor.

Employee SatisfactionEmployee Satisfaction

The service provider who caters to the needs The service provider who caters to the needs of customers has the greatest impact on of customers has the greatest impact on profit. Therefore, they should be treated in a profit. Therefore, they should be treated in a manner that keeps them interested in manner that keeps them interested in satisfying the customer and staying with the satisfying the customer and staying with the company.company.

The assumption is that satisfied employees The assumption is that satisfied employees are more likely to take care of customers. are more likely to take care of customers.

The Service Profit ChainThe Service Profit Chain: service quality : service quality orientation of management, employee orientation of management, employee satisfaction, employee retention, delivery of satisfaction, employee retention, delivery of service quality, customer satisfaction, service quality, customer satisfaction, customer retention, profit. customer retention, profit.

Service GapsService Gaps

A form of gap analysis may be carried to identify A form of gap analysis may be carried to identify customer service gaps or critical areas of the customer service gaps or critical areas of the business where performance may be falling business where performance may be falling short. short.

The decision makers must first develop The decision makers must first develop perceptions of what the customer wants perceptions of what the customer wants (customers may have perceptions gathered from (customers may have perceptions gathered from personal needs, past experience and external personal needs, past experience and external communications). They then must translate this communications). They then must translate this into strategies, policies and action plans. Finally, into strategies, policies and action plans. Finally, the company must deliver a product and service the company must deliver a product and service and external communications that meet the and external communications that meet the customer’s expectations.customer’s expectations.

Service Gaps may be present in one or more of Service Gaps may be present in one or more of the following ways;the following ways; Gap 1: difference between what management Gap 1: difference between what management

thinks customer wants and what the business thinks customer wants and what the business deliversdelivers

Gap 2: difference between what management Gap 2: difference between what management thinks consumer wants and quality standards thinks consumer wants and quality standards (translation of perceptions into standards)(translation of perceptions into standards)

Gap 3: difference between standards and Gap 3: difference between standards and performance (customer’s experience and the performance (customer’s experience and the business’ delivery) business’ delivery)

Gap 4: difference between performance and Gap 4: difference between performance and what is promoted (external communications)what is promoted (external communications)

Gap 5: difference between expectation and Gap 5: difference between expectation and experienceexperience

Standards for Standards for MeasurementMeasurement

Naturally, an unreasonable amount of Naturally, an unreasonable amount of time can not be spent on hundreds time can not be spent on hundreds details. So that the attention should details. So that the attention should be on identifying;be on identifying; the areas where company performs as the areas where company performs as

well as or better than primary well as or better than primary competitorscompetitors

how customers think. The difference how customers think. The difference between absolute product quality and between absolute product quality and relative perceived product quality.relative perceived product quality.

Strength and Weakness Strength and Weakness AnalysisAnalysis

There are some certain factors to There are some certain factors to consider to improve the accuracy of consider to improve the accuracy of measurement of internal analysis. measurement of internal analysis. These include;These include; PrioritizationPrioritization Correcting weaknessesCorrecting weaknesses Locating weaknessesLocating weaknesses Auditing performanceAuditing performance

PrioritizationPrioritization

In order to increase the specificity of In order to increase the specificity of measurement, each strength and weakness measurement, each strength and weakness would be prioritized according to its perceived would be prioritized according to its perceived importance. A further way to do would be importance. A further way to do would be grouping strengths and weaknesses according grouping strengths and weaknesses according to some categories as the ones must be to some categories as the ones must be addressed immediately, would be dealt with as addressed immediately, would be dealt with as time permits, would possibly be ignored. time permits, would possibly be ignored.

Major strength, minor strength, neutral, minor Major strength, minor strength, neutral, minor weakness and major weakness would be weakness and major weakness would be recommended to improve the accuracy of the recommended to improve the accuracy of the internal analysis.internal analysis.

Strength (or Major Strength)Strength (or Major Strength); can be ; can be determined by looking at the advantages determined by looking at the advantages relative to competitors or the capabilities of relative to competitors or the capabilities of the company (they include the assets both the company (they include the assets both tangible and intangible – financial condition, tangible and intangible – financial condition, buildings, product or service quality, brand buildings, product or service quality, brand equity, customer loyalty , location etc and equity, customer loyalty , location etc and skills - intangibles, activities and knowledge – skills - intangibles, activities and knowledge – strategic planning and implementation, strategic planning and implementation, corporate culture, quality of employees etc.)corporate culture, quality of employees etc.)

Minor strengthMinor strength; are the areas where the ; are the areas where the company’s performance is above average or company’s performance is above average or adequate to keep the company competitive. adequate to keep the company competitive. Its position may not be adequate to deserve Its position may not be adequate to deserve being included in major strength. E.g. a décor being included in major strength. E.g. a décor that is acceptable or food quality that is that is acceptable or food quality that is slightly better than average. The problem is slightly better than average. The problem is that they may notthat they may not

be enough to attract competitors’ customers be enough to attract competitors’ customers or to increase the frequency of visits or or to increase the frequency of visits or average amount spent by regular customers.average amount spent by regular customers.

NeutralNeutral; an area of average ability or ; an area of average ability or position. Some areas are neither a strength position. Some areas are neither a strength nor a weakness. If the internal analysis nor a weakness. If the internal analysis shows that some improvement is needed, shows that some improvement is needed, then the factor should be recognized as a then the factor should be recognized as a minor weakness.minor weakness.

Minor weaknessMinor weakness; any area that does not ; any area that does not represent a serious weakness but hinders the represent a serious weakness but hinders the ability of the firm to perform at the desired ability of the firm to perform at the desired level – something that could not be level – something that could not be considered as neutral. considered as neutral.

Weakness (or major weaknessWeakness (or major weakness); the opposite ); the opposite of a strength, important disadvantages that of a strength, important disadvantages that hinders the firm’s strategic efforts at keeping hinders the firm’s strategic efforts at keeping or gaining a desired competitive position. or gaining a desired competitive position.

Correcting WeaknessesCorrecting Weaknesses

There are several options in assessing There are several options in assessing what should be done about a weakness;what should be done about a weakness;

Do not take corrective action; if the Do not take corrective action; if the weakness does not affect overall weakness does not affect overall performance. Address it as a long-term performance. Address it as a long-term objective.objective.

Give serious thought; if the weakness Give serious thought; if the weakness represent a skill or asset necessary to represent a skill or asset necessary to pursue a critical opportunity or minimize a pursue a critical opportunity or minimize a major treat major treat

Locating WeaknessesLocating Weaknesses

Locating the true weakness is Locating the true weakness is sometimes difficult. The goal should sometimes difficult. The goal should be identifying the primary goal by be identifying the primary goal by looking at the symptom of the looking at the symptom of the problem. Once the cause is problem. Once the cause is corrected, the symptoms disappear.corrected, the symptoms disappear.

Auditing PerformanceAuditing Performance

Companies can develop customized forms to Companies can develop customized forms to record and rank their strengths and record and rank their strengths and weaknesses. Each company would select the weaknesses. Each company would select the areas to evaluate based on its priorities and areas to evaluate based on its priorities and past internal analysis. past internal analysis.

Each factor can also be rated based on its Each factor can also be rated based on its importance to the success of the functional importance to the success of the functional department or the business. department or the business.

Performance/importance matrix may be used Performance/importance matrix may be used to determine what actions could be taken to determine what actions could be taken based on the company’s performance in an based on the company’s performance in an area and the importance of that area. area and the importance of that area.

HighHigh

““Importance”Importance”

LowLow

LowLow High High (weakness)(weakness) “Performance” “Performance”

(strength)(strength)

A. B. Keep up

Concentrate the good

here work

C. Low D. Possible

Priority overkill

Performance/Importance MatrixPerformance/Importance Matrix

Who will prepare the Who will prepare the internal analysis?internal analysis?

Regardless of who prepares the internal analysis, Regardless of who prepares the internal analysis, there will be some type of bias involved.there will be some type of bias involved.

The basic options are to use The basic options are to use inside individuals or inside individuals or groupsgroups, use , use outside consultantsoutside consultants, and have , and have customerscustomers complete surveys or comment cards. complete surveys or comment cards.

The advantage of inside people is that they know The advantage of inside people is that they know the business; the advantage of external the business; the advantage of external consultants are that they tend to be more consultants are that they tend to be more objective.objective.

Customer surveys should be a constant sources Customer surveys should be a constant sources of information on performance, however they of information on performance, however they cannot measure every aspect of the business (e.g. cannot measure every aspect of the business (e.g. finance). finance).

Strategic AnalysisStrategic Analysis

Strategic analysis consists of;Strategic analysis consists of;1.1. determining what factors in the determining what factors in the

company’s situational analysis are company’s situational analysis are importantimportant

2.2. deciding which of those factors may have deciding which of those factors may have the greatest impact on the firm’s futurethe greatest impact on the firm’s future

3.3. analyzing these important factors to analyzing these important factors to determine possible corporate, business, determine possible corporate, business, or functional level strategies.or functional level strategies.

Strategic analysis consists of the Strategic analysis consists of the SWOT analysis and the strategic SWOT analysis and the strategic analysis questioning sequence. analysis questioning sequence.

SWOT AnalysisSWOT Analysis SWOT analysis involve the careful review of SWOT analysis involve the careful review of

internal analysis for strengths and internal analysis for strengths and weaknesses and the environmental analysis weaknesses and the environmental analysis for opportunities and threats that might or for opportunities and threats that might or will impact the short-and long-term future of will impact the short-and long-term future of the firm.the firm.

Purpose of the SWOT analysis is to select the Purpose of the SWOT analysis is to select the opportunities to pursue, threats to defend opportunities to pursue, threats to defend against and weaknesses to correct. against and weaknesses to correct.

In doing so, the company’s abilities, the In doing so, the company’s abilities, the trends in the marketplace (customer’s trends in the marketplace (customer’s demands and competitors’ strategies) are demands and competitors’ strategies) are especially important. especially important.

Strategic Analysis Strategic Analysis Questioning SequenceQuestioning Sequence

SWOT analysis usually revolve around details of SWOT analysis usually revolve around details of the internal, customer, and competitor analyses. the internal, customer, and competitor analyses.

SWOT analysis simply presents a focused SWOT analysis simply presents a focused summary of the business’s database of available summary of the business’s database of available information so that better decisions can be made. information so that better decisions can be made. However, there may be too much information to However, there may be too much information to analyze. analyze.

How do companies distinguish between what is How do companies distinguish between what is important and what is not? Managers use important and what is not? Managers use “models” to simplify the decision-making process.“models” to simplify the decision-making process.

Strategic Analysis Strategic Analysis Questioning Sequence ModelQuestioning Sequence Model

Market positionMarket position – – 1.1. What is the firm’s What is the firm’s current market position? current market position?

SWOT factor analysisSWOT factor analysis – – 2.2. What are the What are the key SWOT factors that must be key SWOT factors that must be evaluated in the plan? evaluated in the plan? 3.3. What are the What are the implications of the key SWOT factor or implications of the key SWOT factor or groups of factors being considered?groups of factors being considered?

Historical experience with key SWOT Historical experience with key SWOT factorsfactors – – 4.4. Have existing strategies Have existing strategies related to key SWOT factors been related to key SWOT factors been effective?effective?

Future alternative strategiesFuture alternative strategies – – 5.5. What What alternative or optional strategies should alternative or optional strategies should be considered?be considered?

Viability of strategic alternativesViability of strategic alternatives – – 6.6. Are Are the strategic alternatives compatible with the strategic alternatives compatible with the firm’s competitive environment? the firm’s competitive environment? 7.7. Does the strategy place realistic demands Does the strategy place realistic demands on the abilities of the firm? on the abilities of the firm? 8.8. Is strategy Is strategy worth pursuing? worth pursuing? 9.9. How will competitors How will competitors react?react?

Probable strategic directionProbable strategic direction – – 10.10. What What should be the primary strategic thrusts for should be the primary strategic thrusts for the next planning period?the next planning period?

Market PositionMarket Position First the company must have a First the company must have a

reasonable idea of how it is seen by its reasonable idea of how it is seen by its current customers, before it attempts to current customers, before it attempts to use opportunities available and decides use opportunities available and decides on the appropriate strategy change.on the appropriate strategy change.

Position 1Position 1: a leader in the market; : a leader in the market; Position 2Position 2: somewhat ahead of the : somewhat ahead of the market; market; Position 3Position 3: meeting current : meeting current market demand; market demand; Position 4Position 4: slightly : slightly behind market demand; behind market demand; Position 5Position 5: : seriously behind market demand.seriously behind market demand.

SWOT Factor Analysis SWOT Factor Analysis In judging the importance of SWOT factors, In judging the importance of SWOT factors,

prioritization, impact/immediacy analysis, or prioritization, impact/immediacy analysis, or confidence assessment can be utilized. confidence assessment can be utilized.

Prioritization helps the company to focus its Prioritization helps the company to focus its efforts in areas that will produce the best efforts in areas that will produce the best results. A general strategic option matrix results. A general strategic option matrix would be used for this purpose. would be used for this purpose.

Impact/Immediacy matrix is helpful in Impact/Immediacy matrix is helpful in determining the importance of a threat, determining the importance of a threat, opportunity, strength or weakness to assess opportunity, strength or weakness to assess its potential.its potential.

Confidence is about the likelihood of the event Confidence is about the likelihood of the event to occur.to occur.

Opportunity ThreatOpportunity Threat

StrengthStrength

WeaknessWeakness

Depending on

Pursue the severity

if worthwhile of the threat,

use available

abilities to defend

against it

Correct if Depending on the

worthwhile, pursueseverity of the

or select anotherthreat, correct any

opportunity weaknesses

necessary to

defend against the

threat

General Strategic Option MatrixGeneral Strategic Option Matrix

HighHigh

““Impact”Impact”

LowLow

HighHigh Low Low

““Immediacy”Immediacy”

Category 1Category 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 2Category 4

- Incorporate into - Be aware of factor

annual or long term - Review each year,

Plan or more often,

-Prioritize based on during planning

importancesessions

Impact/Immediacy MatrixImpact/Immediacy Matrix

Future Alternative Future Alternative StrategiesStrategies

They will be developed from a screening of the They will be developed from a screening of the SWOT analysis for potential profitable SWOT analysis for potential profitable opportunities, strengths that should be opportunities, strengths that should be maximized, weaknesses that must be corrected, maximized, weaknesses that must be corrected, and threats that should be avoided or defended and threats that should be avoided or defended against.against.

For example, if the company has certain For example, if the company has certain exceptional strengths (competitive advantages), exceptional strengths (competitive advantages), it can develop strategies to extract the greatest it can develop strategies to extract the greatest value from them. Or, when a firm’s strengths are value from them. Or, when a firm’s strengths are not considered worthwhile, the company can not considered worthwhile, the company can direct its effort to fill a niche not currently being direct its effort to fill a niche not currently being addressed in the market. addressed in the market.

Locating Optional Locating Optional StrategiesStrategies

The search for strategies is (1) The search for strategies is (1) analytical, (2) creative, (3) incremental, analytical, (2) creative, (3) incremental, (4) political. (4) political.

Creativity, some forms;Creativity, some forms; Attribute listingAttribute listing: listing various attributes : listing various attributes

the customer is looking.the customer is looking. Forced relationshipForced relationship: select any stimulus : select any stimulus

word, list the characteristics of that word, word, list the characteristics of that word, then determine which of those words have then determine which of those words have any possible relationship to the firm’s any possible relationship to the firm’s strategies. E.g. plate appearance – strategies. E.g. plate appearance – brighter, more colorful. brighter, more colorful.

Fantasy techniqueFantasy technique: the person sits in a : the person sits in a comfortable, quite place, and visualize himself comfortable, quite place, and visualize himself in a setting e.g. as a customer going through in a setting e.g. as a customer going through the hotel or restaurant, while sensing all the the hotel or restaurant, while sensing all the smells, sounds, decor etc. the insights are used smells, sounds, decor etc. the insights are used to develop possible improvements, to develop possible improvements, modifications and innovations.modifications and innovations.

Heuristic ideation techniqueHeuristic ideation technique (HIT(HIT): utilizes a ): utilizes a matrix to establish possible relationships. On matrix to establish possible relationships. On the vertical side, there would be entrees in the the vertical side, there would be entrees in the restaurant; on the horizontal side, there should restaurant; on the horizontal side, there should be various styles of serving pieces that are be various styles of serving pieces that are available. It is commonly used to develop new available. It is commonly used to develop new menu items.menu items.

Collective notebook methodCollective notebook method: simply having a : simply having a small notebook at all times to write ideas as small notebook at all times to write ideas as they come.they come.