Internal Analysis

1
Chapter 5

• Internal Analysis
• Objective to evaluate how the company is doing
  to direct its efforts in the most efficient and
  effective manner.

2
Situational Analysis

• 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.

3
Internal AnalysisCompany 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 companys 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.

4
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.

5
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).

6
Key Concerns

• The common approach to begin the analysis is with
  a historical review of the firms 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

7
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.

8
Strategic Internal Factors

• 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.

9
Profitability

• 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).

10

• 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.

11
Customer Satisfaction

• 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?

12

• 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.

13
Employee Satisfaction

• 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.

14
Service Gaps

• 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
  customers expectations.

15

• 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 (customers experience and the
  business delivery)
• Gap 4 difference between performance and what is
  promoted (external communications)
• Gap 5 difference between expectation and
  experience

16
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.

17
Strength and Weakness Analysis

• There are some certain factors to consider to
  improve the accuracy of measurement of internal
  analysis. These include
• Prioritization
• Correcting weaknesses
• Locating weaknesses
• Auditing performance

18
Prioritization

• 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.

19

• 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 companys
  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

20

• 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 firms strategic efforts at keeping or
  gaining a desired competitive position.

21
Correcting Weaknesses

• 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

22
Locating Weaknesses

• 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.

23
Auditing Performance

• 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 companys performance in an area and the
  importance of that area.

24
Performance/Importance Matrix

• High
• Importance
• Low
• Low High
• (weakness) Performance
  (strength)

A. B. Keep up Concentrate the
good here work C. Low D.
Possible Priority overkill
25
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).

26
Strategic Analysis

• Strategic analysis consists of
• determining what factors in the companys
  situational analysis are important
• deciding which of those factors may have the
  greatest impact on the firms 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.
  

27
SWOT Analysis

• 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 companys abilities, the trends
  in the marketplace (customers demands and
  competitors strategies) are especially
  important.

28
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 businesss 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.

29
Strategic Analysis Questioning Sequence Model

• Market position 1. What is the firms 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?

30

• Future alternative strategies 5. What
  alternative or optional strategies should be
  considered?
• Viability of strategic alternatives 6. Are the
  strategic alternatives compatible with the firms
  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?

31
Market Position

• 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.

32
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.

33
General Strategic Option Matrix

• Opportunity Threat
• Strength
• Weakness

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 weakness
es necessary to defend against
the threat
34
Impact/Immediacy Matrix

• High
• Impact
• Low

• 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
• importance sessions

35
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 firms strengths are
  not considered worthwhile, the company can direct
  its effort to fill a niche not currently being
  addressed in the market.

36
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 firms strategies. E.g. plate
  appearance brighter, more colorful.

37

• 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.