Chapter 5
Internal Analysis
Objective: to evaluate how the company is doing to direct its efforts
in the most efficient and effective manner.
Situational Analysis
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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”
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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
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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
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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).
Key Concerns
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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
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Organization and Content
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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 crossfunctional efforts.
Companies develop customized internal audit forms to
grade or measure key performance areas.
Strategic Internal Factors
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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.
Profitability
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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).
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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.
Customer Satisfaction
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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?
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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.
Employee Satisfaction
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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.
Service Gaps
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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.
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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.
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Strength and Weakness Analysis
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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
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Prioritization
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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.
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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
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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.
Correcting Weaknesses
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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 Weaknesses
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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.
Auditing Performance
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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.
Performance/Importance Matrix
High
A.
B. Keep up
Concentrate
the good
here
work
C. Low
D. Possible
Priority
overkill
“Importance”
Low
Low
High
(weakness) “Performance” (strength)
Who will prepare the internal
analysis?
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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
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Strategic analysis consists of;
1. determining what factors in the company’s
2.
3.
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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
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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
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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
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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?
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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?
Market Position
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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
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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
Opportunity
Threat
Depending on
Pursue
the severity
if worthwhile
of the threat,
Strength
use available
abilities to defend
against it
Weakness
Correct if
Depending on the
worthwhile, pursue
severity of the
or select another
threat, correct any
opportunity
weaknesses
necessary to
defend against the
threat
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
High
Low
“Immediacy”
Future Alternative Strategies
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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
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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.
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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.
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