The Internal Assessment


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The Internal Assessment

  1. 1. Chapter 4 The Internal Assessment <ul><li>Strategic Management: Concepts & Cases </li></ul><ul><li>10 th Edition </li></ul><ul><li>Fred David PowerPoint Slides by </li></ul><ul><li>Anthony F. Chelte </li></ul><ul><li>Western New England College </li></ul>
  2. 2. Chapter Outline The Nature of an Internal Audit The Resource-Based View (RBV) Integrating Strategy & Culture
  3. 3. Chapter Outline ( cont’d ) Management Marketing Opportunity Analysis
  4. 4. Chapter Outline ( cont’d ) Finance/Accounting Production/Operations Research & Development
  5. 5. Chapter Outline ( cont’d ) Management Information Systems The Internal Factor Evaluation (IFE) Matrix
  6. 6. <ul><li>The biggest levers you’ve got to change a company are strategy, structure, and culture. If I could pick two, I’d pick strategy and culture. – Wayne Leonard, CEO, Entergy </li></ul>Internal Assessment Weak leadership can wreck the soundest strategy. – Sun Zi
  7. 7. <ul><li>-- Strengths </li></ul><ul><li>-- Weaknesses </li></ul>The Nature of an Internal Audit Functional Areas of Business
  8. 8. <ul><li>Internal strengths/weaknesses </li></ul><ul><li>External opportunities/threats </li></ul><ul><li>Clear statement of mission </li></ul>Nature of an Internal Audit Basis for Objectives & Strategies
  9. 9. Key Internal Forces Functional Business Areas: <ul><li>Vary by organization </li></ul><ul><li>Divisions have differing strengths & weaknesses </li></ul>
  10. 10. Key Internal Forces Distinctive Competencies: <ul><li>Firm’s strengths that cannot be easily matched or imitated by competitors </li></ul>
  11. 11. Key Internal Forces Distinctive Competencies: <ul><li>Building competitive advantage involves taking advantage of distinctive competencies </li></ul>
  12. 12. Key Internal Forces Distinctive Competencies: <ul><li>Strategies designed to improve on a firm’s weaknesses and turn to strengths </li></ul>
  13. 13. Internal Audit <ul><li>Information from: </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Marketing </li></ul></ul><ul><ul><li>Finance/accounting </li></ul></ul><ul><ul><li>Production/operations </li></ul></ul><ul><ul><li>Research & Development </li></ul></ul><ul><ul><li>Management information Systems </li></ul></ul>Parallels process of external audit
  14. 14. Internal Audit Involvement in performing an internal strategic-management audit provides vehicle for understanding nature and effect of decisions in other functional business areas of the firm
  15. 15. Internal Audit Coordination & understanding among managers from all functional areas Key to Organizational Success
  16. 16. Internal Audit Number and complexity increases relative to organization size Functional Relationships
  17. 17. Internal Audit Exemplifies complexity of relationships among functional areas of the business Financial Ratio Analysis
  18. 18. Resource Based View (RBV) Approach to Competitive Advantage Internal resources are more important than external factors
  19. 19. Resource Based View (RBV) 3 All Encompassing Categories <ul><li>Physical resources </li></ul><ul><li>Human resources </li></ul><ul><li>Organizational resources </li></ul>
  20. 20. Resource Based View (RBV) Empirical Indicators <ul><li>Rare </li></ul><ul><li>Hard to imitate </li></ul><ul><li>Not easily substitutable </li></ul>
  21. 21. Integrating Strategy & Culture Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integration…is considered valid and taught to new members Organizational Culture
  22. 22. Integrating Strategy & Culture Organizational Culture <ul><li>Resistant to change </li></ul><ul><li>May represent </li></ul><ul><ul><li>Strength </li></ul></ul><ul><ul><li>Weakness </li></ul></ul>
  23. 23. Cultural Products Values Legends Beliefs Heroes Rites Symbols Rituals Myths Integrating Strategy & Culture
  24. 24. Integrating Strategy & Culture Organizational Culture Can Inhibit Strategic Management <ul><li>Miss external changes due to strongly held beliefs </li></ul><ul><li>Natural tendency to “hold the course” even during times of strategic change </li></ul>
  25. 25. Management Functions of Management <ul><li>Planning </li></ul><ul><li>Organizing </li></ul><ul><li>Motivating </li></ul><ul><li>Staffing </li></ul><ul><li>Controlling </li></ul>
  26. 26. Management Planning Stage When Most Important Function Strategy Formulation Organizing Strategy Implementation Motivating Strategy Implementation Staffing Controlling Strategy Implementation Strategy Evaluation
  27. 27. Management Planning <ul><li>Beginning of management process </li></ul><ul><li>Bridge between present & future </li></ul><ul><li>Improves likelihood of attaining desired results </li></ul>
  28. 28. Planning Forecasting Establishing objectives Devising strategies Developing policies Setting goals Management
  29. 29. Management Organizing <ul><li>Achieves coordinated effort </li></ul><ul><li>Defines task & authority relationships </li></ul><ul><li>Departmentalization </li></ul><ul><li>Delegation of authority </li></ul>
  30. 30. Organizing Organizational design Job specialization Job descriptions Job specifications Span of control Unity of command Coordination Job design Job analysis Management
  31. 31. Management Motivating <ul><li>Influencing to accomplish specific objectives </li></ul><ul><li>Communication – major component </li></ul>
  32. 32. Motivating Leadership Communication Work groups Job enrichment Job satisfaction Needs fulfillment Organizational change Morale Management
  33. 33. Management Staffing <ul><li>Personnel management </li></ul><ul><li>Human resources management </li></ul>
  34. 34. Staffing Wage & salary admin. Employee benefits Interviewing Hiring Discharging Training Management development Affirmative Action EEO Labor relations Management
  35. 35. Management Controlling <ul><li>Establishing performance standards </li></ul><ul><li>Ensure actual operations conform to planned operations </li></ul><ul><li>Taking corrective actions </li></ul>
  36. 36. Controlling Quality Financial Sales Inventory Expense Analysis of variance Rewards Sanctions Management
  37. 37. Management Audit Checklist <ul><li>Does the firm use strategic management concepts? </li></ul><ul><li>Are objectives/goals measurable? Well communicated? </li></ul><ul><li>Do managers at all levels plan effectively? </li></ul>
  38. 38. Management Audit Checklist <ul><li>Do managers delegate well? </li></ul><ul><li>Is the organization’s structure appropriate? </li></ul><ul><li>Are job descriptions clear? </li></ul><ul><li>Are job specifications clear? </li></ul><ul><li>Is employee morale high? </li></ul>
  39. 39. Management Audit Checklist <ul><li>Is employee absenteeism low? </li></ul><ul><li>Is employee turnover low? </li></ul><ul><li>Are the reward mechanisms effective? </li></ul><ul><li>Are the organization’s control mechanisms effective? </li></ul>
  40. 40. Marketing Customer Needs/Wants for Products/Services <ul><li>Defining </li></ul><ul><li>Anticipating </li></ul><ul><li>Creating </li></ul><ul><li>Fulfilling </li></ul>
  41. 41. Marketing Marketing Functions <ul><li>Customer analysis </li></ul><ul><li>Selling products/services </li></ul><ul><li>Product & service planning </li></ul><ul><li>Pricing </li></ul><ul><li>Distribution </li></ul><ul><li>Marketing research </li></ul><ul><li>Opportunity analysis </li></ul>
  42. 42. Customer Analysis Customer surveys Consumer information Market positioning strategies Customer profiles Market segmentation strategies Marketing
  43. 43. Advertising Sales Promotion Publicity Sales force management Customer relations Dealer relations Marketing Selling Products/Services
  44. 44. Test marketing Brand positioning Devising warrantees Packaging Product features/options Product style Quality Marketing Planning Product/Service
  45. 45. Forward integration Discounts Credit terms Condition of sale Markups Costs Unit pricing Marketing Pricing
  46. 46. Warehousing Channels Coverage Retail site locations Sales territories Inventory levels Transportation Marketing Distribution
  47. 47. Data collection Data input Data analysis Support business functions Marketing Marketing Research
  48. 48. Assessing costs Assessing benefits Assessing risks Cost/benefit/risk analysis Marketing Opportunity Analysis
  49. 49. Marketing Opportunity Analysis <ul><li>Are markets segmented effectively? </li></ul><ul><li>Is the organization positioned well among competitors? </li></ul><ul><li>Has the firm’s market share been increasing? </li></ul><ul><li>Are the distribution channels reliable & cost effective? </li></ul><ul><li>Is the sales force effective? </li></ul>
  50. 50. Marketing Opportunity Analysis <ul><li>Does the firm conduct market research? </li></ul><ul><li>Are product quality & customer service good? </li></ul><ul><li>Are the firm’s products/services priced appropriately? </li></ul><ul><li>Does the firm have effective promotion, advertising, & publicity strategies? </li></ul>
  51. 51. Marketing Opportunity Analysis <ul><li>Are the marketing planning & budgeting effective? </li></ul><ul><li>Do the firm’s marketing managers have adequate experience and training? </li></ul>
  52. 52. Finance/Accounting <ul><li>Determining financial strengths & weaknesses key to strategy formation </li></ul>
  53. 53. Finance/Accounting Finance/Accounting Functions <ul><li>Investment decision (Capital budgeting) </li></ul><ul><li>Financing decision </li></ul><ul><li>Dividend decision </li></ul>
  54. 54. Firm’s ability to meet its short-term obligations Ratios Current ratio Quick (or acid test) ratio Basic Financial Ratios Liquidity Ratios
  55. 55. Extent of debt financing Ratios Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest earned Basic Financial Ratios Leverage Ratios
  56. 56. Effective use of firm’s resources Ratios Inventory-turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period Basic Financial Ratios Activity Ratios
  57. 57. Effectiveness shown by returns on sales & investment Ratios Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Basic Financial Ratios Profitability Ratios
  58. 58. Effectiveness shown by returns on sales & investment Ratios Return on stockholders equity (ROE) Earnings per share Price-earnings ratio Basic Financial Ratios Profitability Ratios (cont’d)
  59. 59. Firm’s ability to maintain economic position Ratios Sales Net income Earnings per share Dividends per share Basic Financial Ratios Growth Ratios
  60. 60. Finance/Accounting Audit <ul><li>Where is the firm strong/weak indicated by financial ratio analysis? </li></ul><ul><li>Can the firm raise short-term capital as needed? </li></ul><ul><li>Can the firm raise long-term capital as needed through debt and/or equity? </li></ul>
  61. 61. Finance/Accounting Audit <ul><li>Does the firm have sufficient working capital? </li></ul><ul><li>Are capital budgeting procedures effective? </li></ul><ul><li>Are dividend payout policies reasonable? </li></ul><ul><li>Are the firm’s financial managers experienced & well trained? </li></ul>
  62. 62. Production/Operations Production/Operations Functions <ul><li>Process </li></ul><ul><li>Capacity </li></ul><ul><li>Inventory </li></ul><ul><li>Workforce </li></ul><ul><li>Quality </li></ul>
  63. 63. Facility design Technology selection Facility layout Process flow analysis Facility location Line balancing Process control Production/Operations Process
  64. 64. Forecasting Facilities planning Aggregate planning Scheduling Capacity planning Queuing analysis Production/Operations Capacity
  65. 65. Raw materials Work in process Finished goods Materials handling Production/Operations Inventory
  66. 66. Job design Work measurement Job enrichment Work standards Motivation techniques Production/Operations Workforce
  67. 67. Quality control Sampling Testing Quality assurance Cost Control Production/Operations Quality
  68. 68. Production/Operations Audit <ul><li>Are suppliers of materials, parts, etc. reliable and reasonable? </li></ul><ul><li>Are facilities, equipment & machinery in good condition? </li></ul><ul><li>Are inventory-control policies and procedures effective? </li></ul>
  69. 69. Production/Operations Audit <ul><li>Are quality-control policies & procedures effective? </li></ul><ul><li>Are facilities, resources, and markets strategically located? </li></ul><ul><li>Does the firm have technological competencies? </li></ul>
  70. 70. Research & Development Research & Development Functions <ul><li>Development of new products before competitors </li></ul><ul><li>Improving product quality </li></ul><ul><li>Improving manufacturing processes to reduce costs </li></ul>
  71. 71. Financing as many projects as possible use percent-of-sales method Budgeting relative to competitors How many successful new products are needed Research & Development R&D Budgets
  72. 72. Research & Development Audit <ul><li>Are the R&D facilities adequate? </li></ul><ul><li>If R&D is outsourced, is it cost effective? </li></ul><ul><li>Are the R&D personnel well qualified? </li></ul><ul><li>Are R&D resources allocated effectively? </li></ul>
  73. 73. Research & Development Audit <ul><li>Are MIS and computer systems adequate? </li></ul><ul><li>Is communication between R&D & other organizational units effective? </li></ul><ul><li>Are present products technologically competitive? </li></ul>
  74. 74. Management Information Systems Purpose <ul><li>Improve performance of an enterprise by improving the quality of managerial decisions. </li></ul>
  75. 75. <ul><li>Information Systems </li></ul><ul><li>CIO/CTO </li></ul><ul><li>Security </li></ul><ul><li>User-friendly </li></ul><ul><li>E-commerce </li></ul>Management Information Systems
  76. 76. Management Information Systems Audit <ul><li>Do managers use the information system to make decisions? </li></ul><ul><li>Is there a CIO or Director of information systems position in the firm? </li></ul><ul><li>Is data updated regularly? </li></ul>
  77. 77. Management Information Systems Audit <ul><li>Do managers from all functional areas contribute input to the information system? </li></ul><ul><li>Are there effective passwords for entry into the firm’s information system? </li></ul><ul><li>Are strategists of the firm familiar with the information systems of rival firms? </li></ul>
  78. 78. Management Information Systems Audit <ul><li>Is the information system user-friendly? </li></ul><ul><li>Do all users understand the competitive advantages that information can provide? </li></ul><ul><li>Are computer training workshops provided for users? </li></ul><ul><li>Is the firm’s system being improved? </li></ul>
  79. 79. 0.15 3 0.05 5. As a direct seller, Gateway holds high brand recognition 0.40 4 0.10 4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1 0.15 3 0.05 3. Well-known brand name 0.15 3 0.05 2. Continuous decline in operating costs and cost of goods sold 0.40 4 0.05 1. Several new senior executive with world-class skills and leadership experience Strengths Wtd Score Rating Weight Key Internal Factors IFE– Gateway Computers (2003)
  80. 80. 0.15 3 0.05 9. Gateway retails stores excellent 0.20 4 0.05 8. Economies of scale, the 6 th largest PC maker I the world 0.20 4 0.05 7. Good relationship with its suppliers. 0.30 3 0.10 6. Gateway is diversifying into non-PC products Strengths (cont’d) Wtd Score Rating Weight Key Internal Factors IFE– Gateway Computers (2003)
  81. 81. 0.05 2 0.025 4. No niche market 0.10 1 0.025 3. Low return on assets ratio 0.05 1 0.10 2. Almost no budget for R&D vs. Dell’s 18% of revenue 0.15 3 0.05 1. High operating expense (22% of revenue vs. 10% for Dell) Weaknesses Wtd Score Rating Weight Key Internal Factors IFE– Gateway Computers (2003)
  82. 82. 2.85 1.00 TOTAL 0.20 2 0.10 7. Weak performance in overseas market 0.10 2 0.05 6. Limited number Gateway stores 0.20 2 0.10 5. Shortage of cash due to successive losses Weaknesses (cont’d) Wtd Score Rating Weight Key Internal Factors IFE– Gateway Computers (2003)
  83. 83. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 4) Activity Ratios Cost/Benefit Analysis Capital Budgeting Cultural Products Communication Distinctive Competencies Controlling Distribution
  84. 84. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 4) Dividend Decision Functions of Finance/Accounting Empirical Indicators Functions of Management Financial Ratio Analysis Functions of Marketing Financing Decision Functions of Production/ Operations
  85. 85. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 4) Growth Ratios Investment Decision Human Resource Management Leverage Ratios Internal Audit Liquidity Ratios Internal Factor Evaluation (IFE) Matrix Management Information Systems
  86. 86. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 4) Motivating Personnel Management Opportunity Analysis Planning Organizational Culture Pricing Organizing Product & Service Planning
  87. 87. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 4) Production/Operations Functions Selling Profitability Ratios Staffing Research & Development Synergy Resource Based View (RBV) Test Marketing
  88. 88. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 4) Value Chain Analysis (VCA)