Strategic Mangement Lecture 4

Chapter 4
The Internal Assessment

Strategic Management:
Concepts & Cases
13th Edition
Global Edition
Fred David

Copyright © 2011 Pearson Education Ch 4 -1

Internal Assessment

“Great spirits have always encountered
violent opposition from mediocre minds.”
– Albert Einstein

“Weak leadership can wreck the soundest
strategy.”
– Sun Tzu


Internal Audit
 Identify strengths and weaknesses in
 Management
 Marketing

 Finance and accounting

 Production and operations

 Research and development

 Management information systems


Nature of an Internal Audit

Basis for Objectives & Strategies

 Internal strengths/weaknesses
 External opportunities/threats
 Clear statement of mission


Key Internal Forces

Distinctive Competencies:

Firm’s strengths that cannot be
easily matched or imitated by
competitors


Key Internal Forces

Distinctive Competencies:

Building competitive advantage
involves taking advantage of
distinctive competencies


Internal Audit Process
Parallels process of external audit

Information gathered from:
 Management
 Marketing
 Finance/accounting
 Production/operations
 Research & development
 Management information systems

Internal Audit

Involvement in performing an
internal strategic-management audit
provides a vehicle for understanding
the nature and effect of decisions in
other functional business areas of
the firm


Internal Audit

Managers and employees from
all areas provide information
A team of managers then selects
10 to 15 key organizational
strengths and weaknesses to
focus on

Internal Audit

Financial Ratio Analysis

Exemplifies complexity of
relationships among functional areas
of the business


Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more
important than external factors



Three All-Encompassing Categories

1. Physical resources
2. Human resources
3. Organizational resources



Empirical Indicators

 Rare
 Hard to imitate
 Not easily substitutable


Integrating Strategy & Culture

Organizational 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 as the correct
way to perceive, think, and feel



Organizational Culture

 Resistant to change
 May represent:
 Strength
 Weakness



Values

Legends Beliefs

Cultural
Heroes Rites
Products

Symbols Rituals
Myths



Organizational Culture Can Inhibit
Strategic Management

 Miss external changes due to
strongly held beliefs
 Natural tendency to “hold the
course” even during times of
strategic change

Management

Functions of Management

1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling

Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation


Management

Planning

 Beginning of management process
 Bridge between present & future
 Improves likelihood of attaining desired
results


Management

Developing a mission

Forecasting future events
and trends
Planning
Establishing objectives

Choosing strategies to
pursue


Planning

 Synergy

 Can develop through planning
 Exists when everyone pulls

together as a team that knows
what it wants to achieve


Management
Organizing

 Achieves coordinated effort
 Defines task & authority relationships
 Determines who does what
 Determines who reports to whom


Management

 Organizing

 Breaking down tasks into jobs
 Combining jobs to form

departments
 Delegating authority


Management
Motivating
 Influencing to accomplish specific objectives
 Four components include:
 Leadership
 Group dynamics
 Communication
 Organizational change

Management

Staffing

 Personnel management
 Human resource management


Management
Staffing
 Recruiting  Evaluating
 Interviewing  Rewarding
 Testing  Disciplining
 Selecting  Promoting
 Orienting  Transferring
 Training  Demoting
 Developing  Dismissing
 Caring for

Management

Controlling

 Establishing performance standards
 Ensure actual operations conform to
planned operations
 Taking corrective actions


Management
Controlling

1. Establish performance standards

2. Measure individual and organizational
performance
3. Compare actual performance to
planned performance standards
4. Take corrective action

Management Audit Checklist

 Does the firm use strategic
management concepts?
 Are objectives/goals measurable? Well
communicated?
 Do managers at all levels plan
effectively?



 Do managers delegate well?
 Is the organization’s structure
appropriate?
 Are job descriptions clear?
 Are job specifications clear?
 Is employee morale high?



 Is employee absenteeism low?
 Is employee turnover low?
 Are the reward mechanisms effective?
 Are the organization’s control
mechanisms effective?


Marketing

Customer Needs or Wants for Products
and Services

1. Defining

2. Anticipating

3. Creating

4. Fulfilling


Marketing
Marketing Functions

1. Customer analysis

2. Selling products/services

3. Product & service planning

4. Pricing

5. Distribution

6. Marketing research

7. Opportunity analysis


Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies


Marketing

Advertising
Sales Promotion
Publicity
Selling
Products/Services Personal Selling
Sales force management
Customer relations
Dealer relations


Marketing

Test marketing
Brand positioning
Devising warranties
Packaging
Product/Service Product features/options
Planning Product style
Quality
Deleting old products
Providing for customer
service


Marketing

Consumers
Governments
Pricing
Suppliers
Major Stakeholders Distributors
Competitors


Marketing

Warehousing
Distribution channels
Retail site locations
Distribution Sales territories
Inventory levels
Transportation
Wholesaling
Retailing


Marketing

Gather data

Marketing Research Record data

Analyze data


Marketing

Assessing costs

Cost/Benefit Assessing benefits
Analysis

Assessing risks


Marketing Audit
1. Are markets segmented effectively?

2. Is the organization positioned well among
competitors?
3. Has the firm’s market share been
increasing?
4. Are the distribution channels reliable &
cost effective?
5. Is the sales force effective?


Marketing Audit

6. Does the firm conduct market research?

7. Are product quality & customer service
good?
8. Are the firm’s products and services
priced appropriately?
9. Does the firm have effective promotion,
advertising, and publicity strategies?


Marketing Audit

10. Are the marketing, planning, and
budgeting effective?
11. Do the firm’s marketing managers have
adequate experience and training?
12. Is the firm’s Internet presence excellent
as compared to rivals?


Finance/Accounting

1. Investment decision (Capital
budgeting)
2. Financing decision

3. Dividend decision


Basic Financial Ratios

Firm’s ability to meet its
short-term obligations

Liquidity Ratios
Ratios

Current ratio
Quick (or acid test) ratio



Extent of debt financing

Ratios
Leverage Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest-earned



Effective use of firm’s
resources

Ratios
Activity Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period



Effectiveness shown by
returns on sales and
investment

Profitability Ratios Ratios

Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)



Effectiveness shown by
returns on sales &
investment

Profitability Ratios Ratios
(cont’d)
Return on stockholders’
equity (ROE)
Earnings per share
Price-earnings ratio



Firm’s ability to
maintain economic
position

Ratios
Growth Ratios
Sales
Net Income
Earnings per share
Dividends per share


Growth Ratios

Ratio Annual percentage
growth in
 Sales  Total sales

 Net Income  Profits

 Earnings per share  EPS

 Dividends per share  Dividends per share


Finance/Accounting Audit

1. Where is the firm financially strong/weak as
indicated by financial ratio analysis?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital
through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?


Finance/Accounting Audit

6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its
investors and stockholders?
8. Are the firm’s financial managers
experienced and well trained?
9. Is the firm’s debt situation excellent?


Production/Operations

Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality


Production/Operations Audit

•Are suppliers of materials, parts, etc.
reliable and reasonable?
•Are facilities, equipment, machinery, and
offices in good condition?
•Are inventory-control policies and
procedures effective?


Production/Operations Audit

•Are quality-control policies & procedures
effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?


Research & Development

Research & Development Functions
 Development of new products before
competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs
 These functions can be done internally or
externally

Research & Development
Financing as many
projects as possible

Use percent-of-sales
method
R&D Budgets
Budgeting relative to
competitors

How many successful
new products are
needed


Research & Development Audit

•Are the R&D facilities adequate?
•If R&D is outsourced, is it cost-effective?
•Are the R&D personnel well qualified?
•Are R&D resources allocated effectively?


Research & Development Audit

•Are MIS and computer systems
adequate?
•Is communication between R&D and
other organizational units effective?
•Are present products technologically
competitive?


Management Information Systems

Purpose

 Improve performance of an
enterprise by improving the quality
of managerial decisions


Audit
 Do all managers use the information system
to make decisions?
 Is there a CIO or Director of Information
Systems position in the firm?
 Are data updated regularly?
 Do managers from all functional areas
contribute input to the information system?
 Are there effective passwords for entry into
the firm’s information system?


Audit
 Are strategists of the firm familiar with the
information systems of rival firms?
 Is the information system user-friendly?
 Do all users understand the competitive
advantages that information can provide?
 Are computer training workshops provided for
users?
 Is the firm’s system being improved?


Value Chain Analysis

 The process whereby a firm determines
the costs associated with:
 Purchasing raw materials
 Manufacturing products
 Marketing products
 And compares them to the value chain
of rival firms


Value Chain Analysis

 Core competencies

 Distinctive competencies

 Benchmarking


Transforming Value Chain Activities into Sustained
Competitive Advantage

Value Some
Chain Some Core Distinctive
Core
Activities Competencies Competencie
Competencies
Are Evolve into s Yield
Arise in Some
Identified Distinctive Sustained
Activities
and Competencies Competitive
Assessed Advantages


Internal Factor Evaluation (IFE) Matrix

1. List key internal factors
2. Assign a weight ranging from 0.0 to 1.0
3. Assign a 1 to 4 rating to each factor
4. Multiply the weight times the rating
5. Sum the weighted scores


GROUP EXERCISE

 Learning Exercise 4A p160


FOR NEXT WEEK

• Readings 7 & 8 Strategic Management Supplement for
Southern Africa
• Assurance of Learning exercise 4B – Group exercise
• Read Business Report, www.busrep.co.za
• Read CNBC, www.cnbc.com


Strategic Mangement Lecture 4

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