Chapter 4 The Internal Assessment Strategic Management: Concepts & Cases 13th Edition Fred David Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal Assessment – Sun Tzu “Great spirits have always encountered violent opposition from mediocre minds.” – Albert Einstein “Weak leadership can wreck the soundest strategy.” – Sun Tzu Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Identify strengths and weaknesses in Internal Audit Identify strengths and weaknesses in Management Marketing Finance and accounting Production and operations Research and development Management information systems Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal strengths/weaknesses External opportunities/threats Nature of an Internal Audit Basis for Objectives & Strategies Internal strengths/weaknesses External opportunities/threats Clear statement of mission Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Key Internal Forces Distinctive Competencies: Firm’s strengths that cannot be easily matched or imitated by competitors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Key Internal Forces Distinctive Competencies: Building competitive advantage involves taking advantage of distinctive competencies Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Information gathered from: Internal Audit Process Parallels process of external audit Information gathered from: Management Marketing Finance/accounting Production/operations Research & development Management information systems Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Managers and employees from all areas provide information 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal Audit Financial Ratio Analysis Exemplifies complexity of relationships among functional areas of the business Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal resources are more important than external factors Resource Based View (RBV) Approach to Competitive Advantage Internal resources are more important than external factors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Resource Based View (RBV) Three All-Encompassing Categories Physical resources Human resources Organizational resources Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Not easily substitutable Resource Based View (RBV) Empirical Indicators Rare Hard to imitate Not easily substitutable Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Integrating Strategy & Culture Organizational Culture Resistant to change May represent: Strength Weakness Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Integrating Strategy & Culture Values Beliefs Legends Heroes Rites Cultural Products Symbols Rituals Myths Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Integrating Strategy & Culture 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Functions of Management Planning Organizing Motivating Staffing Controlling Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage When Most Important Management Stage When Most Important Function Planning Strategy Formulation Organizing Strategy Implementation Motivating Strategy Implementation Staffing Strategy Implementation Controlling Strategy Evaluation Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Planning Beginning of management process Bridge between present & future Improves likelihood of attaining desired results Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Developing a mission Forecasting future events and trends Establishing objectives Choosing strategies to pursue Planning Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Planning Synergy Can develop through planning Exists when everyone pulls together as a team that knows what it wants to achieve Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Organizing Achieves coordinated effort Defines task & authority relationships Determines who does what Determines who reports to whom Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Organizing Breaking down tasks into jobs Combining jobs to form departments Delegating authority Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Motivating Influencing to accomplish specific objectives Four components include: Leadership Group dynamics Communication Organizational change Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Human resource management Staffing Personnel management Human resource management Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Staffing Recruiting Interviewing Testing Selecting Orienting Training Developing Caring for Evaluating Rewarding Disciplining Promoting Transferring Demoting Dismissing Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Controlling Establishing performance standards Ensure actual operations conform to planned operations Taking corrective actions Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Controlling Establish performance standards Measure individual and organizational performance Compare actual performance to planned performance standards Take corrective action Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Audit Checklist Does the firm use strategic management concepts? Are objectives/goals measurable? Well communicated? Do managers at all levels plan effectively? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Audit Checklist Do managers delegate well? Is the organization’s structure appropriate? Are job descriptions clear? Are job specifications clear? Is employee morale high? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Audit Checklist Is employee absenteeism low? Is employee turnover low? Are the reward mechanisms effective? Are the organization’s control mechanisms effective? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Customer Needs or Wants for Products and Services Defining Anticipating Creating Fulfilling Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Marketing Functions Customer analysis Selling products/services Product & service planning Pricing Distribution Marketing research Opportunity analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Customer surveys Consumer information Market positioning strategies Customer profiles Market segmentation strategies Customer Analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Selling Products/Services Marketing Advertising Sales Promotion Publicity Personal Selling Sales force management Customer relations Dealer relations Selling Products/Services Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Product/Service Planning Marketing Test marketing Brand positioning Devising warranties Packaging Product features/options Product style Quality Deleting old products Providing for customer service Product/Service Planning Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Consumers Governments Suppliers Distributors Competitors Pricing Major Stakeholders Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Warehousing Distribution channels Retail site locations Sales territories Inventory levels Transportation Wholesaling Retailing Distribution Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Gather data Record data Analyze data Marketing Research Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Cost/Benefit Analysis Marketing Assessing costs Assessing benefits Assessing risks Cost/Benefit Analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Audit Are markets segmented effectively? Is the organization positioned well among competitors? Has the firm’s market share been increasing? Are the distribution channels reliable & cost effective? Is the sales force effective? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Audit Does the firm conduct market research? Are product quality & customer service good? Are the firm’s products and services priced appropriately? Does the firm have effective promotion, advertising, and publicity strategies? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Audit Are the marketing, planning, and budgeting effective? Do the firm’s marketing managers have adequate experience and training? Is the firm’s Internet presence excellent as compared to rivals? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Investment decision (Capital budgeting) Financing decision Finance/Accounting Investment decision (Capital budgeting) Financing decision Dividend decision Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Firm’s ability to meet its short-term obligations Ratios Current ratio Quick (or acid test) ratio Liquidity Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Extent of debt financing Ratios Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest-earned Leverage Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Effective use of firm’s resources Ratios Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period Activity Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Effectiveness shown by returns on sales and investment Basic Financial Ratios Effectiveness shown by returns on sales and investment Ratios Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Profitability Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Effectiveness shown by returns on sales & investment Ratios Return on stockholders’ equity (ROE) Earnings per share Price-earnings ratio Profitability Ratios (cont’d) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Firm’s ability to maintain economic position Basic Financial Ratios Firm’s ability to maintain economic position Ratios Sales Net Income Earnings per share Dividends per share Growth Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Growth Ratios Ratio Sales Net Income Earnings per share Dividends per share Annual percentage growth in Total sales Profits EPS Dividends per share Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Figure 4-3 page 109 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Breakeven point = quantity of units that a firm must sell in order for total revenues to equal total costs Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Finance/Accounting Audit Where is the firm financially strong/weak as indicated by financial ratio analysis? Can the firm raise needed short-term capital? Can the firm raise needed long-term capital through debt and/or equity? Does the firm have sufficient working capital? Are capital budgeting procedures effective? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Finance/Accounting Audit Are dividend payout policies reasonable? Does the firm have good relations with its investors and stockholders? Are the firm’s financial managers experienced and well trained? Is the firm’s debt situation excellent? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Production/Operations Functions Process Capacity Inventory Workforce Quality Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Audit Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Financing as many projects as possible Use percent-of-sales method Budgeting relative to competitors How many successful new products are needed R&D Budgets Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Audit Are MIS and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems Purpose Improve performance of an enterprise by improving the quality of managerial decisions Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems 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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems 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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Value Chain Analysis Core competencies Distinctive competencies Benchmarking Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Transforming Value Chain Activities into Sustained Competitive Advantage Value Chain Activities Are Identified and Assessed Core Competencies Arise in Some Activities Some Core Competencies Evolve into Distinctive Competencies Some Distinctive Competencies Yield Sustained Competitive Advantages Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal Factor Evaluation (IFE) Matrix List key internal factors Assign a weight ranging from 0.0 to 1.0 Assign a 1 to 4 rating to each factor Multiply the weight times the rating Sum the weighted scores Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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