Assessment of Organization’s Internal Strength and Weakness Session 4 15 October 2011 Civil Service College Dhaka Presentation by Dr. Muhammad G. Sarwar Cell:

Strategic Management: course outline Sl. No. Topic Title Session no. 1Strategic Management: an overview 1 2Strategy Formulation  Designing Vision and Mission Statements1 External Assessment1 Internal Assessment1 Setting Objectives and Strategic Options1 Strategy Analysis and Choice1 3Strategy Execution 1 4Strategy Evaluation 1 5Limitations of Strategic Management: why strategy may fail ? 1 2

Presentation Contents of 3 rd Session Defining External Environment / Audit of an Organization Nature of External Audit Major External Forces Process of Performing External Audit Competitive Analysis: Porter’s FF (Five Forces) Model Industry Analysis: EFE (External Factor Evaluation) Matrix CP (Competitive Profile) Matrix 3

Stages of Strategic Management Strategic Management process consists of 3 stages: 1. Strategy formulation, 2. Strategy implementation, and 3. Strategy evaluation. 4

Strategy formulation Strategy formulation includes: Developing a vision and mission statements Identifying organization’s external opportunities and threats Indentifying internal strengths and weaknesses Establishing long-term objectives Generating alternative strategies Analyzing alternative strategies and choosing particular strategy. 5

Presentation Contents of 4th Session Defining Organization’s Internal Audit Key Functional Areas Process of Performing Internal Audit Resource-Based View (RBV) Analyzing Six Functional Areas- ◦ Management ◦ Marketing ◦ Finance/Accounting ◦ Production/Operation ◦ R&D (Research and Development) ◦ MIS (Management Information System) ◦ SWOT Analysis ◦ Value Chain Analysis (VCA) and Benchmarking ◦ IFE (Internal Factor Evaluation) Matrix ◦ 6

Internal Strategic Management Audit Internal Strategic Management Audit focuses on identifying and evaluating strength and weakness in functional areas of an organization like management, marketing, finance /accounting, production/operation, R&D, MIS, etc. Internal strength/weakness, coupled with external opportunities/threats and a clear vision/mission statements provide the basis for setting organization’s objectives and strategies. 7

Key Functional Areas of an Organization Six Core Areas ◦ Management ◦ Marketing ◦ Finance /accounting ◦ Production/operation ◦ R&D (Research and Development) ◦ MIS (Management Information System ◦ Sub-areas, say under Marketing  Customer Service  Advertising  Warranties,  Packaging  Pricing 8

Process of Performing Internal Audit Internal audit process is similar to External audit in terms of involving as many managers and employees as possible to make it participatory. Performing an Internal audit requires gathering, assimilating, and evaluating information about the organization's operation. Internal audit process is a highly interactive process that require effective communication / coordination among the functional areas of the organization. 9

Resource-Based View (RBV) RBV is a popular approach for Internal audit for an organization. RBV is a competitive advantage analysis of an organization that contends that internal resources are more important for an organization than external factors in achieving and sustaining competitive advantage. Internal resources are grouped as: ◦ Physical resources ◦ Human resources, and ◦ Organizational resources. 10

Resource-Based View (RBV) contd. RBV theory asserts that for a long term competitive advantage, character of resources should be: ◦ Rare, ◦ Hard to imitate, and ◦ Not easily substitutable. Organization having more the above types of resource, more would be its competitive advantage. 11

Analyzing Functional Areas: Management Management consists of 5 basic activities: ◦ Planning for achieving set objectives ◦ Organizing resources to achieve set objectives ◦ Motivating employees to work hard towards achieving organizational objectives ◦ Staffing properly HR to achieve objectives ◦ Controlling operations towards attaining set objectives 12

Analyzing Functional Areas: Marketing Marketing is a process of defining, anticipating, creating and fulfilling customers’ needs / wants for products and services. Seven basic activities of Marketing are: ◦ Customer analysis ◦ Selling products / services ◦ Product / service planning ◦ Pricing ◦ Distribution ◦ Marketing research, and ◦ Opportunity analysis. 13

Analyzing Functional Areas: Finance /Accounting Functions of Financing / Accounting comprise making 3 decisions for an organization: ◦ Investment decision, ◦ Financing decision, and ◦ Dividend decision. 14

Analyzing Functional Areas: Finance /Accounting (contd.) 5 types of financial ratios: Liquidity Ratios ◦ Current Ratio = Current assets / Current liabilities ◦ Quick Ratio = Current assets – inventory / Current liabilities ◦ Leverage Ratios  Debt to Total Asset Ratio = Total debt / Total assets  Debt to Equity Ratio = Total debt / Total stockholders’ equity  Long term Debt to Equity ratio = Long term debt / Total stockholders’ equity  Times Interest Earned ratio = Profit before interest and taxes / Total interest charges 15

Analyzing Functional Areas: Finance /Accounting (contd.) Activity Ratios ◦ Inventory Turnover = Sales / Inventory of finished goods ◦ Fixed Assets Turnover = Sales / Fixed Assets ◦ Total Assets Turnover = Sales / Total assets ◦ Account Receivable Turnover = Annual credit sales / account receivable ◦ Average Collection Period = Account Receivable / Total credit sales / 365 days 16

Analyzing Functional Areas: Finance /Accounting (contd.) Profitability Ratios ◦ Gross Profit Margin = Sales – Cost of goods sold / Sales ◦ Operating Profit Margin = Earnings before interest and taxes / sales ◦ Net Profit Margin = Net Income / Sales ◦ Return to Total Assets = Net Income / Total assets ◦ Return on stockholders’ Equity = Net Income / Total stockholders’ equity ◦ Earning Per Share = Net Income / No of shares of common stock outstanding ◦ Price Earning Ratio = Market price per share / Earning per share 17

Analyzing Functional Areas: Finance /Accounting (contd.) Growth Ratios ◦ Annual 5 growth in total sales ◦ Annual % growth in profit ◦ Annual % growth in EPS ◦ Annual 5 growth in dividends per share Financial Ratio analysis in 3 Fronts:  Trend analysis of financial ratios over time  Comparison of financial ratios with Industrial average  Comparison of financial ratios with key competitors. 18

Analyzing Functional Areas: Production / Operations Basic Functions of Production Management: Process: Designing physical production system like production location, choice of technology, production layout, flow analysis, process control, transportation. Capacity: Determining optimum output level including facilities planning, forecasting, scheduling, queuing analysis. Inventory: Managing the level of raw materials, work in progress and finished goods. Workforce: Managing human resources including job design, work management, job enrichment, motivation, etc. Quality: Ensuring high quality production through quality control, sampling, testing, etc 19

Analyzing Functional Areas: R&D R&D investment leads to competitive advantage by developing superior product / service. R&D can take two basic forms – ◦ Internal R&D ◦ Contract R&D ◦ R&D budgeting –  percentage of sales method  similar to competitors’ R&D budget  estimating the required R&D budget. 20

Analyzing Functional Areas: MIS MIS ties organization’s all functions together and provides the basis of all strategic management. An effective MIS utilizes computer hardware, software, models for analysis and database. CheckMATE is a popular strategic planning software that is used SPACE (Strategic Position and Action Evaluation) analysis, SWOT (Strengths-Weaknesses-Opportunities – Threats) analysis, IE (Internal-External) analysis, GSM (Grand Strategy Matrix) analysis. 21

SWOT Analysis Resource Strengths Threats Resource Weaknesses Market Opportunit ies 22

SWOT Analysis (contd.) SWOT analysis leads to: Drawing conclusions from the SWOT listings about overall situation of an organization; and Translating these conclusions into strategic actions to better match organization’s strategy to its resource strengths and market opportunities, and to correct the weaknesses and to defend from external threats. 23

Value Chain Analysis (VCA) VCA refers to the process whereby a firm determines the costs associated with disaggregated activities of an organization from purchasing raw materials to producing goods and services and to marketing those goods and services. VCA of an organization includes: ◦ Procurement costs ◦ Production costs ◦ Distribution costs ◦ Sales and marketing costs ◦ Customer Service costs ◦ Management costs 24

Benchmarking Benchmarking is an analytical tool used to determine whether an organization’s value chain activities are competitive compared to its rivals. Benchmarking enables an organization to take action to improve its competitiveness by identifying value chain activities where rival organizations have comparative advantage in costs. 25

IFE (Internal Factor Evolution) Matrix IFE Matrix is a management strategy formulation tool that summarizes and evaluates major strengths and weaknesses in functional areas of the organization. Five steps to construct IFE Matrix: ◦ List key strengths and weaknesses ◦ Assign weight ranging from 0.0 (not important) to 1.0 (all important) ◦ Assign rating from 1 (major weakness) to 4 (major strength) ◦ Multiply weights and rating to get weighted score ◦ Sum the weighted score to get total weighted score for the organization. 26

An example of IFE Matrix Key Internal FactorsWeightRatingWeighted Score Strengths Weaknesses Total Weighted Score 27

Strategic Management: references Fred R. David (2008), Strategic Management: Concepts and Cases, 11th Edition, Prentice Hall (Chapter 4) Arthur A. Thompson, Jr. (2010) Crafting and Executing Strategy: the quest for comparative, 16 th Edition, McGraw Hill (Chapter 4) 28

Thanks Thanks 29