The Internal Assessment: Strategic Management: Concepts & Cases 13 Edition Fred David

Chapter 4
The Internal Assessment
Strategic Management:
Concepts & Cases
13th Edition
Fred David
Copyright © 2011 Pearson Education, Inc. Ch 4 -1

Publishing as Prentice Hall
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
Heroes
Cultural 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.

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

Production/Operations Audit
••Are quality-control policies & procedures

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

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

Research & Development Audit
••Are MIS and computer systems

Are MIS and computer systems
adequate?
adequate?
••Is communication between R&D and
Is communication between R&D and
other
other organizational
organizational units
units effective?
effective?
••Are present products technologically
Are present products technologically
competitive?
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
Value Some
Some
Chain
Chain Some
SomeCore
Core Distinctive
Distinctive
Core
Core
Activities
Activities Competencies
Competencies Competencies
Competencies
Competencies
Competencies
Are
Are Evolve
Evolveinto
into Yield
Yield
Arise
AriseininSome
Some
Identified
Identified Distinctive
Distinctive Sustained
Sustained
Activities
Activities
and
and Competencies
Competencies Competitive
Competitive
Assessed
Assessed Advantages
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


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Chapter 4

The Internal Assessment

Copyright © 2011 Pearson Education, Inc. Ch 4 -1

“Great spirits have always encountered

“Weak leadership can wreck the soundest

Copyright © 2011 Pearson Education, Inc. Ch 4 -3

 Finance and accounting

 Production and operations

 Research and development

 Management information systems

Copyright © 2011 Pearson Education, Inc. Ch 4 -4

Basis for Objectives & Strategies

Copyright © 2011 Pearson Education, Inc. Ch 4 -5

Firm’s strengths that cannot be

Copyright © 2011 Pearson Education, Inc. Ch 4 -6

Building competitive advantage

Copyright © 2011 Pearson Education, Inc. Ch 4 -7

Information gathered from:

Copyright © 2011 Pearson Education, Inc. Ch 4 -9

Managers and employees from

Financial Ratio Analysis

Copyright © 2011 Pearson Education, Inc. Ch 4 -12

Approach to Competitive Advantage

Internal resources are more

Copyright © 2011 Pearson Education, Inc. Ch 4 -13

Three All-Encompassing Categories

Copyright © 2011 Pearson Education, Inc. Ch 4 -14

Copyright © 2011 Pearson Education, Inc. Ch 4 -15

Copyright © 2011 Pearson Education, Inc. Ch 4 -16

Copyright © 2011 Pearson Education, Inc. Ch 4 -17

Copyright © 2011 Pearson Education, Inc. Ch 4 -18

Organizational Culture Can Inhibit

 Miss external changes due to

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Copyright © 2011 Pearson Education, Inc. Ch 4 -21

 Beginning of management process

Copyright © 2011 Pearson Education, Inc. Ch 4 -22

Forecasting future events

Copyright © 2011 Pearson Education, Inc. Ch 4 -23

 Can develop through planning

together as a team that knows

Copyright © 2011 Pearson Education, Inc. Ch 4 -24

 Achieves coordinated effort

Copyright © 2011 Pearson Education, Inc. Ch 4 -25

 Breaking down tasks into jobs

Copyright © 2011 Pearson Education, Inc. Ch 4 -26

Copyright © 2011 Pearson Education, Inc. Ch 4 -28

 Establishing performance standards

Copyright © 2011 Pearson Education, Inc. Ch 4 -30

1. Establish performance standards

2. Measure individual and organizational

 Does the firm use strategic

Copyright © 2011 Pearson Education, Inc. Ch 4 -32

 Do managers delegate well?

Copyright © 2011 Pearson Education, Inc. Ch 4 -33

 Is employee absenteeism low?

Copyright © 2011 Pearson Education, Inc. Ch 4 -34

Customer Needs or Wants for Products

3. Product & service planning

Copyright © 2011 Pearson Education, Inc. Ch 4 -36