Chapter 4 Strategic Management

Chapter 4
The Internal Assessment
"The idea is to concentrate our strength against our

competitor’s relative weakness."
—Bruce Henderson
"A firm that continues to employ a previously successful

strategy eventually and inevitably falls victim to a
competitor."
—William Cohen
Copyright © 2011 Pearson Education, Inc. Ch 4 -1

Publishing as Prentice Hall
Purpose of Internal Audit/ assessment
 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(copied) by competitors

Key Internal Forces
Building competitive advantage

involves taking advantage of
distinctive competencies

Key Internal Forces
Strategies are designed in part to improve

on a firm’s weaknesses and turn them into
strengths.
 The way to Competitive Advantage
Weaknesses  Strengths Distinctive competencies  Competitive Advantage

Internal Audit Process
Parallel process of external audit
•The internal audit requires gathering and
assimilating information about the firm’s:
Management
Marketing
Finance/accounting
Production/operations
Research & development
Management information systems
A failure to recognize and understand relationships among the functional
areas of business can be detrimental to strategic management.
Some firms place too great an emphasis on one function at the expense
of others
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
Compared to the external audit, the process of performing
an internal audit provides more opportunity for participants
to understand how their jobs, departments, and divisions
fit into the whole organization.
This is a great benefit because managers and employees
perform better when they understand how their work
affects other areas and activities of the firm.
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.
• This definition emphasizes the importance of matching
external with internal factors in making strategic decisions

Organizational Culture
 Resistance to change
 Culture can represent a major
strength or weakness for the firm.
 It can be an underlying reason for
strengths or weaknesses in any
of the major business functions.
Organizational Culture Can Inhibit

Strategic Management
 Culture may miss external environmental changes
because they are blinded by strongly held beliefs
 Culture have a natural tendency to “hold the course of
action” even during times of strategic change
 Both culture and personality are enduring and can be warm,
aggressive, friendly, open, innovative, conservative, liberal,
harsh, or likable.

Management

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

Management
Functions Stage when most

important
1.Planning….. Strategy formulation
2.Organizing….. Strategy Implementation
3.Motivating…. Strategy Implementation
4.Staffing……. Strategy Implementation
5.Controlling…. Strategy Evaluation

Management
Planning
Start of the process
Bridge between present and the future
Increases the likelihood of achieving

desired objectives

Management
Activities in Planning
Forecasting
Establishing objectives
Devising strategies
Developing policies
Setting goals

Management
Activities in Organizing
 Organizational design
Job analysis
Job descriptions
Job specifications
Span of control
Unity of command
Job design

Management
Activities in Motivating
 Influencing people to accomplish specific objectives
Communication is a major component

 Leadership
 Work groups/teams
 Job enrichment
 Job satisfaction
 Needs fulfillment
 Organizational change
 Employee morale

Management
Activities in Staffing
 Personnel management / Human resource
management
 Wages and salary
 Employee benefits
 Interviewing
 Hiring / firing
 Training, performance appraisal, career development,
labor relations, disciplining
 Management development
 Safety, health Copyright © 2011 Pearson Education, Inc. Ch 4 -20
 EEO/affirmative action
Management
Activities in Controlling
 Ensure actual performance conforms to standards
 Quality control / Quality assurance
 Financial control
 Sales control
 Inventory control
 Expense control
 Analysis of variance
 Rewards
 Sanctions / Limits
Management Audit- Check list
 1.Does the firm use strategic-management concepts?
 2. Are company objectives and goals measurable and well
communicated?
 3. Do managers at all hierarchical levels plan effectively?
 4. Do managers delegate authority well?
 5. Is the organization’s structure appropriate?
 6. Are job descriptions and job specifications clear?
 7. Is employee morale high?
 8. Are employee turnover and absenteeism low?
 9. Are organizational reward and control mechanisms effective?

Marketing

Marketing
Process of defining, anticipating,

creating, and fulfilling customer’s
needs and wants for products and
services

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
Marketing Functions
1. Customer analysis
 Customer survey
 Consumer information
 Market positioning strategies
 Customer profile
 Market segmentation strategies

Marketing
Marketing Functions
2. Selling products/services
 Advertising
 Sales promotion
 Publicity
 Sales force management (training, motivation
of sale staff)
 Customer relations
 Dealer relations

Marketing
Marketing Functions
3. Product & service planning

 Test marketing
 Brand positioning
 Devising warranties
 Packaging …Emerging as a 5th P
 Product features
 Product style.. How would I will look like
 Product Quality..What is quality???

Marketing
Marketing Functions
4. Pricing
Forward integration… so company can offer better price
Discounts
Credit terms
Conditions of sales (credit sales, sales with option of return)
Markups…how much to add in price

Costs (economies of scale, efficient operations, skilled labor )
Unit pricing (cost+markup)

Marketing
Marketing Functions
5. Distribution
Warehousing …location of warehouse
Channels of distribution
Coverage…areas
Retail site locations
Sales territories….divisions
Inventory levels….
Transportation…modes
Marketing
Marketing Functions
6. Market research
Data collection
Data input
Data analysis
Support all business functions

Marketing
Marketing Functions
7. Opportunity analysis
Assessing cost
Assessing benefits
Assessing risk
Cost / benefit / risk analysis

Marketing Audit – Check list (ending)
 1. Are markets segmented effectively?
 2. Is the organization positioned well among competitors?
 3. Has the firm’s market share been increasing?
 4. Are present channels of distribution reliable and cost effective?
 5. Does the firm have an effective sales organization?
 6. Does the firm conduct market research?
 7. Are product quality and customer service good?
 8. Are the firm’s products and services priced appropriately?
 9. Does the firm have an effective promotion, advertising, and publicity
strategy?
 10. Are marketing, planning, and budgeting effective?
 11. Do the firm’s marketing managers have adequate experience and
training? (bcz it is not the gun which is important but it is the person behind
the gun that is important)
 12. Is the firm’s Internet presence excellent as compared to rivals?
Finance / Accounting

Finance/Accounting
Determining financial strengths and weaknesses is

key to strategy formulation
Functions of finance and accounting:
1.Investment decision(Capital Budgeting)
(where and when you are going to invest or divest)
2.Financing decision (SBU’S, Products)

3.Dividend decision (Investor’s focus, how much, how
often, in what way)

Basic Financial Ratios
Firm’s ability to meet its

short-term obligations
Liquidity Ratios
Ratios
Current ratio
Quick (or acid test) ratio

Extent of financing
through debts
Leverage Ratios 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

Finance/Accounting Audit – Check List
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 – Check List
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
1. Process
2. Capacity
3. Inventory
4. Workforce
5. Quality

1. Process
 Design of the facility
 Choice of technology
 Facility layout
 Process flow analysis (how smooth it is)
 Location of facility
 Line balancing (how well the production line is balanced to meet the demands of
customers)
 Process control
Distances from raw materials to production sites to
customers are a major consideration.
2. Capacity
 Forecasting
 Facilities planning
 Aggregate planning
 Scheduling
 Capacity planning
 Queuing analysis (ordering/sequence of activities)
Capacity utilization is a major consideration.

3. Inventory
 Raw material
 Work in process
 Finished goods
 Materials handling
what to order, when to order, how much to order

4. Work force
 Job design
 Work measurement
 Job enrichment
 Work standards
 Motivation techniques

5. Quality
 Quality control (Inspection deptt.)
 Sampling (Checking sample only, random,
systematic etc.)
 Testing (how and what to test or check)
 Quality assurance
 Cost control (cost of quality control should not exceed its
benefits)

Production/Operations Audit – Check
List
1.
1. Are
Are suppliers
suppliers of of materials,
materials, parts,
parts, etc.
etc.
reliable
reliable and
and reasonable?
reasonable?
2.
2. Are
Are facilities,
facilities, equipment,
equipment, machinery,
machinery, andand
offices
offices in
in good
good condition?
condition?
3.
3. Are
Are inventory-control
inventory-control policies
policies and
and
procedures
procedures effective?
effective?

Production/Operations Audit – Check List
4.
4. Are
Are quality-control
quality-control policies
policies && procedures
procedures
effective?
effective?
5.
5. Are
Are facilities,
facilities, resources,
resources, and
and markets
markets
strategically
strategically located?
located?
6.
6. Does
Does the
the firm
firm have
have technological
technological
competencies?
competencies?

Research & Development

Functions
1. Development of new products before
competitors
2. Improving product quality continuously
3. Improving manufacturing processes to
reduce costs
These functions can be done internally or
externally (outsourcing)
Research & Development Functions

 R & D Budget
 Financing as many projects as possible
 Use percentage of sales method
 Budgeting relative to competitors
 Deciding how many successful new
products are needed (most suitable)

Research & Development Audit - Check List
1.
1. Are
ArethetheR&D
R&Dfacilities
facilitiesadequate?
adequate?
2.
2. IfIf R&D
R&Disisoutsourced,
outsourced,isisititcost-effective?
cost-effective?
3.
3. Are
ArethetheR&D
R&Dpersonnel
personnelwell wellqualified?
qualified?
4.
4. Are
AreR&DR&Dresources
resources allocated
allocatedeffectively?
effectively?
5.
5. Are
AreMISMISand
andcomputer
computer systems
systems adequate?
adequate?
6.
6. Is
Iscommunication
communicationbetween
betweenR&DR&Dandandother
other
organizational
organizationalunits
unitseffective?
effective?
7.
7. Are
Arepresent
presentproducts
productstechnologically
technologically competitive?
competitive?

Management Information Systems
Purpose
 Improve performance of an enterprise

by improving the quality of
managerial decisions

 Information system
 CIO / CTO (Chief Information officer, chief technology officer)
 Titles of MD,CEO,COO chief operating officer are pushed back of attention
 Security issues (access to information)

 User friendly
 E- Commerce

Audit
 Do all managers use the information system
to make decisions? If not its waste of resources
 Is there a CIO or Director of Information
Systems position in the firm? Someone should be made
responsible for this
 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 understasnd the competitive
advantages that information can provide?
 Are computer training workshops provided for
users?
 Is the firm’s system being improved?

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 Strategic Management

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Chapter 4

The Internal Assessment

"The idea is to concentrate our strength against our

"A firm that continues to employ a previously successful

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

 Finance and accounting

 Production and operations

 Research and development

 Management information systems

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

Basis for Objectives & Strategies

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

Firm’s strengths that cannot be

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

Building competitive advantage

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

Strategies are designed in part to improve

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

Copyright © 2011 Pearson Education, Inc. Ch 4 -10

Organizational Culture Can Inhibit

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

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

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

Functions Stage when most

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

Bridge between present and the future

Increases the likelihood of achieving

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

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

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

Communication is a major component

Copyright © 2011 Pearson Education, Inc. Ch 4 -19

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

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

Process of defining, anticipating,

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

3. Product & service planning

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

 Market positioning strategies

 Market segmentation strategies

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

Copyright © 2011 Pearson Education, Inc. Ch 4 -27

3. Product & service planning

 Packaging …Emerging as a 5th P

 Product Quality..What is quality???

Conditions of sales (credit sales, sales with option of return)

Markups…how much to add in price

Unit pricing (cost+markup)

Retail site locations

Support all business functions

Copyright © 2011 Pearson Education, Inc. Ch 4 -31

Cost / benefit / risk analysis

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

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

Determining financial strengths and weaknesses is

2.Financing decision (SBU’S, Products)

Copyright © 2011 Pearson Education, Inc. Ch 4 -35

Firm’s ability to meet its

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

Leverage Ratios Ratios

Copyright © 2011 Pearson Education, Inc. Ch 4 -37

Effective use of firm’s

Copyright © 2011 Pearson Education, Inc. Ch 4 -38

Profitability Ratios Ratios