 Although internal analysis

CHAPTER can FOUR

sometimes take into account the
actionsINTERNAL
of external ENVIRONMENT
organizations or market-wide
ASSESSMENT shifts, it is largely
related to the inherent traits of the organization at hand.
 For example, internal analysis can allow you to identify both strong
and weak aspects of your organization, without taking into account
the performance of external organizations. Unlike interna
analysis, external analysis is less about the organization itself, and
more about its business environment (including its competitors).

4-1
 Key Internal Forces
 Distinctive competencies
 A firm’s strengths that cannot be easily matched or imitated by
competitors.
 Distinctive competence refers to a superior characteristic, strength, or
quality that distinguishes a company from its competitors.
 This distinctive quality can be just about anything—innovation, a skill,
design, technology, name recognition, marketing, workforce, customer
satisfaction, or even being first to market.
 Building competitive advantages involves taking advantage of distinctive
competencies.

4-2
 NATURE OF THE INTERNAL AUDIT

 The internal audit

 Requires gathering and understanding information
about the firm’s management, marketing,
finance/accounting, production/operations, research and
development (R&D), and management information
systems operations
 Provides more opportunity for participants to understand
how their jobs, departments, and divisions fit into the
whole organization.
4-3
 The Process of Performing an Internal Audit

 The process of performing an internal audit closely parallels

the process of performing an external audit.
 Representative managers and employees from throughout
the firm need to be involved in determining a firm's
strengths and weaknesses.
 Performing an internal audit requires gathering,
assimilating\understanding, and evaluating information
about the firm's operations.

4-4
 cont…

 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.

4-5
 The Internal Factor Evaluation (IFE) Matrix

 Internal Factor Evaluation (IFE) matrix is a strategic

management tool for auditing or evaluating major strengths
and weaknesses in functional areas of a business.

 IFE matrix also provides a basis for identifying and evaluating

relationships among those areas.

 IFE matrix together with the EFE matrix are used in strategy
formulation.
4-6
Based on the resource based view, a company’s
strengths and weaknesses can be looked at based
on the following internal parameters.
Integrating Strategy and Culture
Management( Planning, organizing, motivating,
staffing and controlling)
Marketing
Finance/Accounting
Production/ Operations
Research and Development
Management Information Systems
Value Chain Analysis( VCA) 7
An internal factor evaluation( IFE) allow strategists to summarise and
evaluate strengths and weaknesses.

1. List key internal factors as identified in the internal- audit process. Include a
list of 15-20 factors, including both strengths and weaknesses.
2. Assign each factor a weight that ranges from 0 ( not important) to 1( very
important) .
3. Assign a rating between 1and 4 to each key internal factor to indicate how
effectively the firm’s current strategies respond to the factor,
where 4= the response is superior and 1= the response is poor
4. Multiply each factor’s weight by its rating to determine the weighted score.
5. Sum the weighted scores for each variable to determine the total weighted
score for the organization

8
 The Resource-Based View (RBV)

 The Resource-Based View (RBV) approach

 Contends that internal resources are more important for a
firm than external factors in achieving and sustaining
competitive advantage.
 Supporters of the RBV argue that organizational performance
will mainly be determined by internal resources that can be
grouped into three all-inclusive categories:
 physical resources, human resources, and organizational
resources.
4-9
 1. Integrating Strategy and Culture

 Organizational culture significantly affects business decisions

and thus must be evaluated during an internal strategic-
management audit.

 If strategies can benefit from cultural strengths, such as a

strong work ethic or highly ethical beliefs, then management
often can quickly and easily implement changes.
4-11
 2. Management
 The functions of management consist of five basic activities:
planning, organizing, motivating, staffing, and controlling.

 These activities are important to assess in strategic planning

because an organization should continually benefit from its
management strengths and improve on its management
weaknesses.

4-12
 4. Marketing

 Marketing
 the process of defining, anticipating, creating, and
fulfilling customers’ needs and wants for products and
services.

4-13
 Functions of Marketing

Customer analysis

Selling products/services

Product and service planning

Pricing Distribution

Marketing research

Opportunity analysis
4-14
 4.1. Customer analysis

 Customer analysis
 the examination and evaluation of consumer needs,
desires, and wants.
 involves administering customer surveys, analyzing
consumer information, evaluating market positioning
strategies, developing customer profiles, and determining
optimal market segmentation strategies
 essential in developing an effective mission statement.

4-15
 4.2. Product and Service Planning

 Product and service planning

 includes activities such as test marketing; product and brand
positioning; devising warranties; packaging; determining product
options, features, style, and quality; deleting old products; and
providing for customer service.
 important when a company is pursuing product development or
diversification

4-16
 4.4. Pricing

 Five major stakeholders affect pricing decisions: consumers,

governments, suppliers, distributors, and competitors

 Sometimes an organization will pursue a forward integration

strategy primarily to gain better control over prices charged
to consumers.

4-17
 4.4. Distribution

 Distribution
 includes warehousing, distribution channels, distribution
coverage, retail site locations, sales territories, inventory
levels and location, transportation carriers, wholesaling,
and retailing.
 especially important when a firm is striving to implement
a market development or forward integration strategy.

4-18
 4.5. Marketing Research

 Marketing research
 the systematic gathering, recording, and analyzing of
data about problems relating to the marketing of goods
and services
 can find out critical strengths and weaknesses.

4-19
 4. Finance/Accounting Functions

 Investment decision
 the allocation and reallocation of capital and resources to
projects, products, assets, and divisions of an
organization.
 Financing decision
 determines the best capital structure for the firm and
includes examining various methods by which the firm
can raise capital.

4-20
 Finance/Accounting Functions

Dividend decisions
 concern issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and
the repurchase or issuance of stock.
 determine the amount of funds that are retained in a firm
compared to the amount paid out to stockholders.

4-21
 5. Production/Operations

 Production/operations function
 consists of all those activities that transforms inputs
into goods and services.

 Production/operations management deals with inputs,

transformations, and outputs that vary across industries
and markets.
4-22
 7. Management Information Systems

 A management information system’s purpose is to improve

the performance of an enterprise by improving the quality of
managerial decisions
 An effective information system thus collects, codes, stores,
synthesizes, and presents information in such a manner that
it answers important operating and strategic questions

4-23
 4. Value Chain Analysis (VCA)

 Value chain analysis (VCA)

 refers to the process whereby a firm determines the costs
associated with organizational activities from purchasing
raw materials to manufacturing product(s) to marketing
those products
 aims to identify where low-cost advantages or
disadvantages exist anywhere along the value chain from
raw material to customer service activities

4-24
 4.1. Benchmarking

Benchmarking
 an analytical tool used to determine whether a
firm’s value chain activities are competitive
compared to rivals and thus conducive to winning
in the marketplace
 entails measuring costs of value chain activities
across an industry to determine “best practices”

4-25
 CHAPTER FIVE
STRATEGY ANALYSIS AND CHOICE

THE NATURE OF STRATEGY ANALYSIS AND CHOICE

 Strategy analysis and choice seek to determine alternative courses
of action that could best enable the firm to achieve its mission
and objectives
The Process of Generating and Selecting Strategies
 Identifying and evaluating alternative strategies
 Proposing alternative strategies based on their information on
the previous strategic formulation activities.
 The Proposed Alternative strategies need to be discussed in a
meeting or series of meetings. 4-26
 Considerations of strategy choice

 Cultural Aspects
It is beneficial to view strategic management from a cultural perspective
because success often rests upon the degree of support that
strategies receive from a firm’s culture. A firm’s culture can become
antagonistic to new strategies, and the result of that antagonism
may be confusion and disarray.
 Politics aspects
 Governance Issues ETC
4-27
 TYPES OF STRATEGIES
 Alternative strategies that an enterprise could pursue can be categorized into
16 actions under different categories. Each alternative strategy has countless
variations.
INTEGRATION STRATEGIES
Integration strategies are processes that businesses can use to enhance
their competitiveness, efficiency or market share by expanding their
influence into new areas. These areas can include supply, distribution or
competition
 The different types of strategies under this category are sometimes collectively
referred to as vertical integration strategies. Vertical integration strategies
allow a firm to gain control over distributors, suppliers, and/or competitors.
4-28
 CONT…
Forward Integration
 Forward integration involves gaining ownership or increased control over distributors or
retailers. Increasing numbers of manufacturers (suppliers) today are pursuing a forward
integration strategy by establishing Web sites to directly sell products to consumers.
Backward Integration
 Backward integration is a strategy of seeking ownership or increased control of a firm’s
suppliers.
Horizontal Integration
 Horizontal integration refers to a strategy of seeking ownership of or increased control over
a firm’s competitors. One of the most significant trends in strategic management today is
the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and
takeovers among competitors allow for increased economies of scale and enhanced transfer
of resources and competencies. 4-29
 INTENSIVE STRATEGIES
Market penetration, market development, product development and diversification strategies
are sometimes referred to as intensive strategies because they require intensive efforts if a
firm’s competitive position with existing products is to improve.
Market Penetration
 A market penetration strategy seeks to increase market share for present products or
services in present markets through greater marketing efforts. This strategy is widely used
alone and in combination with other strategies.
 Market penetration includes increasing the number of salespersons, increasing advertising
expenditures, offering extensive sales promotion items, or increasing publicity efforts.
Market Development
 Market development involves introducing present products or services into new
geographic areas.
4-30
 CONT…

Product Development
 Product development is a strategy that seeks increased sales
by improving or modifying present products or services.
Product development usually entails large research and
development expenditures.
Diversification strategies
It is a practice of introducing new product in to supply chain in
order to increase profit which are applied when companies
wishes to grow. 4-31
Copyright ©2014 Pearson Education
 CONT…
 There are three different types of diversification strategies that are commonly
used today. These are:
 Concentric Diversification
 Horizontal Diversification
 Conglomerate Diversification
Concentric diversification: refers to the development of new products and services
that are similar to the ones you already sell.
Horizontal Diversification : refers to the development of new products that are
somewhat related to your original lines.
Conglomerate diversification: refers to the development of new products that are
unrelated to your original lines.

4-32
 DEFENSIVE STRATEGIES

 Organizations pursue defensive strategies when the circumstances

require some sort of adjustments in the structure or functioning of
the organization.
 Different Defensive Strategies
Retrenchment
Divestiture
Liquidation

4-33
Retrenchment:
 When the organization faces declining sales & profits then it considers the retrenchment
strategy in which it reorganizes its activities by reducing its assets & costs. By doing so the
organization actually reverses the affects of declining profit & sales. It is also called as
reorganization or turnaround strategy.
Divestiture
 Divestiture is one of defensive strategies in which part or division of an organization is sold.
For further strategic investments or acquisitions, certain capital is raised trough divestiture.
Liquidation:
Liquidation is the selling of all the assets of the organization in parts in order to cash their
tangible worth. It is quite difficult emotional strategy as the element of defeat is recognized
in it.
4-34
Comprehensive Strategy-Formulation Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage
 A Comprehensive Strategy-Formulation Framework

Stage 1 - Input Stage:

 Summarizes the basic input information needed to
formulate strategies.
 Consists of the EFE Matrix, the IFE Matrix, and the
Competitive Profile Matrix (CPM).

6-36
 Competitive Profile Matrix (CPM)

 Competitive Profile Matrix (CPM):

 Identifies firm’s major competitors and their strengths and

weaknesses in relation to a design firm’s strategic positions.

6 -37
Copyright 2007 Prentice Hall
 Strategy-Formulation Analytical Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: Competitive Profile Matrix

The Input Stage (CPM)

External Factor Evaluation

Matrix (EFE)

Note: EFE and CPM form external and IFE from internal (assessment)
 A Comprehensive Strategy-Formulation Framework

 Stage 2 - Matching Stage:

 Focuses on generating possible alternative strategies by
Matching key external and internal factors.
 Techniques include :

 (SWOT) Matrix .
 The Boston Consulting Group (BCG) Matrix.
The Grand Strategy Matrix. 6-39
 Stage 2 :The Matching Stage

SWOT Matrix

Stage 2:
BCG Matrix
The Matching Stage

Grand Strategy Matrix

 Stage 2 :The Matching Stage

1. (SWOT) Matrix: Strengths-Weaknesses-Opportunities-

Threats.
 helps managers to develop four types of strategies:
 SO (strengths-opportunities) Strategies.
 WO (weaknesses-opportunities) Strategies.
 ST (strengths-threats) Strategies.
 WT (weaknesses-threats) Strategies.

6-41
 (SWOT) Matrix

 “SO” Strategies  “WO” Strategies

 use a firm’s internal  aim at improving
strengths to take internal weaknesses by
advantage of external taking advantage of
opportunities. external opportunities.

6-42
 (SWOT) Matrix

 “ST ” Strategies  “WT” Strategies

 use a firm’s strengths to  defensive tactics directed at
avoid or reduce the impact reducing internal weakness
of external threats. and avoiding external
threats.

6-43
 SWOT Matrix
Strengths – S Weaknesses – W
SWOT List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Match and determine
List Opportunities strategy Match and determine
strategy

Threats – T ST Strategies WT Strategies

Match and determine Match and determine
List Threats strategy strategy
 SWOT Matrix
Strengths – S Weaknesses – W
SWOT List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses by
List Opportunities taking advantage of
advantage of opportunities
opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid threats Minimize weaknesses and avoid
List Threats threats
 SWOT Matrix

Key Internal Factor Key External Factor Result Strategy

20% annual growth
Great working in the cell phone
+ = Acquire Cell phone
capacity (strength) industry
(opportunity)
Exit of two major
Pursue horizontal
Insufficient capacity foreign competitors
+ = integration by buying
(weakness) from the industry
competitor's facilities
(opportunity)
Decreasing numbers
Strong R&D Develop new products
+ of young adults =
(strength) for older adults
(threat)
Develop a new
Poor employee Strong union
+ = employee benefits
morale (weakness) activity (threat) package 46
 THE BOSTON CONSULTING GROUP (BCG) MATRIX

2. BCG Matrix :
 Graphically shows differences among divisions in terms of
relative market share position and industry growth rate.
 allows a multidivisional organization to manage its portfolio of
businesses by examining the relative market share position and
the industry growth rate of each division relative to all other
divisions in the organization. 6-47
 The BCG Matrix

 The major benefit of the BCG Matrix is that it draws

attention to the cash flow, investment characteristics, and
needs of an organization’s various divisions.

6-48
 BCG Matrix

High Market Share Position Low

High
Stars II Question Marks I
 High market share  Low market share
Industry Growth

 High growth Industry  high-growth industry

Cash Cows III

 High market share
Dogs IV
 Low market share
 low-growth industry
 low-growth industry
Low

49
BCG Matrix

6-50
 BCG Matrix

1. QUESTION MARKS:
 Low relative market share – compete in high-growth
industry.
 Cash needs are high.
 Cash generation is low.
 Decision to strengthen (intensive strategies) or divest.
 BCG Matrix
2. STARS
 High relative market share and high growth rate.
 Best long-run opportunities for growth & profitability.
 Large investment to maintain or strengthen leading
position.
 Integration strategies, intensive strategies, joint
ventures.
 BCG Matrix
3. CASH COWS
 High relative market share, competes in low-growth industry.
 Generate cash in excess of their needs.
 Milked for other purposes.
 Maintain strong position as long as possible.
 Product development, concentric diversification.
 retrenchment or divestiture.
 BCG Matrix
4. Dogs:
 Low relative market share compete in slow or no growth
industry.
 Weak internal and external position.
 Liquidation, divestiture, retrenchment.
 GRAND STRATEGY MATRIX

 Tool for formulating alternative strategies

 Based on two dimensions
1. Competitive position
2. Market growth
 Rapid Market Growth
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
Weak 6. Liquidation 6. Strong
Horizontal integration
Competitive Competitive
Position Quadrant III Quadrant IV Position
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation Slow Market Growth 56
 Grand Strategy Matrix
Quadrant I
 Excellent strategic position
 Concentration on current markets/products
 Take risks aggressively when necessary
 Which type of strategy would you suggest?
 Grand Strategy Matrix

Quadrant II
 Evaluate present approach
 How to improve competitiveness
 Rapid market growth requires intensive
strategy
 Grand Strategy Matrix

Quadrant III

 Compete in slow-growth industries

 Weak competitive position
 Drastic changes quickly
 Cost & asset reduction (retrenchment)
 Grand Strategy Matrix

Quadrant IV
 Strong competitive position
 Slow-growth industry
 Diversification to more promising growth
areas
Strategy-Formulation Analytical Framework

Quantitative Strategic
Stage 3: Planning Matrix
The Decision Stage (QSPM)
 A Comprehensive Strategy-Formulation Framework

 Stage 3 - Decision Stage:

 Involves the Quantitative Strategic Planning Matrix
(QSPM).
 Discloses the relative attractiveness of alternative strategies
and thus provides objective basis for selecting specific
strategies.

6-62
 The Quantitative Strategic Planning Matrix (QSPM)

 Quantitative Strategic Planning Matrix (QSPM):

 Objectively indicates which alternative strategies are best .

 Uses input from Stage 1 analyses and matching results from Stage
2 analyses to decide objectively among alternative strategies.

6-63