External and Internal Analyses. External and Internal Analyses. Nature of an Internal Audit. Key Internal Forces. Basis for objectives & strategies:

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1 Comprehensive Strategic Management Model External Audit External and Internal Analyses Vision & Mission Statements Chapter 2 Chapter Long-Term Objectives Chapter 5 Internal Audit Chapter 4 Generate, Evaluate, Select Strategies Chapter 6 Implement Strategies: Mgmt Issues Chapter 7 Implement Strategies: Marketing, Fin/Acct, R&D, CIS Chapter 8 Measure & Evaluate Performance Chapter 9 General Environment Demographic Global Environment Sociocultural Industry Environment Competitor Environment Technological General General Economic Political/Legal Environment By studying the external environment, firms identify what they might choose to do Opportunities and threats Ch -1 Dr.Mustafa KILIÇ Ch 4-2 External and Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage) Nature of an Internal Audit Basis for objectives & strategies: Internal strengths/weaknesses External opportunities/threats Clear statement of mission Dr.Mustafa KILIÇ Ch 4- Dr.Mustafa KILIÇ Ch 4-5 Key Internal Forces Distinctive A firm s strengths that cannot be easily matched or imitated by competitors Building competitive advantage involves taking advantage of distinctive competencies Strategies designed in part to improve on a firm s weaknesses and turn to strengths Dr.Mustafa KILIÇ Ch 4-6 vs. Core vs. Distinctive A company competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a company s competitiveness and profitability A distinctive competence is a competitively valuable activity that a company performs better than its rivals Dr.Mustafa KILIÇ Ch 4-7 1

2 Strategic Management Principle A distinctive competence empowers a company to build competitive advantage! Resource Based View (RBV) Approach to Competitive Advantage Internal resources are more important than external factors Dr.Mustafa KILIÇ Ch 4-8 Dr.Mustafa KILIÇ Ch 4-9 are what a firm has to work with--its assets-- including its people and the value of its brand name represent inputs into a firm s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Dr.Mustafa KILIÇ Ch 4-10 Tangible Financial Physical Technological Organizational Intangible Human Resource Innovation Reputation Dr.Mustafa KILIÇ Ch 4-11 Components of Internal Analysis are what a firm does, and represent the firm s capacity or ability to integrate individual firm resources to achieve a desired objective Dr.Mustafa KILIÇ Ch 4-12 Dr.Mustafa KILIÇ Ch 4-1 2

3 Components of Internal Analysis Core become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage Dr.Mustafa KILIÇ Ch 4-14 Dr.Mustafa KILIÇ Ch 4-15 Components of Internal Analysis Core Core Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive Dr.Mustafa KILIÇ Ch 4-16 Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable Dr.Mustafa KILIÇ Ch 4-17 Components of Internal Analysis Core Four Criteria of Sustainable Advantages Value Chain Analysis Valuable Outsource Rare Costly to Imitate Nonsubstitutable Dr.Mustafa KILIÇ Ch 4-2 The Basic Value Chain Support Activities Firm Infrastructure Human Resource Mgmt. Margin Technological Development Procurement Margin Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities Dr.Mustafa KILIÇ Ch 4-24

4 Outsourcing is the purchase of some or all of a valuecreating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently Outsourcing Support Activities Margin Firm Infrastructure Human Resource Mgmt. Technological Development Procurement Margin Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Dr.Mustafa KILIÇ Primary Activities Ch 4-25 Components of Internal Analysis Core Four Criteria of Sustainable Advantages Strategic Competitiveness Competitive Advantage Value Chain Analysis Valuable Outsource Rare Costly to Imitate Nonsubstitutable Dr.Mustafa KILIÇ Ch 4-26 Performance Implications No No No No Yes No No Yes Yes No Valuable? Rare? Costly to Imitate? Nonsubstitutable Yes/ No Yes/ No Competitive Consequences Competitive Disadvantage Competitive Parity Temporary Competitive Advantage Performance Implications Below Average Returns Average Returns Above Average to Average Returns Sustainable Competitive Above Average Yes Yes Yes Yes Advantage Returns Dr.Mustafa KILIÇ Ch 4-28 A Quick Review of Organizational Organizational Financial assets Physical assets Human resources Intangible assets Structural-cultural assets Strategic Competitiveness Competitive Advantage DistinctiveOrganizational Organizational Organizational processes and routines Accumulated knowledge Actual work activities Core Dr.Mustafa KILIÇ Ch 4-29 Key Internal Forces Internal Audit Functional business areas (Avtivity Areas): Vary by organization Divisions have differing strengths and weaknesses Dr.Mustafa KILIÇ Ch 4-0 Parallels process of external audit Gather & assimilate information from: Management Marketing Finance/accounting Production/operations Research & development Management information systems Dr.Mustafa KILIÇ Ch 4-1 4

5 Internal Audit Internal Audit Involvement in performing an internal strategic-management audit provides vehicle for understanding nature and effect of decisions in other functional business areas of the firm. Key to organizational success: Coordination and understanding among managers from all functional areas Dr.Mustafa KILIÇ Ch 4-2 Dr.Mustafa KILIÇ Ch 4- Integrating Strategy and Culture Organizational Culture Integrating Strategy and Culture Cultural products 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 Values beliefs rites rituals ceremonies myths stories legends sagas language symbols heroes Dr.Mustafa KILIÇ Ch 4-4 Dr.Mustafa KILIÇ Ch 4-5 Integrating Strategy and Culture Functions of Management Organizational Culture -- Resistant to change May represent a strength or weakness of the firm Five basic activities Planning Organizing Motivating Staffing Controlling Dr.Mustafa KILIÇ Ch 4-6 Dr.Mustafa KILIÇ Ch 4-7 5

6 Functions of Management Functions of Management Function Planning Organizing Staffing Motivating Stage When Most Important Strategy Formulation Strategy Implementation Strategy Implementation Strategy Implementation Planning Start of the process Bridge between present and future Increases likelihood of achieving desired results Controlling Strategy Evaluation Dr.Mustafa KILIÇ Ch 4-8 Dr.Mustafa KILIÇ Ch 4-9 Planning Functions of Management Forecasting Organizing Planning Establishing objectives Devising strategies Developing policies Setting goals Achieve coordinated effort Defining task and authority relationships Departmentalization Delegation of authority Dr.Mustafa KILIÇ Ch 4-40 Dr.Mustafa KILIÇ Ch 4-41 What Determines the Best Org. Structure? Strategy Size Technology Environment Organizing Organizing Organizational design Job specialization Job descriptions Job specifications Span of control Unity of command Coordination Job design Job analysis Dr.Mustafa KILIÇ Ch 4-42 Dr.Mustafa KILIÇ Ch 4-4 6

7 Motivating Staffing Motivating Leadership Communication Work groups Job enrichment Job satisfaction Needs fulfillment Organizational change Morale Management Staffing Wage & salary admin Employee benefits Interviewing Hiring Firing Training Management development Safety Affirmative action EEO Labor relations Career development Discipline procedures Dr.Mustafa KILIÇ Ch 4-45 Dr.Mustafa KILIÇ Ch 4-47 Controlling Management Audit Checklist Management Controlling Quality control Financial control Sales control Inventory control Expense control Analysis of variances Rewards Sanctions Does the firm use strategicmanagement concepts? Are company objectives and goals measurable and well communicated? Do managers at all hierarchical levels plan effectively? Do managers delegate authority well? Is the organization s structure appropriate? Dr.Mustafa KILIÇ Ch 4-49 Dr.Mustafa KILIÇ Ch 4-50 Management Audit Checklist Marketing Are job descriptions and job specifications clear? Is employee morale high? Are employee turnover and absenteeism low? Are organizational reward and control mechanisms effective? 1. Customer analysis 2. Selling products/services. Product and service planning 4. Pricing 5. Distribution 6. Marketing research 7. Opportunity analysis Dr.Mustafa KILIÇ Ch 4-51 Dr.Mustafa KILIÇ Ch 4-5 7

8 Marketing Audit Marketing Audit Are markets segmented effectively? Is the organization positioned well among competitors? Has the firm s market share been increasing? Are present channels of distribution reliable and cost effective? Does the firm have an effective sales force? Does the firm conduct market research? Are product quality and customer service good? Are the firm's products/services priced appropriately? Does the firm have an effective promotion, advertising, and publicity strategy? Dr.Mustafa KILIÇ Ch 4-61 Dr.Mustafa KILIÇ Ch 4-62 Marketing Audit Finance/Accounting Are marketing planning and budgeting effective? Do the firm s marketing mangers have adequate experience and training Determining financial strengths and weaknesses key to strategy formulation Investment decision (Capital budgeting) Financing decision Dividend decision Dr.Mustafa KILIÇ Ch 4-6 Dr.Mustafa KILIÇ Ch 4-64 Finance/Accounting Basic Financial Ratios Functions of Finance/Accounting 1. Investment decision (Capital budgeting) 2. Financing decision. Dividend decision Liquidity ratios Firm s ability to meet its short-term obligations Ratios Current ratio Quick (or acid-test) ratio Dr.Mustafa KILIÇ Ch 4-65 Dr.Mustafa KILIÇ Ch

9 Basic Financial Ratios Extent of debt financing Ratios Basic Financial Ratios Effective use of firm s resources Ratios Leverage ratios Debt-to-total-assets Debt-to-equity Activity ratios Inventory-turnover Fixed assets turnover Long-term debt-to-equity Total assets turnover Accounts receivable turnover Times-interest earned Average collection period Dr.Mustafa KILIÇ Ch 4-67 Dr.Mustafa KILIÇ Ch 4-68 Basic Financial Ratios Basic Financial Ratios Effectiveness shown by returns on sales and investment Effectiveness shown by returns on sales and investment Profitability ratios Ratios Gross profit margin Operating profit margin Profitability ratios (continued) Ratios Return on stockholders equity (ROE) Net profit margin Earnings per share Return on total assets (ROA) Price-earnings ratio Dr.Mustafa KILIÇ Ch 4-69 Dr.Mustafa KILIÇ Ch 4-70 Growth ratios Basic Financial Ratios Firm s ability to maintain economic position Ratios Sales Net income Earnings per share Dividends per share Finance/Accounting Audit Where is the firm strong and 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? Dr.Mustafa KILIÇ Ch 4-71 Dr.Mustafa KILIÇ Ch

10 Finance/Accounting Audit Production/Operations 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? Process Capacity Inventory Workforce Quality Dr.Mustafa KILIÇ Ch 4-7 Dr.Mustafa KILIÇ Ch 4-74 Production/Operations Audit Production/Operations Audit Are suppliers of raw materials, parts, and subassemblies reliable and reasonable? Are facilities, equipment, machinery, and offices in good condition? Are inventory-control policies and procedures effective? Are quality-control policies and procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies? Dr.Mustafa KILIÇ Ch 4-80 Dr.Mustafa KILIÇ Ch 4-81 Research and Development Research and Development Development of new products before competition Improving product quality Improving manufacturing processes to reduce costs R&D budgets Financing as many projects as possible Use percentage-of-sales method Budgeting relative to competitors Deciding how many successful new products are needed Dr.Mustafa KILIÇ Ch 4-82 Dr.Mustafa KILIÇ Ch

11 Research and Development Audit Does the firm have R&D facilities? Are they adequate? If outside R&D firms are used, are they cost effective? Are the organization s R&D personnel well qualified? Are R&D resources allocated effectively? Research and Development Audit Are management information and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive? Dr.Mustafa KILIÇ Ch 4-84 Dr.Mustafa KILIÇ Ch 4-85 Management Information Systems Management Information Systems Purpose Improve performance of an enterprise by improving the quality of managerial decisions. Information Systems CIO/CTO Security User-friendly E-commerce Dr.Mustafa KILIÇ Ch 4-86 Dr.Mustafa KILIÇ Ch 4-87 Management Information Systems Audit Do all managers in the firm use the information system to make decisions? Is there a chief information officer or director of information systems position in the firm? Are data in the information system updated regularly? Management Information Systems Audit Do managers from all functional areas of the firm contribute input to the information system? Are there effective passwords for entry into the firm s information system? Are strategists of the firm familiar with the information systems of rival firms? Dr.Mustafa KILIÇ Ch 4-88 Dr.Mustafa KILIÇ Ch

12 Management Information Systems Audit Is the information system user-friendly? Do all users of the information system understand the competitive advantages that information can provide firms? Are computer training workshops provided for users? Is the firm s system being improved? Dr.Mustafa KILIÇ Ch 4-90 Five- Internal Analysis (IFE) Step Process: List key internal factors (10-20) Strengths & weaknesses Assign weight to each (0 to 1.0) Sum of all weights = 1.0 Dr.Mustafa KILIÇ Ch 4-91 Internal Analysis (IFE) Internal Analysis (IFE) Assign 1-4 rating to each factor Firm s current strategies response to the factor Multiply each factor s weight by its rating Produces a weighted score Sum the weighted scores for each Determines the total weighted score for the organization Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5 Dr.Mustafa KILIÇ Ch 4-92 Dr.Mustafa KILIÇ Ch 4-9 Internal Analysis (IFE) Mandalay Bay Weight Internal Strengths Largest casino company in world Room occupancy rates over 95% Increasing free cash flows Owns 1 mile on Las Vegas strip Strong management team Buffets at most facilities Minimal comps provided Rating Weighted score Mandalay Bay Internal Weaknesses Little diversification Laughlin properties Recent loss of joint ventures Internal Analysis (IFE) Most properties located in Las Vegas Family reputation, not high rollers Weight Rating Weighted score Long-range planning 4.20 Reputation as family-friendly Financial ratios TOTAL (including Strengths) Dr.Mustafa KILIÇ Ch 4-94 Dr.Mustafa KILIÇ Ch

13 Internal Analysis (IFE) Mandalay Bay (in the previous example), has a total weighted score of 2.75 indicating that the firm is above average in its overall internal strength Dr.Mustafa KILIÇ Ch