Chapter 4 The Internal Assessment Strategic Management: Concepts & Cases 13 th Edition Fred David Ch 4-١ Chapter Outline The Nature of an Internal Audit The Resource-Based View (RBV) Integrating Strategy & Culture Ch 4-٢ ١
Chapter Outline (cont d) Management Marketing Opportunity Analysis Ch 4-٣ Chapter Outline (cont d) Finance/Accounting Production/Operations Research & Development Ch 4-٤ ٢
Chapter Outline (cont d) Management Information Systems The Internal Factor Evaluation (IFE) Matrix Ch 4-٥ Internal Assessment The biggest levers you ve got to change a company are strategy, structure, and culture. If I could pick two, I d pick strategy and culture. Wayne Leonard, CEO, Entergy Weak leadership can wreck the soundest strategy. Sun Zi Ch 4-٦ ٣
Nature of an Internal Audit Functional Areas of Business -- Strengths -- Weaknesses Ch 4-٧ Nature of an Internal Audit Basis for Objectives & Strategies Internal strengths/weaknesses External opportunities/threats Clear statement of mission Ch 4-٨ ٤
Key Internal Forces Functional Business Areas: Vary by organization Divisions have differing strengths & weaknesses Ch 4-٩ Key Internal Forces Distinctive Competencies: Firm s strengths that cannot be easily matched or imitated by competitors 3M AND R&D Ch 4-١٠ ٥
Key Internal Forces Distinctive Competencies: Building competitive advantage involves taking advantage of distinctive competencies Ch 4-١١ Key Internal Forces Distinctive Competencies: Strategies designed to improve on a firm s weaknesses and turn to strengths Ch 4-١٢ ٦
Internal Audit Parallels process of external audit Information from: Management Marketing Finance/accounting Production/operations Research & Development Management information Systems Ch 4-١٣ 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 Ch 4-١٤ ٧
Internal Audit Key to Organizational Success Coordination & understanding among managers from all functional areas Ch 4-١٥ Internal Audit Functional Relationships Number and complexity increases relative to organization size Ch 4-١٦ ٨
Internal Audit Financial Ratio Analysis Exemplifies complexity of relationships among functional areas of the business Ch 4-١٧ Resource Based View (RBV) Approach to Competitive Advantage Internal resources are more important than external factors Ch 4-١٨ ٩
Resource Based View (RBV) 3 All Encompassing Categories 1. Physical resources 2. Human resources 3. Organizational resources Ch 4-١٩ Resource Based View (RBV) Empirical Indicators Rare Hard to imitate Not easily substitutable Ch 4-٢٠ ١٠
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 Ch 4-٢١ Integrating Strategy & Culture Organizational Culture Resistant to change May represent: Strength Weakness Ch 4-٢٢ ١١
Integrating Strategy & Culture Legends Values Beliefs Heroes Cultural Products Rites Symbols Myths Rituals Ch 4-٢٣ Integrating Strategy & Culture 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 Ch 4-٢٤ ١٢
U.S. Versus Foreign Cultures To successfully compete in world markets, U.S. managers must obtain a better knowledge of historical, cultural, and religious forces that motivate and drive people in other countries. Ch 4-٢٥ Ch 4-٢٦ ١٣
Management Functions of Management 1. Planning 2. Organizing 3. Motivating 4. Staffing 5. Controlling Ch 4-٢٧ Management Function Planning Stage When Most Important Strategy Formulation Organizing Strategy Implementation Motivating Strategy Implementation Staffing Strategy Implementation Controlling Strategy Evaluation Ch 4-٢٨ ١٤
Management Planning Beginning of management process Bridge between present & future Improves likelihood of attaining desired results Ch 4-٢٩ Management Forecasting Establishing objectives Planning Devising strategies Developing policies Setting goals Ch 4-٣٠ ١٥
Management Organizing Achieves coordinated effort Defines task & authority relationships Departmentalization Delegation of authority Ch 4-٣١ Management Organizing Organizational design Job specialization Job descriptions Job specifications Span of control Unity of command Coordination Job design Job analysis Ch 4-٣٢ ١٦
Management Motivating Influencing to accomplish specific objectives Communication major component Ch 4-٣٣ Management Motivating Leadership Communication Work groups Job enrichment Job satisfaction Needs fulfillment Organizational change Morale Ch 4-٣٤ ١٧
Management Staffing Personnel management Human resources management Ch 4-٣٥ Management Staffing Wage & salary admin. Employee benefits Interviewing Hiring Discharging Training Management development Affirmative Action EEO Labor relations Ch 4-٣٦ ١٨
Management Controlling Establishing performance standards Ensure actual operations conform to planned operations Taking corrective actions Ch 4-٣٧ Management Controlling Quality Financial Sales Inventory Expense Analysis of variance Rewards Sanctions Ch 4-٣٨ ١٩
Management Audit Checklist Does the firm use strategic management concepts? Are objectives/goals measurable? Well communicated? Do managers at all levels plan effectively? Ch 4-٣٩ Management Audit Checklist Do managers delegate well? Is the organization s structure appropriate? Are job descriptions clear? Are job specifications clear? Is employee morale high? Ch 4-٤٠ ٢٠
Management Audit Checklist Is employee absenteeism low? Is employee turnover low? Are the reward mechanisms effective? Are the organization s control mechanisms effective? Audit sheet example Ch 4-٤١ Marketing Customer Needs/Wants for Products/Services 1. Defining 2. Anticipating 3. Creating 4. Fulfilling 5. Delightening Ch 4-٤٢ ٢١
Marketing Marketing Functions 1. Customer analysis 2. Selling products/services 3. Product & service planning 4. Pricing 5. Distribution 6. Marketing research 7. Opportunity analysis Ch 4-٤٣ Marketing Customer surveys Consumer information Customer Analysis Market positioning strategies Customer profiles Market segmentation strategies Ch 4-٤٤ ٢٢
Marketing Selling Products/Services Advertising Sales Promotion Publicity Sales force management Customer relations Dealer relations Ch 4-٤٥ Marketing Planning Product/Service Test marketing Brand positioning Devising warrantees Packaging Product features/options Product style Quality Ch 4-٤٦ ٢٣
Marketing Pricing Forward integration Discounts Credit terms Condition of sale Markups Costs Unit pricing Ch 4-٤٧ Marketing Distribution Warehousing Channels Coverage Retail site locations Sales territories Inventory levels Transportation Ch 4-٤٨ ٢٤
Marketing Marketing Research Data collection Data input Data analysis Support business functions Ch 4-٤٩ Marketing Assessing costs Opportunity Analysis Assessing benefits Assessing risks Cost/benefit/risk analysis Ch 4-٥٠ ٢٥
Marketing Opportunity Analysis 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? Ch 4-٥١ Marketing Opportunity Analysis 6. Does the firm conduct market research? 7. Are product quality & customer service good? 8. Are the firm s products/services priced appropriately? 9. Does the firm have effective promotion, advertising, & publicity strategies? Ch 4-٥٢ ٢٦
Marketing Opportunity Analysis 10.Are the marketing planning & budgeting effective? 11.Do the firm s marketing managers have adequate experience and training? Ch 4-٥٣ Finance/Accounting Determining financial strengths & weaknesses key to strategy formation Ch 4-٥٤ ٢٧
Finance/Accounting Finance/Accounting Functions 1. Investment decision (Capital budgeting) 2. Financing decision 3. Dividend decision Ch 4-٥٥ Basic Financial Ratios Firm s ability to meet its short-term obligations Liquidity Ratios Ratios Current ratio Quick (or acid test) ratio Ch 4-٥٦ ٢٨
Basic Financial Ratios Extent of debt financing Leverage Ratios Ratios Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest earned Ch 4-٥٧ Basic Financial Ratios Effective use of firm s resources Activity Ratios Ratios Inventory-turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period Ch 4-٥٨ ٢٩
Basic Financial Ratios Effectiveness shown by returns on sales & investment Profitability Ratios Ratios Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Ch 4-٥٩ Basic Financial Ratios Effectiveness shown by returns on sales & investment Profitability Ratios (cont d) Ratios Return on stockholders equity (ROE) Earnings per share Price-earnings ratio Ch 4-٦٠ ٣٠
Basic Financial Ratios Firm s ability to maintain economic position Growth Ratios Ratios Sales Net income Earnings per share Dividends per share Ch 4-٦١ Example Ratio Analysis Key Monitoring Ratios 2008 Net Working Capital (Current Assets Current Liabilities) (JD) Current Ratio (Current Assets/Current Liabilities) (%) Total Assets turnover (Net Sales / Total Assets) (Times) Debt ratio (Total Debt / Total Assets) (%) Return on Investment ROI (Net Profit/ Total Assets) (%) Sales Productivity (Sales/ Number of employees) (JD) 2009 2010 31,000 57,781 121,794 115.80% 123.87% 192.70% 1.22 1.48 2.13 34.67% 38.16% 23.82% 6.22% 6.82% 9.67% 20981 29513 42030 Ch 4-٦٢ ٣١
Finance/Accounting Audit Where is the firm strong/weak as indicated by financial ratio analysis? Can the firm raise short-term capital as needed? Can the firm raise long-term capital as needed through debt and/or equity? Ch 4-٦٣ Finance/Accounting Audit Does the firm have sufficient working capital? Are capital budgeting procedures effective? Are dividend payout policies reasonable? Are the firm s financial managers experienced & well trained? Ch 4-٦٤ ٣٢
Finance/Accounting Audit Effective Financial Analysis Requires: 1. Analysis of how the ratios have changed over time 2. How the ratios compare to industry norms 3. How the ratios compare with key competitors Ch 4-٦٥ Production/Operations Production/Operations Functions Process Capacity Inventory Workforce Quality Ch 4-٦٦ ٣٣
Production/Operations Process Facility design Technology selection Facility layout Process flow analysis Facility location Line balancing Process control Ch 4-٦٧ Production/Operations Capacity Forecasting Facilities planning Aggregate planning Scheduling Capacity planning Queuing analysis Ch 4-٦٨ ٣٤
Production/Operations Inventory Raw materials Work in process Finished goods Materials handling Ch 4-٦٩ Production/Operations Workforce Job design Work measurement Job enrichment Work standards Motivation techniques Ch 4-٧٠ ٣٥
Production/Operations Quality Quality control Sampling Testing Quality assurance Cost Control Ch 4-٧١ Production/Operations Audit Are suppliers of materials, parts, etc. reliable and reasonable? Are facilities, equipment & machinery in good condition? Are inventory-control policies and procedures effective? Ch 4-٧٢ ٣٦
Production/Operations Audit Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies? Ch 4-٧٣ Research & Development Research & Development Functions Development of new products before competitors Improving product quality Improving manufacturing processes to reduce costs Ch 4-٧٤ ٣٧
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 Ch 4-٧٥ Research & Development Audit Are the R&D facilities adequate? If R&D is outsourced, is it cost effective? Are the R&D personnel well qualified? Are R&D resources allocated effectively? Ch 4-٧٦ ٣٨
Research & Development Audit Are MIS and computer systems adequate? Is communication between R&D & other organizational units effective? Are present products technologically competitive? Ch 4-٧٧ Management Information Systems Purpose Improve performance of an enterprise by improving the quality of managerial decisions. Ch 4-٧٨ ٣٩
Management Information Systems Information Systems CIO/CTO Security User-friendly E-commerce Ch 4-٧٩ Management Information Systems Audit Do managers use the information system to make decisions? Is there a CIO or Director of Information Systems position in the firm? Is data updated regularly? Ch 4-٨٠ ٤٠
Management Information Systems Audit Do managers from all functional areas 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? Ch 4-٨١ Management Information Systems Audit 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? Ch 4-٨٢ ٤١
Internal Factors Evaluation Matrix A summary step in conducting an internal strategic-management audit is to construct an IFE Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among these areas. Ch 4-٨٣ Ch 4-٨٤ ٤٢
Ch 4-٨٥ Example Wafa Est. Ch 4-٨٦ ٤٣
HW Develop an internal audit system be creative Develop an IFE matrix for -an industrial company - government entity -Service firm -- a hospital -- a university ٨٧ ٤٤