Transcript File

Chapter 4
The Internal Assessment
Great Spirits have always encountered
violent opposition from mediocre minds
Albert Einstein

This chapter focuses on identifying and
evaluating a firm’s strengths and weaknesses
in the functional areas of business, including
management, marketing,
finance/accounting. Production/ operations,
research & development & management
information system
Nature of an Internal Audit
Basis for Objectives & Strategies
•All organizations have strengths & weaknesses in
the functional areas of business
•No enterprise is equally strong or weak in all areas
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Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
P&G
Known for
superb
marketing
Key Internal Forces
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Different types of organizations – Hospitals,
universities, Banks, the functional business
areas, of course differ
A firms strategy that cannot be easily imitated
by competitors are called distinctive
competencies
Strategies are designed – turning firms
weaknesses into strength & maybe into
distinctive competencies
Internal Audit
Parallels process of external audit
 Gathering & assimilating info
•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management information
Systems
about the firm’s management,
marketing, finance,
productions/operations, R&D,
MISystems operations
 opportunity for participants to
understand how their jobs,
departments & divisions fit into
the whole organization
Example: Marketing &
manufacturing managers jointly
discuss issues related to S/W
Performing and internal audit thus is an excellent vehicle or
forum for improving the process of communication in the
organization
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Strategic management is a highly interactive
process that requires effective coordination
among management, marketing,
finance/accounting, production/operations,
R&D & MIS managers.
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Financial ratio analysis exemplifies the complexity
of relationships among the functional areas of
business. A declining return on investment or profit
margin ratio could be the result of ineffective
marketing, poor management policies, research
and development errors, or a weak management
information system.
Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important for
a firm than external factors in achieving
and sustaining competitive advantage
RBV view contend that org performance will be
primarily be determined by internal resources
that can be grouped into three allencompassing categories
Resource Based View (RBV)
3 All Encompassing Categories
1. Physical resources
Plant & equipment, location, technology, raw materials
Machines …….
2. Human resources
Employees, training, experience, intelligence, knowledge, skills,
abilities
3. Organizational resources
Structure, planning processes, information systems, copyrights,
databases and so on
RBV
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Managing strategically according to the RBV
involves developing and exploiting a firm’s
unique resources and capabilities, and
continually maintaining & strengthening
those resources
The theory asserts that it is advantageous for
a firm to pursue a strategy that is not
currently being implemented by any
competing firm
Resource Based View (RBV)
For a resource to be valuable, it must be…..
 Rare (resources that other firms do not
possess)
 Hard to imitate(is it costly for
others to imitate?)
 Not easily substitutable (Porter’s :
no viable substitutes, a firm will be able
to sustain its CA
The more a
resource (s) is
rare, nonimitable
& nonsubtitutable,
the stronger a
firm’s competitive
advantage will be
& the longer it will
last
VIRO (Barney framework)
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A resource is a strength if it provides a
company with a competitive advantage
A resource is a weakness if its something
corporation does poorly or doesn’t have the
capacity to do although its competitors have the
capacity
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Value= Does it provide competitive advantage
Rareness= Do other competitors possess it?
Imitability = Is it costly for others to imitate
Organization= is the firm organized to exploit the
resource?
If answer is “YES”
Distinctive Competence
Integrating Strategy & Culture
Organizational Culture
Set of key values, beliefs, understanding & norms
that members of an Organization share
Or
A pattern of behavior(that has been) developed by
an organization as it learns to cope with its
problem of external adaptation and internal
integration , & that has worked well enough to be
considered valid and to be taught to new members
as the correct way to perceive, think and feel
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Remarkably resistant to change, culture can
represent a major strength or weakness for
the firm
An org’s culture compares to an individual’s
personality in the sense that no two
organizations have the same culture and no
two individuals have the same personality.
Both culture and personality are fairly
enduring and can be warm, aggressive,
friendly, open, innovative, conservative,
liberal, harsh, or likable
Integrating Strategy & Culture
Values
Beliefs
Legends
Heroes
Symbols
Cultural
Products
Myths
Rites
Rituals
The challenge of strategic management today is to bring about the changes
in organizational culture and individual mind-sets that are needed to support
the formulation, implementation and evaluation of strategies
Management
Function
Stage When Most
Important
Planning
Strategy Formulation
Organizing
Strategy Implementation
Motivating
Strategy Implementation
Staffing
Strategy Implementation
Controlling
Strategy Evaluation
Planning
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The only thing certain about the future of
any organization is change, and planning is
the essential bridge between the present and
the future that increases the likelihood of
achieving desired results.
Process by which an individual or business may
turn empty dreams into achievements
Planning consists of all those managerial
activities related to preparing for the future,
specific tasks include forecasting,
establishing objectives, devising strategies,
developing policies, and setting goals
Organizing
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Means who does what and who reports to
whom
Well organized enterprises successfully
competing against-and in some cases
defeating-much stronger but –less organized
firms.
Well organized firm generally has motivated
managers and employees who are committed
to seeing Org succeed
Organizing
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The organizing function of management can
be viewed as consisting of three sequential
activities:
Breaking down tasks into jobs(work specialization
 Combing jobs to form
departments(departmentalization)
 Delegating authority
Changes in strategy often requires changes in
structure because positions may be created,
deleted or merged
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Delegating authority is an important
organizing activity
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“You can tell how good a manager is by observing
how his or her department functions when he or
she isn’t there”
Employees are today are more educated and
more capable if participating in organizational
decisions making than ever before
Motivating
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The process of influencing people to
accomplish specific objectives
Four major components
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Leadership
Group dynamics
Communication
Organizational Change
Motivating continues…….
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Leadership includes developing a vision of the
firm’s future and inspiring people to work hard
to achieve that vision
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Effective leaders traits
Knowledge of the business
 Cognitive ability
 Self – Confidence
 Honesty
 Integrity & drive
Group dynamics & Communication plays an important
role in formulating and implementing strategies
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Staffing
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Includes activities such as recruiting,
interviewing, testing, selecting, orienting,
training, developing, evaluating and
rewarding, promoting…… as well as
managing union relations
Strategists are becoming increasingly aware
of how important HR are to effective strategic
management. They provide leadership for
organizations that are restructuring or they
allow employees to work at home
Controlling
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All those activities undertaken to ensure that
actual operations conform to planned
operations
Measuring individual performance is often
conducted ineffectively or not at all in Orgs
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Evaluations can create confrontations that most
managers prefer to avoid
No single approach to measuring performance is
without limitation
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Graphic rating scale/BARs/Critical incident method
Management Audit checklist of Questions
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Does the firm use SM 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 Org structure appropriate?
Are job descriptions and Job specifications
clear?
Are employees turnover and absenteeism low?
Marketing
Process of
1. Defining
2. Anticipating
3. Creating
4. Fulfilling
Customer Needs/Wants
for Products/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
Read Book
Understanding
these functions
helps
strategists
identify and
evaluate
marketing
strengths and
weaknesses
Marketing Audit checklist of
Questions
Are markets segmented effectively?
 Is the organization positioned well
among competitors?
 Has the firm’s market share been
increasing?
 Does the firm conduct market
research?
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Finance/Accounting
Finance/Accounting Functions
comprise three decisions:
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
Financial condition is often considered the single best
measure of a firm’s competitive position and overall
attractiveness to investors
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Investment decisions/ Capital budgeting
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Financing decisions:
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Is the allocation and reallocation of capital and
resources to projects, assets, and divisions of an
organization
Determines the best capital structure for the firm
and includes examining various methods by which
the firm can raise capital(debt to equity/ debt to total
assets ratio)
Dividend decisions:
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Amount of funds that are retained in a firm
compared to the amount paid out to stockholders
Types of financial Ratios
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Computed from an organization’s income
statement and balance sheet
Comparing ratios over time and to industry
averages is more likely to result in meaningful
statistics that can be used to identify and
evaluate strengths and weaknesses
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How has each ratio changed over time?
How does each ratio compared to industry norms?
How does each ratio compare with key
competitors?
Checklist
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Where is the firm financially strong and weak
as indicated by financial ratio analyses?
Can the firm raise needed short-term capital?
Can the firm raise needed long-term capital
through debt or equity ?
Are the firm’s financial managers
experienced and well trained?
Production/Operations
Production/Operations Functions
 Process
 Capacity
 Inventory
 Workforce
 Quality
•All those activities that transforms input into
goods and services
•A manufacturing operation transforms or
converts inputs such as raw materials, labor,
capital, machines and facilities into finished
goods and services
•Most automakers require a 30-day notice
to build vehicles, but Toyota Motor fills a
buyer’s new car order in just 5 days
•Toyota’s 360 suppliers are linked to the
company via virtual assemble line
Checklist
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Are supplies of raw materials, parts and
subassemblies reliable and reasonable?
Are facilities, equipment, machinery and
offices in good condition?
Does the firm have technological
competencies?
Research & Development
Research & Development Functions
 Development of new products before
competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs
Management Information
Systems
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Information Systems
CIO/CTO
Security
User-friendly
E-commerce
Information ties all business
functions together and
provides the basis for all
managerial decisions.
MIS receives raw material
from both the external and
internal evaluation of an Org
It gathers data about
marketing, finance, production
and personnel matters
internally and
social/demographic/environme
ntal /economic factors
externally
Value Chain Analysis
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Process whereby a firm determines the costs
associated with the organizational activities
from purchasing raw materials to
manufacturing products to marketing those
products
Thus value chain analysis can be critically
important for a firm in monitoring whether it
prices and costs are competitive
The combine costs of all the various activities
in a company’s value chain define the firm’s
cost of doing business
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Value chains differ immensely across
industries and firms
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HP- programming, peripherals, software,
hardware, and laptops
Motel- food, housekeeping, check-in and check
out operations, website, reservations system
all firms should use competence into a
distinctive competence- A core competence
is a value-chain activity that a firm performs
especially well
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Core competence- distinctive competence
Stages in a Vertical Value Chain
© Copyright 2004 McGraw-Hill. All rights reserved.
6–38
Benchmarking
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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
Enables a firm to take action to improve its
competitiveness by identifying(and improving
upon) value chain activities where rival firms
have comparative advantages in cost,
service, reputation or operation
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Hardest part – gaining access to value chain
activities with associated costs…. FIND OUT
The internal Factor Evaluation Matrix
Strategy formulation tool which
evaluates the major strengths and
weaknesses in the functional areas of
business, and it also provides a basis
for identifying and evaluating
relationships among those areas.

IFE– Gateway Computers (2003)
Weight
Rating
Wtd
Score
1. Several new senior executive with worldclass skills and leadership experience
0.05
4
0.40
2. Continuous decline in operating costs
and cost of goods sold
0.05
3
0.15
3. Well-known brand name
0.05
3
0.15
4. Consumer Reports (Sept 2002)
recommended Gateway 500X as #1
0.10
4
0.40
5. As a direct seller, Gateway holds high
brand recognition
0.05
3
0.15
Key Internal Factors
Strengths
IFE– Gateway Computers (2003)
Weight
Rating
Wtd
Score
6. Gateway is diversifying into non-PC
products
0.10
3
0.30
7. Good relationship with its suppliers.
0.05
4
0.20
8. Economies of scale, the 6th largest PC
maker I the world
0.05
4
0.20
9. Gateway retails stores excellent
0.05
3
0.15
Key Internal Factors
Strengths (cont’d)
IFE– Gateway Computers (2003)
Weight
Rating
Wtd
Score
1. High operating expense (22% of revenue
vs. 10% for Dell)
0.05
3
0.15
2. Almost no budget for R&D vs. Dell’s 18%
of revenue
0.10
1
0.05
3. Low return on assets ratio
0.025
1
0.10
4. No niche market
0.025
2
0.05
Key Internal Factors
Weaknesses
IFE– Gateway Computers (2003)
Weight
Rating
Wtd
Score
5. Shortage of cash due to successive
losses
0.10
2
0.20
6. Limited number Gateway stores
0.05
2
0.10
7. Weak performance in overseas market
0.10
2
0.20
TOTAL
1.00
Key Internal Factors
Weaknesses (cont’d)
2.85
 Total
weighted scores well
below 2.5 characterize
organizations that are weak
internally, whereas scores
significantly above 2.5
indicate a strong internal
position