In your assigned groups, each group can select a group leader to submit their work in the assigned Dropbox on Slate. For any re

MGMT 40000D Strategic Management

Week 4.

By: Dr. Wael Ramadan, B.Eng., MBA, PhD, PMP, LSSBB, SPC, SDP, POPM, SA, SMC.

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Agenda:

• StratSim Decision Point

• CH 4: Perform The Internal Audit

• Next Class: – StratSim Decision Point

– Weekly Case Presentation Due for Assigned Team

• Final Project Proposals & Team Contracts Due next week

(Refer to Topical Outline For Deadline)

• Summary

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Chapter Objectives 1. Describe how to perform an internal strategic-

management audit. 2. Discuss the Resource-Based View (RBV) in strategic

management. 3. Discuss key interrelationships among the functional

areas of business. 4. Identify the basic functions or activities that make up

management, marketing, finance/accounting production/operations, research and development, and management information systems.

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Chapter Objectives 5. Explain how to determine and prioritize a firm’s

internal strengths and weaknesses. 6. Explain the importance of financial ratio analysis. 7. Discuss the nature and role of management

information systems in strategic management. 8. Develop an Internal Factor Evaluation

(IFE) Matrix. 9. Explain cost/benefit analysis value chain

analysis, and benchmarking as strategic- management tools.

Strategic Management Model

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Key Internal Forces • Distinctive competencies

– A firm’s strengths that cannot be easily matched or imitated by competitors

• Building competitive advantages involves taking advantage of distinctive competencies.

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Weaknesses Strengths Distinctive Competencies Competitive Advantage

The Process of Gaining Competitive Advantage in a Firm

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The Process of Performing an Internal Audit

• The internal audit – Requires gathering and assimilating 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

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The Resource-Based View (RBV)

• Contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage

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The Resource-Based View (RBV) • Proponents of the RBV contend that organizational

performance will primarily be determined by internal resources that can be grouped into three all-encompassing categories:

– Physical Resources: plant and equipment, location, technology, raw materials, machines

– Human Resources: employees, training, experience, intelligence, knowledge, skills, abilities

– Organizational Resources: firm structure, planning processes, information systems, patents, trademarks, copyrights, databases, and so on.

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The Resource-Based View (RBV)

• For a resource to be valuable, it must be either (1) rare, (2) hard to imitate, or (3) not easily substitutable

• These three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage

Example Cultural Products Defined

Examples of Possible Aspects of an Organizational Culture

Dimension Low Degree Degree Degree High 1. Strong work ethic; arrive early and leave late 1 2 3 4 5

2. High ethical beliefs; clear code of business ethics followed 1 2 3 4 5

3. Formal dress; shirt and tie expected 1 2 3 4 5

4. Informal dress; many casual dress days 1 2 3 4 5

5. Socialize together outside of work 1 2 3 4 5

6. Do not question supervisor’s decision 1 2 3 4 5

7. Encourage whistle-blowing 1 2 3 4 5

8. Be health conscious; have a wellness program 1 2 3 4 5

9. Allow substantial “working from home” 1 2 3 4 5

10. Encourage creativity, innovation, and open-mindedness 1 2 3 4 5

11. Support women and minorities; no glass ceiling 1 2 3 4 5

12. Be highly socially responsible; be philanthropic 1 2 3 4 5

13. Have numerous meetings 1 2 3 4 5

14. Have a participative management style 1 2 3 4 5

15. Preserve the natural environment; have a sustainability program

1 2 3 4 5

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Integrating Strategy and Culture • Organizational culture significantly affects

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

• If strategies can capitalize on cultural strengths, such as a strong work ethic or highly ethical beliefs, then management often can swiftly and easily implement changes.

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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 capitalize on its management strengths and improve on its management weaknesses.

The Basic Functions of Management

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Management Audit Checklist of Questions

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?

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Management Audit Checklist of Questions (cont.)

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?

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Marketing

• Marketing is the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services

Functions of Marketing

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Customer analysis

Selling products and services

Product and service planning

Pricing

Distribution

Marketing research

Cost/benefit analysis

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Marketing • 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

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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

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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

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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

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Marketing Research

• Marketing research – the systematic gathering, recording, and

analyzing of data about problems relating to the marketing of goods and services

– can uncover critical strengths and weaknesses

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Cost/Benefit Analysis

Three steps are required to perform a cost/benefit analysis: 1. compute the total costs associated with a

decision, 2. estimate the total benefits from the decision, 3. compare the total costs with the total

benefits.

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Marketing Audit Checklist of Questions

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?

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Marketing Audit Checklist of Questions

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? 12. Is the firm’s Internet presence excellent as

compared to rivals?

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Finance/Accounting Functions

The functions of finance/accounting comprise three decisions:

1. The investment decision 2. The financing decision 3. The dividend decision

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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

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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

Classification of Key Financial Ratios Into Five Types:

• Measure the firm’s ability to meet maturing short- term obligationsLiquidity Ratios

• Measure the extent to which a firm has been financed by debtLeverage Ratios

• Measure how effectively a firm is using its resourcesActivity Ratios

• Measure management’s overall effectiveness as shown by the returns generated on sales and investmentProfitability Ratios

• Measures the firm’s ability to maintain its economic position in the growth of the economy and industryGrowth Ratios

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Finance/Accounting Functions 1. How has each ratio changed over time?

2. How does each ratio compare to industry norms?

3. How does each ratio compare with key competitors?

A Summary of Key Financial Ratios

A Summary of Key Financial Ratios (2)

A Summary of Key Financial Ratios (3)

A Summary of Key Financial Ratios (4)

Sample Financial Ratio Trend Analysis

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Finance/Accounting Audit Checklist

1. Where is the firm financially strong and weak as indicated by financial ratio analyses?

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?

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Finance/Accounting Audit Checklist

7. Are dividend payout policies reasonable?

8. Does the firm have good relations with its investors and stockholders?

9. Are the firm’s financial managers experienced and well trained?

10. Is the firm’s debt situation excellent?

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.

The Basic Functions (Decisions) Within Production/Operations

Implications of Various Strategies on Production/Operations

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Production/Operations Audit Checklist

1. Are supplies of raw materials, parts, and subassemblies reliable and reasonable?

2. Are facilities, equipment, machinery, and offices in good condition?

3. Are inventory-control policies and procedures effective? 4. Are quality-control policies and procedures effective? 5. Are facilities, resources, and markets strategically located? 6. Does the firm have technological competencies?

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Research and Development Audit 1. Does the firm have R&D facilities? Are they adequate? 2. If outside R&D firms are used, are they cost-effective? 3. Are the organization’s R&D personnel well qualified? 4. Are R&D resources allocated effectively? 5. Are management information and computer

systems adequate? 6. Is communication between R&D and other

organizational units effective? 7. Are present products technologically competitive?

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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

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Management Information Systems Audit

1. Do all managers in the firm use the information system to make decisions?

2. Is there a chief information officer or director of information systems position in the firm?

3. Are data in the information system updated regularly?

4. Do managers from all functional areas of the firm contribute input to the information system?

5. Are there effective passwords for entry into the firm’s information system?

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Management Information Systems Audit

6. Are strategists of the firm familiar with the information systems of rival firms?

7. Is the information system user-friendly? 8. Do all users of the information system understand

the competitive advantages that information can provide firms?

9. Are computer training workshops provided for users of the information system?

10.Is the firm’s information system continually being improved in content- and user-friendliness?

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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

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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”

Transforming Value Chain Activities into Sustained Competitive Advantage

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The Internal Factor Evaluation (IFE) Matrix

1. List key internal factors as identified in the internal-audit process

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor, industry based

3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a strength or weakness. Rating value interpretation: 1= major weakness, 2=minor weakness, 3= minor strength, 4=major strength.

4. Multiply each factor’s weight by its rating to determine a weighted score for each variable

5. Sum the weighted scores for each variable to determine the total weighted score for the organization. (Interpretation of total weighted score value: 4=strong internal position, 1=weak internal position)

A Sample Internal Factor Evaluation Matrix