The Internal Assessment

STRATEGIC MANAGEMENT

Chapter 4

The Internal Assessment

          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 and development, and management information systems.

The Nature of an Internal Audit

           All organizations have strengths and weaknesses in the functional areas of business. No enterprise is equally strong or weak in all areas. Internal strengths/weaknesses coupled with external opportunities/threats and a clear statement of mission, provide the basis for establishing objectives and strategies. Objectives and strategies are established with the intention of capitalizing upon internal strengths and overcoming weaknesses.

Key Internal Forces

          Each organization has its own strengths and weaknesses. Strengths are matched or over matched and weaknesses are exploited or capitalized by rivals.

          Distinctive competencies are firm’s strengths that cannot be easily matched or imitated by competitors.  

The Process of Performing an Internal Audit

· Requires gathering, assimilating, and evaluating information about the firm’s operations.

· Critical factors can be identified and prioritized.

· As in external audit, it involves key personnel/employees.

· Coordinated effort among all functional areas of business is needed.

The Resource-Based View (RBV)

          The RBV to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage and that these resources are actually what helps the firm exploit opportunity and neutralize threats.

          Internal Resources can be grouped into three encompassing categories:

· Physical resources – include all plant & equipment, location, technology, raw materials, machines.

· Human resources – include all employees, training, experience, intelligence, knowledge, skills, and abilities.

· Organizational resources – include firm structure, planning processes, information systems, patents, trademarks, copyrights, databases, and so on.

          The theory (RBV) asserts that it is advantageous for a firm to pursue a strategy that is not currently being implemented by any competing firm. When other firms are unable to duplicate a particular strategy, then the focal firm has a sustainable competitive advantage. 

          In order for a resource to be valuable, it must be either:

· Rare– are resources that other firms do not possess.

· Hard to Imitate- difficult to imitate

· Not easily substitutable- no viable substitutes

Often called “empirical indicators”, these three characteristics of resources enable the firm to implement strategies that improve its efficiency/effectiveness and lead to sustainable competitive advantage.

The more the resource(s) is rare, non-imitable, and non-substitutable the stronger the firm’s competitive advantage will be and the longer it will last.

Since both external and internal factors continually change, strategists seek to identify and take advantage of positive changes and buffer against negative changes in a continuing effort t gain and sustain a firm’s competitive advantage.

This is the essence and challenge of strategic management and oftentimes survival of the firm hinges on this work.

Integrating Strategy and Culture

          Organizational Culture  is” a pattern of behavior developed by an organization as it learns to cope with its problem of external adaption 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.”

          Remarkable resistant to change, culture can represent a major strength or weakness for a firm. An organization’s culture is like an individual personality, no two organizations have the same culture as no two individual has the same personality.

It is important for strategists to integrate strategy and culture.

- An organization’s culture must support the collective commitment of its people to a common purpose. It must foster competence and enthusiasm among managers and employees.

Different countries have different cultures. But SMILE is the only form of communication that works worldwide – take it along with you.

Management

The Basic Functions of Management

Function	Description	Stage of Strategic Management Process When Most Important
Planning	Planning consists of all those activities related to preparing for the future. Specific tasks include forecasting, establishing objectives, devising strategies developing policies, and setting goals.	Strategy Formulation
Organizing	Organizing includes all those managerial activities that result in a structure of task and authority relationships. Specific areas include organizational design, job specialization, job descriptions, job specifications, span of control, and unity of command, coordination, job design, and job analysis.	Strategy Implementation
Motivating	Motivating involves efforts directed towards shaping human behavior. Specific topics include leadership, communication, work groups, behavior modification, and delegation of authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee, morale, and managerial morale.	Strategy Implementation
Staffing	Staffing activities are centered on personnel or human resource management. Included are wage and salary administration, employee benefits, interviewing, hiring, firing, training, management development, employee safety, affirmative action, equal employment opportunity, union relations, career development, personnel research, discipline policies, grievance procedure, and public relations.	Strategy Implementation
Controlling	Controlling refers to all those managerial activities directed toward ensuring that actual results are consistent with planned results. Key areas of concern include quality control, financial control, sales control, inventory control, and expense control, analysis of variances, rewards, and sanctions.	Strategy Evaluation

Marketing

          Marketing can be defined as the process of defining, anticipating, creating, and fulfilling customer’s needs and wants for products and services.

Seven Basic Functions of Marketing

1. 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.

2. Selling Products/Services – selling includes many marketing activities, such as advertising, sales promotion, publicity, personal selling, sales force management, customer relations, and dealer relations.

3. Product and Service Planning – includes activities such as test marketing, product and brand positioning, devising warranties, packaging, determining product options, product features, product style, and product quality, deleting old products, and providing for customer service.

4. Pricing - The Price Variable refers to what the consumer must give up to purchase a product or service. The cost of the product to the consumer includes the dollar amount exchanged for an item, time, mental activity, and behavioral effort. A firm must consider a number of factors in determining the price it charges for its product or service, including costs, demand factors, competition, and perceived value.

5. Distribution – includes warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and retailing.

6. Marketing Research – is the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services. It can uncover strengths and weaknesses.

7. Opportunity Analysis – involves assessing the costs, benefits, and risks associated with marketing decisions.

Finance/Accounting

          Financial condition is often considered the single best measure of a firm’s competitive position and overall attractiveness to investors. Financial factors often alter existing strategies and change implementation program.

          The functions of finance/accounting comprise three decisions:

1. Investment Decision – also called capital budgeting, is the allocation and reallocation of capital and resources to projects, products, assets, and divisions of an organization.

2. Financing Decision – determine the best capital structure for the firm and includes examining various methods by which the firm can raise capital.

3. Dividend Decision – concern issues as the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the repurchase or issuance of stock.

Key Financial Ratios Classifications:

1. Liquidity Ratios measure a firm’s ability to meet maturing short-term obligations.

· Current Ratio =

· Quick (or Acid-Test) Ratio =

2. Leverage Ratios measure the extent to which a firm has been financed by debt.

· Debt-to-Total Assets Ratio =

· Debt-to-Equity Ratio =

· Long-Term Debt-to-Equity Ratio =

· Times-Interest-Earned Ratio =

3. Activity Ratios measure how effectively a firm is using its resources.

· Inventory Turnover =

· Fixed Assets Turnover =

· Total Assets Turnover =

· Account Receivable =

· Average Collection Period =

4. Profitability Ratios measure management’s overall effectiveness as shown by the returns generated on sales and investment.

· Gross Profit Margin =

· Operating Profit Margin =

· Net Profit Margin =

· Return on Total Assets (ROA) =

· Return on Stockholder’s Equity(ROE) =

· Earnings Per Share (EPS) =

· Price-Earnings Ratio =

5. Growth Ratios measure the firm’s ability to maintain its economic position in the growth of the economy and industry.

· Sales: Annual percentage growth in total sales.

· Net Income: Annual percentage growth in profits.

· Earnings per Share: Annual percentage growth in EPS

· Dividends per Share: Annual percentage growth in dividends per share.

Production/Operations

          The production/operation function of a business consists f all those activities that transform inputs into goods and services.

The Basic Functions of Production Management

1. Process – Process decisions concern the design of the physical production system. It includes choice of technology, facility layout, process flow, facility location, line balancing, process control, and transportation analysis.

2. Capacity – Capacity decisions concern determination of optimal output levels fort the organization – not too much or not too little. It includes forecasting, facilities planning, scheduling, capacity planning and queuing analysis.

3. Inventory – Inventory decisions involve managing the level of raw materials, work-in-process, and finished goods. It includes what to order, when to order, how much to order, and materials handling.

4. Workforce – Workforce decisions are concerned with managing skilled, unskilled, clerical and managerial employees. It includes job design, work measurement, job enrichment, work standards, and motivation techniques.

5. Quality – Quality decisions are aimed at ensuring that high quality goods and services are produced. It includes quality control, sampling, testing, quality assurance, and cost control.

Research and Development

          Organizations invest in R & D because they believe that such an investment will lead to a superior product or service and will give competitive advantage.

          Effective management of the R & D function requires a strategic and operational partnership between R & D and other vital business functions.

          R & D in organizations can take two basic forms:

1. Internal R &D – and organization operate its own R & D department.

2. Contract R & D – a firm hires independent researchers or independent agencies to develop specific products.

          A widely used R & D approach for obtaining outside R & D assistance is to pursue a joint venture with another firm.

Management Information Systems

          Information ties all business functions together and provides the basis for all managerial decisions. Information represents a major source of competitive management advantage or disadvantage.

          A management information system receives raw materials from both external and internal and internal evaluation of an organization. It gathers data about marketing, finance, production, and personnel matters internally and social, cultural, demographic, environmental, economic, political, governmental, legal, technological, and competitive factors externally. Data are integrated in ways needed to support managerial decision making.

          Data become information only when they are evaluated, filtered, condensed, analyzed, and organized for a specific purpose, problem, individual, or time.

The Value Chain

          The business of a firm can best be described as a Value Chain, in which total revenues minus total costs of all activities undertaken to develop and market a product or service yields value.

          Value Chain Analysis (VCA) refers to the process whereby a firm determines the costs associated with organizational activities from purchasing raw materials to manufacturing and to marketing the products.

The Internal Factor Evaluation Matrix (IFE) 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 business. Similar of EFE Matrix IFE Matrix can be developed in five steps.