1. Copyright 2005 Prentice Hall1 Bus 411 Day 6

2. Copyright 2005 Prentice Hall Ch 4 -2 Agenda Discussion on Internal Assessment  Strengths and weaknesses Assignment #2 due next class Assignment #3 will be assigned next class Templates section in WebCT  I am creating templates form any of the analytical tools we will use in this class  Will become useful for Case Study portion

3. Copyright 2005 Prentice Hall Ch 4 -3 Chapter 4 The Internal Assessment Strategic Management: Concepts & Cases 10 th Edition Fred David PowerPoint Slides by Anthony F. Chelte Western New England College

4. Copyright 2005 Prentice Hall Ch 4 -4 Chapter Outline The Nature of an Internal Audit The Resource-Based View (RBV) Integrating Strategy & Culture

5. Copyright 2005 Prentice Hall Ch 4 -5 Chapter Outline ( cont’d ) Management Marketing Opportunity Analysis

6. Copyright 2005 Prentice Hall Ch 4 -6 Chapter Outline ( cont’d ) Finance/Accounting Production/Operations Research & Development

7. Copyright 2005 Prentice Hall Ch 4 -7 Chapter Outline ( cont’d ) Management Information Systems The Internal Factor Evaluation (IFE) Matrix

8. Copyright 2005 Prentice Hall Ch 4 -8 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 Internal Assessment Weak leadership can wreck the soundest strategy; forceful execution of even a poor plan can often bring victory. Sun Tzu

9. Copyright 2005 Prentice Hall Ch 4 -9 The Nature of an Internal Audit -- Strengths -- Weaknesses Functional Areas of Business

10. Copyright 2005 Prentice Hall Ch 4 -10 Internal strengths/weaknesses External opportunities/threats Clear statement of mission Nature of an Internal Audit Basis for Objectives & Strategies

11. Copyright 2005 Prentice Hall Ch 4 -11 Key Internal Forces Functional Business Areas:  Vary by organization  Divisions have differing strengths & weaknesses

12. Copyright 2005 Prentice Hall Ch 4 -12 Key Internal Forces Distinctive Competencies:  Firm’s strengths that cannot be easily matched or imitated by competitors

13. Copyright 2005 Prentice Hall Ch 4 -13 Key Internal Forces Distinctive Competencies:  Building competitive advantage involves taking advantage of distinctive competencies

14. Copyright 2005 Prentice Hall Ch 4 -14 Key Internal Forces Distinctive Competencies:  Strategies designed to improve on a firm’s weaknesses and turn to strengths

15. Copyright 2005 Prentice Hall Ch 4 -15 Internal Audit Information from: Management Marketing Finance/accounting Production/operations Research & Development Management information Systems Parallels process of external audit

16. Copyright 2005 Prentice Hall Ch 4 -16 Internal Audit Involvement in performing an internal strategic-management audit provides vehicle for understanding the nature and effect of decisions in other functional business areas of the firm

17. Copyright 2005 Prentice Hall Ch 4 -17 Internal Audit Coordination & understanding among managers from all functional areas Key to Organizational Success

18. Copyright 2005 Prentice Hall Ch 4 -18 Internal Audit Number and complexity increases relative to organization size Functional Relationships

19. Copyright 2005 Prentice Hall Ch 4 -19 Internal Audit Exemplifies complexity of relationships among functional areas of the business Financial Ratio Analysis

20. Copyright 2005 Prentice Hall Ch 4 -20 Resource Based View (RBV) Approach to Competitive Advantage Internal resources are more important than external factors

21. Copyright 2005 Prentice Hall Ch 4 -21 Resource Based View (RBV) 3 All Encompassing Categories 1. Physical resources Materials, plant and equipment Tangibles 2. Human resources Talent 3. Organizational resources Structure, planning, intellectual property

22. Copyright 2005 Prentice Hall Ch 4 -22 Resource Based View (RBV) Empirical Indicators  Rare  Hard to imitate  Not easily substitutable

23. Copyright 2005 Prentice Hall Ch 4 -23 Integrating Strategy & 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 Organizational Culture

24. Copyright 2005 Prentice Hall Ch 4 -24 Integrating Strategy & Culture Organizational Culture  Resistant to change  May represent  Strength  Weakness

25. Copyright 2005 Prentice Hall Ch 4 -25 Cultural Products Values Legends Beliefs HeroesRites SymbolsRituals Myths Integrating Strategy & Culture

26. Copyright 2005 Prentice Hall Ch 4 -26 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

27. Copyright 2005 Prentice Hall Ch 4 -27 Management Functions of Management 1. Planning 2. Organizing 3. Motivating 4. Staffing 5. Controlling

28. Copyright 2005 Prentice Hall Ch 4 -28 Management Planning Stage When Most Important Function Strategy Formulation Organizing Strategy Implementation Motivating Strategy Implementation Staffing Controlling Strategy Implementation Strategy Evaluation

29. Copyright 2005 Prentice Hall Ch 4 -29 Management Planning  Beginning of management process  Bridge between present & future  Improves likelihood of attaining desired results

30. Copyright 2005 Prentice Hall Ch 4 -30 Planning Forecasting Establishing objectives Devising strategies Developing policies Setting goals Management

31. Copyright 2005 Prentice Hall Ch 4 -31 Management Organizing  Achieves coordinated effort  Defines task & authority relationships  Departmentalization  Delegation of authority

32. Copyright 2005 Prentice Hall Ch 4 -32 Organizing Organizational design Job specialization Job descriptions Job specifications Span of control Unity of command Coordination Job design Job analysis Management

33. Copyright 2005 Prentice Hall Ch 4 -33 Management Motivating  Influencing to accomplish specific objectives  Communication – major component

34. Copyright 2005 Prentice Hall Ch 4 -34 Motivating Leadership Communication Work groups Job enrichment Job satisfaction Needs fulfillment Organizational change Morale Management

35. Copyright 2005 Prentice Hall Ch 4 -35 Management Staffing  Personnel management  Human resources management

36. Copyright 2005 Prentice Hall Ch 4 -36 Staffing Wage & salary admin. Employee benefits Interviewing Hiring Discharging Training Management development Affirmative Action EEO Labor relations Management

37. Copyright 2005 Prentice Hall Ch 4 -37 Management Controlling  Establishing performance standards  Ensure actual operations conform to planned operations  Taking corrective actions

38. Copyright 2005 Prentice Hall Ch 4 -38 Controlling Quality Financial Sales Inventory Expense Analysis of variance Rewards Sanctions Management

39. Copyright 2005 Prentice Hall Ch 4 -39 Management Audit Checklist Does the firm use strategic management concepts? Are objectives/goals measurable? Well communicated? Do managers at all levels plan effectively? Does the firm use strategic management concepts? Are objectives/goals measurable? Well communicated? Do managers at all levels plan effectively?

40. Copyright 2005 Prentice Hall Ch 4 -40 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? Do managers delegate well? Is the organization’s structure appropriate? Are job descriptions clear? Are job specifications clear? Is employee morale high?

41. Copyright 2005 Prentice Hall Ch 4 -41 Management Audit Checklist Is employee absenteeism low? Is employee turnover low? Are the reward mechanisms effective? Are the organization’s control mechanisms effective? Is employee absenteeism low? Is employee turnover low? Are the reward mechanisms effective? Are the organization’s control mechanisms effective?

42. Copyright 2005 Prentice Hall Ch 4 -42 Marketing Customer Needs/Wants for Products/Services 1. Defining 2. Anticipating 3. Creating 4. Fulfilling

43. Copyright 2005 Prentice Hall Ch 4 -43 Marketing Marketing Functions 1. Customer analysis 2. Selling products/services 3. Product & service planning 4. Pricing 5. Distribution 6. Marketing research 7. Opportunity analysis

44. Copyright 2005 Prentice Hall Ch 4 -44 Customer Analysis Customer surveys Consumer information Market positioning strategies Customer profiles Market segmentation strategies Marketing

45. Copyright 2005 Prentice Hall Ch 4 -45 Advertising Sales Promotion Publicity Sales force management Customer relations Dealer relations Marketing Selling Products/Services

46. Copyright 2005 Prentice Hall Ch 4 -46 Test marketing Brand positioning Devising warrantees Packaging Product features/options Product style Quality Marketing Planning Product/Service

47. Copyright 2005 Prentice Hall Ch 4 -47 Forward integration Discounts Credit terms Condition of sale Markups Costs Unit pricing Marketing Pricing

48. Copyright 2005 Prentice Hall Ch 4 -48 Warehousing Channels Coverage Retail site locations Sales territories Inventory levels Transportation Marketing Distribution

49. Copyright 2005 Prentice Hall Ch 4 -49 Data collection Data input Data analysis Support business functions Marketing Marketing Research

50. Copyright 2005 Prentice Hall Ch 4 -50 Assessing costs Assessing benefits Assessing risks Cost/benefit/risk analysis Marketing Opportunity Analysis

51. Copyright 2005 Prentice Hall Ch 4 -51 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?

52. Copyright 2005 Prentice Hall Ch 4 -52 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?

53. Copyright 2005 Prentice Hall Ch 4 -53 Marketing Opportunity Analysis 10. Are the marketing planning & budgeting effective? 11. Do the firm’s marketing managers have adequate experience and training?

54. Copyright 2005 Prentice Hall54 Bus 411 Day 7

55. Copyright 2005 Prentice Hall Ch 4 -55 Agenda Discussion on Internal Assessment  Strengths and weaknesses Assignment #2 due Assignment #3 will be assigned at end class Templates section in WebCT  I am creating templates for any of the analytical tools we will use in this class  Will become useful for Case Study portion

56. Copyright 2005 Prentice Hall Ch 4 -56 Finance/Accounting  Determining financial strengths & weaknesses key to strategy formation

57. Copyright 2005 Prentice Hall Ch 4 -57 Finance/Accounting Finance/Accounting Functions 1. Investment decision (Capital budgeting) 2. Financing decision 3. Dividend decision

58. Copyright 2005 Prentice Hall Ch 4 -58 Financial ratios Objective indicators Three uses  Trending over time  Comparison to industry norms  Comparison to competitors Industry norms are available through UMFK electronic resources  Business and Company Resource Center  http://www.umfk.maine.edu/infoserv/library/indxdb /alphalist.asp?Loc=fk http://www.umfk.maine.edu/infoserv/library/indxdb /alphalist.asp?Loc=fk

59. Copyright 2005 Prentice Hall Ch 4 -59 Firm’s ability to meet its short-term obligations Ratios Current ratio Quick (or acid test) ratio Basic Financial Ratios Liquidity Ratios

60. Copyright 2005 Prentice Hall Ch 4 -60 Extent of debt financing Ratios Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest earned Basic Financial Ratios Leverage Ratios

61. Copyright 2005 Prentice Hall Ch 4 -61 Effective use of firm’s resources Ratios Inventory-turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period Basic Financial Ratios Activity Ratios

62. Copyright 2005 Prentice Hall Ch 4 -62 Effectiveness shown by returns on sales & investment Ratios Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Basic Financial Ratios Profitability Ratios

63. Copyright 2005 Prentice Hall Ch 4 -63 Effectiveness shown by returns on sales & investment Ratios Return on stockholders equity (ROE) Earnings per share Price-earnings ratio Basic Financial Ratios Profitability Ratios (cont’d)

64. Copyright 2005 Prentice Hall Ch 4 -64 Firm’s ability to maintain economic position Ratios Sales Net income Earnings per share Dividends per share Basic Financial Ratios Growth Ratios

65. Copyright 2005 Prentice Hall Ch 4 -65 Finance/Accounting Audit Where is the firm strong/weak 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? Where is the firm strong/weak 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?

66. Copyright 2005 Prentice Hall Ch 4 -66 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? 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?

67. Copyright 2005 Prentice Hall Ch 4 -67 Production/Operations Production/Operations Functions  Process  Capacity  Inventory  Workforce  Quality

68. Copyright 2005 Prentice Hall Ch 4 -68 Facility design Technology selection Facility layout Process flow analysis Facility location Line balancing Process control Production/Operations Process

69. Copyright 2005 Prentice Hall Ch 4 -69 Forecasting Facilities planning Aggregate planning Scheduling Capacity planning Queuing analysis Production/Operations Capacity

70. Copyright 2005 Prentice Hall Ch 4 -70 Raw materials Work in process Finished goods Materials handling Production/Operations Inventory

71. Copyright 2005 Prentice Hall Ch 4 -71 Job design Work measurement Job enrichment Work standards Motivation techniques Production/Operations Workforce

72. Copyright 2005 Prentice Hall Ch 4 -72 Quality control Sampling Testing Quality assurance Cost Control Production/Operations Quality

73. Copyright 2005 Prentice Hall Ch 4 -73 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? Are suppliers of materials, parts, etc. reliable and reasonable? Are facilities, equipment & machinery in good condition? Are inventory-control policies and procedures effective?

74. Copyright 2005 Prentice Hall Ch 4 -74 Production/Operations Audit Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies? Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies?

75. Copyright 2005 Prentice Hall Ch 4 -75 Research & Development Research & Development Functions  Development of new products before competitors  Improving product quality  Improving manufacturing processes to reduce costs

76. Copyright 2005 Prentice Hall Ch 4 -76 Financing as many projects as possible use percent-of-sales method Budgeting relative to competitors How many successful new products are needed Research & Development R&D Budgets

77. Copyright 2005 Prentice Hall Ch 4 -77 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? 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?

78. Copyright 2005 Prentice Hall Ch 4 -78 Research & Development Audit Are MIS and computer systems adequate? Is communication between R&D & other organizational units effective? Are present products technologically competitive? Are MIS and computer systems adequate? Is communication between R&D & other organizational units effective? Are present products technologically competitive?

79. Copyright 2005 Prentice Hall Ch 4 -79 Management Information Systems Purpose  Improve performance of an enterprise by improving the quality of managerial decisions.

80. Copyright 2005 Prentice Hall Ch 4 -80 Management Information Systems Information Systems CIO/CTO Security User-friendly E-commerce

81. Copyright 2005 Prentice Hall Ch 4 -81 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? 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?

82. Copyright 2005 Prentice Hall Ch 4 -82 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? 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?

83. Copyright 2005 Prentice Hall Ch 4 -83 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? 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?

84. Copyright 2005 Prentice Hall Ch 4 -84 Value Chains Defined by Michael Porter in his 1985 book “Competitive Advantage” A way for organizing the activities of a business so that each activity adds value (value-added activity) or productivity to the total operations of the business. Each activity is said to have a value proposition Firms that have identified and optimized their value chains will have Competitive advantage over those that have not.

85. Copyright 2005 Prentice Hall Ch 4 -85 PRIMARY ACTIVITIES Inbound Logistics  Supply line of business Operations  Conversion of raw materials into finished products  Center of value chain where value-added occurs Outbound Logistics  Storing, distribution and shipping of final product

86. Copyright 2005 Prentice Hall Ch 4 -86 PRIMARY ACTIVITIES (Cont’d) Marketing and Sales  Deals with ultimate customer Service  After-sale service to customer

87. Copyright 2005 Prentice Hall Ch 4 -87 SUPPORT ACTIVITIES Corporate Infrastructure  Backbone of business unit Human Resources  Matching the right people to the right job Technology Development  Product and business processes improvement Procurement  Prerequisite for production

88. Copyright 2005 Prentice Hall Ch 4 -88 VALUE CHAIN Image from http://www.cscresearchservices.com/foundation/library/value/RP01.asp

89. Copyright 2005 Prentice Hall Ch 4 -89 The 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 a business, and it also provides a basis for identifying and evaluating relationships among these areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique.

90. Copyright 2005 Prentice Hall Ch 4 -90 5 Steps to an IFE 1.List key internal factors as identified in the internal-audit process. Use a total from ten to twenty internal factors including both strengths and weaknesses. 2.Assign a weight ranging from 0 (not important) to 1.0 (very important). The weight indicates the relative importance of the factor to being successful in the firm’s industry. The sum of all the weights must equal 1.0. 3.Assign a 1-4 rating to each factor to indicate whether that factor represents a major weakness (1), minor weakness (2), minor strength (3), or major strength (4). 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. Total weighted scores of below 2.5 indicate an internally weak organization.

91. Copyright 2005 Prentice Hall Ch 4 -91 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Strengths 1. Several new senior executive with world- class skills and leadership experience 0.0540.40 2. Continuous decline in operating costs and cost of goods sold 0.0530.15 3. Well-known brand name0.0530.15 4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1 0.1040.40 5. As a direct seller, Gateway holds high brand recognition 0.0530.15

92. Copyright 2005 Prentice Hall Ch 4 -92 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Strengths (cont’d) 6. Gateway is diversifying into non-PC products 0.1030.30 7. Good relationship with its suppliers.0.0540.20 8. Economies of scale, the 6 th largest PC maker I the world 0.0540.20 9. Gateway retails stores excellent0.0530.15

93. Copyright 2005 Prentice Hall Ch 4 -93 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Weaknesses 1. High operating expense (22% of revenue vs. 10% for Dell) 0.0530.15 2. Almost no budget for R&D vs. Dell’s 18% of revenue 0.1010.05 3. Low return on assets ratio0.02510.10 4. No niche market0.02520.05

94. Copyright 2005 Prentice Hall Ch 4 -94 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Weaknesses (cont’d) 5. Shortage of cash due to successive losses 0.1020.20 6. Limited number Gateway stores0.0520.10 7. Weak performance in overseas market0.1020.20 TOTAL1.002.85

95. Copyright 2005 Prentice Hall Ch 4 -95 Assignment 3 Calculating ratios In class exercise using Apple KKD and SBUX for assignment Doing an IFE  KKD Due in one week on Feb 14