Fred R.

David
Prentice Hall
Ch 4-1
Chapter 4
The Internal Assessment
Strategic Management:
Concepts and Cases. 9
th
edition
Fred R. David

Fred R. David
Prentice Hall
Ch 4-2
Chapter Outline
The Nature of an Internal Audit

Integrating Strategy and Culture

Management


Fred R. David
Prentice Hall
Ch 4-3
Chapter Outline
Marketing

Finance/Accounting

Production/Operations

Fred R. David
Prentice Hall
Ch 4-4
Chapter Outline
Research and Development

Management Information Systems

The Internal Factor Evaluation
Matrix (IFE)

Fred R. David
Prentice Hall
Ch 4-5
The Internal Assessment
Great spirits have always encountered
violent opposition from mediocre minds.

-- Albert Einstein

Fred R. David
Prentice Hall
Ch 4-6
Nature of an Internal Audit
All organizations

Strengths
Weaknesses


Fred R. David
Prentice Hall
Ch 4-7
Nature of an Internal Audit
Basis for objectives & strategies:

Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission


Fred R. David
Prentice Hall
Ch 4-8
Key Internal Forces
Functional business areas:

Vary by organization
Divisions have differing strengths and
weaknesses

Fred R. David
Prentice Hall
Ch 4-9
Key Internal Forces
Distinctive Competencies

A firms strengths that cannot be easily
matched or imitated by competitors

Building competitive advantage involves
taking advantage of distinctive competencies

Strategies designed in part to improve on a
firms weaknesses and turn to strengths
Fred R. David
Prentice Hall
Ch 4-10
Internal Audit
Parallels process of external audit
Gather & assimilate information from:
Management
Marketing
Finance/accounting
Production/operations
Research & development
Management information systems
Fred R. David
Prentice Hall
Ch 4-11
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.
Fred R. David
Prentice Hall
Ch 4-12
Internal Audit

Key to organizational success:

Coordination and understanding among
managers from all functional areas
Fred R. David
Prentice Hall
Ch 4-13
Internal Audit

Functional relationships:

Number and complexity increases relative
to organization size

Fred R. David
Prentice Hall
Ch 4-14
Internal Audit

Financial Ratio Analysis:

Exemplifies complexity of relationships
among functional areas of the business


Fred R. David
Prentice Hall
Ch 4-15
Integrating Strategy and Culture
Organizational Culture

Pattern of behavior developed by an
organization as it learns to cope with
its problem of external adaptation and
internal integrationis considered
valid and taught to new members
Fred R. David
Prentice Hall
Ch 4-16
Integrating Strategy and Culture
Organizational Culture --

Resistant to change

May represent a strength or weakness
of the firm

Fred R. David
Prentice Hall
Ch 4-17
Integrating Strategy and Culture
Cultural products
Values
beliefs
rites
rituals
ceremonies
myths

stories
legends
sagas
language
symbols
heroes

Fred R. David
Prentice Hall
Ch 4-18
Integrating Strategy and Culture
Culture can inhibit strategic management:

Miss changes in external environment
because they are blinded by strongly held
beliefs

When a culture has been effective in the
past, natural tendency to stick with it in
future, even during times of major strategic
change
Fred R. David
Prentice Hall
Ch 4-19
Functions of Management
Five basic activities

Planning
Organizing
Motivating
Staffing
Controlling
Fred R. David
Prentice Hall
Ch 4-20
Functions of Management
Planning
Stage When Most
Important
Function
Strategy Formulation
Organizing
Strategy Implementation
Motivating
Strategy Implementation
Staffing
Controlling
Strategy Implementation
Strategy Evaluation
Fred R. David
Prentice Hall
Ch 4-21
Functions of Management
Planning

Start of the process
Bridge between present and future
Increases likelihood of achieving desired
results
Fred R. David
Prentice Hall
Ch 4-22
Planning
Planning
Forecasting

Establishing objectives

Devising strategies

Developing policies

Setting goals
Fred R. David
Prentice Hall
Ch 4-23
Functions of Management
Organizing

Achieve coordinated effort
Defining task and authority relationships
Departmentalization
Delegation of authority
Fred R. David
Prentice Hall
Ch 4-24
Organizing
Organizing
Organizational design
Job specialization
Job descriptions
Job specifications
Span of control
Unity of command
Coordination
Job design
Job analysis
Organizing
Organizational design
Job specialization
Job descriptions
Job specifications
Span of control
Unity of command
Coordination
Job design
Job analysis
Organizing
Organizational design
Job specialization
Job descriptions
Job specifications
Span of control
Unity of command
Coordination
Job design
Job analysis
Fred R. David
Prentice Hall
Ch 4-25
Functions of Management
Motivating

Influencing people to accomplish specific
objectives
Communication is a major component
Fred R. David
Prentice Hall
Ch 4-26
Motivating
Motivating


Leadership
Communication
Work groups
Job enrichment
Job satisfaction
Needs fulfillment
Organizational
change
Morale


Fred R. David
Prentice Hall
Ch 4-27
Functions of Management
Staffing

Personnel management
Human resources management
Fred R. David
Prentice Hall
Ch 4-28
Staffing
Staffing

Wage & salary admin
Employee benefits
Interviewing
Hiring
Firing
Training
Management development
Safety
Affirmative action
EEO
Labor relations
Career development
Discipline procedures


Management
Fred R. David
Prentice Hall
Ch 4-29
Functions of Management
Controlling

Ensure actual operations conform to
planned operations
Fred R. David
Prentice Hall
Ch 4-30
Controlling
Controlling

Quality control
Financial control
Sales control
Inventory control
Expense control
Analysis of variances
Rewards
Sanctions

Management
Fred R. David
Prentice Hall
Ch 4-31
Management Audit Checklist
Does the firm use strategic-
management 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 organizations structure
appropriate?
Fred R. David
Prentice Hall
Ch 4-32
Management Audit Checklist
Are job descriptions and job
specifications clear?
Is employee morale high?
Are employee turnover and
absenteeism low?
Are organizational reward and control
mechanisms effective?

Fred R. David
Prentice Hall
Ch 4-33
Marketing
Process of defining, anticipating, creating,
and fulfilling customers needs and
wants for products and services

Fred R. David
Prentice Hall
Ch 4-34
Marketing

1. Customer analysis
2. Selling products/services
3. Product and service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
Fred R. David
Prentice Hall
Ch 4-35
Marketing
Customer analysis
Customer surveys

Consumer information

Market positioning
strategies

Customer profiles

Market segmentation
strategies
Fred R. David
Prentice Hall
Ch 4-36
Marketing
Selling
Products/services
Advertising

Sales

Promotion

Publicity

Sales force management

Customer relations

Dealer relations
Fred R. David
Prentice Hall
Ch 4-37
Marketing
Product/service
planning
Test marketing

Brand positioning

Devising warrantees

Packaging

Product features/options

Product style

Quality

Fred R. David
Prentice Hall
Ch 4-38
Marketing
Pricing
Forward integration

Discounts

Credit terms

Condition of sale

Markups

Costs

Unit pricing

Fred R. David
Prentice Hall
Ch 4-39
Marketing
Distribution

Warehousing

Channels

Coverage

Retail site locations

Sales territories

Inventory levels

Transportation
Fred R. David
Prentice Hall
Ch 4-40
Marketing
Marketing research
Data collection

Data input

Data analysis

Support all business
functions

Fred R. David
Prentice Hall
Ch 4-41
Marketing
Opportunity
Analysis
Assessing costs

Assessing benefits

Assessing risks

Cost/benefit/risk
analysis
Fred R. David
Prentice Hall
Ch 4-42
Marketing Audit

Are markets segmented effectively?
Is the organization positioned well among
competitors?
Has the firms market share been increasing?
Are present channels of distribution reliable
and cost effective?
Does the firm have an effective sales force?
Fred R. David
Prentice Hall
Ch 4-43
Marketing Audit
Does the firm conduct market research?
Are product quality and customer
service good?
Are the firm's products/services priced
appropriately?
Does the firm have an effective
promotion, advertising, and publicity
strategy?

Fred R. David
Prentice Hall
Ch 4-44
Marketing Audit
Are marketing planning and budgeting
effective?
Do the firms marketing mangers have
adequate experience and training
Fred R. David
Prentice Hall
Ch 4-45
Finance/Accounting


Determining financial strengths and
weaknesses key to strategy formulation
Investment decision (Capital budgeting)
Financing decision
Dividend decision
Fred R. David
Prentice Hall
Ch 4-46
Finance/Accounting


Functions of Finance/Accounting

1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
Fred R. David
Prentice Hall
Ch 4-47
Basic Financial Ratios
Liquidity ratios
Firms ability to meet
its short-term
obligations

Ratios

Current ratio

Quick
(or acid-test)
ratio
Fred R. David
Prentice Hall
Ch 4-48
Leverage ratios
Extent of debt
financing

Ratios

Debt-to-total-assets

Debt-to-equity

Long-term debt-to-equity

Times-interest earned
Basic Financial Ratios
Fred R. David
Prentice Hall
Ch 4-49
Activity ratios
Effective use of firms
resources

Ratios

Inventory-turnover

Fixed assets turnover

Total assets turnover

Accounts receivable turnover

Average collection period
Basic Financial Ratios
Fred R. David
Prentice Hall
Ch 4-50
Profitability ratios
Effectiveness shown
by returns on sales
and investment

Ratios

Gross profit margin

Operating profit margin

Net profit margin

Return on total assets (ROA)

Basic Financial Ratios
Fred R. David
Prentice Hall
Ch 4-51
Profitability ratios
(continued)
Effectiveness shown
by returns on sales
and investment

Ratios

Return on stockholders equity
(ROE)

Earnings per share

Price-earnings ratio
Basic Financial Ratios
Fred R. David
Prentice Hall
Ch 4-52
Growth ratios
Firms ability to
maintain economic
position

Ratios

Sales

Net income

Earnings per share

Dividends per share
Basic Financial Ratios
Fred R. David
Prentice Hall
Ch 4-53
Where is the firm strong and weak as
indicated by financial ratio analysis?
Can the firm raise needed short-term capital?
Can the firm raise needed long-term capital
through debt and/or equity?
Does the firm have sufficient working capital?
Are capital budgeting procedures effective?
Finance/Accounting Audit
Fred R. David
Prentice Hall
Ch 4-54
Are dividend payout policies reasonable?
Does the firm have good relations with its
investors and stockholders?
Are the firms financial managers experienced
and well trained?
Finance/Accounting Audit
Fred R. David
Prentice Hall
Ch 4-55
Process
Capacity
Inventory
Workforce
Quality
Production/Operations
Fred R. David
Prentice Hall
Ch 4-56
Process
Design of facility

Choice of technology

Facility layout

Process flow analysis

Facility location

Line balancing

Process control
Production/Operations
Fred R. David
Prentice Hall
Ch 4-57
Capacity
Forecasting

Facilities planning

Aggregate planning

Scheduling

Capacity planning

Queuing analysis
Production/Operations
Fred R. David
Prentice Hall
Ch 4-58
Inventory
Raw material

Work in process

Finished goods

Materials handling
Production/Operations
Fred R. David
Prentice Hall
Ch 4-59
Workforce
Job design

Work measurement

Job enrichment

Work standards

Motivation techniques
Production/Operations
Fred R. David
Prentice Hall
Ch 4-60
Quality
Quality control

Sampling

Testing

Quality assurance

Cost control
Production/Operations
Fred R. David
Prentice Hall
Ch 4-61
Are suppliers of raw materials, parts, and
subassemblies reliable and reasonable?
Are facilities, equipment, machinery, and
offices in good condition?
Are inventory-control policies and procedures
effective?
Production/Operations Audit
Fred R. David
Prentice Hall
Ch 4-62
Are quality-control policies and procedures
effective?
Are facilities, resources, and markets
strategically located?
Does the firm have technological
competencies?
Production/Operations Audit
Fred R. David
Prentice Hall
Ch 4-63
Development of new products before
competition
Improving product quality
Improving manufacturing processes to
reduce costs
Research and Development
Fred R. David
Prentice Hall
Ch 4-64
R&D budgets
Financing as many
projects as possible

Use percentage-of-sales
method

Budgeting relative to
competitors

Deciding how many
successful new
products are needed
Research and Development
Fred R. David
Prentice Hall
Ch 4-65
Does the firm have R&D facilities? Are
they adequate?
If outside R&D firms are used, are they
cost effective?
Are the organizations R&D personnel
well qualified?
Are R&D resources allocated
effectively?
Research and Development Audit
Fred R. David
Prentice Hall
Ch 4-66
Are management information and computer
systems adequate?
Is communication between R&D and other
organizational units effective?
Are present products technologically
competitive?

Research and Development Audit
Fred R. David
Prentice Hall
Ch 4-67
Purpose
Improve performance of an enterprise by
improving the quality of managerial
decisions.
Management Information
Systems
Fred R. David
Prentice Hall
Ch 4-68
Information Systems
CIO/CTO
Security
User-friendly
E-commerce
Management Information
Systems
Fred R. David
Prentice Hall
Ch 4-69
Do all managers in the firm use the
information system to make decisions?
Is there a chief information officer or
director of information systems position
in the firm?
Are data in the information system
updated regularly?

Management Information
Systems Audit
Fred R. David
Prentice Hall
Ch 4-70
Do managers from all functional areas
of the firm contribute input to the
information system?
Are there effective passwords for entry
into the firms information system?
Are strategists of the firm familiar with
the information systems of rival firms?

Management Information
Systems Audit
Fred R. David
Prentice Hall
Ch 4-71
Is the information system user-friendly?
Do all users of the information system
understand the competitive advantages
that information can provide firms?
Are computer training workshops
provided for users?
Is the firms system being improved?
Management Information
Systems Audit
Fred R. David
Prentice Hall
Ch 4-72
Internal Analysis (IFE)
Five-Step Process:

List key internal factors (10-20)
Strengths & weaknesses

Assign weight to each (0 to 1.0)
Sum of all weights = 1.0
Fred R. David
Prentice Hall
Ch 4-73
Assign 1-4 rating to each factor
Firms current strategies response to the
factor

Multiply each factors weight by its rating
Produces a weighted score
Internal Analysis (IFE)
Fred R. David
Prentice Hall
Ch 4-74

Sum the weighted scores for each
Determines the total weighted score for the
organization

Highest possible weighted score for the
organization is 4.0; the lowest, 1.0.
Average = 2.5
Internal Analysis (IFE)
Fred R. David
Prentice Hall
Ch 4-75
.15 3 .05 Financial ratios
.15 3 .05 Reputation as family-friendly
.20 4 .05 Long-range planning
.15 3 .05 Minimal comps provided
.15 3 .05 Buffets at most facilities
.15 3 .05 Strong management team
.60 4 .15 Owns 1 mile on Las Vegas strip
.15 3 .05 Increasing free cash flows
.40 4 .10 Room occupancy rates over 95%
.20 4 .05 Largest casino company in world
Weighted
score
Rating Weight
Mandalay Bay
Internal Strengths
Internal Analysis (IFE)
Fred R. David
Prentice Hall
Ch 4-76
2.75 1.0 TOTAL (including Strengths)
.10 1 .10 Recent loss of joint ventures
.10 1 .10 Laughlin properties
.10 2 .05 Family reputation, not high rollers
.10 2 .05 Little diversification
.05 1 .05 Most properties located in Las Vegas
Weighted
score
Rating Weight
Mandalay Bay
Internal Weaknesses
Internal Analysis (IFE)
Fred R. David
Prentice Hall
Ch 4-77

Mandalay Bay (in the previous
example), has a total weighted
score of 2.75 indicating that the firm
is above average in its overall
internal strength

Internal Analysis (IFE)
Fred R. David
Prentice Hall
Ch 4-78
Key Terms
Activity ratios
Buying
Capital budgeting
Communication
Computer information systems
Controlling
Cost/benefit analysis
Cultural products
Customer analysis
Fred R. David
Prentice Hall
Ch 4-79
Key Terms
Distinctive competencies
Distribution
Dividend decision
Financial ratio analysis
Financing decisions
Functions of finance/accounting
Functions of management
Fred R. David
Prentice Hall
Ch 4-80
Key Terms
Functions of marketing
Functions of production/operations
Growth ratio
Human resource management
Internal audit
Internal Factor Evaluation (IFE) Matrix
Investment Decision
Fred R. David
Prentice Hall
Ch 4-81
Key Terms
Leverage ratios
Liquidity ratios
Marketing research
Motivating
Opportunity analysis
Organizational culture
Organizing
Personnel management
Planning
Pricing
Fred R. David
Prentice Hall
Ch 4-82
Key Terms
Product and service planning
Production/operations functions
Profitability ratios
Research and development
Fred R. David
Prentice Hall
Ch 4-83
Key Terms
Selling
Social responsibility
Staffing
Synergy
Test marketing