Business Policy and Strategy III Questions & Answers

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Strategic Management Concepts: A Competitive Advantage Approach Sixteenth Edition

Chapter 4 The Internal Assessment

Learning Objectives (1 of 2) 4.1 Describe the nature and role of an internal assessment in formulating strategies.

4.2 Discuss why organizational culture is so important in formulating strategies.

4.3 Identify the basic functions (activities) that make up management and their relevance in formulating strategies.

4.4 Identify the basic functions of marketing and their relevance in formulating strategies.

4.5 Discuss the nature and role of finance and accounting in formulating strategies.

Learning Objectives (2 of 2) 4.6 Discuss the nature and role of production/operations in formulating strategies.

4.7 Discuss the nature and role of research and development (R&D) in formulating strategies.

4.8 Discuss the nature and role of management information systems (MIS) in formulating strategies.

4.9 Explain value chain analysis and its relevance in formulating strategies.

4.10 Develop and use an Internal Factor Evaluation (IFE) Matrix.

Figure 4-1 A Comprehensive Strategic- Management Model

Source: Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. Also, Ratnaningsih, Anik, and Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4, (October 2010): 20.

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.

Figure 4-2 The Process of Gaining Competitive Advantage in a Firm

Weaknesses → Strengths → Distinctive Competencies → Competitive Advantage

The Process of Performing an Internal Audit • The internal audit

– Requires gathering, assimilating, and prioritizing information about the firm's management, marketing, finance, accounting, production/operations, research and development (R and D), and management information systems operations

– Provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole firm

The Resource-Based View (RBV) (1 of 3) • The Resource-Based View (RBV) Approach

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

The Resource-Based View (RBV) (2 of 3) • 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 – human resources – organizational resources

The Resource-Based View (RBV) (3 of 3) • 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 are called Empirical Indicators

• These enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage.

Integrating Strategy and Culture • Organizational culture significantly affects planning

activities.

• 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.

Organizational Culture • Organizational culture is “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 and 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.”

Cultural Products • Values

• Beliefs

• Rites

• Rituals

• Ceremonies

• Myths

• Stories

• Legends

• Sagas

• Language

• Metaphors

• Symbols

• Folktales

• Heroes and heroines

Table 4-2 Aspects of 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

Fifteen Example (Possible) Aspects of an Organization’s Culture

Management The functions of management consist of five basic activities:

• planning

• organizing

• motivating

• staffing

• controlling

The Basic Functions of Management (1 of 2) • Planning: forecasting, establishing objectives, devising

strategies, and developing policies

• Organizing: organizational design, job specialization, job descriptions, span of control, coordination, job design, and job analysis

• Motivating: leadership, communication, work groups, behavior modification, delegation of authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee morale, and managerial morale

The Basic Functions of Management (2 of 2) • Staffing: wage and salary administration, employee

benefits, interviewing, hiring, firing, training, management development, employee safety, equal employment opportunity, and union relations

• Controlling: quality control, financial control, sales control, inventory control, expense control, analysis of variances, rewards, and sanctions

Management Audit Checklist of Questions (1 of 2) 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?

Management Audit Checklist of Questions (2 of 2) 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?

Marketing Marketing

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

Functions of Marketing • Customer analysis

• Selling products and services

• Product and service planning

• Pricing

• Distribution

• Marketing research

• Cost/ benefit analysis

Customer Analysis • 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

Selling Products and Services • Selling

– includes many marketing activities, such as advertising, sales promotion, publicity, personal selling, sales force management, customer relations, and dealer relations

Product and Service Planning • 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

Pricing • 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.

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

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

Cost/Benefit Analysis • Cost/Benefit Analysis

– Three steps are required: 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

Marketing Audit Checklist of Questions (1 of 2) 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?

Marketing Audit Checklist of Questions (2 of 2) 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?

Finance/Accounting Functions (1 of 4) The functions of finance/accounting comprise three decisions:

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

Finance/Accounting Functions (2 of 4) • Investment Decision (Capital Budgeting)

– 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

Finance/Accounting Functions (3 of 4) • 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

Finance/Accounting Functions (4 of 4) 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?

Table 4-4 A Summary of Key Financial Ratios (1 of 4)

Ratio How Calculated What it measures

Liquidity Ratios

Current Ratio Current assets over Current liabilities The extent to which a firm can meet its short-term obligations

Quick Ratio

Current assets minus inventory over Current liabilities The extent to which a firm can meet its short-term obligations without relying on the sale of its inventories

Leverage Ratios

Debt-to-Total- Assets Ratio

Total debt over Total assets The percentage of total funds provided by creditors

Debt-to-Equity Ratio

Total debt over Total stockholders’ equity The percentage of total funds provided by creditors versus by owners

Long-Term Debt- to-Equity Ratio

Long-term debt over Total stockholders’ equity The balance between debt and equity in a firm’s long-term capital structure

Times-Interest- Earned Ratio

Profits before interest and taxes over Total interest charges the extent to which earnings can decline without the firm becoming unable to meet its annual interest costs

Current assets Current liabilities

Current assets minus inventory Current liabilities

Total debt Total assets Total debt

Total stockholders' equity

Long-term debt Total stockholders' equity

Profits before interest and taxes Total interest charges

A Summary of Key Financial Ratios (2 of 4) Ratio How Calculated What it measures

Activity Ratios

Inventory turnover

Sales over Inventory of finished goods Whether a firm holds excessive stocks of inventories and whether a firm is slowly selling its inventories compared to the industry average

Fixed Assets turnover

Sales over Fixed assets Sales productivity and plant and equipment utilization

Total Assets turnover

Sales over Total assets Whether a firm is generating a sufficient volume of business for the size of its asset investment

Accounts Receivable turnover

Annual credit sales over Accounts receivable The average length of time it takes a firm to collect credit sales (in percentage terms)

Average Collection Period

Accounts receivable over total credit sales per 365 days The average length of time it takes a firm to collect on credit sales (in days)

Sales Inventory of finished goods

Sales Fixed assets

Sales Total assets

Annual credit sales Accounts receivable

Accounts receivable Total credit sales/365 days

A Summary of Key Financial Ratios (3 of 4) Ratio How Calculated What it measures

Profitability Ratios Gross Profit Margin

Sales minus cost of goods sold over Sales the total margin available to cover operating expenses and yield a profit

Operating Profit Margin

Earnings before interest and taxes EBIT over Sales Profitability without concern for taxes and interest

Net Profit Margin Net income over sales After-tax profits per dollar of sales

Return on total Assets (ROA)

Net income over Total assets After-tax profits per dollar of assets; this ratio is also called return on investment (ROI)

Return on Stockholders’ Equity (ROE)

Net Income over Total stockholders’ equity After-tax profits per dollar of stockholders’ investment in the firm

Earnings Per Share (EPS)

Net income over Number of shares of common stock outstanding Earnings available to the owners of common Stock

Price-Earnings Ratio

Market price per share over Earnings per share Attractiveness of firm on equity markets

Sales minus cost of goods sold Sales

Earnings before interest and taxes EBIT Sales

Net income Sales

Net income Total assets

Net income Total stockholders' equity

Net income Number of shares of common stock outstanding

Market price per share Earnings per share

A Summary of Key Financial Ratios (4 of 4) Ratio How Calculated What it measures

• Growth Ratios

Sales Annual percentage growth in total sales

Firm’s growth rate in sales

Net Income Annual percentage growth in profits

Firm’s growth rate in profits

Earnings Per Share Annual percentage growth in EPS

Firm’s growth rate in EPS

Dividends Per Share Annual percentage growth in dividends per share

Firm’s growth rate in dividends per share

Finance/Accounting Audit Checklist (1 of 2) 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?

Finance/Accounting Audit Checklist (2 of 2) 6. Are dividend payout policies reasonable?

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

8. Are the firm's financial managers experienced and well trained?

9. Is the firm's debt situation excellent?

Production/Operations • Production/operations function

– consists of all those activities that transform inputs into goods and services

• Production/operations management deals with inputs, transformations, and outputs that vary across industries and markets.

Table 4-6 The Basic Functions (Decisions) Within Production/Operations

Decision Areas Example Decisions

1. Process these decisions include choice of technology, facility layout, process flow analysis, facility location, line balancing, process control, and transportation analysis. Distances from raw materials to production sites to customers are a major consideration.

2. Capacity these decisions include forecasting, facilities planning, aggregate planning, scheduling, capacity planning, and queuing analysis. Capacity utilization is a major consideration.

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

4. Workforce these decisions involve managing the skilled, unskilled, clerical, and managerial employees by caring for job design, work measurement, job enrichment, work standards, and motivation techniques.

5. Quality these decisions are aimed at ensuring that high-quality goods and ser- vices are produced by caring for quality control, sampling, testing, quality assurance, and cost control.

Table 4-7 Implications of Various Strategies on Production/Operations

Various Strategies Implications

1. Become a low-cost provider

Creates high barriers to entry Creates larger market Requires longer production runs and fewer product changes

2. Become a high-quality provider

Requires more quality-assurance efforts Requires more expensive equipment Requires highly skilled workers and higher wages

3. Provide great customer service

Requires more service people, service parts, and equipment Requires rapid response to customer needs or changes in customer tastes Requires a higher inventory investment

4. Be the first to introduce new products

Has higher research and development costs Has high retraining and tooling costs

5. Become highly automated

Requires high capital investment Reduces flexibility May affect labor relations Makes maintenance more crucial

6. Minimize layoffs Serves the security needs of employees and may develop employee loyalty Helps attract and retain highly skilled employees

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?

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?

Management Information Systems • Management Information System

– Receives raw material from both external and internal evaluation of an organization

– Improves the performance of an enterprise by improving the quality of managerial decisions

– Collects, codes, stores, synthesizes, and presents information in such a manner that it answers important operating and strategic questions

Management Information Systems Audit (1 of 2) 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?

Management Information Systems Audit (2 of 2) 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?

Value Chain Analysis (VCA) • 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

Figure 4-8 Transforming Value Chain Activities into Sustained Competitive Advantage

Benchmarking • 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”

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.

3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a strength or weakness.

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.

Table 4-8 A Sample Internal Factor Evaluation Matrix for a Retail Computer Store (1 of 2)

Key internal Factors Weight Rating Weighted

Score Strengths Blank Blank Blank 1. Inventory turnover increased from 5.8 to 6.7. 0.05 3 0.15

2. Average customer purchase increased from $97 to $128. 0.07 4 0.28

3. Employee morale is excellent. 0.10 3 0.30

4. In-store promotions resulted in 20% increase in sales. 0.05 3 0.15

5. Newspaper advertising expenditures increased 10%. 0.02 3 0.06

6. Revenues from repair/service in the store up 16%. 0.15 3 0.45

7. In-store technical support personnel have MIS college degrees.

0.05 4 0.20

8. Store’s debt-to-total assets ratio declined to 34%. 0.03 3 0.09

9. Revenues per employee up 19%. 0.02 3 0.06

Table 4-8 A Sample Internal Factor Evaluation Matrix for a Retail Computer Store (2 of 2)

Key internal Factors Weight Rating Weighted Score

Weaknesses Blank Blank Blank

1. Revenues from software segment of store down 12%.

0.10 2 0.20

2. Location of store negatively impacted by new Highway 34.

0.15 2 0.30

3. Carpet and paint in store somewhat in disrepair.

0.02 1 0.02

4. Bathroom in store needs refurbishing. 0.02 1 0.02

5. Revenues from businesses down 8%. 0.04 1 0.04

6. Store has no website. 0.05 2 0.10

7. Supplier on-time delivery increased to 2.4 days.

0.03 1 0.03

8. Often customers have to wait to check out

0.05 1 0.05

Total 1.00 BLANK 2.50