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Strategic Management Concepts: A

Competitive Advantage Approach,

Concepts and Cases Seventeenth Edition

Chapter 4 The Internal Assessment

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Learning Objectives (1 of 2)

4.1 Describe the nature and role of an internal assessment

in formulating strategies.

4.2 Discuss the nature and role of management in

formulating strategies.

4.3 Discuss the nature and role of marketing in formulating

strategies.

4.4 Discuss the nature and role of finance and accounting

in formulating strategies.

After studying this chapter, you should be able to do the following:

4.1 Describe the nature and role of an internal assessment in formulating

strategies.

4.2 Discuss the nature and role of management in formulating strategies.

4.3 Discuss the nature and role of marketing in formulating strategies.

4.4 Discuss the nature and role of finance and accounting in formulating

strategies.

Learning Objectives (2 of 2)

4.5 Discuss management information systems (MIS) in

terms of formulating strategies.

4.6 Explain how to develop and use an Internal Factor

Evaluation (IFE) Matrix.

After studying this chapter, you should be able to do the following:

4.5 Discuss management information systems (MIS) in terms of formulating

strategies.

4.6 Explain how to develop and use an Internal Factor Evaluation (IFE) Matrix.

Figure 4.1 The Comprehensive

Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22,

no. 1 (February 1989): 91. See also Anik Ratnaningsih, 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.

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

All organizations have strengths and weaknesses in the functional areas of

business. No enterprise is equally strong or weak in all areas. Strategic

planning is most successful when managers and employees from all functional

areas work together to provide ideas and information.

The Resource-Based View (R B V) (1 of 3)

• The Resource-Based View (R B V) Approach

– contends that internal resources are more important for

a firm than external factors in achieving and sustaining

competitive advantage

The Resource-Based View (R B V) (2 of 3)

• Proponents of the R B V contend that organizational

performance will primarily be determined by internal

resources. These resources can be grouped into

– tangible

– intangible

Tangible resources are labor, capital, land, plant, and equipment. Intangible

resources are culture, knowledge, brand equity, reputation, and intellectual

property.

The Resource-Based View (R B V) (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.

The basic premise of the RBV is that the mix, type, amount, and nature of a

firm’s internal resources should be considered first and foremost in devising

strategies that can lead to sustainable competitive advantage.

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

Strategies are designed in part to improve on a firm’s weaknesses, turning

them into strengths—and maybe even into distinctive competencies that can

provide the firm with competitive advantages over rival firms.

Management

The functions of management consist of four basic

activities:

• planning

• organizing

• motivating

• 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 (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

Planning consists of all those managerial activities related to preparing for the

future.

Organizing includes all those managerial activities that result in a structure of

task and authority relationships.

Motivating involves efforts directed toward shaping human behavior.

The Basic Functions of Management (2 of 2)

• Controlling: quality control, financial control, sales control,

inventory control, expense control, analysis of variances,

rewards, and sanctions

Controlling refers to all those managerial activities directed toward ensuring

that actual results are consistent with planned results.

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.

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.

Every business entity has a unique organizational culture that impacts

strategic-planning activities.

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.”

Remarkably resistant to change, culture can represent a major strength or

weakness for any firm. It can be an underlying reason for strengths or

weaknesses in any of the major business functions.

Table 4.4 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

Table 4.4 provides some example (possible) aspects of an organization’s

culture. Note that you might want to ask employees and managers to rate the

degree that the dimension characterizes the firm.

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?

This checklist of questions can help determine specific strengths and

weaknesses in the functional area of business. An answer of no to any

question could indicate a potential weakness. Positive or yes answers to the

checklist questions suggest potential areas of strength.

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

• the process of defining, anticipating, creating, and fulfilling

customers’ needs and wants.

Marketing can be described as the process of defining, anticipating, creating,

and fulfilling customers’ needs and wants.

Five Basic Activities in Marketing

1. Marketing research and target market analysis

2. Product planning

3. Pricing products

4. Promoting products

5. Placing or distributing products

These are the five basic activities in marketing. Each will be described on the

following slides.

Marketing Research and Target

Market Analysis

• 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

• Target Market Analysis

– The examination and evaluation of consumer needs

and wants

Marketing research and target market analysis is one of the five basic

marketing activities.

Product Planning

• Product 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

Product planning is the second function of marketing.

Pricing

• Pricing

– Refers to deciding the amount an individual must

exchange to receive a firm’s product offering.

– Pricing strategies are often based on costs, demand,

the competition, or on customers’ needs.

Pricing is the third function of marketing.

Promotion

• Promotion

– Includes many marketing activities, such as

advertising, sales promotion, public relations, personal

selling, and direct marketing.

– Common promotional tools designed to inform

consumers about products include TV advertising,

magazine ads, billboards, websites, and public

relations, among others.

Promotion is the fourth marketing function.

Distribution

• Channels of Distribution

– This is a term that refers to various intermediaries that

take a product from a producer to an end customer.

– These intermediaries have names such as

wholesalers, retailers, brokers, facilitators, agents,

vendors, or simply distributors.

Distribution is the fifth function of marketing.

Marketing Audit Checklist of

Questions (1 of 2)

1. Are markets segmented effectively?

2. Is the organization positioned well among competitors?

3. Are present channels of distribution reliable and cost

effective?

4. Is the firm conducting and using market research

effectively?

These questions about marketing must be examined in strategic planning.

Marketing Audit Checklist of

Questions (2 of 2)

5. Are product quality and customer service good?

6. Are the firm's products and services priced appropriately?

7. Does the firm have an effective promotional strategy?

8. 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

According to James Van Horne, the functions of finance/accounting comprise

three decisions: the investment decision, the financing decision, and 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

After strategies are formulated, capital budgeting decisions are required to

successfully implement strategies.

Firms may raise capital by, for example, issuing stock, increasing debt, selling

assets, or using a combination of these approaches.

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

Three financial ratios that are helpful in evaluating a firm’s dividend decisions

are the earnings-per-share ratio, the dividends-per-share ratio, and the price-

earnings ratio.

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?

Financial ratios are computed from an organization’s income statement and

balance sheet. Computing financial ratios is like taking a photograph—the

results reflect a situation at just one point in time. Comparing ratios over time

and to industry averages is more likely to result in meaningful statistics that

can be used to identify and evaluate strengths and weaknesses.

Financial ratio analysis should be conducted on three separate fronts.

Figure 4.2 Financial Ratio Trend

Analysis

Table 4.9 A Summary of Key Financial

Ratios (1 of 4)

Ratio How Calculated What it measures

Liquidity Ratios

Current Ratio extent to which a firm can meet its short-

term obligations

Quick Ratio

The extent to which a firm can meet its

short-term obligations without relying on

the sale of its inventories

Current assets

Current liabilities

Current assets minus inventory

Current liabilities

Leverage Ratios

Debt-to-Total-

Assets Ratio

The percentage of total funds provided by

creditors

Debt-to-Equity

Ratio

The percentage of total funds provided by

creditors versus by owners

Long-Term Debt-

to-Equity Ratio The balance between debt and equity in a

firm’s long-term capital structure

Times-Interest-

Earned Ratio

the extent to which earnings can decline

without the firm becoming unable to meet

its annual interest costs

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

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 productivity and plant and

equipment utilization

Total Assets

turnover

Whether a firm is generating a sufficient

volume of business for the size of its asset

investment

Accounts

Receivable

turnover

The average length of time it takes a firm

to collect credit sales (in percentage

terms)

Average

Collection Period

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

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

the total margin available to

cover operating expenses and

yield a profit

Operating Profit

Margin

Profitability without concern for

taxes and interest

Net Profit Margin After-tax profits per dollar of

sales

Return on total

Assets (R O A)

After-tax profits per dollar of

assets; this ratio is also called

return on investment (R O I)

Return on

Stockholders’

Equity (R O E)

After-tax profits per dollar of

stockholders’ investment in the

firm

Earnings Per Share (E P S)

Earnings available to the owners

of common stock

Price-Earnings Ratio 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

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

or equity?

4. Does the firm have sufficient working capital?

5. Are capital budgeting procedures effective?

Some finance and accounting questions that should be examined in any

strategic analysis of the firm are given here.

Finance/Accounting Audit Checklist (2 of 2)

6. Are dividend payout policies reasonable?

7. Does the firm have excellent 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?

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

The heart of an information system is a database containing the kinds of

records and data important to managers.

Business Analytics

• A business technique that involves using software to mine

huge volumes of data to help executives make decisions.

• Also called predictive analytics, machine learning, or

data mining.

Business analytics is a business technique that involves using software to

mine huge volumes of data to help executives make decisions.

Also called predictive analytics, machine learning, or data mining.

The Internal Factor Evaluation (I F E)

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.

A summary step in conducting an internal strategic-management audit is to

construct an Internal Factor Evaluation (IFE) Matrix.

Figure 4.3 How to Gain and Sustain

Competitive Advantages

Slide 1: Strategic Management Concepts: A Competitive Advantage Approach, Concepts and Cases
Slide 2: Learning Objectives (1 of 2)
Slide 3: Learning Objectives (2 of 2)
Slide 4: Figure 4.1 The Comprehensive Strategic-Management Model
Slide 5: The Process of Performing an Internal Audit
Slide 6: The Resource-Based View (R B V) (1 of 3)
Slide 7: The Resource-Based View (R B V) (2 of 3)
Slide 8: The Resource-Based View (R B V) (3 of 3)
Slide 9: Key Internal Forces
Slide 10: Management
Slide 11: The Basic Functions of Management (1 of 2)
Slide 12: The Basic Functions of Management (2 of 2)
Slide 13: Production/Operations
Slide 14: Integrating Strategy and Culture
Slide 15: Organizational Culture
Slide 16: Table 4.4 Aspects of Organizational Culture
Slide 17: Management Audit Checklist of Questions (1 of 2)
Slide 18: Management Audit Checklist of Questions (2 of 2)
Slide 19: Marketing
Slide 20: Five Basic Activities in Marketing
Slide 21: Marketing Research and Target Market Analysis
Slide 22: Product Planning
Slide 23: Pricing
Slide 24: Promotion
Slide 25: Distribution
Slide 26: Marketing Audit Checklist of Questions (1 of 2)
Slide 27: Marketing Audit Checklist of Questions (2 of 2)
Slide 28: Finance/Accounting Functions (1 of 4)
Slide 29: Finance/Accounting Functions (2 of 4)
Slide 30: Finance/Accounting Functions (3 of 4)
Slide 31: Finance/Accounting Functions (4 of 4)
Slide 32: Figure 4.2 Financial Ratio Trend Analysis
Slide 33: Table 4.9 A Summary of Key Financial Ratios (1 of 4)
Slide 34: A Summary of Key Financial Ratios (2 of 4)
Slide 35: A Summary of Key Financial Ratios (3 of 4)
Slide 36: A Summary of Key Financial Ratios (4 of 4)
Slide 37: Finance/Accounting Audit Checklist (1 of 2)
Slide 38: Finance/Accounting Audit Checklist (2 of 2)
Slide 39: Management Information Systems
Slide 40: Business Analytics
Slide 41: The Internal Factor Evaluation (I F E) Matrix
Slide 42: Figure 4.3 How to Gain and Sustain Competitive Advantages
Slide 43: Copyright