Chapter 2: Strategy Formulation

Part II. Of this chapter cont’d

Reference[Chapter 6 of the text book]
Part II. The Internal Audit/Assessment
Objectives:
After studying this part, you should be able to do the following:

1. Describe how to perform an internal strategic-management audit.

2. Discuss the Resource-Based View (RBV) in strategic management.
3. Discuss key interrelationships among the functional areas of business.
4. Identify the basic functions or activities that make up management, marketing,
finance/accounting production/operations, research and development, and
management information systems.
5. Explain how to determine and prioritize a firm’s internal strengths and weaknesses.
6. Discuss the nature and role of management information systems in strategic
management.
7. Explain cost/benefit analysis value chain analysis, and benchmarking as strategic-
management tools.
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: The process of Gaining Competitive Advantage in a Firm

Weakness  Strength Distinctive Competencies Competitive Advantage

The Process of Performing an Internal Audit
 The internal audit
 Requires gathering and assimilating information about the firm’s
 (A)management,
 (B)marketing,
 (C)finance/accounting,
 (D)production/operations,
 (E)research and development (R&D), and
 (F)management information systems operations
 Provides more opportunity for participants to understand how
their jobs, departments, and divisions fit into the whole
organization
The Resource-Based View (RBV)
 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
 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, and
organizational resources
 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 enable a firm to
implement strategies that improve its efficiency and
effectiveness and lead to a sustainable competitive advantage
(A)Management

 The functions of management consist of five basic

activities: planning, organizing, motivating, staffing, and
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
Management Audit Checklist of Questions

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?
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?
(B)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/Services
 Product and Service Planning
 Pricing Distribution
 Marketing Research
 Opportunity Analysis
Marketing
 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
 essential in developing an effective mission statement
Desirable Characteristics of Ads Today
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
 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

Three steps are required to perform a cost/benefit analysis:

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. 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?
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?
(C)Finance/Accounting Functions
The functions of finance/accounting comprise three decisions:
1. the investment decision
2. the financing decision
3. the dividend decision
 Investment decision
 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
 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 Audit Checklist
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?
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?
(D)Production/Operations
 Production/operations function
 consists of all those activities that transforms inputs into goods and services
 Production/operations management deals with inputs, transformations, and
outputs that vary across industries and markets
The Basic Functions (Decisions) Within
Production/Operations
Implications of Various Strategies on
Production/Operations
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?
(E)Management Information Systems

 A management information system’s purpose is to improve the

performance of an enterprise by improving the quality of managerial
decisions

 An effective information system thus collects, codes, stores,

synthesizes, and presents information in such a manner that it
answers important operating and strategic questions
Management Information Systems Audit
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?
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)
 refersto 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
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”
Transforming Value Chain Activities into
Sustained Competitive Advantage
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
A Sample Internal Factor Evaluation
Matrix for a Retail Computer Store