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Strategic Management

Lesson 4:

Internal Assessment
Instructor: Va Siheng (National Institute of Management, Phnom Penh)
(Note: Most of the slides for Lesson 3 are from: Anthony F. Chelte / Fred David, Prentice Hall 2001)
June 18, 2012 1

Internal Factors
Internal Factors are forces located inside of the company which have an impact upon the overall performance of the organization. Examples include: human resources, products &

services, finance, technology, organizational culture, etc.

Prior to developing its strategy, a company must perform a survey or audit of its internal environment in order to identify existing strengths and weaknesses inside the company.
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Strengths and Weaknesses


Strength: Refers to a resource (e.g. asset, competency, process, skill, knowledge) of a company which provides the company with a competitive advantage relative to its competitors.
Weakness: A resource is a weakness if it is something the corporation does poorly or doesnt have the capacity to do relative to its competitors
(Wheelen, p. 82)

June 18, 2012

VRIO Framework

1) 2) 3) 4)

The following 4 questions are used to evaluate the strength of each resource of the firm?
VALUE: Does it provide competitive Advantage? RARENESS: Do other competitors possess it? IMITABILITY: Is it costly for others to imitate? ORGANIZATION: Is the firm organized to exploit the resource?

Source: Wheelen, p. 82.


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4.2

Core Competencies and Distinctive Competencies

Core Competencies and Distinctive Competencies


Core Competencies
Things a corporation can do exceedingly well

Distinctive Competencies
Core competencies that are superior to those of competitors
Chapter 4 75
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Prentice Hall, 2000


June 18, 2012

Distinctive Competencies
A firms strengths that cannot be easily matched or imitated by competitors. Building competitive advantage involves taking advantage of distinctive competencies.
Ex: 3M (exploits in research and development)

Strategies are designed in part to improve on a firms weaknesses, turning them into strengths and maybe even into distinctive competencies.
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Scanning the Internal Environment


All organizations have Strengths and Weaknesses in the functional areas of business. Vary by organization. (Ex: Hospitals; Universities;....)

No enterprise is equally strong or weak in all areas. Example:


Maytag (excellent production and design) Procter & Gamble (superb marketing)

June 18, 2012

Scanning the Internal Environment


The most effective way to identify internal strengths and weaknesses is to conduct an audit of the key functions/departments within the company. The most important areas to focus on include: marketing, finance, production/operations, personnel, research & development, etc. Cross-functional factors such as management and organizational culture also need to be evaluated.
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Corporate Culture
Corporate or organizational culture can be defined as a system of shared beliefs, values and way of doing things within a particular organization or company.
In

general, having an entrepreneurial corporate culture is considered to be a strength, while having a bureaucratic corporate culture is considered a weakness.
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June 18, 2012

Corporate Culture
Key questions for conducting the audit of corporate culture include: Note: Yes = Strength;
No = weakness

Is the general work environment friendly and open? Is internal conflict avoided? Is the company open to new ideas? Are rewards (salary/bonus/promotion) based on performance? Is long term thinking rewarded? Is there an intercultural work environment? (e.g. diversity in terms of age, gender, ethnicity, etc.)
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Management
Good management skills are essential to the effective operation of all departments within a company. Management can be divided into the following functions:
Planning Organizing Motivating Staffing Controlling

Each of the functions can be evaluated in order to identify existing strengths and weaknesses within the company.
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Internal Assessment (Contd)


Management
Forecasting Establishing objectives Planning Devising strategies Developing policies Setting goals
June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001) 12

Management (Planning)
Key questions include:
Does the company have a strong commitment to long-term strategic planning? Does the company have clear vision / mission statements? Does the company have clearly stated goals and objectives? Does the company have clear action plans?

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Internal Assessment (Contd)


Management

Organizing

Organizational design Job specialization Job descriptions Job specifications Span of control Unity of command Coordination Job design Job analysis
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June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

Management (Organizing)
Key questions include
Are job descriptions and job specifications clear? Is the organizational structure clear and effective? (e.g. functional, divisional, matrix, etc.) Does the organizational structure facilitate horizontal and vertical communication? Are reporting relationships clearly defined? Minimal bureaucracy?

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Internal Assessment (Contd)


Management

Motivating

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

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Management (Motivating)
Key questions include:
Do the managers of the company have good leadership skills? Do they delegate tasks including responsibilities/authority to subordinates? Do they have good listening skills? (I.e. how well do top managers listen to lower level management) Are they effective at motivating their subordinates/employees? Are employee turnover and absenteeism low?
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Internal Assessment (Contd)


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

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

Management (Staffing)
Is the companys existing recruitment process effective? Is the companys existing training and development program effective? Does the company regularly monitor and evaluate employee/management performance? Legal and ethical issues!

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Internal Assessment (Contd)


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

Controlling

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Management (Controlling)
Key questions include:
Are plans effectively implemented? Is quality effectively monitored and controlled? Is inventory effectively monitored and controlled? Are costs effectively monitored and controlled?

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Marketing Function
Marketing is the process of defining, anticipating, creating, and fulfilling customers needs and wants for products and services. (Fred David, p. 151) The main areas of marketing which need to be surveyed to determine strengths and weaknesses include: customer analysis, selling of products/services, product/service planning, pricing, distribution and marketing research.

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Internal Assessment (Contd)


Marketing Customer surveys Consumer information

Customer analysis

Market positioning strategies Customer profiles Market segmentation strategies

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Advertising Marketing

Sales
Promotion

Selling Products/services

Publicity
Sales force management

Customer relations
Dealer relations
June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001) 24

Internal Assessment (Contd)


Test marketing Marketing

Brand positioning
Devising warrantees

Product/service planning

Packaging
Product features/options

Product style
Quality
June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001) 25

Internal Assessment (Contd)


Forward integration Marketing

Discounts
Credit terms

Pricing

Condition of sale
Markups

Costs
Unit pricing
June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001) 26

Internal Assessment (Contd)


Warehousing Marketing

Channels
Coverage

Distribution

Retail site locations


Sales territories

Inventory levels
Transportation
June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001) 27

Internal Assessment (Contd)


Marketing

Data collection
Data input

Marketing research

Data analysis Support all business functions

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Marketing Function
Key questions include:
Does the company know the needs of its customers? Does the company know the buying criteria of its customers? (e.g. price, quality, terms, delivery,
support, etc.)

Does the company regularly conduct customer surveys? Does the company have a strong commitment to please its customers?
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Marketing Function
Does the company have knowledge concerning the public perception of their company? Does the company have some customers who are market leaders? Are the companys current products/services successful in existing markets? Is the company able to enter new markets with existing or new products / services? Is the company able to maximize product/service differentiation?
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Marketing Function
Does the company have effective and reliable distribution channels? Does the company know the products / services / prices of its competitors? Does the company have an effective advertising strategy? Is the companys market share increasing over time?
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Finance/Accounting
Perhaps the most important area in terms of determining a companys strengths and weaknesses relates to the financial situation of the company. An analysis of a firms financial statements (balance sheet, income statements) will indicate the overall state of health of the company. In particular, financial ratios are calculated using numbers from the financial statements in order to determine a companys profitability, liquidity, efficiency, etc.
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Finance / Accounting
Financial ratios can be used to compare a companys current position with past or historical performance. Financial ratios can also be used to compare a companies position with that of the industry average, thus determining strengths and weaknesses. For a complete list of financial ratios (Liquidity Ratios, Leverage Ratios, Activity Ratios, Profitability Ratios, etc.) please see Fred David, page: 144.
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Internal Assessment (Contd)


Financial ratios

Firms ability to meet its short-term obligations


Ratios

Liquidity ratios

Current ratio Quick (or acid-test) ratio

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)

Financial ratios

Extent of debt financing


Ratios
Debt-to-total-assets

Leverage ratios

Debt-to-equity Long-term debt-to-equity Times-interest earned

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)

Financial ratios

Effective use of firms resources


Ratios

Activity ratios

Inventory-turnover
Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)

Financial ratios

Effectiveness shown by returns on sales and investment


Ratios

Profitability ratios

Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA)

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)

Financial ratios

Effectiveness shown by returns on sales and investment


Ratios
Return on stockholders equity (ROE)

Profitability ratios (continued)

Earnings per share


Price-earnings ratio

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)

Financial ratios

Firms ability to maintain economic position


Ratios

Growth ratios

Sales Net income

Earnings per share


Dividends per share

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Finance / Accounting
In addition to calculating and evaluating financial ratios, some key questions to ask include:
Are the companys financial managers experienced and effective? Does the company set clear financial targets? Does the company have a good relationship with its investors / shareholders. Is the company able to raise short-term capital? Does the company have a good credit rating?
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Production/Operations
Production / Operations focuses on the transformation of raw materials and inputs into goods and services (outputs). The 5 most important areas relating to Production / Operations which need to be evaluated in the audit are:
Process: Capacity: Inventory: Workforce: Quality:
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Internal Assessment (Contd)


Production/Operations Design of facility

Choice of technology
Facility layout

Process

Process flow analysis Facility location Line balancing Process control

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Production/Operations Forecasting Facilities planning

Capacity

Aggregate planning Scheduling Capacity planning Queuing analysis

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Production/Operations Raw material Work in process Inventory Finished goods Materials handling

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Production/Operations

Job design
Work measurement

Workforce

Job enrichment Work standards Motivation techniques

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Production/Operations

Quality control
Sampling

Quality

Testing Quality assurance Cost control

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Production/Operations Audit Checklist
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?

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Internal Assessment (Contd)


Production/Operations Audit Checklist (Contd)
Are quality-control policies and procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies?

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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Research & Development


The future of a company often depends on its level of commitment to research and development in order to improve existing products / services / processes and to develop new products / services and processes. Research and Development (R&D) programs can be evaluated based on resource levels (Budget) or in terms of results (new products to market).

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Research & Development


Key questions include:
Is the companys R&D program effective? Is the annual R&D budget adequate? (e.g. in comparison to competitors, industry average) Is there effective communication between the R&D department and other functions/departments inside the company? (e.g. marketing, production, etc.)

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Internal Factor Evaluation Matrix (IFE)


The IFE Matrix is used to summarize the results of the Internal scanning or audit of the company.

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Internal Factor Evaluation Matrix (IFE)


Step # 1: Write down at least 10 to 20 internal factors which have a significant impact on your company. Strengths should be listed first, followed by weaknesses.

Step # 2: Evaluate the importance of each of the factors in terms of the overall success of the firm within its particular industry by giving a weight to each factor.
Range: from 0.0 (not important) to 1.0 (very important). The combined wait for all factors must equal 1.0.
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Internal Factor Evaluation Matrix (IFE)


Step # 3: Identify whether the strength/weakness is major or minor by placing a rating of 1 to 4 besides each factor:
1 2 3 4 = major weakness = minor weakness = minor strength = major strength

Step # 4: Calculate the score for each factor by multiplying the weights/ratings generated in steps # 2 & 3. Step # 5; add up all of the scores for each factor to determine the total score for the company.
The highest possible score is 4.0.
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IFE Matrix
K ey Internal Factors Strengths Sales growth for D ell is 42.8 percent compared to 21 percent for the industry and is being experienced in all geographic areas T he companys management is very effective as show n by its RO A, RO E , and RO I D ell ow ns its relationship w ith its consumers and can react to their input quickly Inventory turnover is 57.53 versus 22.87 for the industry D ells D irect M odel allow s competitive advantage T he company has Internet sales of $30 millio n per day and utilizes the Internet for every aspect of their business T he company carries only 6 days of inventory D ell is the fastest grow ing computer company in the industry and ho lds 17.1 percent of the U .S. PC market share D ell finished first among 1000 companies in total returns to investors over the past 3, 5, and 10 years W eaknesses T he company is not capitalizing on the individual market D ell has several single source supplier relations and depends on suppliers for all co mponent parts D ell had a back log of $170 millio n as of the end of 1998 D ell operates in one industry segment It takes 5 to 7 days to receive a computer from D ell Stakeholders have a very high expectation for growth Revenues fro m Asia Pacific and Japan make up only 6 percent of total company revenues T he companys gross margin is 22.11 as compared to an industry average of 33.45 Consumer aw areness is low TO TA L W eight R ating W eighted Score 0.30 0.10 3 0.15 0.05 0.10 0.05 0.20 0.03 0.03 0.06 4 4 4 3 4 4 3 4 0.60 0.20 0.40 0.15 0.80 0.12 0.09 0.24

0.03 0.02 0.01 0.01 0.03 0.01 0.05 0.03 0.04 1.00

2 2 2 2 2 2 1 1 2

0.06 0.04 0.02 0.02 0.06 0.02 0.05 0.03 0.08 3.28

June 18, 2012 (Source: Anthony F. Chelte / Fred David, 2001)

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