Summary ch.4 Fred R. David

SUMMARY of Ch. # 4: The Internal Assessment Submitted to:

Dr. Ali Askari

Group Members  Adnan Ahmed (01)  Ali Ather (03)

 Aatikah Mansoori (09)  JaweriaRizvi (23)

Summary This chapter focuses on identifying and evaluating a firm’s strength & weaknesses in the functional area of business. The Nature of an Internal Audit Internal strengths/weaknesses, coupled with external, opportunities/threats and a clear statement of mission, provide the basis for establishing objectives and strategies. Objectives and strategies are established with the intension of capitalizing upon internal strength and overcoming weaknesses. Key Internal Forces A firm’s strengths that cannot be easily matched or imitated by competitors are called distinctive competency. 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 & may be even into distinctive competencies. The Process of Performing an Internal Audit Representative Managers & employees from throughout the form need to be involve in determining a firm’s strength and weaknesses. The internal audit requires gathering & assimilating information about the firm’s management, marketing, finance/accounting, production/operations, R & D and M.I.S operations. Compare to the external audit the process of performing an internal audit provides more opportunity for participants to understand how their jobs, department & divisions for into the whole organization. This is a great benefit because manager & employees perform better when they understand how their work affects other areas and activities of the firm. Communication may be the most important word in the management. The Process of Gaining Competitive Advantage in a firm. A key to organizational success is effective coordination and understanding among managers from all functional business areas. Through involvement in performing an internal strategic-management audit, managers from different departments & divisions of the firm come to understand the nature and effect of decisions in other functional business areas in their firm. The Resource-Based View RBV: The RBV approach to competitive advantage contents that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. In contrast to I/O theory proponents of the RBV view content that organizational performance will primarily be determine by internal resources that cab be group into three all-encompassing categories: physical resources (including plants & equipment, location, technology, raw material), human resources (including employees, training, experience, intelligence, skills)& organization resources

SUMMARY of Ch. # 4: The Internal Assessment (including firm’s structure, papents, trade marks, copy rights, databases.) Managing strategically according to the RBV involves developing & xploiting a firm’s unique reources and capabilities continually maintaining and strengthening those resources. The theory asserts that it is advantageous for a firm to peruse a strategy that is not currently being implemented by any competing firm. For a resource to be valuable it must be either: 1- Rare 2- Hard to imitate 3- Not easily substitutable often called empirical indicators, these three characteristics of resources enable a firm to implement strategies that improves its efficiency & effectiveness and lead to a sustainable competitive advantage. Integrating Strategy & Culture: Organizational culture can be defined as “a pattern of behavior that has been developed by an organization as it learns to cope with its problem of external adaptation & 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 thing and feel.” Cultural products include values, beliefs, rituals, ceremonies, language etc. Success in often determined by linkages between a firm’s culture and strategies. Management The functions of management consist of five basic activities: planning, organizing, motivating, staffing & controlling. Planning: It consist of all those managerial activities related to preparing or the future. Specific tasks include forecasting, establishing objective, devising strategies, developing policies & setting goals. Organizing: It includes all those managerial activities that result in a structure of task and authority relationship. Specific area include organizational design, job specialization, job descriptions, job specifications, span of control, unity of command, coordination, allocation or resources, job design & analysis. Motivating: It involves efforts directed towards shaping human behavior. Specific topics includes leadership, communication, work groups, behavior modification, delegation of authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee morale & managerial morale. Staffing: Its activities are centered on personal or human resources management. Included are wage & salary administration, employee benefits, interviewing, hiring, firing, training, management development, employee safety, affirmative actions, equal employment opportunities, union relations, career development, personal research & public relations. Controlling: It refers to all those managerial activities directed towards ensuring that actual results are consistent with planned results. Key areas of concern incudes quality, financial, sales, inventory and expense control also analysis of variances, rewards and sanctions.

Marketing: Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. Seven functions of marketing are

SUMMARY of Ch. # 4: The Internal Assessment 1) Customer analysis 2) Selling 3) Planning 4) Pricing 5) Distribution 6) Marketing research 7) Opportunity analysis. Customer Analysis: Customer analysis is the examination and evaluation of consumer needs, desires and wants. Successful organizations continually monitor present and potential customers buying patterns.

Selling: Selling includes many marketing activities, such as advertising, sales promotion, personal selling etc. Selling includes Communicating directly with potential customers to determine and satisfy their needs.

Product and Services Planning: Product and service planning includes activities such as test marketing product and brand positioning, devising warranties, packaging, product style and product quality. Test marketing allows an organization to test alternative marketing plans and to forecast future sales of the product.

Pricing: Five major stakeholders’ effect pricing decisions; consumers, governments, suppliers, distributors and competitor. Usually the dominant firm aggressively matches all the price cuts by competitors.

Distribution: Distribution includes warehousing, sales territories, location, transportation etc. Various entities act as intermediaries. Distribution becomes important when a firm is striving to implement a market development or forward integration strategy. Successful organizations identify and evaluate alternative ways to reach their ultimate market. Possible approaches vary from direct selling to wholesalers and retailers.

Marketing Research: Marketing research is the research that companies do to study consumers and other companies. Marketing research seeks to understand the best ways to connect a consumer and a product, with the hopes that the consumer will buy. This involved evaluating the current marketing already being done for that product, or similar products that are created by the same company, and determining how well the marketing campaigns are working. This also involves studying the marketing techniques of other companies.

Opportunity Analysis:

SUMMARY of Ch. # 4: The Internal Assessment It involves assessing the cots benefit and risk associated with marketing decisions. Three steps are required to complete cost and benefit analysis. It involves computation of total cost, estimation of benefit from the cost and decision and comparison of total cost with total benefits. One key factor to be considered is risk.

Marketing Audit Checklist Questions: These questions talk about market segmentation, organizational position in the market, market share, distribution channels, sales, research, quality, pricing, promotion and advertising, marketing, planning, budgeting and experience of managers. Finance/ Accounting: Financial factors are one of the core reasons behind change in implementation plans and existing strategies. A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow and equity can eliminate some strategies as being feasible alternatives. Liquidity ratio measures firm’s ability to meet maturing short term obligations. Leverage ratios measures the extent to which a firm has financed by debt. Activity ratios measure how effectively a firm is using its resources. Profitability ratios measures management’s overall effectiveness as shown by the returns generated on sales and investment. Growth ratios measure the firm’s ability to maintain its economic position in the growth of economy and industry. There are three main functions in finance. Investment decision is all about allocation of resources to projects. Dividend decisions deal about earnings paid to stockholders. Lastly, financial decision determines the best capital structure for the company. Financial ratio analysis should be beyond actual calculation and interpretation of ratios. There are three separate fronts: Historical trends, comparison with industry and how the ratios are compared with those of competitors. There are some seasonal factors and also the treatment ways in different industries which becomes limitation in interpreting ratios.

Finance Accounting Audit Checklist: This checklist deals with the questions related to stability of firm reflected by ratios, raising of short term capital, long term capital, working capital, budgeting procedures, dividend policies and similar financial issues. Production/ Operation: POM deals with inputs, transformations and outputs that vary across industries and markets. Roger Schroeder suggested that POM comprises five functions or decision areas: process, capacity, inventory, workforce, quality. Production Operation Audit Checklist: This checklist deals with questions about suppliers, raw materials, facilities, equipment, office condition, inventory control policies, markets strategic location and technological facilities. Research and Development

SUMMARY of Ch. # 4: The Internal Assessment The fifth major area of internal operations that should be examined for specific strengths and weaknesses is research and development (R&D).Many firms today conduct no R&D, and yet many other companies depend on successful R&D activities for survival. Organizations invest in R&D because they believe that such an investment will lead to a superior product or service and will give them competitive advantages. Effective management of the R&D function requires a strategic and operational partnership between R&D and the other vital business functions. A spirit of partnership and mutual trust between general and R&D managers is evident in the best-managed firms today. The best -managed firms today seek to organize R&D activities in a way that breaks the isolation of R&D from the rest of the company and promotes a spirit of partnership between R&D managers and other managers in the firm. The strategic-management process facilitates this cross-functional approach to managing the R&D function. Internal and External R&D Cost distributions among R&D activities vary by company and industry, but total R&D costs generally do not exceed manufacturing and marketing start-up costs. Four approaches to determining R&D budget allocations commonly are used: (1) Financing as many project proposals as possible, (2) Using a percentage-of-sales method, (3) Budgeting about the same amount that competitors spend for R&D (4) Deciding how many successful new products are needed and working backward to estimate the required R&D investment. R&D in organizations can take two basic forms: (1) Internal R&D, in which an organization operates its own R&D department. (2) Contract R&D, in which a firm hires independent researchers or independent agencies to develop specific products. Most firms have no choice but to continually develop new and improve products because of changing consumer needs and taste, new technologies, shorten products, life cycles, and increased domestic and foreign competition Management Information Systems Information ties all business functions together and provides the bases for all managerial decision. It is the cornerstone of all organizations. A management information systems purpose is to improve the performance of an enterprise by improving the quality managerial decisions. The heart of an information system is a data base continuing the of records and data important to managers. A management information system receives raw material from both the external and internal evaluation of an organization. There is a logical flow of material in a computer information system, there by data are input to the system and transform in to input. An effective management information system utilize computer hardware, software, models

SUMMARY of Ch. # 4: The Internal Assessment for analyzes, and a data base. Organizations are becoming more complex, decentralized, and globally dispersed; the function of information system is growing in importance. We are truly in an information age. Firms whose information - system skills are weak are at a competitive disadvantage. On the other hand, strengths in information systems allow firms to establish distinctive competencies in other areas. Strategic-Planning Software Some strategic decision support systems, however, are too sophisticated, expensive, or restrictive to be used easily by managers in a firm. This is unfortunate because the strategic-management process must be a people process to be successful. Value Chain Analyzes (VCA) According to porter, the business of a firm can best be describe as a value chain, in which total revenues minus total cost of all activities undertaken to develop and market a product or service yields value. Vale chain analyzes(VCA) refers to the process whereby a firm determines the costs associated with organizational activities from purchasing row materials to manufacturing product(s) to marketing those products. BCA can enable firm to better identify its own strengths weaknesses, as compare to competitors value chain analyses and their own data to examine overtime. Substantial judgment may be required in performing a VCA because different items along the value chain may impact other items positively or negatively, so their exist complex inter relationships. When a measure competitor or new market entrant offers products or services at very low prices, this way be because that firm has substantially lower value chain cost or perhaps the revival firm is just waging a desperate attempt to gain sales or market share. Value chain differs immensely across industries and firms. More and more companies are using VCA to gain and sustain competitive advantage by being specially efficient and effective alo0ng various parts of the value chain. Bench Marking Bench marking is an analytical tool use to determine whether a firms value chain activities are competitive compact to rivals and thus conductive to winning in the market place. The hardest part of bench marking can be gaining access to other firms value chain activities with associative cost. Sum rival firms share benchmarking data. The Internal Factor Evaluation (IFE) Matrix A summary step is conducting an internal strategic-management audit is to construct an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and evaluates the measure strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among those areas. (IFE) Matrix can be developing in five steps:

SUMMARY of Ch. # 4: The Internal Assessment 1. List key internal factors as identified internal-audit process. Use a total of from 10 t0 20 internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. 2. Assign a weight that ranges from 0.0(not important) to 1.0(all-important) to each factor, The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firms industry. 3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a major weakness (rating =3),or a major strength (rating = 4) 4. Multiply each factors weight by its rating to determine the total weighted score for each variable. 5. Sum the weighted scores for each to determine the total weighted score for the organization. Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 1.0 with the average score being 2.5. When a key internal factor is both strength and a weakness, the factor should be included twice in the IFE Matrix, and a weight and rating should be assigned to each statement.

SUMMARY of Ch. # 4: The Internal Assessment