Topic 2 Internal Analysis PDF

TOPIC 2 : INTERNAL AUDIT BJTH 3123 STRATEGIC MANAGEMENT IN TECHNOLOGY Salmah Omar, uum  Chapter Objectives 1. Describe how to perform an int...

TOPIC 2 : INTERNAL AUDIT BJTH 3123 STRATEGIC MANAGEMENT IN TECHNOLOGY Salmah Omar, uum  Chapter Objectives 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..  Chapter Objectives 5. Explain how to determine and prioritize a firm’s internal strengths and weaknesses. 6. Explain the importance of financial ratio analysis. 7. Discuss the nature and role of management information systems in strategic management. 8. Develop an Internal Factor Evaluation (IFE) Matrix. 9. 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.  The Process of Performing an Internal Audit  The internal audit Requires gathering and assimilating information about the firm’s 1)management, 2)marketing, 3)finance/accounting, 4)production/operations, 5)research and development (R&D), and 6)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  The Resource-Based View (RBV) 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.  The Resource-Based View (RBV) 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.  Integrating Strategy and Culture Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic-management audit. 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. Example Aspect of Cultural  1.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?  Management Audit Checklist of Questions (cont.) 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?  Examples of Management (Strength/weaknesses) 1. Avon is struggling to recover from poor management strategies that led to a CEO changeover and global bribery investigations. (AVON) 2. No published vision statement. (P&G) 3. Mission statement is not well developed 4. Under the direction of new CEO Alan Ennis 400 jobs were eliminated and a restricting of the organizational structure saved the company $30 million in 2009. (REVLON)  2. 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 Cost benefit 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 The power of Ads 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 Assessing the costs, benefits and risks associated with marketing decisions. 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 Eg: NPV  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?  Marketing Audit Checklist of Questions 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?  Examples of Marketing (Strength/weaknesses) 1. Ryanair advertisements may be viewed as poor do to the use of vulgar, explicit, and sexual material. 2. Avon company receives sales from catalogs and a website, but the vast majority of its sales come from its 6.4 million independent sales representatives in some 110 countries. 3. Finance/Accounting Functions The functions of finance/accounting comprise three decisions: 1. the investment decision 2. the financing decision 3. the dividend decision Finance/Accounting Functions 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 Finance/Accounting Functions 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 A Summary of Key Financial Ratios A Summary of Key Financial Ratios A Summary of Key Financial Ratios A Summary of Key Financial Ratios  Finance/Accounting Functions 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?  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?  Finance/Accounting Audit Checklist 7. Are dividend payout policies reasonable? 8. Does the firm have good relations with its investors and stockholders? 9. Are the firm’s financial managers experienced and well trained? 10. Is the firm’s debt situation excellent? Examples of Finance (Strength/weaknesses) 1. Profits increased by 204% due to an increase in planes, routes and passengers. 2. Avon reported a loss of $38 million in 2012 in which every region of the world experienced worse revenues and profits than in 2011. 3. Debt to Equity ratio of 0.4 suggests Disney is using debt to finance at an appropriate level while revenues have increased for 9 of the last 10 years. 4. 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?  Examples of Production (Strength/weaknesses) 1. Not operating as efficiently as Johnson & Johnson. (P&G) 2. 90% of Ryanair’s flights arrive on time. 3. 284 new routes will allow Ryanair to capture new passenger business. 4. Maintenance cost increased by 29%. 5. Domino’s enjoys large economies of scale and great brand recognition. 5. RESEARCH AND DEVELOPMENT (R&D) Investment that will lead to a superior product or service. To be “first mover” or “late mover”. Assess and decide on 4W and 1H. Two basic form: – Internal R&D – External R&D  Android@Home Cancer Treatment Space Elevator Driverless Car  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? Examples of R&D (Strength/weaknesses) 1. Revlon spent $24 million on R&D in 2010 employing 140 people on these tasks. 2. Avon only spends around $75 million on R&D.  6. 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?  Management Information Systems Audit 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? Examples of MIS (Strength/weaknesses 1. 92% of bookings being done over the internet, lower cost by lower workers needed and telephone usage. (Ryanair) 2. Relies upon Amazon for a majority of its cloud computing services and cannot easily switch to another cloud provider. (Netflix) 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.  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 Examples of VCA Results 1. Backward integrated supply chain provides over 99% of supplies for franchisee stores. (Domino) 2. Strategic relationship with McGraw-Hill in 2009 to target sales in higher education markets. (Amazon) 3. Netflix deal with Disney and Sony expires in 2011. (Netflix)  The Internal Factor Evaluation (IFE) Matrix The 5 steps: 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 IFE (cont…) Rating (1 to 4): 1 = Major weakness 2 = Minor weakness 3 = Minor Strength 4 = Major Strength Total Weighted Score can range from a low of 1.0 to a high of 4.0. If < 2.5 = weak internally. If > 2.5 = strong internal position. A Sample Internal Factor Evaluation Matrix for a Retail Computer Store  Cont… The two most important factors: – Revenues from repair/service segment – Location of the store The store is doing best on: – Average customer purchase amount – In-store technical support The store is having major problem with: – Carpet and paint, bathroom, revenues from business, supplier delivery and checkout procedures. The matrix used substantial quantitative rather than vague statement; this is excellent. Overall the total weighted score is 2.5 (on average, there are more rooms for improvement).