copyright 2005 prentice hall1 bus 411 day 6. copyright 2005 prentice hall ch 4 -2 agenda finish...
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Copyright 2005 Prentice Hall Ch 4 -2
Agenda
Finish Discussion on External Assessment Begin Discussion on Internal Assessment
Strengths and weaknesses Assignment #2 due next class Assignment #3 will be assigned next class Templates section in WebCT
There are templates for every one of the analytical tools we will use in this class
Will become useful for Case Study portion
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Competitive Forces
Collection & evaluation of data on competitors is essential for successful strategy formulation
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Competitive Forces
Competition on virtually all industries can be described as intense.
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Competitive Forces
•Strengths
•Weaknesses
•Capabilities
•Opportunities
•Threats
•Objectives
•Strategies
Identifying Rival Firms
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Key Questions Concerning Competitors
Their objectives and strategies
Their weaknesses
Their responses to external variables
Their vulnerability to our alternative strategies
Their strengths
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Key Questions Concerning Competitors (cont’d)
Entry and exit of firms in the industry
Our product/service positioning
Key factors for our current position in industry
Sales/profit rankings of competitors over time
Our vulnerability to strategic counterattack
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Key Questions Concerning Competitors (cont’d)
The threat of substitute products/services
Nature of supplier & distributor relationships
Should we keep our strategies secret from employees and stakeholders?
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Competitive Forces
•Moody’s Manuals
•Standard Corporation Descriptions
•Value Line Investment Surveys
•Dun’s Business Rankings
•Standard & Poor’s Industry Surveys
•Industry Week
•Forbes, Fortune, Business Week
Sources of Corporate Information
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Competitive Forces
1. Market share matters
2. Understand what business you are in
3. Broke or not, fix it
4. Innovate or evaporate
7 Characteristics of most Competitive U.S. Firms:
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Competitive Forces
5. Acquisition is essential to growth
6. People make a difference
7. No substitute for quality
7 Characteristics of most Competitive U.S. Firms:
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The Five-Forces Model of Competition
Potential development of substitute products
Rivalry among competing firms
Bargaining power of suppliers
Potential entry of new competitors
Bargaining power of consumers
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The Five-Forces Model
Most powerful of the five forces Focus on competitive advantage of
strategies
Rivalry Among Competing Firms
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The Five-Forces Model
Barriers to entry are important Quality, pricing, and marketing can
overcome barriers
Potential Entry of New Competitors
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The Five-Forces Model
Pressures increase when consumer’s switching costs decrease
Firm’s plans for increased capacity & market penetration
Potential Development of Substitute Products
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The Five-Forces Model
Large number of suppliers & few substitutes affects intensity of competition
Backward integration can gain control or ownership of suppliers
Bargaining Power of Suppliers
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The Five-Forces Model
Customers concentrated or buy in volume affects intensity of competition
Consumer power is higher where products are standard or undifferentiated
Bargaining Power of Consumers
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The Global Challenge
Faced by U.S. Firms --
•Gain & maintain exports to other nations
•Defend domestic markets against imported goods
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The Global Challenge
Simultaneously globally competitive & nationally responsive
Multinational Corporations (MNC’s)
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The Global Challenge
Worldwide integration of:
Strategy formulation
Strategy implementation
Strategy evaluation
Globalization
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The Global Challenge
Similar consumption patterns
Global buyers and sellers
E-commerce
Instant transmission of money & information
Globalization of Industries
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Industry Analysis: The External Factor Evaluation (EFE) Matrix
CompetitivePoliticalCultural
Technological
EnvironmentalSocial
Governmental
DemographicEconomic
Summarize & Evaluate
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5 Steps (Page 101-103)
1. List key external factors10-20 Opportunities then threats
Assign weights from 0.0 to 1.0 based on importanceSum of all weights across all factors = 1
Assign a rating from 1 to 4 for all factors where4 = the firm’s response is superior3 = the firm’s response is above avg2 = the firm’s response is average1 = the firm’s response is poor
1. Multiply the rating by the weight2. Sum the weighted scores
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EFE – Gateway Computers (2003)
Key External Factors Weight RatingWtd
Score
Opportunities1. Global PC market expected to grow 20% in 2004
0.10 3 0.30
2. Cost of PC component parts expected to decrease 10% - 2004
0.10 3 0.30
3. Internet use growing rapidly 0.05 2 0.10
4. China entered WTO; lowered taxes for importing PC’s
0.10 1 0.10
5. The average income for PC worker has declined from $40K/yr to $30k/yr
0.05 3 0.15
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EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Opportunities (cont’d)6. Modernization of business firms and government agencies
0.05 2 0.10
7. U.S. (& world) economies recovering 0.05 3 0.15
8. 30% of Chinese population can afford a PC; only 10% of homes have a PC
0.05 1 0.05
Threats 0.10 1 0.10
1. Intense rivalry in industry 0.10 1 0.05
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EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Threats (cont’d)
2. Severe price cutting in PC industry 0.10 2 0.20
3. Different countries have different reg’s and infrastructure for PC’s
0.05 1 0.05
4. Palm & PDA becoming substitutes 0.05 3 0.15
5. Demand exceeds supply of experienced PC workers
0.05 4 0.20
6. Birth rate in U.S. declining annually 0.05 3 0.15
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EFE – Gateway Computers (2003) (cont’d)
Key External Factors Weight RatingWtd
Score
Threats (cont’d)7. U.s. consumers and businesses delaying purchase of PC’s
0.05 2 0.10
8. PC firms diversifying into consumer electronics
0.05 3 0.15
Total 1.00 2.40
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Total weighted score of 4.0 Organization response is outstanding to threats
and weaknesses
Industry Analysis EFE
Total weighted score of 1.0 Firm’s strategies not capitalizing on opportunities
or avoiding threats
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Industry Analysis EFE
Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Important --
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Industry Analysis: Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions
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Steps to a CPM
Identify Critical Success Factors (CSF) Broad issues Internal and external (5 of each is a good mix)
Assign a weight to each CSF Must add up to 1
Assign a rating for your firm and each of your competitors 4 = major strength 3 = minor strength 2 = minor weakness 1 – major weakness
Multiply weight by rating Sum the weighted ratings and compare
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Gateway Apple Dell
CSF’s Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Market share 0.15 3 0.45 2 0.30 4 0.60
Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
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Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Score
Rating Wt’d Score
Rating Wt’d Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price competitive
0.02 4 0.08 1 0.02 3 0.06
Mgt. experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
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Industry Analysis CPM
Just because one firm receives a 3.2 rating and another receives a 2.8 rating, it does not follow that the first firm is 20 percent better than the second.
Important --
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Assignment two
Prepare a EFE and CPM for Krispy Kreme Doughnuts Bus 411 assignment two.doc
Due in one week Excel templates for both the EFE and CPM
are available in WebCT
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Chapter 4 The Internal Assessment
Strategic Management: Concepts & Cases
10th EditionFred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
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Chapter Outline
The Nature of an Internal Audit
The Resource-Based View (RBV)
Integrating Strategy & Culture
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Chapter Outline (cont’d)
Management
Marketing
Opportunity Analysis
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Chapter Outline (cont’d)
Finance/Accounting
Production/Operations
Research & Development
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Chapter Outline (cont’d)
Management Information Systems
The Internal Factor Evaluation (IFE) Matrix
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The biggest levers you’ve got to change a company are strategy, structure, and culture. If I could pick two, I’d pick strategy and culture. –Wayne Leonard, CEO, Entergy
Internal Assessment
Weak leadership can wreck the soundest strategy; forceful execution of even a poor plan can often bring victory.Sun Tzu
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The Nature of an Internal Audit
-- Strengths
-- Weaknesses
Functional Areas of Business
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Internal strengths/weaknesses External opportunities/threats Clear statement of mission
Nature of an Internal Audit
Basis for Objectives & Strategies
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Key Internal Forces
Functional Business Areas:
Vary by organization
Divisions have differing strengths & weaknesses
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Key Internal Forces
Distinctive Competencies:
Firm’s strengths that cannot be easily matched or imitated by competitors
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Key Internal Forces
Distinctive Competencies:
Building competitive advantage involves taking advantage of distinctive competencies
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Key Internal Forces
Distinctive Competencies:
Strategies designed to improve on a firm’s weaknesses and turn to strengths
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Internal Audit
•Information from:•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management information Systems
Parallels process of external audit
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Internal Audit
Involvement in performing an internal strategic-management audit provides vehicle for understanding the nature and effect of decisions in other functional business areas of the firm
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Internal Audit
Coordination & understanding among managers from all functional areas
Key to Organizational Success
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Internal Audit
Number and complexity increases relative to organization size
Functional Relationships
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Internal Audit
Exemplifies complexity of relationships among functional areas of the business
Financial Ratio Analysis
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Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important than external factors
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Resource Based View (RBV)
3 All Encompassing Categories
1. Physical resources
Materials, plant and equipment
Tangibles
2. Human resources
Talent
3. Organizational resources
Structure, planning, intellectual property
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Resource Based View (RBV)
Empirical Indicators
Rare
Hard to imitate
Not easily substitutable
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Integrating Strategy & Culture
Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integration…is considered valid and taught to new members
Organizational Culture
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Integrating Strategy & Culture
Organizational Culture
Resistant to change
May represent
Strength
Weakness
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CulturalProducts
Values
Legends Beliefs
Heroes Rites
Symbols RitualsMyths
Integrating Strategy & Culture
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Integrating Strategy & Culture
Organizational Culture Can Inhibit Strategic Management
Miss external changes due to strongly held beliefs
Natural tendency to “hold the course” even during times of strategic change
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Management
Functions of Management
1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
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Management
Planning
Stage When Most ImportantFunction
Strategy Formulation
Organizing Strategy Implementation
Motivating Strategy Implementation
Staffing
Controlling
Strategy Implementation
Strategy Evaluation
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Management
Planning
Beginning of management process
Bridge between present & future
Improves likelihood of attaining desired results
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Planning
Forecasting
Establishing objectives
Devising strategies
Developing policies
Setting goals
Management
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Management
Organizing
Achieves coordinated effort
Defines task & authority relationships
Departmentalization
Delegation of authority
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Organizing
Organizational designJob specializationJob descriptions
Job specificationsSpan of control
Unity of commandCoordinationJob design
Job analysis
Management
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Management
Motivating
Influencing to accomplish specific objectives
Communication – major component
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Motivating
LeadershipCommunication
Work groupsJob enrichmentJob satisfactionNeeds fulfillment
Organizational changeMorale
Management
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Management
Staffing
Personnel management
Human resources management
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Staffing
Wage & salary admin.Employee benefits
InterviewingHiring
DischargingTraining
Management developmentAffirmative Action
EEOLabor relations
Management
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Management
Controlling
Establishing performance standards
Ensure actual operations conform to planned operations
Taking corrective actions
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Controlling
QualityFinancial
SalesInventoryExpense
Analysis of varianceRewardsSanctions
Management
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Management Audit Checklist
•Does the firm use strategic management concepts?•Are objectives/goals measurable? Well communicated?•Do managers at all levels plan effectively?
•Does the firm use strategic management concepts?•Are objectives/goals measurable? Well communicated?•Do managers at all levels plan effectively?
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Management Audit Checklist
•Do managers delegate well?•Is the organization’s structure appropriate?•Are job descriptions clear?•Are job specifications clear?•Is employee morale high?
•Do managers delegate well?•Is the organization’s structure appropriate?•Are job descriptions clear?•Are job specifications clear?•Is employee morale high?
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Management Audit Checklist
•Is employee absenteeism low?•Is employee turnover low?•Are the reward mechanisms effective?•Are the organization’s control mechanisms effective?
•Is employee absenteeism low?•Is employee turnover low?•Are the reward mechanisms effective?•Are the organization’s control mechanisms effective?
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Marketing
Customer Needs/Wants for Products/Services
1. Defining
2. Anticipating
3. Creating
4. Fulfilling
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Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
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Customer Analysis
Customer surveys
Consumer information
Market positioning strategies
Customer profiles
Market segmentation strategies
Marketing
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AdvertisingSales
PromotionPublicity
Sales force managementCustomer relations
Dealer relations
Marketing
Selling Products/Services
Copyright 2005 Prentice Hall Ch 4 -79
Test marketingBrand positioning
Devising warranteesPackaging
Product features/optionsProduct style
Quality
Marketing
Planning Product/Service
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Forward integrationDiscounts
Credit termsCondition of sale
MarkupsCosts
Unit pricing
Marketing
Pricing
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WarehousingChannelsCoverage
Retail site locationsSales territoriesInventory levelsTransportation
Marketing
Distribution
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Data collectionData input
Data analysisSupport business functions
Marketing
Marketing Research
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Assessing costs
Assessing benefits
Assessing risks
Cost/benefit/risk analysis
Marketing
Opportunity Analysis
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Marketing
Opportunity Analysis
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are the distribution channels reliable & cost effective?
5. Is the sales force effective?
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Marketing
Opportunity Analysis
6. Does the firm conduct market research?
7. Are product quality & customer service good?
8. Are the firm’s products/services priced appropriately?
9. Does the firm have effective promotion, advertising, & publicity strategies?
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Marketing
Opportunity Analysis
10.Are the marketing planning & budgeting effective?
11.Do the firm’s marketing managers have adequate experience and training?
Copyright 2005 Prentice Hall Ch 4 -87
Finance/Accounting
Determining financial strengths & weaknesses key to strategy formation
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Finance/Accounting
Finance/Accounting Functions
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
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Financial ratios
Objective indicators Two uses
Trending over time Comparison to industry norms
Industry norms are available through UMFK electronic resources Business and Company Resource Center http://www.umfk.maine.edu/infoserv/library/indxdb
/alphalist.asp?Loc=fk
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Firm’s ability to meet its short-term obligations
Ratios
Current ratioQuick (or acid test) ratio
Basic Financial Ratios
Liquidity Ratios
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Extent of debt financing
Ratios
Debt-to-total assetsDebt-to-equity
Long-term debt-to-equityTimes-interest earned
Basic Financial Ratios
Leverage Ratios
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Effective use of firm’s resources
Ratios
Inventory-turnoverFixed assets turnoverTotal assets turnover
Accounts receivable turnoverAverage collection period
Basic Financial Ratios
Activity Ratios
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Effectiveness shown by returns on sales &
investment
Ratios
Gross profit marginOperating profit margin
Net profit marginReturn on total assets (ROA)
Basic Financial Ratios
Profitability Ratios
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Effectiveness shown by returns on sales &
investment
Ratios
Return on stockholders equity (ROE)
Earnings per sharePrice-earnings ratio
Basic Financial Ratios
Profitability Ratios(cont’d)
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Firm’s ability to maintain economic position
Ratios
SalesNet income
Earnings per shareDividends per share
Basic Financial Ratios
Growth Ratios
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Finance/Accounting Audit
•Where is the firm strong/weak indicated by financial ratio analysis?•Can the firm raise short-term capital as needed?•Can the firm raise long-term capital as needed through debt and/or equity?
•Where is the firm strong/weak indicated by financial ratio analysis?•Can the firm raise short-term capital as needed?•Can the firm raise long-term capital as needed through debt and/or equity?
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Finance/Accounting Audit
•Does the firm have sufficient working capital?•Are capital budgeting procedures effective?•Are dividend payout policies reasonable?•Are the firm’s financial managers experienced & well trained?
•Does the firm have sufficient working capital?•Are capital budgeting procedures effective?•Are dividend payout policies reasonable?•Are the firm’s financial managers experienced & well trained?
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Production/Operations
Production/Operations Functions
Process
Capacity
Inventory
Workforce
Quality
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Facility designTechnology selection
Facility layoutProcess flow analysis
Facility locationLine balancingProcess control
Production/Operations
Process
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ForecastingFacilities planning
Aggregate planningScheduling
Capacity planningQueuing analysis
Production/Operations
Capacity
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Raw materialsWork in processFinished goods
Materials handling
Production/Operations
Inventory
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Job designWork measurement
Job enrichmentWork standards
Motivation techniques
Production/Operations
Workforce
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Quality controlSamplingTesting
Quality assuranceCost Control
Production/Operations
Quality
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Production/Operations Audit
•Are suppliers of materials, parts, etc. reliable and reasonable?•Are facilities, equipment & machinery in good condition?•Are inventory-control policies and procedures effective?
•Are suppliers of materials, parts, etc. reliable and reasonable?•Are facilities, equipment & machinery in good condition?•Are inventory-control policies and procedures effective?
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Production/Operations Audit
•Are quality-control policies & procedures effective?•Are facilities, resources, and markets strategically located?•Does the firm have technological competencies?
•Are quality-control policies & procedures effective?•Are facilities, resources, and markets strategically located?•Does the firm have technological competencies?
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Research & Development
Research & Development Functions
Development of new products before competitors
Improving product quality
Improving manufacturing processes to reduce costs
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Financing as many projects as possible
use percent-of-sales method
Budgeting relative to competitors
How many successful new products are
needed
Research & Development
R&D Budgets
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Research & Development Audit
•Are the R&D facilities adequate?•If R&D is outsourced, is it cost effective?•Are the R&D personnel well qualified?•Are R&D resources allocated effectively?
•Are the R&D facilities adequate?•If R&D is outsourced, is it cost effective?•Are the R&D personnel well qualified?•Are R&D resources allocated effectively?
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Research & Development Audit
•Are MIS and computer systems adequate?•Is communication between R&D & other organizational units effective?•Are present products technologically competitive?
•Are MIS and computer systems adequate?•Is communication between R&D & other organizational units effective?•Are present products technologically competitive?
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Management Information Systems
Purpose
Improve performance of an enterprise by improving the quality of managerial decisions.
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Management Information Systems
Information Systems CIO/CTO Security User-friendly E-commerce
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Management Information Systems Audit
•Do managers use the information system to make decisions?•Is there a CIO or Director of information systems position in the firm?•Is data updated regularly?
•Do managers use the information system to make decisions?•Is there a CIO or Director of information systems position in the firm?•Is data updated regularly?
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Management Information Systems Audit
•Do managers from all functional areas contribute input to the information system?•Are there effective passwords for entry into the firm’s information system?•Are strategists of the firm familiar with the information systems of rival firms?
•Do managers from all functional areas contribute input to the information system?•Are there effective passwords for entry into the firm’s information system?•Are strategists of the firm familiar with the information systems of rival firms?
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Management Information Systems Audit
•Is the information system user-friendly?•Do all users understand the competitive advantages that information can provide?•Are computer training workshops provided for users?•Is the firm’s system being improved?
•Is the information system user-friendly?•Do all users understand the competitive advantages that information can provide?•Are computer training workshops provided for users?•Is the firm’s system being improved?
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The IFE Matrix
A summary step in conducting an internal strategic-management audit is to construct an IFE Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among these areas.
Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique.
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5 Steps to an IFE
1. List key internal factors as identified in the internal-audit process. Use a total from ten to twenty internal factors including both strengths and weaknesses.
2. Assign a weight ranging from 0 (not important) to 1.0 (very important). The weight indicates the relative importance of the factor to being successful in the firm’s industry. The sum of all the weights must equal 1.0.
3. Assign a 1-4 rating to each factor to indicate whether that factor represents a major weakness (1), minor weakness (2), minor strength (3), or major strength (4).
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.
Total weighted scores of below 2.5 indicate an internally weak organization.
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IFE– Gateway Computers (2003)
Key Internal Factors Weight RatingWtd
Score
Strengths1. Several new senior executive with world-class skills and leadership experience
0.05 4 0.40
2. Continuous decline in operating costs and cost of goods sold
0.05 3 0.15
3. Well-known brand name 0.05 3 0.15
4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1
0.10 4 0.40
5. As a direct seller, Gateway holds high brand recognition
0.05 3 0.15
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IFE– Gateway Computers (2003)
Key Internal Factors Weight RatingWtd
Score
Strengths (cont’d)6. Gateway is diversifying into non-PC products
0.10 3 0.30
7. Good relationship with its suppliers. 0.05 4 0.20
8. Economies of scale, the 6th largest PC maker I the world
0.05 4 0.20
9. Gateway retails stores excellent 0.05 3 0.15
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IFE– Gateway Computers (2003)
Key Internal Factors Weight RatingWtd
Score
Weaknesses1. High operating expense (22% of revenue vs. 10% for Dell)
0.05 3 0.15
2. Almost no budget for R&D vs. Dell’s 18% of revenue
0.10 1 0.05
3. Low return on assets ratio 0.025 1 0.10
4. No niche market 0.025 2 0.05
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IFE– Gateway Computers (2003)
Key Internal Factors Weight RatingWtd
Score
Weaknesses (cont’d)5. Shortage of cash due to successive losses
0.10 2 0.20
6. Limited number Gateway stores 0.05 2 0.10
7. Weak performance in overseas market 0.10 2 0.20
TOTAL 1.00 2.85