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STRATEGIC Stace
ems MANAGEMENT
A Competitive Advantage Approach
Fourteen
DaLVYLS
Fred R. David
Chapter Four
Pag tae) Chapter Objectives
. Describe how to perform an internal strategic-
management audit.
. Discuss the Resource-Based View (RBV) in
strategic management.
. Discuss key interrelationships among the functional
areas of business.
. Identify the basic functions or activities that make
up management, marketing, finance/accounting
production/operations, research and development,
and management information systems.
42
[Link] o Of ND OM
Chapter Objectives
. Explain how to determine and prioritize a firm’s
internal strengths and weaknesses.
. Explain the importance of financial ratio analysis.
. Discuss the nature and role of management
information systems in strategic management.
. Develop an Internal Factor Evaluation (IFE)
Matrix.
. Explain cost/benefit analysis value chain
analysis, and benchmarking as strategic-
management tools.
4-3
BY:[Link] A Comprehensive Strategic-
______Management Model ___
FiuRE 4-4
A. Comprehensive Strategic Management Model
44
[Link] Key Internal Forces
“* Distinctive competencies
| Afirm’s strengths that cannot be easily
matched or imitated by competitors
** Building competitive advantages involves
taking advantage of distinctive
competencies.
The Process of Gaining Competitive Advantage in a Firm
Weaknesses > Strengths = Distinctive Competencies > Competitive Advantage
45
BY:[Link] The Process of Performing an
Internal Audit —________
*¢ The internal audit
i
Requires gathering and assimilating
information about the firm’s management,
marketing, finance/accounting,
production/operations, research and
development (R&D), and management
information systems operations
Provides more opportunity for participants to
understand how their jobs, departments, and
divisions fit into the whole organization
46
BY:[Link] The Resource-Based View (RBV)
** The Resource-Based View (RBV)
approach
0 contends that internal resources are more
important for a firm than external factors in
achieving and sustaining competitive
advantage
47
BY:[Link] 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
48
[Link] 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
4-8
BY:[Link] Example Cultural Products
Defined —____.
TABLE 4-1 Example Cultural Products Defined
Rites
Ceremonial
Ritual
Myth
Saga
Legend
Story
Folktale
Symbol
Language
Metaphors
Values
Belief
Heraes/teroines
Planned sets of activities that consolidate various forms of cultural expressions into-one-e
Soveral rites connected together.
AA standardized sct of behaviors uscd fo manage annicties
‘A narrative of imagined events, usually not supported by facts
[A historical narrative describing the wnique accomplishments ofa group and its leaders.
|A [Link] narrative of some wonderful event, usully Not supported by facts.
'A narrative usually based on true events.
A fictional story.
[Any object act, event, quality, oF relation used to convey meaning.
‘The manner in which members of a group communicate
Shorthand of words used to capture a vision orto reinforce old or new values,
Life-direeting antitudes that serve as behavioral guidelines,
An understanding of a particular phenomenon,
Individuals greatly respected.
4-10
[Link] 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.
ait
BY:[Link] 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.
442
BY:[Link] The Basic Functions of
_______Management——___
TABLE 43. The Basic Functions of Management
Function
Descrintion
Stage of Strategic- Management
Process When Mast Important
Fanning
‘Onganiriag
Mociating
‘Stating
‘Conioling
‘Planning consist of al those managerial activities related Wo preparit
‘ae te future. Specific tas inclde forecasting, exiaishing cbjectives,
devising strategies, developing policies, and sting pols,
(Organizing include all those managerial activites bt reset in x troctine
‘of task and authority elatonships. Specific ars include organizational
‘desipn jo spoctlization, job descriguins, 0b specications, pa of
opto, vay command, coontitation, job design andj anaysis,
Motivating involves efferts directo! loward shape hurnan Behave,
‘Specific topics ince leadership, communication, work groups, bebstior
‘medication, delegation of authoity, jb canihment, job satisfac,
‘ced flillment,oranlzatonal change, employee morale, and manage-
ial morale.
‘Stuffing actives are ceetered a personnel oe human recone manage
wen. Tacided ane wage and slay adeinistatiog, emplyce bench,
lnicrviewing., lig ric, taining, managemen developmen, cmpleyee
safety affirmative action, equal employroent opportunity. uni reations,
career develapment, persoanel researc, disciple policies, gricance pro-
‘edures, and public relations
Conigling refer o all those managerial acvtis drested toward emu
‘ng that actual gel. are consisicl with planned esas. Rey ameas of
‘soncer include quality canto, Financial cons, sales cont, inventory
conte, expense natrl, analyic oF variances, revards, ond xanctians.
‘Surteyy Formulation
‘Strategy Implementation
‘Stralegy Implementation
‘Strategy Implenentation
Suriegy Evaluation
413
[Link] Management Audit Checklist
____ of Questions —
os
. Does the firm use strategic-management
concepts?
. Are company objectives and goals
measurable and well communicated?
. Do managers at all hierarchical levels plan
effectively?
. Do managers delegate authority well?
. Is the organization’s structure appropriate?
a4
BY:[Link] Management Audit Checklist
______of Questions (cont.) —_
6. Are job descriptions and job
specifications clear?
7. ls employee morale high?
8. Are employee turnover and absenteeism
low?
9. Are organizational reward and control
mechanisms effective?
445
BY:[Link] Marketing
** Marketing
| the process of defining, anticipating, creating,
and fulfilling customers’ needs and wants for
products and services
4-16
[Link] Functions of Marketing
eel ig analysis
es reygeye lige hts ay a=ty
elt bir acme pats male Nea mi
bed uct and service planning
ii an ae el
ai?
[Link] 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
0 essential in developing an effective mission
statement
448
BY:[Link] Desirable Characteristics
of Ads Today —____
TABLE 4-4 Desirable Characteri:
tics of Ads Today
Bee
ween aw
Take direct aim at competitors; so leaner, meaner, and to the point.
Be less lavish and glamorous, requiring less production dollars to develop.
. Be short and sweet, mostly 10- and 15-second ads rather than 30+ seconds.
. “Make you feel good” or “put you in a good mood” because (a) ads can be more
easily avoided than ever and (b) people are experiencing hard times and seek comfort,
. Be more pervasive such as on buses, elevators, cell phones, and trucks.
Appear less on websites as banner ads become the new junk mail.
. Red will overtake the color orange as the most popular ad color.
More than ever emphasize low price and value versus riv;
. More than ever emphasize how the product/service will make your life better.
4-19
[[Link] 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
=
4-20
BY:[Link] 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
424
BY:[Link] Distribution
“* Distribution
0
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
4-22
BY:[Link] Marketing Research
“* Marketing research
(| the systematic gathering, recording, and
analyzing of data about problems relating to
the marketing of goods and services
0 can uncover critical strengths and
weaknesses
4-23
BY:[Link] Cost/Benefit Analysis
Three steps are required to perform a
cost/benefit analysis:
1 .compute the total costs associated with a
decision,
[Link] the total benefits from the
decision,
[Link] the total costs with the total
benefits.
4-26
BY:[Link] 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?
4-25
BY:[Link] 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?
4-26
BY:[Link] Finance/Accounting Functions
The functions of finance/accounting
comprise three decisions:
[Link] investment decision
[Link] financing decision
[Link] dividend decision
427
BY:[Link] 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
4-28
BY:[Link] 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
0 determine the amount of funds that are
retained in a firm compared to the amount
paid out to stockholders
4-29
BY:[Link] A Summary of Key
Financial Ratios —________
TABLE 4.6 A Summary of Key Financial Ratios
Ratio How Caleulated What it Measures
Aiquidity Ratios:
‘Coneot Ratio Conreot ete “The extent to which a firm can meet ke
Correat liabilities sorter obligations
‘Quick Ratio Ourent assets minus inventory ‘The extent to which a firm can mect its
Leverage Ratios
‘Caren Tabiiies
oe term obligations without relying ypon
the sale of Re invemetes
Debewo-Toal-Asct Rao
Debi-o-Bguity Ratio
Lg Tetm Diet us gui Rats
“Times loterest-Earmed Ratio
"Tonal iieres charges
The pereentage of total funds that are pro
idea Wy creditors
‘The percentage of toll finds provided by
eednes verses by owners
‘The balance Between debt abd equity in a
Firs long-term eapital sircaire
‘Thecutent to which camings can dectine
without the frm Becoming unahle 49 micet
its anaual interest costs
‘[Link] A Summary of Key
Financial Ratios —______
TABLE 4-6 _A Summary of Key Financial Ratios
Activity Ratios
Taventory Tumover Sales
Taweniogy of finished goous
Fixed Assets Turnover Sales
Finca assets
“Total Assets Tumover Sales
"Total assets
Accounts Reesivable Tumover Annual credit sales
“Recounts receivable
Average Callection Period Account receivable
"Total ere sales363 dag
‘Whether a firm holds excenive socks of
inveaiories and whether a frm is showy
selling is inventories compared to the in.
dustry average
Sales productivity and plant and equipment
uilization
Whether a firm is generating a sufficient
volume of business forthe sizeof its asset
investment
“The average eagth of tine it takes fem to
‘collet credit sales (in pereentage terms)
The average length of tim i takes a firm to
‘collet on ereditsales (in days)
[Link] A Summary of Key
_____Financial Ratios —__
TABLE 4-6 A Summary of Key Financial Ratios
Profitability Ratios
Gross Profit Margin
(Operating Profit Nagin.
[Net Profit Margi
Recum on Total Assets (ROAD
Retum on Stockholder” Equity (ROE)
Profitability Ratios
Sales mina: cou of gone wad
Sales
arnings before inerest and taxes ERIT
‘Sales
Net income
Sales
Net income
"Tora assets
Net income
“Total stockholders equity
"The wal margin allble w coveropera-
lng expec sd yield pot
Profitability withour concen for tates and
After tax profits per dollar of sales
‘Aftertax profits per dolar of avsets: this m=
tio ix also called returnom investment (ROD
‘After-tmx profits per dollar of stockbokdery
favestment in the Fem
Earnings Por Shaze (EPS)
Price. Eamings Ratio
‘Net income
‘Number of shares of common sock outstanding
Market price per share
Earnings per share
Eamings available the owners of com.
roa stock
Antractiveness of firm on equity markets
[Link] A Summary of Key
Financial Ratios —______.
TABLE 4-6 A Summary of Key Financial Ratios—continucd
Ratio How Calculated What It Measures:
Growth Ratios
Sales “Annual persentage growth in total sales
Net Income ‘Annual percentage growth in peofts
Earnings Per Share ‘Annual perecniage growih in EPS
Dividends Per Share ‘Annual percentage growth in dividends per share Firm's growih rate in elividends per share
4-33
BY:[Link] AN —*
Finance/Accounting Functions
. How has each ratio changed over time?
. How does each ratio compare to industry
norms?
. How does each ratio compare with key
competitors?
4-34
BY:[Link] Finance/Accounting Audit
CC hecklist —
wh
a
. Where is the firm financially strong and weak
as indicated by financial ratio analyses?
. Can the firm raise needed short-term capital?
. Can the firm raise needed long-term capital
through debt and/or equity?
. Does the firm have sufficient working capital?
. Are capital budgeting procedures effective?
4-35,
BY:[Link] 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?
[Link] the firm’s debt situation excellent?
4-36
BY:[Link] Production/Operations
** Production/operations function
0 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.
4.37
BY:[Link] The Basic Functions (Decisions)
_____Within Production/Operations ___
TABLE 4-7 _The Basie Functions (Decisions) Within Production/Operations
Decision Areas, Example Decisions
1 Process ‘These decisions include choice of technology, facility layout, process low analysis, facility Yocaioa, fine
balancing, process contro and transportation analysis. Distances from raw materials to peosuction sites to
‘customers ate a major consideration,
2. Capacity, ‘These decisions include forecasting. facilities planning, aggregate planning, scheduling, capacity planning, and
_quewing analysis, Capactly utilization ie major consideration.
[Link] ‘These decisions involve managing the level of raw materials, workin-process, and Tnished goods, especially
‘considering whl to order, when to onder, how much to order, and materials handling.
A. Workforce ‘These decisions ivolve managing the skilled, unskilled clerical, and managerial employees by caring Foe job
design, work measurement, job enrichmen|, work standards, and! motivation techniques.
5. Quality ‘These decisions are aimed at ensuring that high-quality goods and services are produced by caring for quality
control. sampling. testing. quality assurance, and cost contr
[Link] Implications of Various Strategies
_______on Production/Operations __
TABLE 4-8 Implications of Various Strat
Various Strategies
ies on Production/ Operations
Implications
T Lacon provider
2 Abigh quality provider
4, Provide pret customer service
4. Be the fiw introduce new proces
5, Become highly astrnated
6, Minimize tayo
‘Creates igh barren went,
Eyeuls liege niet
RReites longer paxiction cus and fewer product chanzes
Resquites ors quality-assuranceeffors
Rsquises mace expensive equipment
Relies highly skilled workers and highse wages
Reyes mare service people, service pasts, and equipeent
Reuites rap reyponse tn customer ages or change in custornc antes
Restos a hipher inventogyimvestinent
Haxhigherescarch and development. cts
a gh retetaing ec oing coms
Reyuiteshigh capital investment
Rexhacts Mesiility
May affect Tabor relations
Makes mainicaanse more rms
Serves the security nee of employees an! may sevelop employee tnyaty
eps to atract and tain highly skilled employees
[Link] Production/Operations
____ Audit Checklist
as
. Are supplies 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?
Are quality-control policies and procedures effective?
Are facilities, resources, and markets strategically
located?
Does the firm have technological competencies?
440
BY:[Link] Research and Development Audit
Does the firm have R&D facilities? Are they adequate?
If outside R&D firms are used, are they cost-effective?
Are the organization’s R&D personnel well qualified?
Are R&D resources allocated effectively?
Are management information and computer systems
adequate?
ls communication between R&D and other
organizational units effective?
7. Are present products technologically competitive?
See eS
2
441
BY:[Link] 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
and
BY:[Link] Management Information
_______Sysiems 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?
4-43
BY:[Link] Management Information
_______Sysiems 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?
[Link] the firm's information system continually being
improved in content- and user-friendliness?
4-44
BY:[Link] 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
485
BY:[Link] 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
0 entails measuring costs of value chain
activities across an industry to determine
“best practices”
4-46
BY:[Link] Transforming Value Chain Activities
a Sue C five Advan
FIGURE 4-8
Transforming Value Chain Activities into Sustained Competitive
Advantage
Some Core
Competencies
Evolve into.
Distinctive
Competencies
4-87
[Link] 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
4-48
BY:[Link] A Sample Internal Factor Evaluation
____Matrix for a Retail Computer Store _
TABLE 4-9 A Sample Internal Factor Evaluation Matrix for 3 Retail Computer Store
Rey Internal Factors Weight Rating —__Wetghted Score
Strengths
TInveatory trmoner Inereised froas S810 67 as 3 ais
2. Average customer purcase increased from $97 1 $1.28 om 4 ons
[Link] morale is exellent, 10 3 0.0
4 Instore promotions resulted 1920 percent increase fa sas ons 3 ous
S. Newspaper alverising expenditures inseased 10 percent 02 3 0.06
6, Revenues (om repainservicesepmient ef sage up 16 percent ons 3 bas
7. An-sioe tcchaical suppen personae! have MIS college degrees ns 4 020
1. Store's deo total assets alo declines Lo 34 percent 3 3 om
9. Renenues pereriployer up 19 pereKot m2 3 0.06
Weaknesses
{FiRevenies from sotware sepinent of store down 12 perce a0 2 20
2. Location of tore negatively impacted by new Highway 34 ais 2 00
4..Cagpet and pat in store somewhat in isrepait an 1 02
4. Bathroorn in sore nocd refurbishing oa 1 0.02
'. Revenues fom businesses down 8 percent oo 1 on
6, Stone hasino Website 0s 10
7. Supplier on-time dlivery increase wo 2.4 days ons aot
8, tea customers have to wait t