Assessment of Assessment of Organization’s Internal Organization’s Internal Strength and Weakness Strength and Weakness

Session 415 October 2011Civil Service College Dhaka

Presentation by

Dr. Muhammad G. SarwarEmail: sarwar_mg@yahoo.comCell: 01821443741

Strategic Management: course Strategic Management: course outlineoutlineSl. No.

Topic Title Session no.

1 Strategic Management: an overview 1

2 Strategy Formulation Designing Vision and Mission Statements 1• External Assessment 1

• Internal Assessment 1

• Setting Objectives and Strategic Options

1

• Strategy Analysis and Choice 1

3 Strategy Execution 1

4 Strategy Evaluation 1

5 Limitations of Strategic Management: why strategy may fail ?

1

2

Presentation Contents of 3Presentation Contents of 3rdrd SessionSessionDefining External Environment / Audit

of an OrganizationNature of External AuditMajor External ForcesProcess of Performing External AuditCompetitive Analysis: Porter’s FF (Five

Forces) ModelIndustry Analysis: EFE (External Factor

Evaluation) MatrixCP (Competitive Profile) Matrix

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Stages of Strategic Management

Strategic Management process consists of 3 stages:

1.Strategy formulation,2.Strategy implementation, and3.Strategy evaluation.

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Strategy formulationStrategy formulationStrategy formulation includes:Developing a vision and mission

statementsIdentifying organization’s external

opportunities and threatsIndentifying internal strengths and

weaknessesEstablishing long-term objectivesGenerating alternative strategiesAnalyzing alternative strategies and

choosing particular strategy. 5

Presentation Contents of 4th Presentation Contents of 4th SessionSessionDefining Organization’s Internal AuditKey Functional AreasProcess of Performing Internal AuditResource-Based View (RBV)Analyzing Six Functional Areas-

◦ Management◦ Marketing◦ Finance/Accounting◦ Production/Operation◦ R&D (Research and Development)◦ MIS (Management Information System)◦ SWOT Analysis

◦ Value Chain Analysis (VCA) and Benchmarking◦ IFE (Internal Factor Evaluation) Matrix

◦ 6

Internal Strategic Internal Strategic Management AuditManagement AuditInternal Strategic Management Audit

focuses on identifying and evaluating strength and weakness in functional areas of an organization like management, marketing, finance /accounting, production/operation, R&D, MIS, etc.

Internal strength/weakness, coupled with external opportunities/threats and a clear vision/mission statements provide the basis for setting organization’s objectives and strategies.

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Key Functional Areas of an Key Functional Areas of an OrganizationOrganizationSix Core Areas

◦ Management◦ Marketing◦ Finance /accounting◦ Production/operation◦ R&D (Research and Development)◦ MIS (Management Information System

◦Sub-areas, say under Marketing Customer ServiceAdvertisingWarranties, Packaging Pricing

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Process of Performing Internal Process of Performing Internal AuditAuditInternal audit process is similar to External

audit in terms of involving as many managers and employees as possible to make it participatory.

Performing an Internal audit requires gathering, assimilating, and evaluating information about the organization's operation.

Internal audit process is a highly interactive process that require effective communication / coordination among the functional areas of the organization.

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Resource-Based View Resource-Based View (RBV)(RBV)RBV is a popular approach for Internal

audit for an organization. RBV is a competitive advantage analysis

of an organization that contends that internal resources are more important for an organization than external factors in achieving and sustaining competitive advantage.

Internal resources are grouped as:◦ Physical resources◦ Human resources, and◦ Organizational resources.

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Resource-Based View (RBV) Resource-Based View (RBV) contd.contd.

RBV theory asserts that for a long term competitive advantage, character of resources should be:◦Rare,◦Hard to imitate, and◦Not easily substitutable. Organization having more the above

types of resource, more would be its competitive advantage.

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Analyzing Functional Areas:Analyzing Functional Areas:ManagementManagementManagement consists of 5 basic

activities:◦Planning for achieving set objectives◦Organizing resources to achieve set

objectives◦Motivating employees to work hard

towards achieving organizational objectives

◦Staffing properly HR to achieve objectives◦Controlling operations towards attaining

set objectives 12

Analyzing Functional Areas:Analyzing Functional Areas:MarketingMarketingMarketing is a process of defining,

anticipating, creating and fulfilling customers’ needs / wants for products and services.

Seven basic activities of Marketing are:◦ Customer analysis◦ Selling products / services◦ Product / service planning◦ Pricing◦ Distribution◦ Marketing research, and◦ Opportunity analysis.

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Analyzing Functional Areas:Analyzing Functional Areas:Finance /AccountingFinance /Accounting

Functions of Financing / Accounting comprise making 3 decisions for an organization:◦Investment decision,◦Financing decision, and◦Dividend decision.

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Analyzing Functional Areas:Analyzing Functional Areas:Finance /Accounting Finance /Accounting (contd.)(contd.)

5 types of financial ratios:Liquidity Ratios

◦ Current Ratio = Current assets / Current liabilities ◦ Quick Ratio = Current assets – inventory / Current

liabilities

◦ Leverage Ratios Debt to Total Asset Ratio = Total debt / Total assets Debt to Equity Ratio = Total debt / Total

stockholders’ equity Long term Debt to Equity ratio = Long term debt /

Total stockholders’ equity Times Interest Earned ratio = Profit before interest

and taxes / Total interest charges

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Analyzing Functional Areas:Analyzing Functional Areas:Finance /Accounting Finance /Accounting (contd.)(contd.)Activity Ratios

◦Inventory Turnover = Sales / Inventory of finished goods

◦Fixed Assets Turnover = Sales / Fixed Assets

◦Total Assets Turnover = Sales / Total assets

◦Account Receivable Turnover = Annual credit sales / account receivable

◦Average Collection Period = Account Receivable / Total credit sales / 365 days

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Analyzing Functional Areas:Analyzing Functional Areas:Finance /Accounting (contd.)Finance /Accounting (contd.)

Profitability Ratios◦ Gross Profit Margin = Sales – Cost of goods

sold / Sales◦ Operating Profit Margin = Earnings before

interest and taxes / sales◦ Net Profit Margin = Net Income / Sales◦ Return to Total Assets = Net Income / Total

assets◦ Return on stockholders’ Equity = Net

Income / Total stockholders’ equity◦ Earning Per Share = Net Income / No of

shares of common stock outstanding◦ Price Earning Ratio = Market price per

share / Earning per share 17

Analyzing Functional Areas:Analyzing Functional Areas:Finance /Accounting Finance /Accounting (contd.)(contd.)

Growth Ratios◦Annual 5 growth in total sales◦Annual % growth in profit◦Annual % growth in EPS◦Annual 5 growth in dividends per shareFinancial Ratio analysis in 3 Fronts:

Trend analysis of financial ratios over time Comparison of financial ratios with Industrial average Comparison of financial ratios with key competitors.

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Analyzing Functional Areas:Analyzing Functional Areas:Production / OperationsProduction / OperationsBasic Functions of Production

Management: Process: Designing physical production system like

production location, choice of technology, production layout, flow analysis, process control, transportation.

Capacity: Determining optimum output level including facilities planning, forecasting, scheduling, queuing analysis.

Inventory: Managing the level of raw materials, work in progress and finished goods.

Workforce: Managing human resources including job design, work management, job enrichment, motivation, etc.

Quality: Ensuring high quality production through quality control, sampling, testing, etc

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Analyzing Functional Areas:Analyzing Functional Areas:R&DR&DR&D investment leads to

competitive advantage by developing superior product / service.

R&D can take two basic forms –◦Internal R&D◦Contract R&D ◦ R&D budgeting –

percentage of sales method similar to competitors’ R&D budget estimating the required R&D budget.

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Analyzing Functional Areas:Analyzing Functional Areas:MISMISMIS ties organization’s all functions together

and provides the basis of all strategic management.

An effective MIS utilizes computer hardware, software, models for analysis and database.

CheckMATE is a popular strategic planning software that is used SPACE (Strategic Position and Action Evaluation) analysis, SWOT (Strengths-Weaknesses-Opportunities –Threats) analysis, IE (Internal-External) analysis, GSM (Grand Strategy Matrix) analysis.

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SWOT AnalysisSWOT Analysis

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SWOT Analysis SWOT Analysis (contd.)(contd.)

SWOT analysis leads to:Drawing conclusions from the SWOT

listings about overall situation of an organization; and

Translating these conclusions into strategic actions to better match organization’s strategy to its resource strengths and market opportunities, and to correct the weaknesses and to defend from external threats.

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Value Chain Analysis Value Chain Analysis (VCA)(VCA)VCA refers to the process whereby a firm

determines the costs associated with disaggregated activities of an organization from purchasing raw materials to producing goods and services and to marketing those goods and services.

VCA of an organization includes:◦ Procurement costs◦ Production costs◦ Distribution costs◦ Sales and marketing costs◦ Customer Service costs◦ Management costs

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BenchmarkingBenchmarkingBenchmarking is an analytical tool

used to determine whether an organization’s value chain activities are competitive compared to its rivals.

Benchmarking enables an organization to take action to improve its competitiveness by identifying value chain activities where rival organizations have comparative advantage in costs.

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IFE (Internal Factor Evolution) IFE (Internal Factor Evolution) MatrixMatrix IFE Matrix is a management strategy

formulation tool that summarizes and evaluates major strengths and weaknesses in functional areas of the organization.

Five steps to construct IFE Matrix:◦ List key strengths and weaknesses◦ Assign weight ranging from 0.0 (not

important) to 1.0 (all important)◦ Assign rating from 1 (major weakness) to 4

(major strength)◦ Multiply weights and rating to get weighted

score◦ Sum the weighted score to get total

weighted score for the organization. 26

An example of IFE MatrixAn example of IFE MatrixKey Internal Factors

Weight Rating Weighted Score

Strengths

1

2

3

Weaknesses

1

2

3

Total Weighted Score

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Strategic Management: Strategic Management: referencesreferencesFred R. David (2008), Strategic

Management: Concepts and Cases, 11th Edition, Prentice Hall (Chapter 4)

Arthur A. Thompson, Jr. (2010) Crafting and Executing Strategy: the quest for comparative, 16th Edition, McGraw Hill (Chapter 4)

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ThanksThanks

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