Lecture 4

The Internal Assessment

 Learning Objectives
4.1 Describe the nature and role of an internal assessment in
formulating strategies.
4.2 Discuss the resource-based view approach
4.3 Discuss why a company’s recources, capabilities and
distinctive competencies are central to its strategic approach.
4.4 Explain the building blocks of competitive advantage.
4.5 Discuss the nature and role of management, marketing,
finance and accounting and management information systems
(MIS) in formulating strategies.
4.6 Explain how to develop and use an Internal Factor Evaluation
(IFE) Matrix.
 Internal Analysis
– Concerned with identifying the strengths and weaknesses of the company.
– Requires gathering, assimilating, and prioritizing information about the
firm's important area such as management, marketing, finance,
accounting, production/operations, research and development (R and D),
and management information systems.
The Process of Performing an Internal
Audit
• The Resource-Based View (R B V) Approach
– contends that internal resources are more important for a firm
than external factors in achieving and sustaining competitive
advantage
• Proponents of the R B V contend that organizational performance
will primarily be determined by internal resources. These resources
can be grouped into
– tangible
– intangible
 RBV
• Resources - refer to the assets of a company. A company’s resources can be
divided into two types: tangible and intangible resources.
• Tangible resources are physical entities, such as land, buildings,
manufacturing plants, equipment, inventory, and money.
• Intangible resources are nonphysical entities that are created by managers
and other employees, such as brand names, the reputation of the company,
the knowledge that employees have gained through experience, and the
intellectual property of the company (patents, copyrights, and trademarks).
• Resources are particularly valuable when they enable a company to create
strong demand for its products, and/or to lower its costs.
 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 are called Empirical Indicators
• These enable a firm to implement strategies that improve its efficiency and
effectiveness and lead to a sustainable competitive advantage.
 Valuable Resources
• For example: The software code underlying Windows are rare because only
Microsoft has full access to it. The code is also difficult to imitate.
 Key Internal Forces
• A company has a competitive advantage over its rivals
when its profitability is greater than the average profitability
of all companies in its industry.
• Competitive advantage is based upon distinctive
competencies. Distinctive competencies are firm-specific
strengths that allow a company to differentiate its products
from those offered by rivals, and/or achieve substantially
lower costs than its rivals.
 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.
• For example: Toyota has distinctive competencies in the
development and operation of manufacturing processes.
 Key Internal Forces
• Capabilities - refer to a company’s resource-coordinating skills and
productive use. These skills reside in an organization’s rules,
routines, and procedures.
• Capabilities are intangible. They reside not in individuals, but in the
way individuals interact, cooperate, and make decisions within the
context of an organization.
• Like resources, capabilities are particularly valuable if they enable a
company to create strong demand for its products, and/or to lower its
costs.
 The Building Blocks of Competitive
Advantage
• Four factors help a company to build and sustain competitive
advantage: superior efficiency, quality, innovation, and customer
responsiveness.
 The Building Blocks of Competitive
Advantage
• Efficiency
• The simplest measure of efficiency is the quantity of inputs that it takes to
produce a given output, that is, efficiency = outputs/inputs.
• The more efficient a company is, the fewer inputs required to produce a
particular output, and the lower its costs will be. One common measure of
efficiency is employee productivity.
• Eg. If it takes General Motors 30 hours of employee time to assemble a car
and it takes Ford 25 hours, we can say that....
 The Building Blocks of Competitive
Advantage
• Quality as Excellence and Reliability
• A product can be thought of as a bundle of attributes.The
attributes of many physical products include their form, features,
performance, durability, reliability, style, and design.
• A product is said to have superior quality when customers
perceive that its attributes provide them with higher utility than the
attributes of products sold by rivals.
 The Building Blocks of Competitive
Advantage
• Innovation refers to the act of creating new products or processes.
• Product innovation is the development of products that are new to the world
or have superior attributes to existing products.
• Process innovation is the development of a new process for producing
products and delivering them to customers.
• Not all innovations succeed, those that do can be a major source of
competitive advantage.
 The Building Blocks of Competitive
Advantage
• Customer Responsiveness
• A company must be able to do a better job than competitors of identifying and
satisfying its customers’ needs.
• Customers will then attribute more value to its products, creating a
competitive advantage based on differentiation. Improving the quality of a
company’s product offering is consistent with achieving responsiveness.
• Another factor that stands out is the need to customize goods and services to
the unique demands of individual customers or customer groups.
How does a firm functional area support
strategy formulation?
 The Basic Functions of Management
• The functions of management consist of four basic activities:

• Planning, Organizing, Leading and Controlling.

• The strong and effective leadership of top excutives can make a significant
contribution to an organization’s success.
• For example, CEOs such as Jeff Bezos and Jack Ma have been credited with
playing critical roles in the success of Amazon and Alibaba.
 Management
• Management strengths may underpin the company’s success. For
example:
– the ability to make quick decisions;
– skilled employees, successful recruitment, effective training and
development;
– good motivation and morale;
– efficient administration.
 Integrating Strategy and Culture
• Organizational culture significantly affects planning activities.
• 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.
• Organizational culture is “a pattern of behavior that has been
developed by an organization as it learns to cope with its
problem of external adaptation and 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, think,
and feel.”
Table 4.4 Aspects of Organizational
Culture

Fifteen Example (Possible) Aspects of an Organization’s Culture

 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?
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?
 Marketing
• The process of defining, anticipating, creating, and fulfilling customers’
needs and wants.

• Five Basic Activities in Marketing

1. Marketing research and target market analysis
2. Product planning
3. Pricing products
4. Promoting products
5. Placing or distributing products
 How marketing can be a source of
strength?
• a good reputation and a strong brand
name;
• an established customer base;
• a strong product range;
• an effective online presence;
• effective research and development;
• use of design and innovation;
• a skilled sales team;
• thorough after-sales service;
 Marketing Audit Checklist of Questions
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Are present channels of distribution reliable and cost effective?
4. Is the firm conducting and using market research effectively?
5. Are product quality and customer service good?
6. Are the firm's products and services priced appropriately?
7. Does the firm have an effective promotional strategy?
8. Is the firm's Internet presence excellent as compared to rivals?
 Finance/Accounting Functions
Important factors might include:
• positive cash flow;
• growing turnover and profitability;
• skilled financial management, good credit control and few bad debts;
• a strong balance sheet;
• a strong credit rating, and a good relationship with the bank and other
sources of finance.
 Table 4.9 A Summary of Key Financial
Ratios
Liquidity Ratios

Current assets
Current liabilities

Current assets minus inventory

Current liabilities

Total debt
Total assets
Total debt
Total stockholders' equity

Long-term debt
Total stockholders' equity

Profits before interest and taxes

Total interest charges
A Summary of Key Financial Ratios

Sales minus cost of goods sold

Sales

Earnings before interest and taxes EBIT

Sales
Net income
Sales
Net income
Total assets

Net income
Total stockholders' equity
Net income
Number of shares of common stock outstanding
Market price per share
Earnings per share
A Summary of Key Financial Ratios

Sales
Inventory of finished goods

Sales
Fixed assets
Sales
Total assets

Annual credit sales

Accounts receivable

Accounts receivable
Total credit sales/365 days
A Summary of Key Financial Ratios
 Evaluating Firm Performance
• A meaningful ratio analysis must go beyond the calculation and
interpretation of financial ratios.
• Must include how ratios change over time.
• Important reference points are needed when analyzing a firm’s
financial position - historical comparisons, comparisons with
industry norms and comparisons with key competitors.
Figure 4.2 Financial Ratio Trend Analysis
 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 or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
7. Does the firm have excellent relations with its investors and stockholders?
8. Are the firm's financial managers experienced and well trained?
9. Is the firm's debt situation excellent?
 Production/Operations
• Production/operations function
– consists of all those activities that transform inputs into goods
and services
• By performing its activities efficiently, the production function of a
company helps to lower its cost structure.
• Strengths in production/operation includes: modern/low-cost
production facilities;
a good location and effective purchasing and good relationships
with suppliers.
 Research and Development
• Firms pursuing a product development strategy need to have a
strong R&D orientation.
• High-tech firms such as Microsoft spend a much larger proportion
of their revenues on R&D.
• R&D supports existing businessess, help launch new businesses,
develop new products, improve product quality, improve
manufcaturing efficiency and deepening the company’s
technological capabilities.
• The work of R&D may result in more efficient production
processes, thereby lowering production costs.
 Management Information Systems
– Improves the performance of an enterprise by improving the
quality of managerial decisions
– A management information system provides higher availability
of data, thereby reducing uncertainty and allowing managers to
make better ratio quality decisions based on insightful data.
– A well-structured management information system will collect
all the necessary data without any additional input from the
workers. MIS has been credited for reducing costs, errors, and
time associated with information processing.
The Internal Factor Evaluation (I FE) 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.
A Sample Internal Factor Evaluation Matrix
for a Retail Computer Store
Figure 4.3 How to Gain and Sustain
Competitive Advantages
 Acknowledgement
• David, Fred R. (2020). Strategic management: Concepts and
principles (17th Ed). Prentice-Hall.

• David, Fred R. (2016). Strategic management: Concepts and

principles (15th Ed). Prentice-Hall.

• Hitt, Ireland & Hoskisson. (2015). Strategic management:

Competitiveness and globalization (11th Ed.). South-Western.