Strategic Management Concepts: A Competitive Advantage Approach Sixteenth Edition Chapter 3 The External Assessment Slide in this Presentation Contain Hyperlinks. JAWS users should be able to get a list of links by using INSERT+F7 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Learning Objectives (1 of 2) 3.1 Describe the nature and purpose of an external assessment in formulating strategies. 3.2 Identify and discuss 10 external forces that must be examined in formulating strategies: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive. 3.3 Explain Porter’s Five Forces Model and its relevance in formulating strategies. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 3.4 Describe key sources of information used for locating vital external information. 3.5 Discuss forecasting tools and techniques. 3.6 Explain how to develop and use an External Factor Evaluation (EFE) Matrix. 3.7 Explain how to develop and use a Competitive Profile Matrix. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved External Audit • External audit – focuses on identifying and evaluating trends and events beyond the control of a single firm – reveals key opportunities and threats confronting an organization so that managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Nature of an External Audit • The external audit is aimed at identifying key variables that offer actionable responses • Firms should be able to respond either offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Figure 3-1 A Comprehensive StrategicManagement Model Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key External Forces External forces can be divided into five broad categories: 1. economic forces 2. social, cultural, demographic, and natural environment forces 3. political, governmental, and legal forces 4. technological forces 5. competitive forces Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Figure 3-2 Relationships Between Key External Forces and an Organization Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Process of Performing an External Audit (1 of 2) • First, gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Process of Performing an External Audit (2 of 2) • Information should be assimilated and evaluated • A final list of the most important key external factors should be communicated Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Industrial Organization (I/O) View • The Industrial Organization (I/O) approach to competitive advantage advocates that external (industry) factors are more important than internal factors in a firm for gaining and sustaining competitive advantage. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Economic Forces (1 of 2) • Shift to service economy • Availability of credit • Level of disposable income • Propensity of people to spend • Interest rates • Inflation rates • GDP trends • Consumption patterns • Unemployment trends • Value of the dollar Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Economic Forces (2 of 2) • Import/Export factors • Demand shifts for different goods and services • Income differences by region and consumer group • Price fluctuations • Foreign countries’ economic conditions • Monetary and Fiscal policy • Stock market trends • Tax rate variation by country and state • European Economic Community (EEC) policies • Organization of Petroleum Exporting Countries (OPEC) policies Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Advantages of a Strong Dollar (1 of 2) 1. Leads to lower exports 2. Leads to higher imports 3. Makes U.S. goods expensive for foreign consumers 4. Helps keep inflation low 5. Allows U.S. firms to purchase raw materials cheaply from other countries 6. Allows U.S. to service its debt better 7. Spurs foreign investment 8. Encourages Americans to travel abroad Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Advantages of a Strong Dollar (2 of 2) 1. Leads to lower oil prices because oil globally is priced in U.S. dollars 2. Encourages Americans to spend money because they can buy more for their money Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Social, Cultural, Demographic, and Natural Environmental Forces • U.S. Facts – Aging population – Less white – 2050 = 20% population > 65 years – 2075 = no ethnic or racial majority Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key Social, Cultural, Demographic, and Natural Environmental Variables (1 of 3) • Population changes by race, age, and geographic area • Regional changes in tastes and preferences • Number of marriages • Number of divorces • Number of births • Number of deaths • Immigration and emigration rates • Social Security programs Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key Social, Cultural, Demographic, and Natural Environmental Variables (2 of 3) • Life expectancy rates • Per capita income • Social media pervasiveness • Attitudes toward retirement • Energy conservation • Attitudes toward product quality • Attitudes toward customer service • Pollution control Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key Social, Cultural, Demographic, and Natural Environmental Variables (3 of 3) • Attitudes toward foreign peoples • Energy conservation • Social programs • Number of churches • Number of church members • Social responsibility issues Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Political, Governmental, and Legal Forces • The increasing global interdependence among economies, markets, governments, and organizations makes it imperative that firms consider the possible impact of political variables on the formulation and implementation of competitive strategies. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Political, Government, and Legal Variables (1 of 2) • Environmental regulations • Number of patents • Changes in patent laws • Equal employment laws • Level of defense expenditures • Unionization trends • Antitrust legislation Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Political, Government, and Legal Variables (2 of 2) • USA versuss. other country relationships • Political conditions in foreign countries • Global price of oil changes • Local, state, and federal laws • Import-export regulations • Tariffs • Local, state, and national elections Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Technological Forces (1 of 3) New technologies such as: • the Internet of Things • 3D printing • the cloud • mobile devices • biotech • analytics • autotech Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Technological Forces (2 of 3) • robotics and • artificial intelligence are fueling innovation in many industries, and impacting strategic-planning decisions. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Technological Forces (3 of 3) • Many firms now have a Chief Information Officer (CIO) and a Chief Technology Officer (CTO) who work together to ensure that information needed to formulate, implement, and evaluate strategies is available where and when it is needed Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Results of Technological Advances (1 of 2) 1. Major opportunities and threats that must be considered in formulating strategies. 2. Can affect organizations’ products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices, and competitive position. 3. Can create new markets, result in new and improved products, change the relative competitive cost positions, and render existing products and services obsolete. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Results of Technological Advances (2 of 2) 4. Can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of employees, managers, and customers. 5. Can create new competitive advantages that are more powerful than existing advantages. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Competitive Forces (1 of 2) • An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Competitive Forces (2 of 2) Characteristics of the most competitive companies: 1. Strive to continually increase market share 2. Use the vision/mission as a guide for all decisions 3. Whether it's broke or not, fix it-make it better 4. Continually adapt, innovate, improve 5. Acquisition is essential to growth 6. Hire and retain the best employees and managers possible 7. Strive to stay cost-competitive on a global basis Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key Questions About Competitors (1 of 3) 1. What are the strengths of our major competitors? 2. What are the weaknesses of our major competitors? 3. What are the objectives and strategies of our major competitors? 4. How will our major competitors most likely respond to current economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive trends affecting our industry? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key Questions About Competitors (2 of 3) 5. How vulnerable are the major competitors to our alternative company strategies? 6. How vulnerable are our alternative strategies to successful counterattack by our major competitors? 7. How are our products or services positioned relative to major competitors? 8. To what extent are new firms entering and old firms leaving this industry? 9. What key factors have resulted in our present competitive position in this industry? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Key Questions About Competitors (3 of 3) 10.How have the sales and profit rankings of our major competitors in the industry changed over recent years? Why have these rankings changed that way? 11.What is the nature of supplier and distributor relationships in this industry? 12.To what extent could substitute products or services be a threat to our competitors? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Competitive Intelligence Programs (1 of 2) Competitive intelligence (CI) • a systematic and ethical process for gathering and analyzing information about the competition's activities and general business trends to further a business's own goals Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Competitive Intelligence Programs (2 of 2) The three basic objectives of a CI program are: 1. To provide a general understanding of an industry and its competitors 2. To identify areas in which competitors are vulnerable and to assess the impact strategic actions would have on competitors 3. To identify potential moves that a competitor might make that would endanger a firm's position in the market Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Figure 3-3 The Five-Forces Model of Competition (1 of 2) Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Five-Forces Model of Competition (2 of 2) 1. Identify key aspects or elements of each competitive force that impact the firm. 2. Evaluate how strong and important each element is for the firm. 3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Five-Forces Model (1 of 6) • Rivalry among competing firms – Most powerful of the five forces – Focus on competitive advantage of strategies over other firms Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 3-7 The Five-Forces Model (2 of 6) When the number of competing firms is high When competing firms are of similar size When competing firms have similar capabilities When the demand for an industry’s products is falling When the product or service prices in the industry are falling When consumers can switch brands easily When barriers to leaving the market are high When barriers to entering the market are low When fixed costs are high among competing firms When the product is perishable When rivals have excess capacity When consumer demand is falling When rivals have excess inventory When rivals sell similar products/services When mergers are common in the industry Conditions That Cause High Rivalry Among Competing Firms Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Five-Forces Model (3 of 6) • Potential Entry of New Competitors – Barriers to entry are important – Quality, pricing, and marketing can overcome barriers Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Barriers to Entry (1 of 2) • Need to gain economies of scale quickly • Need to gain technology and specialized know-how • Lack of experience • Strong customer loyalty • Strong brand preferences • Large capital requirements • Lack of adequate distribution channels Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Barriers to Entry (2 of 2) • Government regulatory policies • Tariffs • Lack of access to raw materials • Possession of patents • Undesirable locations • Counterattack by entrenched firms • Potential saturation of the market Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Five-Forces Model (4 of 6) • Potential development of substitute products – Pressure increases when: ▪ Prices of substitutes decrease ▪ Consumers' switching costs decrease Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Five-Forces Model (5 of 6) • Bargaining Power of Suppliers is increased when (there are): – Few suppliers – Few substitutes – Costs of switching raw materials is high • Backward integration is gaining control or ownership of suppliers Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Five-Forces Model (6 of 6) • Bargaining power of consumers – Customers being concentrated or buying in volume affects intensity of competition – Consumer power is higher where products are standard or undifferentiated Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Conditions Where Consumers Gain Bargaining Power 1. If buyers can inexpensively switch 2. If buyers are particularly important 3. If sellers are struggling in the face of falling consumer demand 4. If buyers are informed about sellers' products, prices, and costs 5. If buyers have discretion in whether and when they purchase the product Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Sources of External Information (1 of 2) • Unpublished sources include customer surveys, market research, speeches at professional and shareholders' meetings, television programs, interviews, and conversations with stakeholders. • Published sources of strategic information include periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Sources of External Information (2 of 2) • finance.yahoo.com • hoovers.com • globaledge.msu.edu/industries/ Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Forecasting Tools and Techniques • Forecasts – educated assumptions about future trends and events – no forecast is perfect Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Making Assumptions • Assumptions – Best present estimates of the impact of major external factors, over which the manager has little if any control, but which may exert a significant impact on performance or the ability to achieve desired results. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Business Analytics • Using software to mine huge volumes of data • Helps executives make decisions Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize and evaluate these factors: • Social • Political • Cultural • Governmental • Demographic • Legal • Economic • Technological • Environmental • Competitive Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved EFE Matrix Steps 1. List 20 key external factors 2. Weight from 0.0 to 1.0 3. Rate the effectiveness of current strategies from 1-4 4. Multiply weight * rating 5. Sum weighted scores Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 3-9 EFE Matrix for a Local 10Theater Cinema Complex (1 of 2) Key External Factors Weight Rating Weighted Score Opportunities Blank Blank Blank 1. Two new neighborhoods developing within 3 miles 0.09 1 0.09 2. TDB University is expanding 6% annually 0.08 4 0.32 3. Major competitor across town recently closed 0.08 3 0.24 4. Demand for going to cinemas growing 10% 0.07 2 0.14 5. Disposable income among citizens up 5% in prior year 0.06 3 0.18 6. Rowan County is growing 8% annually in population 0.05 3 0.15 7. Unemployment rate in county declined to 3.1% 0.03 2 0.06 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 3-9 EFE Matrix for a Local 10-Theater Cinema Complex (2 of 2) Key External Factors Weight Rating Weighted Score Threats Blank Blank Blank 8. Trend toward healthy eating eroding concession sales 0.12 4 0.48 9. Demand for online movies and DVDs growing 10% 0.06 2 0.12 10. Commercial property adjacent to cinemas for sale 0.06 3 0.18 11. TDB University installing an on-campus movie theater 0.04 3 0.12 12. County and city property taxes increasing 25% 0.08 2 0.16 13. Local religious groups object to R-rated movies 0.04 3 0.12 14. Movies rented at local Red Box’s up 12% 0.08 2 0.16 15. Movies rented last quarter from Time Warner up 15% 0.06 1 0.06 Total 1.00 Blank 2.58 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Industry Analysis: Competitive Profile Matrix (CPM) • Identifies firm's major competitors and their strengths & weaknesses in relation to a sample firm's strategic positions • Critical success factors include internal and external issues Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 3-12 An Example Competitive Profile Matrix Blank Critical Success Factors Blank Weight Company 1 Company 2 Company 3 Company 1 Company 2 Company 3 Rating Score Rating Score Rating Score Advertising 0.20 1 0.20 4 0.80 3 0.60 Product Quality 0.10 4 0.40 3 0.30 2 0.20 Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10 Management 0.10 4 0.40 3 0.20 1 0.10 Financial Position 0.15 4 0.60 2 0.30 3 0.45 Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20 Global Expansion 0.20 4 0.80 1 0.20 2 0.40 Market Share 0.05 1 0.05 4 0.20 3 0.15 Total 1.00 blank 3.15 blank 2.50 blank 2.20 Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 = major strength. As indicated by the total weighted score of 2.50, Competitor 2 is weakest. Only eight critical success factors are included for simplicity; this is too few in actuality. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Copyright Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Strategic Management Concepts: A Competitive Advantage Approach Sixteenth Edition Chapter 4 The Internal Assessment Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Learning Objectives (1 of 2) 4.1 Describe the nature and role of an internal assessment in formulating strategies. 4.2 Discuss why organizational culture is so important in formulating strategies. 4.3 Identify the basic functions (activities) that make up management and their relevance in formulating strategies. 4.4 Identify the basic functions of marketing and their relevance in formulating strategies. 4.5 Discuss the nature and role of finance and accounting in formulating strategies. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 4.6 Discuss the nature and role of production/operations in formulating strategies. 4.7 Discuss the nature and role of research and development (R&D) in formulating strategies. 4.8 Discuss the nature and role of management information systems (MIS) in formulating strategies. 4.9 Explain value chain analysis and its relevance in formulating strategies. 4.10 Develop and use an Internal Factor Evaluation (IFE) Matrix. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Figure 4-1 A Comprehensive StrategicManagement Model Source: Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. Also, Ratnaningsih, Anik, and Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4, (October 2010): 20. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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. Figure 4-2 The Process of Gaining Competitive Advantage in a Firm Weaknesses → Strengths → Distinctive Competencies → Competitive Advantage Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Process of Performing an Internal Audit • The internal audit – Requires gathering, assimilating, and prioritizing information about the firm's management, marketing, finance, accounting, production/operations, research and development (R and D), and management information systems operations – Provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole firm Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Resource-Based View (RBV) (1 of 3) • 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Resource-Based View (RBV) (2 of 3) • 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 – organizational resources Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Resource-Based View (RBV) (3 of 3) • 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. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Organizational Culture • 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.” Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Cultural Products • Values • Sagas • Beliefs • Language • Rites • Metaphors • Rituals • Symbols • Ceremonies • Folktales • Myths • Heroes and heroines • Stories • Legends Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 4-2 Aspects of Organizational Culture Dimension Low Degree Degree Degree High 1. Strong work ethic; arrive early and leave late 1 2 3 4 5 2. High ethical beliefs; clear code of business ethics followed 1 2 3 4 5 3. Formal dress; shirt and tie expected 1 2 3 4 5 4. Informal dress; many casual dress days 1 2 3 4 5 5. Socialize together outside of work 1 2 3 4 5 6. Do not question supervisor’s decision 1 2 3 4 5 7. Encourage whistle-blowing 1 2 3 4 5 8. Be health conscious; have a wellness program 1 2 3 4 5 9. Allow substantial “working from home” 1 2 3 4 5 10. Encourage creativity, innovation, and open-mindedness 1 2 3 4 5 11. Support women and minorities; no glass ceiling 1 2 3 4 5 12. Be highly socially responsible; be philanthropic 1 2 3 4 5 13. Have numerous meetings 1 2 3 4 5 14. Have a participative management style 1 2 3 4 5 15. Preserve the natural environment; have a sustainability program 1 2 3 4 5 Fifteen Example (Possible) Aspects of an Organization’s Culture Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Management The functions of management consist of five basic activities: • planning • organizing • motivating • staffing • controlling Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Basic Functions of Management (1 of 2) • Planning: forecasting, establishing objectives, devising strategies, and developing policies • Organizing: organizational design, job specialization, job descriptions, span of control, coordination, job design, and job analysis • Motivating: leadership, communication, work groups, behavior modification, delegation of authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee morale, and managerial morale Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved The Basic Functions of Management (2 of 2) • Staffing: wage and salary administration, employee benefits, interviewing, hiring, firing, training, management development, employee safety, equal employment opportunity, and union relations • Controlling: quality control, financial control, sales control, inventory control, expense control, analysis of variances, rewards, and sanctions Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Management Audit Checklist of Questions (1 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Management Audit Checklist of Questions (2 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Marketing Marketing • the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Functions of Marketing • Customer analysis • Selling products and services • Product and service planning • Pricing • Distribution • Marketing research • Cost/ benefit analysis Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Customer Analysis • 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Selling Products and Services • Selling – includes many marketing activities, such as advertising, sales promotion, publicity, personal selling, sales force management, customer relations, and dealer relations Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Pricing • 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. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Cost/Benefit Analysis • Cost/Benefit Analysis – Three steps are required: 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Marketing Audit Checklist of Questions (1 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Marketing Audit Checklist of Questions (2 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Finance/Accounting Functions (1 of 4) The functions of finance/accounting comprise three decisions: 1. The investment decision 2. The financing decision 3. The dividend decision Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Finance/Accounting Functions (2 of 4) • Investment Decision (Capital Budgeting) – 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Finance/Accounting Functions (3 of 4) • 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Finance/Accounting Functions (4 of 4) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 4-4 A Summary of Key Financial Ratios (1 of 4) Ratio How Calculated What it measures Current assets Current liabilities Current assets over Current liabilities The extent to which a firm can meet its short-term obligations Current assets minus inventory over Current liabilities The extent to which a firm can meet its short-term obligations without relying on the sale of its inventories Liquidity Ratios Current Ratio Quick Ratio Current assets minus inventory Current liabilities Leverage Ratios Debt-to-TotalAssets Ratio Debt-to-Equity Ratio Long-Term Debtto-Equity Ratio Times-InterestEarned Ratio Total debt Total assets Total debt Total stockholders' equity Total debt over Total assets Total debt over Total stockholders’ equity Long-term debt over Total stockholders’ equity Long-term debt Total stockholders' equity Profits before interest and taxes over Total interest charges Profits before interest and taxes Total interest charges The percentage of total funds provided by creditors The percentage of total funds provided by creditors versus by owners The balance between debt and equity in a firm’s long-term capital structure the extent to which earnings can decline without the firm becoming unable to meet its annual interest costs Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved A Summary of Key Financial Ratios (2 of 4) Ratio How Calculated What it measures Activity Ratios Sales over Inventory of finished goods Inventory turnover Fixed Assets turnover Sales Inventory of finished goods Sales Sales over Fixed assets Fixed assets Whether a firm holds excessive stocks of inventories and whether a firm is slowly selling its inventories compared to the industry average Sales productivity and plant and equipment utilization Total Assets turnover Sales over Total assets Sales Total assets Whether a firm is generating a sufficient volume of business for the size of its asset investment Accounts Receivable turnover Annual credit sales over Accounts receivable The average length of time it takes a firm to collect credit sales (in percentage terms) Average Collection Period Accounts receivable over total credit sales per 365 days The average length of time it takes a firm to collect on credit sales (in days) Annual credit sales Accounts receivable Accounts receivable Total credit sales/365 days Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved A Summary of Key Financial Ratios (3 of 4) Ratio How Calculated What it measures minus cost of goods sold over Sales SalesSales minus cost of goods sold Sales the total margin available to cover operating expenses and yield a profit Earnings before interest and taxes EBIT over Sales Profitability without concern for taxes and interest Profitability Ratios Gross Profit Margin Operating Profit Margin Earnings before interest and taxes EBIT Sales Net Profit Margin Net income over sales Return on total Assets (ROA) Net income over Total assets After-tax profits per dollar of assets; this ratio is also called return on investment (ROI) Return on Stockholders’ Equity (ROE) Net Income over Total stockholders’ equity Net income Total stockholders' equity After-tax profits per dollar of stockholders’ investment in the firm Net income over Number of shares of common stock outstanding Earnings available to the owners of common Stock Net income Sales Net income Total assets Earnings Per Share (EPS) Net income Number of shares of common stock outstanding Price-Earnings Ratio Market price per share over Earnings per share Market price per share Earnings per share After-tax profits per dollar of sales Attractiveness of firm on equity markets Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved A Summary of Key Financial Ratios (4 of 4) Ratio • How Calculated What it measures Growth Ratios Sales Annual percentage growth in total sales Firm’s growth rate in sales Net Income Annual percentage growth in profits Firm’s growth rate in profits Earnings Per Share Annual percentage growth in EPS Firm’s growth rate in EPS Dividends Per Share Annual percentage growth in dividends per share Firm’s growth rate in dividends per share Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Finance/Accounting Audit Checklist (1 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Finance/Accounting Audit Checklist (2 of 2) 6. Are dividend payout policies reasonable? 7. Does the firm have good 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Production/Operations • Production/operations function – consists of all those activities that transform inputs into goods and services • Production/operations management deals with inputs, transformations, and outputs that vary across industries and markets. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 4-6 The Basic Functions (Decisions) Within Production/Operations Decision Areas Example Decisions 1. Process these decisions include choice of technology, facility layout, process flow analysis, facility location, line balancing, process control, and transportation analysis. Distances from raw materials to production sites to customers are a major consideration. 2. Capacity these decisions include forecasting, facilities planning, aggregate planning, scheduling, capacity planning, and queuing analysis. Capacity utilization is a major consideration. 3. Inventory these decisions involve managing the level of raw materials, work-inprocess, and finished goods, especially considering what to order, when to order, how much to order, and materials handling. 4. Workforce these decisions involve managing the skilled, unskilled, clerical, and managerial employees by caring for job design, work measurement, job enrichment, 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 control. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 4-7 Implications of Various Strategies on Production/Operations Various Strategies Implications 1. Become a low-cost provider Creates high barriers to entry Creates larger market Requires longer production runs and fewer product changes 2. Become a high-quality provider Requires more quality-assurance efforts Requires more expensive equipment Requires highly skilled workers and higher wages 3. Provide great customer service Requires more service people, service parts, and equipment Requires rapid response to customer needs or changes in customer tastes Requires a higher inventory investment 4. Be the first to introduce new products Has higher research and development costs Has high retraining and tooling costs 5. Become highly automated Requires high capital investment Reduces flexibility May affect labor relations Makes maintenance more crucial 6. Minimize layoffs Serves the security needs of employees and may develop employee loyalty Helps attract and retain highly skilled employees Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Management Information Systems • Management Information System – Receives raw material from both external and internal evaluation of an organization – Improves the performance of an enterprise by improving the quality of managerial decisions – Collects, codes, stores, synthesizes, and presents information in such a manner that it answers important operating and strategic questions Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Management Information Systems Audit (1 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Management Information Systems Audit (2 of 2) 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? Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Figure 4-8 Transforming Value Chain Activities into Sustained Competitive Advantage Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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” Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 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. Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 4-8 A Sample Internal Factor Evaluation Matrix for a Retail Computer Store (1 of 2) Weight Rating Weighted Score Strengths Blank Blank Blank 1. Inventory turnover increased from 5.8 to 6.7. 0.05 3 0.15 2. Average customer purchase increased from $97 to $128. 0.07 4 0.28 3. Employee morale is excellent. 0.10 3 0.30 4. In-store promotions resulted in 20% increase in sales. 0.05 3 0.15 5. Newspaper advertising expenditures increased 10%. 0.02 3 0.06 6. Revenues from repair/service in the store up 16%. 0.15 3 0.45 7. In-store technical support personnel have MIS college degrees. 0.05 4 0.20 8. Store’s debt-to-total assets ratio declined to 34%. 0.03 3 0.09 9. Revenues per employee up 19%. 0.02 3 0.06 Key internal Factors Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Table 4-8 A Sample Internal Factor Evaluation Matrix for a Retail Computer Store (2 of 2) Key internal Factors Weight Weaknesses Blank Rating Weighted Score Blank Blank 1. Revenues from software segment of store down 12%. 0.10 2 0.20 2. Location of store negatively impacted by new Highway 34. 0.15 2 0.30 3. Carpet and paint in store somewhat in disrepair. 0.02 1 0.02 4. Bathroom in store needs refurbishing. 0.02 1 0.02 5. Revenues from businesses down 8%. 0.04 1 0.04 6. Store has no website. 0.05 2 0.10 7. Supplier on-time delivery increased to 2.4 days. 0.03 1 0.03 8. Often customers have to wait to check out 0.05 1 0.05 Total 1.00 BLANK 2.50 Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved Copyright Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved 
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