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Transcript of Chapter4 Internal Assessment
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Ch 4-1
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
Chapter 4
The Internal Assessment
Strategic Management:Concepts & Cases
12th Edition
Fred David
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Ch 4-2
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Chapter Outline
The Nature of an Internal Audit
The Resource-Based View (RBV)
Integrating Strategy & Culture
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Ch 4-3
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Chapter Outline (cont’d)
Management
Marketing
Opportunity Analysis
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Ch 4-4
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Chapter Outline (cont’d)
Finance/Accounting
Production/Operations
Research & Development
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Ch 4-5
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Chapter Outline (cont’d)
Management Information Systems
The Internal Factor Evaluation (IFE) Matrix
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Ch 4-6
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“ Great spirits have always encountered
violent opposition from mediocre minds.”
– Albert Einstein
Internal Assessment
“ Weak leadership can wreck the soundest
strategy.” – Sun Tzu
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Ch 4-7
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Nature of an Internal Audit
– Strengths
– Weaknesses
Functional Areas of Business
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Ch 4-8
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Ch 4-9
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Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
Nature of an Internal Audit
The Basis for Objectives & Strategies
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Ch 4-10
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Key Internal Forces
Functional Business Areas:
Vary by organizationDivisions have differing strengths &weaknesses
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Ch 4-11
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Key Internal Forces
1. A firm’s strengths that cannot be easily
matched or imitated by competitors arecalled distinctive competencies. Building
competitive advantages involves takingadvantage of distinctive competencies.
2. Strategies are designed in part to improve
on a firm’s weaknesses, turning them intostrengths, and maybe even into distinctivecompetencies.
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Ch 4-12
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Key Internal Forces
Distinctive Competencies:
Strategies designed to improve on afirm’s weaknesses and turn to strengths
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Ch 4-13
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Internal Audit
•Information from:
•Management•Marketing
•Finance/accounting
•Production/operations
•Research & development
•Management information systems
Parallels process of external audit
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Ch 4-14
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The Process of Performing an Internal
Audit
1. The process of performing an internal auditclosely parallels the process of performingan external audit. Representative managers
and employees from throughout the firmneed to be involved in determining a firm’sstrengths and weaknesses.
2. Performing an internal audit requires
gathering, assimilating\understanding, andevaluating information about the firm’soperations.
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Ch 4-15
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The Process of Performing an Internal
Audit
3. Compared to the external audit, the processof performing an internal audit providesmore opportunity for participants to
understand how their jobs, departments, anddivisions fit into the whole organization.
4. Financial ratio analysis exemplifies the
complexity of relationships among thefunctional areas of business.
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Ch 4-16
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Resource Based View (RBV)
Internal resources come from three categories.
1. Physical resources: plant, equipment, location,technology, raw materials, machines, etc.
2. Human resources: employees, training,experience, intelligence, knowledge, skills, abilities,etc.
3. Organizational resources: firm structure, planning
processes, information systems, patents,trademarks, copyrights, databases, etc.
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Ch 4-17
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The Basic principle
The mix, type, amount, and nature of afirm’s internal resources should be
considered first and foremost in devising
strategies that can lead to sustainablecompetitive advantage.
Firms should pursue strategies that are
not currently being implemented by anycompeting firm.
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Ch 4-18
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Evaluating Key Resources
VRIO Framework
How to identify the key resources?
Base on four criteria:
1. Value: Does it pro vide competi t ive advantage ?
2. Rareness: Do other compet itors pos sess i t?
3. Limitability: Is i t cost ly fo r others to im itate?
4. Organization: Is the fi rm organized to exploi t the resource?
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Ch 4-19
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Integrating Strategy & Culture
Organizat ional cul ture can be def ined as a
pattern of behavior developed by an
organization as it learns to cope w ith i ts problem
of external adaptat ion and internal integrat ion
that has worked wel l enough to be considered
valid and to be taught to new members as the
co rrect way to perceive, think , and feel .
Remarkably resistant to change, cul ture can represent a major strength o r weakness for the
f i rm.
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Ch 4-20
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CulturalProducts
Values
Legends Beliefs
Heroes Rites
Symbols RitualsMyths
Integrating Strategy & Culture
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Ch 4-21
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Integrating Strategy & Culture
Organizational Culture Can InhibitStrategic Management
Miss external changes due to strongly heldbeliefs
Natural tendency to ―hold the course‖ even
during times of strategic change
Organizational culture significantly affectsbusiness decisions and thus, must beevaluated during an internal strategic-
management audit.
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Ch 4-22
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U.S. Versus Foreign Cultures
To successfully compete in world markets,
U.S. managers must obtain a better
knowledge of historical, cultural, and religiousforces that motivate and drive people in other
countries.
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Ch 4-23
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U.S. Versus Foreign Cultures
In Japan, for example, business relations
operate within the context of wa, which
stresses group harmony and social cohesion.
In China, business behavior revolves around
Guianxi, or personal relations.
In Korea, activities involve concern for Inhwa,or harmony based on respect of hierarchical
relationships, including obedience to authority.
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Ch 4-24
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U.S. Versus Foreign Cultures
U.S. managers have a low tolerance for
silence, whereas Asian managers view
extended periods of silence as important for organizing and evaluating one’s thoughts.
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Ch 4-25
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Ch 4-26
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Culture and behavior
Probably the biggest obstacle to theeffectiveness of U.S. managers, or managers from any country working in
another, is the fact that it is almostimpossible to change the attitude of aforeign workplace. ―The system drives you;
you cannot fight the system or culture,‖ says
Bill Parker, president of Phillips Petroleumin Norway.
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Ch 4-27
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Management
Functions of Management
1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
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Ch 4-28
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Management
Planning
Stage When Most
ImportantFunction
Strategy Formulation
Organizing Strategy Implementation
Motivating Strategy Implementation
Staffing
Controlling
Strategy Implementation
Strategy Evaluation
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Ch 4-29
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Management
Planning
Beginning of management process
Bridge between present & future
Improves likelihood of attainingdesired results
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Ch 4-30
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Planning
Forecasting
Establishing objectives
Devising strategies
Developing policies
Setting goals
Management
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Ch 4-31
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Management
Organizing
Achieves coordinated effort
Defines task & authority relationships
Departmentalization
Delegation of authority
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Ch 4-32
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Organizing
Organizational design Job specialization Job descriptions
Job specifications Span of control Unity of command Coordination Job design Job analysis
Management
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Ch 4-33
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Management
Motivating
Influencing to accomplish specific
objectives
Communication – major component
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Ch 4-34
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Motivating
Leadership Communication Work groups Job enrichment Job satisfaction Needs fulfillment
Organizational change
Morale
Management
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Ch 4-35
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Management
Staffing
Personnel management
Human resource management
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Ch 4-36
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Staffing
Wage & salary admin. Employee benefits
Interviewing Hiring
Discharging Training
Managementdevelopment
Affirmative action EEO
Labor relations
Management
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Ch 4-37
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Management
Controlling
Establishing performance standards
Ensure actual operations conform toplanned operations
Taking corrective actions
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Ch 4-38
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Controlling
Quality Financial Sales
Inventory Expense
Analysis of variance Rewards
Sanctions
Management
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Ch 4-39
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Management Audit Checklist
•Does the firm use strategic managementconcepts?• Are objectives/goals measurable? Well
communicated?•Do managers at all levels planeffectively?
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Ch 4-40
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Management Audit Checklist
•Do managers delegate well?•Is the organization’s structure
appropriate?
• Are job descriptions clear?• Are job specifications clear?•Is employee morale high?
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Ch 4-41
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Management Audit Checklist
•Is employee absenteeism low?•Is employee turnover low?• Are the reward mechanisms effective?• Are the organization’s control mechanisms effective?
•This checklist can help determine specific strengthsand weaknesses. ―No‖ answers indicate potential
weaknesses, while ―Yes‖ answers indicate areas of
strength.
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Ch 4-42
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Marketing
Marketing can be described as the process of defining, anticipating, creating, and fulfillingcustomers’ needs and wants for products and
services.
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Ch 4-43
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Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
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Ch 4-44
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1. Customer Analysis
Customer analysis—the examination and evaluationof consumer needs, desires, and wants—involvesadministering customer surveys, analyzingconsumer information, evaluating market positioning
strategies, developing customer profiles, anddetermining optimal market segmentation strategies.
a. The information generated by customer analysis canbe essential in developing an effective mission
statement.b. Successful organizations continually monitor presentand potential customers’ buying patterns
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Ch 4-45
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2. Selling Products/Services
Successful strategy implementation generallyrests on the ability of an organization to sellsome product or service. Selling includes
many marketing activities such as advertising,sales promotion, publicity, and so on. Table4.4 lists the firms which spend the most onadvertising.
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Ch 4-46
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Ch 4-47
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3. Product and Service Planning
Product and service planning include activitiessuch as test marketing; product and brandpositioning; devising warranties; packaging;determining product options, product features,product style, and product quality; deleting oldproducts; and providing for customer service.
1. One of the most effective product and serviceplanning techniques is test marketing.
2. Consumer goods companies use test marketingmore frequently than industrial goods companies. Itcan allow companies to avoid substantial losses byrevealing weak products and ineffective marketingapproaches before large-scale production begins.
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Ch 4-48
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4. Pricing
Five major stakeholders affect pricing decisions:consumers, governments, suppliers, distributors,and competitors.
1. Sometimes an organization will pursue a forwardintegration strategy primarily to gain better controlover prices charged to consumers.
2. Governments can impose constraints on price fixing,price discrimination, minimum prices, unit pricing,
price advertising, and price controls.
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Ch 4-49
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5. Distribution
Distribution includes warehousing, distributionchannels and coverage, retail site locations, salesterritories, inventory levels and location,transportation carriers, wholesaling, and retailing.
1. Distribution becomes especially important when afirm is striving to implement a market development or forward integration strategy.
2. Successful organizations identify and evaluatealternative ways to reach their ultimate market.
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6. Marketing Research
Marketing research is the systematic gathering,recording, and analyzing of data about problemsrelating to the marketing of goods and services.
a. Marketing research can uncover critical strengths andweaknesses, and marketing researchers can employnumerous scales, instruments, procedures, concepts,and techniques to gather information.
b. Marketing research activities support all major
business functions.
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7. Opportunity Analysis
The next function of marketing is opportunityanalysis, which involves assessing the costs,benefits, and risks associated with marketingdecisions.
a. Three steps are required to perform a cost/benefitanalysis:
(1) compute the total costs associated with a decision,
(2) estimate the total benefits from the decision,
(3) and compare the total costs with the total benefits.b. As expected benefits exceed total costs, an
opportunity becomes more attractive.
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MarketingMarketing 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 the distribution channels reliable &
cost effective?
5. Is the sales force effective?
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Marketing
Opportunity Analysis
6. Does the firm conduct market research?
7. Are product quality & customer service
good?
8. Are the firm’s products/services priced
appropriately?
9. Does the firm have effective promotion,
advertising, and publicity strategies?
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Marketing
Opportunity Analysis
10.Are the marketing, planning, and
budgeting effective?
11.Do the firm’s marketing managers have
adequate experience and training?
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Ch 4-55
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Finance/Accounting
Determining financial strengths &weaknesses key to strategyformation
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Ch 4-56
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Finance/Accounting
Importance of Finance and Accounting
1. Financial condition is often considered the singlebest measure of a firm’s competitive position and
overall attractiveness to investors. Determining anorganization’s financial strengths and weaknesses is
essential to formulating strategies effectively.
2. A firm’s liquidity, leverage, working capital,
profitability, asset utilization, cash flow, and equitycan eliminate some strategies as being feasiblealternatives.
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Finance/Accounting
Finance/Accounting Functions
According to James Van Horne, the
functions of finance/accounting comprise
three decisions:
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
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Firm’s ability to meet its
sho rt-term obl igat ions
Ratios
Current ratio
Quick (or acid test) ratio
Basic Financial Ratios
Liquidity Ratios
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The extent to which a firmhas been financed bydebt.
Ratios
Debt-to-total-assetsDebt-to-equity
Long-term debt-to-equityTimes-interest-earned
Basic Financial Ratios
Leverage\power
Ratios
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Effective use of firm’s
resources
Ratios
Inventory turnover Fixed assets turnover Total assets turnover
Accounts receivable turnover Average collection period
Basic Financial Ratios
Activity Ratios
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Effect iveness show n by
returns on sales &
investment
Ratios
Gross profit marginOperating profit margin
Net profit marginReturn on total assets (ROA)
Basic Financial Ratios
Profitability Ratios
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Effect iveness show n by
returns on sales &
investment
Ratios
Return on stockholders’ equity
(ROE)
Earnings per sharePrice-earnings ratio
Basic Financial Ratios
Profitability Ratios
(cont’d)
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Firm’s ability to maintain
econom ic posi t ion
Ratios
SalesNet income
Earnings per shareDividends per share
Basic Financial Ratios
Growth Ratios
N l E i P i
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Natural Environment PerspectiveEU Countries Impose Curbs on Use of Chemicals
Tough new laws start in 2008
Use of some 30,000 chemicals need to be documented
Cease using 1,500 of the most dangerous chemicals
EU countries need to cut emissions
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Finance/Accounting Audit
•Does the firm have sufficient workingcapital?• Are capital budgeting procedures
effective?• Are dividend payout policies reasonable?•Are the firm’s financial managers
experienced & well trained?
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Finance/Accounting Audit
Effective Financial Analysis Requires:1. Analysis of how the ratios have
changed over time
2. How the ratios compare to industrynorms3. How the ratios compare with key
competitors
P d i d O i
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Production and Operations
1. The production/operations functions of abusiness consist of all those activities thattransform inputs into goods and services.
2. Production/operations management dealswith inputs, transformations, and outputs thatvary across industries and markets.
3. The production/operations activities oftenrepresent the largest part of an organization’s
human and capital assets.
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Production/Operations
Production/Operations Functions
Process
Capacity
Inventory
Workforce
Quality
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Global Perspective
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Global Perspective Auto Industry Work Week and Hourly Pay Variation (par per hour)
Germany $44.05
U.S. $33.95
Canada $29.17
Japan $27.38
France $26.34
S. Korea $15.82
Mexico $ 3.50
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Facility designTechnology selection
Facility layoutProcess flow analysisFacility locationLine balancingProcess control
Production/Operations
Process
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ForecastingFacilities planning
Aggregate planningScheduling
Capacity planningQueuing analysis
Production/Operations
Capacity
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Raw materials
Work in processFinished goods
Materials handling
Production/Operations
Inventory
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Job design
Work measurementJob enrichmentWork standards
Motivation techniques
Production/Operations
Workforce
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Quality control
SamplingTestingQuality assurance
Cost control
Production/Operations
Quality
P d ti /O ti A dit
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Production/Operations Audit
• Are suppliers of materials, parts, etc.reliable and reasonable?• Are facilities, equipment, and machineryin good condition?• Are inventory-control policies andprocedures effective?
P d ti /O ti A dit
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Production/Operations Audit
• Are quality-control policies & procedureseffective?• Are facilities, resources, and marketsstrategically located?•Does the firm have technologicalcompetencies?
Research & Development
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Research & Development
Many firms today do not conduct R&D, andyet many other companies depend onsuccessful R&D activities for survival. Firms
pursuing a product development strategyespecially need to have a strong R&Dorientation.
Research & Development
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Research & Development
R&D in organizations can take two basic forms: (1)internal R&D, in which an organization operates itsown R&D department, and/or (2) contract R&D, inwhich a firm hires independent researchers or
independent agencies to develop specific products. Many companies use both approaches to develop
new products.
A widely used approach for obtaining outside R&Dassistance is to pursue a joint venture with another firm.
Research & Development
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Research & Development
Most firms have no choice but to continuallydevelop new and improved products becauseof changing consumer needs and tastes, new
technologies, shortened product life cycles,and increased domestic and foreigncompetition.
R h & D l t
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Research & Development
Research & Development Functions
Development of new products before
competitors
Improving product quality
Improving manufacturing processes to
reduce costs
R h & D l t
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Financing as manyprojects as possible
Use percent-of-salesmethod
Budgeting relative tocompetitors
How many successfulnew products areneeded
Research & Development
R&D Budgets
Research & Development Audit
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Research & Development Audit
• Are the R&D facilities adequate?•If R&D is outsourced, is it cost-effective?• Are the R&D personnel well qualified?• Are R&D resources allocated effectively?
Research & Development Audit
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Research & Development Audit
• Are MIS and computer systemsadequate?•Is communication between R&D andother organizational units effective?• Are present products technologicallycompetitive?
Management Information
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Management Information
Systems
Purpose
Improve performance of an enterprise byimproving the quality of managerial
decisions
Management Information Systems
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Management Information Systems
Importance of Information1. Information ties all business functions together and provides the
basis for all managerial decisions.
2. A management information system receives raw material fromboth the external and internal evaluation of an organization. It
gathers data about marketing, finance, production, andpersonnel matters internally; and social, cultural, demographic,environmental, economic, political, government, legal,technological, and competitive factors externally. Data isintegrated in ways needed to support managerial decisionmaking.
3. Because organizations are becoming more complex,decentralized, and globally dispersed, the function of informationsystems is growing in importance.
Management Information
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Management Information
Systems
Information Systems
CIO/CTO
Security User-friendly
E-commerce
Management Information
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Management Information
Systems Audit
•Do managers use the information systemto make decisions?•Is there a CIO or Director of Information
Systems position in the firm?•Is data updated regularly?
Management Information
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Management Information
Systems Audit
•Do managers from all functional areascontribute input to the information system?• Are there effective passwords for entry
into the firm’s information system? • Are strategists of the firm familiar with theinformation systems of rival firms?
Management Information
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Management Information
Systems Audit
•Is the information system user-friendly?•Do all users understand the competitiveadvantages that information can provide?
• Are computer training workshops providedfor users?•Is the firm’s system being improved?
VALUE CHAIN ANALYSIS
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VALUE CHAIN ANALYSIS
Porter describes the business of a firm as avalue chain, in which total revenues minustotal costs of all activities undertaken todevelop and market a product or service
yields value. B. Value Chain Analysis refers to the
process whereby a firm determines the costs
associated with organizational activities frompurchasing raw materials to manufacturingproducts to marketing those products.
VALUE CHAIN ANALYSIS
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VALUE CHAIN ANALYSIS
. All firms should use value-chain analysis to develop a nurture acore competence and develop this competence into a distinctivecompetence.
1. A core competence is a value-chain activity that a firmperforms especially well.
When a core competence evolves into a major competitiveadvantage, it is called a distinctive competence. Figure 4-4illustrates this process.
D. Firms use benchmarking to determine whether its value chainactivities are competitive compared to rivals. This entails
measuring the costs of value chain activities across an industryto determine ―best practices‖ among competing firms for thepurpose of duplicating or improving upon those best practices.
Corporate Value Chain
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p
Value Chain Analysis
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Examine each product line’s value chain Core competencies & core deficiencies
Examine the “linkages” within each productline’s value chain
Connections between the way one value activity isperformed and the cost of performance of another activity
Examine the synergies among the value chainsof different product lines or business units
Economies of scope
THE INTERNAL FACTOR
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EVALUATION (IFE) MATRIX
1. A summary step in conducting an internal strategic-management audit is to construct an IFE Matrix.This strategy-formulation tool summarizes andevaluates the major strengths and weaknesses in
the functional areas of a business, and it alsoprovides a basis for identifying and evaluatingrelationships among these areas.
2. Intuitive judgments are required in developing anIFE Matrix, so the appearance of a scientificapproach should not be interpreted to mean this isan all-powerful technique.
Steps in developing Internal Factor
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Evaluation (IFE) Matrix
1. List key internal factors as identified in the internal-auditprocess. Use a total from ten to twenty internal factorsincluding both strengths and weaknesses.
2. Assign a weight ranging from 0 (not important) to 1.0 (veryimportant). The weight indicates the relative importance of thefactor to being successful in the firm’s industry. The sum of all
the weights must equal 1.0.3. Assign a 1-4 rating to each factor to indicate whether that
factor represents a major weakness (1), minor weakness (2),minor strength (3), or major strength (4).
4. Multiply each factor’s weight by its rating to determine aweighted score for each variable.
5. Sum the weighted scores for each variable to determine thetotal weighted score for the organization.
6. Total weighted scores of below 2.5 indicate an internally weakorganization.
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Review
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Explain why prioritizing the relative importance of strengths and weaknesses to include in an IFE Matrix is animportant strategic-management activity.
Prioritizing strengths and weaknesses can require substantialnegotiation among managers because of the impact that
factors included in the IFE Matrix will have on an organization’sstrategies. Strategies will be devised to capitalize on thestrengths and to improve the weaknesses. Managers fromdifferent departments and divisions of the organization willpresent supporting evidence for inclusion of factors thatconcern their particular unit of the firm. No more than 20
factors should be included in an IFE Matrix because too manystrategies cannot be effectively pursued simultaneously.
Review
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Diagram a formal organizational chart that reflects thefollowing positions: a president, two executive officers,four middle managers, and 18 lower-level managers. Now,diagram three overlapping and hypothetical informationgroup structures. How can this information be helpful to astrategist in formulating and implementing strategy?
Identifying the structure of informal groups can aid informulating and implementing strategies because thisinformation reveals communication patterns in the firm. Thisinformation could suggest individuals that are most important ininfluencing other persons to support established organizational
objectives.
Review
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Do you think aggregate R&D expenditures for American firms will increase or decrease next
year? Why?
R&D expenditures will likely increase because
technological advancements are shortening theproduct life cycle in nearly all industries. Productsof all types are becoming obsolete more quicklythan ever before, thus requiring greater R&D
expenditures to gain competitive advantages in themarketplace.
Review
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Explain how you would motivate managers andemployees to implement a major new strategy.
There is a need to demonstrate clearly how thenew strategy will benefit managers and employees
of the organization. Articulate effectively why thenew strategy is needed, given competitors’strategies, products, and services. Strive tomobilize the firm’s cultural products to support thenew strategy. Involve as many managers as
possible in discussions about how to effectivelyimplement the strategy. The process is moreimportant than the plan.
Review
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Why do you think production/operations managers areoften not directly involved in strategy-formulationactivities? Why can this be a major organizationalweakness?
There is an unfortunate stigma in many organizations that
production/operations managers do not need to be involved instrategy-formulation decisions; they implement only strategies.This attitude can represent a major weakness in anyorganization because more than 80 percent of company assetsare generally tied up in production/operations facilities,materials, plants, equipment, inventory, and machines.
Production managers’ input into strategy-formulation activitiescan help assure that cost-effective strategies are selected for implementation.
Review
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Would you ever pay out dividends when your firm’sannual net profit is negative? Why? What effect could thishave on a firm’s strategies?
For the following reasons, dividends are sometimes paid evenwhen a firm’s annual net profit is negative:
1. Paying cash dividends is customary. Failure to do so could bethough of as a stigma. A cash dividend is considered a signalabout the future.
2. Dividends represent a sales point for investment bankers.Some institutions can only buy dividend-paying stocks.
3. Shareholders often demand dividends, even in companies withgreat opportunities for reinvesting all available funds.
4. A myth exists that paying dividends will result in a higher stockprice.
Review
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Why do you believe cultural productsaffect all the functions of business?
Cultural products permeate every activity inan organization. People become attached tocultural products and often resist changes inrites, rituals, values, beliefs, and norms.Whether people work in marketing,manufacturing, personnel, or finance/accounting, they likely feel stronglyabout a firm’s culture.
For Review (Chapter 4)
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Key Terms & Concepts
For Review (Chapter 4)
Activity Ratios Cost/Benefit Analysis
Capital Budgeting Cultural Products
Communication Distinctive Competencies
Controlling Distribution
For Review (Chapter 4)
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Key Terms & Concepts
( p )
Dividend DecisionFunctions of
Finance/Accounting
Empirical Indicators Functions of Management
Financial Ratio Analysis Functions of Marketing
Financing DecisionFunctions of Production/
Operations
For Review (Chapter 4)
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Key Terms & Concepts
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Growth Ratios Investment Decision
Human Resource
ManagementLeverage Ratios
Internal Audit Liquidity Ratios
Internal Factor Evaluation
(IFE) Matrix
Management Information
Systems
For Review (Chapter 4)
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Key Terms & Concepts
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Motivating Personnel Management
Opportunity Analysis Planning
Organizational Culture Pricing
OrganizingProduct & Service
Planning
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Key Terms & Concepts
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Production/Operations
FunctionsSelling
Profitability Ratios Staffing
Research & Development Synergy
Resource Based View
(RBV)Test Marketing
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Key Terms & Concepts
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Value Chain Analysis
(VCA)