Strategic formulation
Strategy Formulation
Vision & Mission
External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection
Internal Audit
Parallels process of external audit
•Information from:
•Management
•Marketing/sales
•Finance/accounting
•Production/operations
•Research & Development
•Management information Systems
Management Audit Checklist: a yes is a
strength a no is a weakness for all the
checklists
•Does the firm use strategic management
concepts?
•Are objectives/goals measurable? Well
communicated?
•Do managers at all levels plan
effectively? Do managers delegate well?
Management Audit Checklist: a yes is a
strength a no is a weakness for all the
checklists
Marketing/sales
Opportunity Analysis: yes is strength ,no is a
weakness
Are markets segmented effectively?
Has the firm’s market share been increasing?
Does the firm conduct market research?
Are product quality & customer service good?
Finance/Accounting Audit
•Can the firm raise capital as needed?
•through debt (assets that are owned) and/or
equity (assets minus liabilities)?
•
•Does the firm have sufficient working capital
(goods that are already produced)?
• Are the firm’s financial managers experienced &
well trained?
Production/Operations Audit
•Are suppliers of materials, parts, etc.
reliable and reasonable?
•Are facilities, equipment & machinery in
good condition?
•Are inventory-control policies and
procedures effective?
•Are facilities, resources, and markets
strategically located?
Copyright 2007 Prentice
Hall
Ch 4 -7
Research & Development Audit
•Are the R&D facilities adequate?
•If R&D is outsourced, is it cost effective?
•Are R&D resources allocated effectively?
•Is communication between R&D & other
organizational units effective?
•Are present products technologically
competitive?
Copyright 2007 Prentice
Hall
Ch 4 -8
Management Information
Systems Audit
•Do managers use the information system to
make decisions?
•Is data updated regularly?
•Do managers from all functional areas
contribute input to the information system?
•Are strategists of the firm familiar with the
information systems of rival firms?
•Is the firm’s system being improved (is IT
evolution ideal)?
Internal (factor) evaluation matrix
• The IEM is a summary of the internal audit
• Summaries internal strength and
weaknesses within the functional area’s of
the business.
• Identifies and evaluates cross-functional
relationships; e.g. marketing and finance.
Internal factor evaluation (IFE)
•
•
•
•
•
•
List key internal factors as identified in the internalaudit process. Use a total from ten to twenty internal
factors including both strengths and weaknesses.
Assign a weight ranging from 0 (not important) to 1.0
(very important). The weight indicates the relative
importance of the factor to being successful in the
firm’s industry. The sum of all the weights must equal
1.0.
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).
Multiply each factor’s weight by its rating to determine
a weighted score for each variable.
Sum the weighted scores for each variable to
determine the total weighted score for the organization.
Total weighted scores of below 2.5 indicate an
internally weak organization.
Ryanair Internal Evaluation matrix
Weight Rating Weighted Score
Strengths
1. Owning 42 bases allows Ryanair to operate at a lower cost then
0.24
4
0.06
competitors.
2. 92% of bookings being done over the internet lower cost by
0.16
4
0.04
lower workers needed and telephone usage.
3. Ryanair being the second largest airlines in Europe is a well
0.28
4
0.07
known company among European flyers.
0.16
4
0.04
4. 90% of Ryanair’s flights arrive on time.
5. Ryanair has created a niche in the market by offering many direct
0.16
4
0.04
flights.
6. 284 new routes will allow Ryanair to capture new passenger
0.20
4
0.05
business.
7. Profits increased by 204% due to an increase in planes, routes
0.40
4
0.10
and passengers.
8. The down turn in the economic cycle and low fares has lead to
0.15
3
0.05
an increase in traffic growth by 14%.
0.40
4
0.10
9. Ryanair forecast generating over $1 billion in surplus cash.
10. Have 51 new planes.
0.15
3
0.05
Ryanair Internal Evaluation
matrix
1.
2.
3.
4.
5.
6.
7.
8.
Weaknesses
Low customer loyalty because of a no refund policy and relax
attitude on canceling of flights.
Poor customer service leaves an opening for competitors to
capture our customers.
Ryanair advertisements may be viewed as poor do to the use of
vulgar, explicit, and sexual material.
Ryanair’s lack of major city destinations.
Low market growth opportunities.
Staff cost increased by 8%.
Ryanair charges customers for many ancillaries items that are
free on most other airlines.
Maintenance cost increased by 29%.
TOTALS
Weight Rating Weighted Score
0.05
1
0.05
0.06
1
0.06
0.02
1
0.02
0.05
0.05
0.04
2
2
2
0.10
0.10
0.08
0.06
1
0.06
0.07
1.00
1
0.07
2.84
An alternative internal
evaluation
• Porter’s Business Value Chain
– Highlights specific activities in a business where
competitive strategies can best be applied and where
information systems are likely to have a strategic impact
• Primary activities
• Support activities
• Moreover the VCA will focus on analysis your company
against competitors (benchmarking) and so adopt
industrial “best practices”
Value chain
Analysis
Determines cost
associated with
organisation
activities
Can help a firm to
Identify strengths
and weaknesses.
A generic
example of
activities is
provided in below.
Information systems in the VCA
Adopted Laudon and Laudon (2012)
VCA
• All firms should use value chain analysis to develop and nurture a
core competence and develop this competence into a distinctive
competence.
– 1. A core competence is a value chain activity that a firm performs
especially well.
– 2. When a core competence evolves into a major competitive advantage,
it is called a distinctive competence. (e.g. manufacturing system;
marketing analysis )
• Firms determine whether its value chain activities are competitive
compared to rivals.
– This entails measuring the costs of value chain activities, if possible, across an
industry to determine “best practices” among competing firms for the purpose of
duplicating or improving upon those best practices.
Business Value chain analysis
• VCA (really a business process model), firms achieve
competitive advantages by being more efficient.
• This does not necessarily mean low-priced (passed
onto the consumer). The gains from efficiency may
be retained by the firm as greater profits, depending
on the competitive situation.
– For instance, Tesco adopts a business value chain
model to achieve the lowest prices, but not so low
as to report lower profits.
Extending the chain: The Industrial
value chain
• This is the link between firms, in a
particular industry, going from raw
materials to consumer.
• Supplier’s suppliers, Suppliers, logistics
partners , and distributors including retailers.
• But in the Internet age, this kind of
dependence and co-ordination takes place
much more broadly (geographical area) and
continuously (24/7).
Industrial Value “web”
• The chain can be seen to have developed into a
web (a more flexible chain)
• Collection of independent firms that use
information technology to coordinate their value
chains to produce a product collectively
– The customer receives a single product or service
which was co-produced by many firms working
together closely.
• Value webs are flexible and adapt to changes in
supply and demand
The industrial value “web”
• The value web is a
networked system
that can
synchronize the
value chains of
business partners
within an industry to
respond rapidly to
changes in supply
and demand.
Adopted Laudon and Laudon (2012)
Potential exam questions
• An Internal Factor Evaluation Matrix can be used for
evaluation of an organisation:
– What information is required,
(12 Marks)
– How is this information used to construct the matrix
(10 marks)
– What conclusions could be drawn from using the
matrix. (8 Marks)
• Value chain analysis is a method of performing an
internal analysis. Describe, using a suitable example,
how to perform a VCA (within a firm and within the
industry) and how can it improve the organisation’s
competitive advantage (30 Marks.)