STRATEGIC MANAGEMENT MIDTERM REVIEWER

LESSON 3 - EXTERNAL ASSESSMENT • A final list of the most important key external factors
should be communicated
External Audit
• Key external factors should be: (IMAH)
− Focuses on identifying and evaluating trends and events 1. Important to achieving long-term and annual
beyond the control of a single firm objectives
− Reveals key opportunities and threats confronting an 2. Measurable
organization so that managers can formulate strategies 3. Applicable to all competing firms, and
to take advantage of the opportunities and avoid or 4. Hierarchical in the sense that some will pertain to
reduce the impact of threats the overall company and others will be more
narrowly focused on functional or divisional areas
The Nature of External Audit
The Industrial Organization (I/O) View
− The external audit is aimed at identifying key variables
that offer actionable responses The Industrial Organization (I/O) approach to competitive
− Firms should be able to respond either offensively or advantage advocates that external (industry) factors are more
defensively to the factors by formulating strategies that important than internal factors in a firm for achieving competitive
take advantage of external opportunities or that minimize advantage.
the impact of potential threats
Political, Governmental, and Legal Forces
Key External Forces (ESPTC) The increasing global interdependence among economies,
• Economic forces markets, governments, and organizations makes it imperative
• Social, cultural, demographic, and natural environment that firms consider the possible impact of political variables on
forces the formulation and implementation of competitive strategies.
• Political, governmental, and legal forces
• Technological Forces
• Competitive Forces
How to Audit
• Gather competitive intelligence and information about
economic, social, cultural, demographic,
environmental, political, governmental, legal, and
technological trends.
• Information should be assimilated and evaluated
 Key Social, Cultural, Demographic, and Natural
Environment Variables

Economic Forces

Technological Forces
The Internet has changed the very nature of opportunities
and threats by: (AICEC)
1. altering the life cycles of products,
2. increasing the speed of distribution,
3. creating new products and services,
4. erasing limitations of traditional geographic markets,
5. changing the historical trade-off between production
standardization and flexibility

Technological advancements can: (CRCR)

• Create new markets,

• Result in a proliferation of new and improved products,
 • Change the relative competitive cost positions in an Key Questions About Competitors
industry
• Render existing products and services obsolete.
Competitive Forces
An important part of an external audit is identifying rival firms
and determining their strengths, weaknesses, capabilities,
opportunities, threats, objectives, and strategies.
Characteristics of the most competitive companies:
(MUWIAPT)
1. Market share matters
2. Understand and remember precisely what business you
are in
3. Whether it’s broke or not, fix it–make it better
4. Innovate or evaporate
Five Forces Model (RPPBB)
5. Acquisition is essential to growth
6. People make a difference
7. There is no substitute for quality

Rivalry among competing firms: (MF)

• Most powerful of the five forces

• Focus on the competitive advantage of strategies over
other firms
Potential Entry of New Competitors (BQ) Industry Analysis: The EFE Matrix

• Barriers to entry are important External Factor Evaluation Matrix (ESCDEPGTCL)

• Quality, pricing, and marketing can overcome barriers
• Economic
Barriers to Entry (NNLSSLLP) • Social
• Cultural
• Need to gain economies of scale quickly • Demographic
• Need to gain technology and specialized know-how • Environmental
• Lack of experience • Political
• Strong customer loyalty • Governmental
• Strong brand preferences • Technological
• Large capital requirements • Competitive
• Lack of adequate distribution channels • Legal
• Potential saturation of the market
EFE Matrix Steps (LWRMS)
Potential development of substitute products
1. List key external factors total of 15-20 factors
Pressure increases when: (PC) 2. Weight from 0 to 1 0.0 - not important to 1.0 (very important)
• Prices of substitutes decrease 3. Rate the effectiveness of current strategies 1-4
• Consumers’ switching costs decrease 4. Multiply weight * rating
5. Sum weighted scores
Bargaining Power of Suppliers is increased when there are:
(LFCB) 4 = the response is superior,
3 = the response is above average,
1. Large numbers of suppliers 2 = the response is average, and
2. Few substitutes 1 = the response is poor
3. Costs of switching raw materials is high
4. Backward integration is gaining control or ownership of
suppliers

Bargaining power of consumers (CC)

• Customers being concentrated or buying in volume

affects the intensity of competition
• Consumer power is higher where products are standard
or undifferentiated
 LESSON 4 - INTERNAL ASSESSMENT

Competitive Profile Matrix

• Identifies the firm’s major competitors and their strengths
& weaknesses in relation to a sample firm’s strategic
positions
• Critical success factors include internal and external The Process of Performing an Internal Audit
issues
− Requires gathering and assimilating information about
the firm’s management, marketing, finance/accounting,
production/operations, research and development (R&D),
and management information systems operations
− Provides more opportunity for participants to understand
how their jobs, departments, and divisions fit into the
whole organization
The Resource-Based View Approach
− Contends that internal resources are more important for a
firm than external factors in achieving and sustaining
competitive advantage
− 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, and organizational resources
− For a resource to be valuable, it must be either: (RHN)
o Rare
o Hard to imitate
o Not easily substitutable
− These three characteristics of resources enable a firm to
implement strategies that improve its efficiency and
effectiveness and lead to a sustainable competitive
advantage
Integrating Strategy and Culture
− Organizational culture significantly affects business Management Audit (DADDIAIAA)
decisions and thus must be evaluated during an internal
strategic-management audit. 1. Does the firm use strategic-management concepts?
− If strategies can capitalize on cultural strengths, such as 2. Are company objectives and goals measurable and well
a strong work ethic or high ethical beliefs, then communicated?
management often can swiftly and easily implement 3. Do managers at all hierarchical levels plan effectively?
changes. 4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
Management 6. Are job descriptions and job specifications clear?
7. Is employee morale high?
− The functions of management consist of five basic
8. Are employee turnover and absenteeism low?
activities: planning, organizing, motivating, staffing,
9. Are organizational reward and control mechanisms
and controlling. (POMSC)
effective?
− These activities are important to assess in strategic
planning because an organization should continually Marketing
capitalize on its management strengths and improve
on its management weaknesses. The process of defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and services
Customer analysis
− The examination and evaluation of consumer needs,
desires, and wants.
 − Involves administering customer surveys, analyzing Cost-Benefit Analysis (CEC)
consumer information, evaluating market positioning
strategies, developing customer profiles, and determining 1. Compute the total costs associated with a decision,
optimal market segmentation strategies 2. Estimate the total benefits from the decision,
3. Compare the total costs with the total benefits.
− Essential in developing an effective mission statement
Marketing Audit Checklist of Questions (AIHADDAADADI)
Product and Service Planning
1. Are markets segmented effectively?
− Includes activities such as test marketing; product and
2. Is the organization positioned well among competitors?
brand positioning; devising warranties; packaging;
3. Has the firm’s market share been increasing?
determining product options, features, style, and quality;
4. Are present channels of distribution reliable and cost-
deleting old products, and providing customer service
effective?
− Important when a company is pursuing product
5. Does the firm have an effective sales organization?
development or diversification
6. Does the firm conduct market research?
Pricing 7. Are product quality and customer service good?
8. Are the firm’s products and services priced
− Five major stakeholders affect pricing decisions: appropriately?
consumers, governments, suppliers, distributors, 9. Does the firm have an effective promotion, advertising,
and competitors and publicity strategy?
− Sometimes an organization will pursue a forward 10. Are marketing, planning, and budgeting effective?
integration strategy primarily to gain better control over 11. Do the firm’s marketing managers have adequate
prices charged to consumers experience and training?
Distribution 12. Is the firm’s Internet presence excellent as compared to
rivals? financial ratios can signal strengths or
− Includes warehousing, distribution channels, weaknesses in management,
marketing, production, research and
distribution coverage, retail site locations, sales Finance/Accounting Functions (IFD) development, and management
information systems activities.
territories, inventory levels and location,
The functions of finance/accounting comprise three decisions:
transportation carriers, wholesaling, and retailing
− Especially important when a firm is striving to implement 1. The investment decision It is important to note here that
financial ratios are equally applicable
a market development or forward integration strategy 2. The financing decision in for-profit and nonprofit
organizations
3. The dividend decision
Marketing Research
Investment Decision also called capital budgeting
− The systematic gathering, recording, and analyzing of
data about problems relating to the marketing of goods − The allocation and reallocation of capital and
and services resources to projects, products, assets, and divisions
− Can uncover critical strengths and weaknesses 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
Dividend Decision
− 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

Finance/Accounting Functions (ChCoCo)

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?
Finance/Accounting Audit Checklist (WCCDAAADAI)
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?
6. Are capital budgeting procedures effective?
7. Are dividend payout policies reasonable?
 8. Does the firm have good relations with its investors and
stockholders?
9. Are the firm’s financial managers experienced and well
trained?
10. Is the firm’s debt situation excellent?
Production / Operations
Production/operations function
− consists of all those activities that transform inputs into
goods and services
Production/operations management
Production/Operations Audit Checklist of Questions
− deals with inputs, transformations, and outputs that vary (AAAAAD)
across industries and markets.
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?
Research and Development Audit Checklist of Questions
(DIAAAIA)
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?
Management and Information Systems − Aims to identify where low-cost advantages or
disadvantages exist anywhere along the value chain from
− A management information system’s purpose is to
raw material to customer service activities
improve the performance of an enterprise by improving
the quality of managerial decisions Benchmarking
− An effective information system thus collects, codes,
− An analytical tool used to determine whether a firm’s
stores, synthesizes and presents information in such a
value chain activities are competitive compared to rivals
manner that it answers important operating and strategic
and thus conducive to winning in the marketplace
questions
− Entails measuring costs of value chain activities across
Management and Information Systems Audit (DIADAAIDAI) the industry to determine “best practices”
1. Do all managers in the firm use the information system to Internal Factor Evaluation (IFE) Matrix (LAAMS)
make decisions?
2. Is there a chief information officer or director of 1. List key internal factors as identified in the internal audit
information systems position in the firm? process
3. Are data in the information system updated regularly? 2. Assign a weight that ranges from 0.0 (not important) to
4. Do managers from all functional areas of the firm 1.0 (all-important) to each factor
contribute input to the information system? 3. Assign a 1-to-4 rating to each factor to indicate whether
5. Are there effective passwords for entry into the firm’s that factor represents a strength or weakness
information system? 4. Multiply each factor’s weight by its rating to determine a
6. Are strategists of the firm familiar with the information weighted score for each variable
systems of rival firms? 5. Sum the weighted scores for each variable to determine
7. Is the information system user-friendly? the total weighted score for the organization
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?
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
 LONG TERM OBJECTIVES
− represent the results expected from pursuing certain
strategies
STRATEGIES
− represent the actions to be taken to accomplish long-term
objectives

LESSON 5 - STRATEGIES IN ACTION - PART 1

QMRUCHOC
 − When an organization has both the capital and
human resources needed to manage the new
business of distributing its own products.

2. BACKWARD INTEGRATION
− Seeking ownership or increased control of a firm’s
suppliers
o Ex. Chinese carmaker Geely Automobile
PAAERMSAAP Integration Holdings Ltd. purchased Australian
car-parts maker Drivetrain Systems International
Pty. Ltd.
− When an organization’s present suppliers are
especially expensive, unreliable, or incapable of
meeting the firm’s needs for parts, components,
assemblies, or raw materials.
− When the number of suppliers is small and the
STRATEGIES number of competitors is large.
FBHMMPRURDL
− When an organization competes in an industry that is
1. FORWARD INTEGRATION growing rapidly; this is a factor because integrative-type
− Gaining ownership or increased control over distributors strategies (forward, backward, and horizontal) reduce an
or retailers organization’s ability to diversify in a declining industry.
o Ex. PepsiCo launched a hostile takeover of Pepsi − When an organization has both capital and human
Bottling Group after its $4.2 billion offer was resources to manage the new business of supplying its
rejected. own raw materials.
− When an organization’s present distributors are − When the advantages of stable prices are particularly
especially expensive, unreliable, or incapable of important
meeting the firm’s distribution needs. − When present supplies have high-profit margins,
− When the availability of quality distributors is so which suggests that the business of supplying products
limited as to offer a competitive advantage to those firms or services in the given industry is a worthwhile venture.
that integrate forward − When an organization needs to quickly acquire a
− When an organization competes in an industry that is needed resource
growing and is expected to continue to grow
markedly; this is a factor because forward integration
reduces an organization’s ability to diversify if its basic
industry falters.
3. HORIZONTAL INTEGRATION 5. MARKET DEVELOPMENT
− Seeking ownership or increased control over competitors − Introducing present products or services into a new
o Ex. Pfizer acquires Wyeth; both are huge drug geographic area
companies o Ex. Time Warner purchased 31 percent of Central
− When an organization competes in a growing Development European Media Enterprises Ltd. in
industry. order to expand into Romania, the Czech
− When increased economies of scale provide major Republic, Ukraine, and Bulgaria
competitive advantages. − When new channels of distribution are available that
− When an organization has both the capital and human are reliable, inexpensive, and of good quality.
talent needed to successfully manage an expanded − When an organization is very successful at what it
organization. does.
− When competitors are faltering due to a lack of − When new untapped or unsaturated markets exist.
managerial expertise or a need for particular resources − When an organization has the needed capital and
that an organization possesses; note that horizontal human resources to manage expanded operations.
integration would not be appropriate if competitors are − When an organization has excess production capacity.
doing poorly, because in that case, overall industry sales − When an organization’s basic industry is rapidly
are declining. becoming global in scope

4. MARKET PENETRATION 6. PRODUCT DEVELOPMENT

− Seeking increased market share for present products or − Seeking increased sales by improving present products
services in present markets through greater marketing or services or developing new ones
efforts o Ex. News Corp.’s book publisher HarperCollins
o Ex. Coke spending millions on its new slogan began producing audio books for download, such
“Open Happiness” as Jeff Jarvis’s “What Would Google Do?”
− When current markets are not saturated with a − When an organization has successful products that
particular product or service. are in the maturity stage of the product life cycle; the
− When the usage rate of present customers could be idea here is to attract satisfied customers to try new
increased significantly. (improved) products as a result of their positive
− When the market shares of major competitors have experience with the organization’s present products or
been declining while total industry sales have been services.
increasing. − When an organization competes in an industry that is
characterized by rapid technological developments.
− When major competitors offer better-quality products
at comparable prices.
− When an organization competes in a high-growth − When an organization’s present channels of
industry. distribution can be used to market the new products to
− When an organization has especially strong research current customers
and development capabilities. − When an organization’s basic industry is experiencing
declining annual sales and profits.
7. RELATED DIVERSIFICATION − When an organization has the capital and managerial
− Adding new but related products or services talent needed to compete successfully in a new industry.
o Ex. Sprint Nextel Corp. diversified from the cell − When an organization has the opportunity to
phone business by partnering with Garmin Ltd. to purchase an unrelated business that is an attractive
deliver wireless Internet services to GPS investment opportunity.
machines − When there exists a financial synergy between the
− When an organization competes in a no-growth or a acquired and acquiring firm. (Note that a key difference
slow-growth industry. between related and unrelated diversification is that the
− When adding new, but related, products would former should be based on some commonality in
significantly enhance the sales of current products. markets, products, or technology, whereas the latter
− When new, but related, products could be offered at should be based more on profit considerations.)
highly competitive prices. − When existing markets for an organization’s present
− When new, but related, products have seasonal sales products are saturated.
levels that counterbalance an organization’s existing
peaks and valleys. 9. RETRENCHMENT
− When an organization’s products are currently in the − Regrouping through cost and asset reduction to reverse
declining stage of the product life cycle. declining sales and profit
− When an organization has a strong management team. o Ex. The world’s largest steelmaker, ArcelorMittal,
shut down half of its plants and laid off thousands
8. UNRELATED DIVERSIFICATION of employees even amid worker protests
− Adding new, unrelated products or services worldwide
o Ex. Cisco Systems Inc. entered the camcorder − When an organization has a clearly distinctive
business by acquiring Pure Digital Technology competence but has failed consistently to meet its
− When revenues derived from an organization’s current objectives and goals over time.
products or services would increase significantly by − When an organization is one of the weaker
adding the new, unrelated products. competitors in a given industry.
− When an organization competes in a highly competitive − When an organization is plagued by inefficiency, low
and/or a no-growth industry, as indicated by low profitability, poor employee morale, and pressure
industry profit margins and returns. from stockholders to improve performance.
− When an organization has failed to capitalize on − When an organization has pursued both a retrenchment
external opportunities, minimize external threats, strategy and a divestiture strategy, and neither has
take advantage of internal strengths, and overcome been successful.
internal weaknesses over time; that is, when the − When an organization’s only alternative is bankruptcy.
organization’s strategic managers have failed (and − When the stockholders of a firm can minimize their
possibly will be replaced by more competent individuals). losses by selling the organization’s assets.
− When an organization has grown so large so quickly
that major internal reorganization is needed.

10. DIVESTITURE
− Selling a division or part of an organization
o Ex. The British airport firm BAA Ltd. divested three
UK airports
− When an organization has pursued a retrenchment
strategy and failed to accomplish needed
improvements.
− When a division needs more resources to be
competitive than the company can provide.
− When a division is responsible for an organization’s
overall poor performance.
− When a division is a misfit with the rest of an
organization; this can result from radically different
markets, customers, managers, employees, values, or
needs.
− When a large amount of cash is needed quickly and
cannot be obtained reasonably from other sources.
− When government antitrust action threatens an
organization

11. LIQUIDATION
− Selling all of a company’s assets, in parts, for their
tangible worth
o Ex. Michigan newspapers such as the Ann Arbor
News, Detroit Free Press, and Detroit News
liquidated hard-copy operations