Chapter 4

The Internal Assessment

Strategic Management:
Concepts & Cases
12th Edition
Fred David

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Publishing as Prentice Hall Ch 4-1
 Chapter Outline

The Nature of an Internal Audit

The Resource-Based View (RBV)

Integrating Strategy & Culture

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 Chapter Outline (cont’d)

Management

Marketing

Opportunity Analysis

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 Chapter Outline (cont’d)

Finance/Accounting

Production/Operations

Research & Development

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 Chapter Outline (cont’d)

Management Information Systems

The Internal Factor Evaluation (IFE) Matrix

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 Internal Assessment

“Great spirits have always encountered

violent opposition from mediocre minds.”
– Albert Einstein

“Weak leadership can wreck the soundest

strategy.”
– Sun Tzu

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 Nature of an Internal Audit

Functional Areas of Business

– Strengths

– Weaknesses

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 Nature of an Internal Audit

The Basis for Objectives & Strategies

 Internal strengths/weaknesses
 External opportunities/threats
 Clear statement of mission

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 Key Internal Forces

Functional Business Areas:

Vary by organization
Divisions have differing strengths &
weaknesses

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Key Internal Forces

1. A firm’s strengths that cannot be easily

matched or imitated by competitors are
called distinctive competencies. Building
competitive advantages involves taking
advantage of distinctive competencies.
2. Strategies are designed in part to improve
on a firm’s weaknesses, turning them into
strengths, and maybe even into distinctive
competencies.
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 Key Internal Forces

Distinctive Competencies:

Strategies designed to improve on a

firm’s weaknesses and turn to strengths

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 Internal Audit

Parallels process of external audit

•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & development
•Management information systems

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The Process of Performing an Internal
Audit
1. The process of performing an internal audit
closely parallels the process of performing
an external audit. Representative managers
and employees from throughout the firm
need to be involved in determining a firm’s
strengths and weaknesses.
2. Performing an internal audit requires
gathering, assimilating\understanding, and
evaluating information about the firm’s
operations.
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The Process of Performing an Internal
Audit
3. Compared to the external audit, the process
of performing an internal audit provides
more opportunity for participants to
understand how their jobs, departments, and
divisions fit into the whole organization.
4. Financial ratio analysis exemplifies the
complexity of relationships among the
functional areas of business.

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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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The Basic principle

 The mix, type, amount, and nature of a

firm’s internal resources should be
considered first and foremost in devising
strategies that can lead to sustainable
competitive advantage.
 Firms should pursue strategies that are

not currently being implemented by any

competing firm.

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 Evaluating Key Resources

VRIO Framework
 How to identify the key resources?
Base on four criteria:
1. Value: Does it provide competitive advantage?
2. Rareness: Do other competitors possess it?
3. Limitability: Is it costly for others to imitate?
4. Organization: Is the firm organized to exploit
the resource?

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Integrating Strategy & Culture
 Organizational culture can be defined as a
pattern of behavior developed by an
organization as it learns to cope with its problem
of external adaptation and internal integration
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.
 Remarkably resistant to change, culture can
represent a major strength or weakness for the
firm.

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Integrating Strategy & Culture

Values

Legends Beliefs

Heroes
Cultural Rites
Products

Symbols Rituals
Myths

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 Integrating Strategy & Culture
Organizational Culture Can Inhibit
Strategic Management
 Miss external changes due to strongly held
beliefs
 Natural tendency to “hold the course” even
during times of strategic change
 Organizational culture significantly affects
business decisions and thus, must be
evaluated during an internal strategic-
management audit.

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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 religious
forces that motivate and drive people in other
countries.

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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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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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Copyright © 2009 Pearson Education, Inc.
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Culture and behavior

 Probably the biggest obstacle to the

effectiveness of U.S. managers, or
managers from any country working in
another, is the fact that it is almost
impossible to change the attitude of a
foreign workplace. “The system drives you;
you cannot fight the system or culture,” says
Bill Parker, president of Phillips Petroleum in
Norway.
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 Management

Functions of Management

1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling

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 Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

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 Management

Planning

 Beginning of management process

 Bridge between present & future
 Improves likelihood of attaining
desired results

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 Management

 Forecasting

 Establishing objectives

Planning  Devising strategies

 Developing policies

 Setting goals

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 Management

Organizing

 Achieves coordinated effort

 Defines task & authority relationships
 Departmentalization
 Delegation of authority

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 Management

 Organizational design
 Job specialization
 Job descriptions
 Job specifications
Organizing  Span of control
 Unity of command
 Coordination
 Job design
 Job analysis

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 Management

Motivating

 Influencing to accomplish specific

objectives
 Communication – major component

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 Management

 Leadership
 Communication
 Work groups
 Job enrichment
Motivating
 Job satisfaction
 Needs fulfillment
 Organizational change
 Morale

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 Management

Staffing

 Personnel management
 Human resource management

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 Management

 Wage & salary admin.

 Employee benefits
 Interviewing
 Hiring
 Discharging
Staffing  Training
 Management
development
 Affirmative action
 EEO
 Labor relations

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 Management

Controlling

 Establishing performance standards

 Ensure actual operations conform to
planned operations
 Taking corrective actions

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 Management

 Quality
 Financial
 Sales
 Inventory
Controlling
 Expense
 Analysis of variance
 Rewards
 Sanctions

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 Management Audit Checklist

••Does
Does the
the firm
firm use
use strategic
strategic management
management
concepts?
concepts?
••Are
Are objectives/goals
objectives/goals measurable?
measurable? Well
Well
communicated?
communicated?
••Do
Do managers
managers at at all
all levels
levels plan
plan
effectively?
effectively?

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 Management Audit Checklist

••Do
Do managers
managers delegate
delegate well?
well?
••Is
Is the
the organization’s
organization’s structure
structure
appropriate?
appropriate?
••Are
Are job
job descriptions
descriptions clear?
clear?
••Are
Are job
job specifications
specifications clear?
clear?
••Is
Is employee
employee morale
morale high?
high?

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 Management Audit Checklist

••IsIsemployee
employeeabsenteeism
absenteeismlow?
low?
••IsIsemployee
employeeturnover
turnoverlow?
low?
••Are
Arethe
thereward
rewardmechanisms
mechanismseffective?
effective?
••Are
Arethe
theorganization’s
organization’scontrol
controlmechanisms
mechanismseffective?
effective?
••This
Thischecklist
checklistcan
canhelp
helpdetermine
determinespecific
specificstrengths
strengthsand
and

weaknesses.
weaknesses.“No”
“No”answers
answersindicate
indicatepotential
potentialweaknesses,
weaknesses,while
while

“Yes”
“Yes”answers
answersindicate
indicateareas
areasof
ofstrength.
strength.

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Marketing

 Marketing can be described as the process of

defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and
services.

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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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1. 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.
a. The information generated by customer analysis can
be essential in developing an effective mission
statement.
b. Successful organizations continually monitor
present and potential customers’ buying patterns

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2. Selling Products/Services

 Successful strategy implementation generally

rests on the ability of an organization to sell
some product or service. Selling includes
many marketing activities such as
advertising, sales promotion, publicity, and so
on. Table 4.4 lists the firms which spend the
most on advertising.

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Copyright © 2009 Pearson Education, Inc.
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3. Product and Service Planning
 Product and service planning include activities
such as test marketing; product and brand
positioning; devising warranties; packaging;
determining product options, product features,
product style, and product quality; deleting old
products; and providing for customer service.
1. One of the most effective product and service
planning techniques is test marketing.
2. Consumer goods companies use test marketing
more frequently than industrial goods companies. It
can allow companies to avoid substantial losses by
revealing weak products and ineffective marketing
approaches before large-scale production begins.

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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 forward
integration strategy primarily to gain better control
over 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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5. Distribution
 Distribution includes warehousing, distribution
channels and coverage, retail site locations, sales
territories, inventory levels and location,
transportation carriers, wholesaling, and retailing.
1. Distribution becomes especially important when a
firm is striving to implement a market development or
forward integration strategy.
2. Successful organizations identify and evaluate
alternative 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 problems
relating to the marketing of goods and services.
a. Marketing research can uncover critical strengths and
weaknesses, and marketing researchers can employ
numerous 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 opportunity
analysis, which involves assessing the costs,
benefits, and risks associated with marketing
decisions.
a. Three steps are required to perform a cost/benefit
analysis:
(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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 Marketing
Marketing 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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 Finance/Accounting

 Determining financial strengths &

weaknesses key to strategy
formation

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Finance/Accounting
 Importance of Finance and Accounting
 1. Financial condition is often considered the single
best measure of a firm’s competitive position and
overall attractiveness to investors. Determining an
organization’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 equity
can eliminate some strategies as being feasible
alternatives.

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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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 Basic Financial Ratios

Firm’s ability to meet its

short-term obligations

Liquidity Ratios
Ratios

Current ratio
Quick (or acid test) ratio

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 Basic Financial Ratios

The extent to which a firm

has been financed by
debt.

Leverage\power Ratios
Ratios
Debt-to-total-assets
Debt-to-equity
Long-term debt-to-equity
Times-interest-earned

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 Basic Financial Ratios

Effective use of firm’s

resources

Activity Ratios Ratios

Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period

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 Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment
Profitability Ratios
Ratios

Gross profit margin

Operating profit margin
Net profit margin
Return on total assets (ROA)

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 Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment
Profitability Ratios
(cont’d) Ratios

Return on stockholders’ equity

(ROE)
Earnings per share
Price-earnings ratio

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 Basic Financial Ratios

Firm’s ability to maintain

economic position

Growth Ratios Ratios

Sales
Net income
Earnings per share
Dividends per share

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Natural Environment Perspective
EU 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
Does the
the firm
firm have
have sufficient
sufficient working
working
capital?
capital?
••Are
Are capital
capital budgeting
budgeting procedures
procedures
effective?
effective?
••Are
Are dividend
dividend payout
payout policies
policies reasonable?
reasonable?
••Are
Are the
the firm’s
firm’s financial
financial managers
managers
experienced
experienced && well well trained?
trained?

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 Finance/Accounting Audit

Effective
Effective Financial
Financial Analysis
Analysis Requires:
Requires:
1.
1. Analysis
Analysis of
of how
how the
the ratios
ratios have
have
changed
changed over
over time
time
2.
2. How
How the
the ratios
ratios compare
compare to to industry
industry
norms
norms
3.
3. How
How the
the ratios
ratios compare
compare with
with key
key
competitors
competitors

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Production and Operations

 1. The production/operations functions of a

business consist of all those activities that
transform inputs into goods and services.
 2. Production/operations management deals
with inputs, transformations, and outputs that
vary across industries and markets.
 3. The production/operations activities often
represent 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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Copyright © 2009 Pearson Education, Inc.
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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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 Production/Operations

Facility design
Technology selection
Facility layout
Process Process flow analysis
Facility location
Line balancing
Process control

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 Production/Operations

Forecasting
Facilities planning
Capacity Aggregate planning
Scheduling
Capacity planning
Queuing analysis

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 Production/Operations

Raw materials
Inventory Work in process
Finished goods
Materials handling

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 Production/Operations

Job design
Work measurement
Workforce Job enrichment
Work standards
Motivation techniques

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 Production/Operations

Quality control
Sampling
Quality Testing
Quality assurance
Cost control

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 Production/Operations Audit

••Are
Are suppliers
suppliers of of materials,
materials, parts,
parts, etc.
etc.
reliable
reliable and
and reasonable?
reasonable?
••Are
Are facilities,
facilities, equipment,
equipment, and
and machinery
machinery
in
in good
good condition?
condition?
••Are
Are inventory-control
inventory-control policies
policies and
and
procedures
procedures effective?
effective?

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 Production/Operations Audit

••Are
Are quality-control
quality-control policies
policies && procedures
procedures
effective?
effective?
••Are
Are facilities,
facilities, resources,
resources, and
and markets
markets
strategically
strategically located?
located?
••Does
Does the
the firm
firm have
have technological
technological
competencies?
competencies?

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Research & Development

 Many firms today do not conduct R&D, and

yet many other companies depend on
successful R&D activities for survival. Firms
pursuing a product development strategy
especially need to have a strong R&D
orientation.

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Research & Development
 R&D in organizations can take two basic forms: (1)
internal R&D, in which an organization operates its
own R&D department, and/or (2) contract R&D, in
which 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&D
assistance is to pursue a joint venture with another
firm.

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Research & Development

 Most firms have no choice but to continually

develop new and improved products because
of changing consumer needs and tastes, new
technologies, shortened product life cycles,
and increased domestic and foreign
competition.

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 Research & Development

Research & Development Functions

 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs

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 Research & Development
Financing as many
projects as possible

Use percent-of-sales
method
R&D Budgets
Budgeting relative to
competitors

How many successful

new products are
needed

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 Research & Development Audit

••Are
Are the
the R&D
R&D facilities
facilities adequate?
adequate?
••IfIf R&D
R&D is
is outsourced,
outsourced, is is itit cost-effective?
cost-effective?
••Are
Are the
the R&D
R&D personnel
personnel wellwell qualified?
qualified?
••Are
Are R&D
R&D resources
resources allocated
allocated effectively?
effectively?

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 Research & Development Audit

••Are
Are MIS
MIS and
and computer
computer systems
systems
adequate?
adequate?
••Is
Is communication
communication between
between R&DR&D and
and
other
other organizational
organizational units
units effective?
effective?
••Are
Are present
present products
products technologically
technologically
competitive?
competitive?

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Management Information
Systems

Purpose

 Improve performance of an enterprise by

improving the quality of managerial
decisions

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Management Information Systems
 Importance of Information
1. Information ties all business functions together and provides the
basis for all managerial decisions.
2. A management information system receives raw material from
both the external and internal evaluation of an organization. It
gathers data about marketing, finance, production, and
personnel matters internally; and social, cultural, demographic,
environmental, economic, political, government, legal,
technological, and competitive factors externally. Data is
integrated in ways needed to support managerial decision
making.
3. Because organizations are becoming more complex,
decentralized, and globally dispersed, the function of information
systems is growing in importance.
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 Management Information
Systems

 Information Systems
 CIO/CTO
 Security
 User-friendly
 E-commerce

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Publishing as Prentice Hall Ch 4-87
 Management Information
Systems Audit

••Do
Do managers
managers useuse the
the information
information system
system
to
to make
make decisions?
decisions?
••Is
Is there
there aa CIO
CIO or
or Director
Director ofof Information
Information
Systems
Systems position
position in
in the
the firm?
firm?
••Is
Is data
data updated
updated regularly?
regularly?

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Publishing as Prentice Hall Ch 4-88
 Management Information
Systems Audit

••Do
Do managers
managers from from allall functional
functional areas
areas
contribute
contribute input
input toto the
the information
information system?
system?
••Are
Are there
there effective
effective passwords
passwords for for entry
entry
into
into the
the firm’s
firm’s information
information system?
system?
••Are
Are strategists
strategists ofof the
the firm
firm familiar
familiar with
with the
the
information
information systems
systems of of rival
rival firms?
firms?

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-89
 Management Information
Systems Audit

••Is
Is the
the information
information system
system user-friendly?
user-friendly?
••Do
Do all
all users
users understand
understand the
the competitive
competitive
advantages
advantages that that information
information can
can provide?
provide?
••Are
Are computer
computer training
training workshops
workshops provided
provided
for
for users?
users?
••Is
Is the
the firm’s
firm’s system
system being
being improved?
improved?

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-90
VALUE CHAIN ANALYSIS
 Porter describes the business of a firm as a
value chain, in which total revenues minus
total costs of all activities undertaken to
develop 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 from
purchasing raw materials to manufacturing
products to marketing those products.
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Publishing as Prentice Hall Ch 4-91
VALUE CHAIN ANALYSIS
 . All firms should use value-chain analysis to develop a 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.
 When a core competence evolves into a major competitive
advantage, it is called a distinctive competence. Figure 4-4
illustrates this process.
 D. Firms use benchmarking to determine whether its value chain
activities are competitive compared to rivals. This entails
measuring the costs of value chain activities across an industry
to determine “best practices” among competing firms for the
purpose of duplicating or improving upon those best practices.

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Publishing as Prentice Hall Ch 4-92
 Corporate Value Chain

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Publishing as Prentice Hall Ch 4-93
 Value Chain Analysis

 Examine each product line’s value chain

 Core competencies & core deficiencies
 Examine the “linkages” within each product
line’s value chain
 Connections between the way one value activity is
performed and the cost of performance of another
activity

 Examine the synergies among the value chains

of different product lines or business units
 Economies of scope

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Publishing as Prentice Hall Ch 4-94
THE INTERNAL FACTOR
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 and
evaluates the major strengths and weaknesses in
the functional areas of a business, and it also
provides a basis for identifying and evaluating
relationships among these areas.
2. Intuitive judgments are required in developing an
IFE Matrix, so the appearance of a scientific
approach should not be interpreted to mean this is
an all-powerful technique.

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Publishing as Prentice Hall Ch 4-95
Steps in developing Internal Factor
Evaluation (IFE) Matrix
1. List key internal factors as identified in the internal-audit
process. Use a total from ten to twenty internal factors
including both strengths and weaknesses.
2. 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.
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 a
weighted score for each variable.
5. Sum the weighted scores for each variable to determine the
total weighted score for the organization.
6. Total weighted scores of below 2.5 indicate an internally weak
organization.
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Publishing as Prentice Hall Ch 4-96
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall Ch 4-97
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall Ch 4-98
Review
 Explain why prioritizing the relative importance of
strengths and weaknesses to include in an IFE Matrix is an
important strategic-management activity.
 Prioritizing strengths and weaknesses can require substantial
negotiation among managers because of the impact that
factors included in the IFE Matrix will have on an organization’s
strategies. Strategies will be devised to capitalize on the
strengths and to improve the weaknesses. Managers from
different departments and divisions of the organization will
present supporting evidence for inclusion of factors that
concern their particular unit of the firm. No more than 20
factors should be included in an IFE Matrix because too many
strategies cannot be effectively pursued simultaneously.

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-99
Review
 Diagram a formal organizational chart that reflects the
following positions: a president, two executive officers,
four middle managers, and 18 lower-level managers. Now,
diagram three overlapping and hypothetical information
group structures. How can this information be helpful to a
strategist in formulating and implementing strategy?
 Identifying the structure of informal groups can aid in
formulating and implementing strategies because this
information reveals communication patterns in the firm. This
information could suggest individuals that are most important in
influencing other persons to support established organizational
objectives.

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Publishing as Prentice Hall Ch 4-100
Review
 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 the
product life cycle in nearly all industries. Products
of all types are becoming obsolete more quickly
than ever before, thus requiring greater R&D
expenditures to gain competitive advantages in the
marketplace.

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-101
Review
 Explain how you would motivate managers and
employees to implement a major new strategy.
 There is a need to demonstrate clearly how the
new strategy will benefit managers and employees
of the organization. Articulate effectively why the
new strategy is needed, given competitors’
strategies, products, and services. Strive to
mobilize the firm’s cultural products to support the
new strategy. Involve as many managers as
possible in discussions about how to effectively
implement the strategy. The process is more
important than the plan.
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Publishing as Prentice Hall Ch 4-102
Review
 Why do you think production/operations managers are
often not directly involved in strategy-formulation
activities? Why can this be a major organizational
weakness?
 There is an unfortunate stigma in many organizations that
production/operations managers do not need to be involved in
strategy-formulation decisions; they implement only strategies.
This attitude can represent a major weakness in any
organization because more than 80 percent of company assets
are generally tied up in production/operations facilities,
materials, plants, equipment, inventory, and machines.
Production managers’ input into strategy-formulation activities
can help assure that cost-effective strategies are selected for
implementation.

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-103
Review
 Would you ever pay out dividends when your firm’s annual
net profit is negative? Why? What effect could this have
on a firm’s strategies?
 For the following reasons, dividends are sometimes paid even
when a firm’s annual net profit is negative:
1. Paying cash dividends is customary. Failure to do so could be
though of as a stigma. A cash dividend is considered a signal
about 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 with
great opportunities for reinvesting all available funds.
4. A myth exists that paying dividends will result in a higher stock
price.
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall Ch 4-104
Review
 Why do you believe cultural products
affect all the functions of business?
 Cultural products permeate every activity in
an organization. People become attached to
cultural products and often resist changes in
rites, rituals, values, beliefs, and norms.
Whether people work in marketing,
manufacturing, personnel, or
finance/accounting, they likely feel strongly
about a firm’s culture.
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall Ch 4-105
 For Review (Chapter 4)

Key Terms & Concepts

Activity Ratios Cost/Benefit Analysis

Capital Budgeting Cultural Products

Communication Distinctive Competencies

Controlling Distribution

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-106
 For Review (Chapter 4)

Key Terms & Concepts

Functions of
Dividend Decision
Finance/Accounting

Empirical Indicators Functions of Management

Financial Ratio Analysis Functions of Marketing

Functions of Production/
Financing Decision
Operations

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-107
 For Review (Chapter 4)

Key Terms & Concepts

Growth Ratios Investment Decision

Human Resource
Leverage Ratios
Management

Internal Audit Liquidity Ratios

Internal Factor Evaluation Management Information

(IFE) Matrix Systems

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-108
 For Review (Chapter 4)

Key Terms & Concepts

Motivating Personnel Management

Opportunity Analysis Planning

Organizational Culture Pricing

Product & Service

Organizing
Planning

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-109
 For Review (Chapter 4)

Key Terms & Concepts

Production/Operations
Selling
Functions

Profitability Ratios Staffing

Research & Development Synergy

Resource Based View

Test Marketing
(RBV)

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-110
 For Review (Chapter 4)

Key Terms & Concepts

Value Chain Analysis

(VCA)

Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall Ch 4-111