All Rights Reserved Ch. 4: 1 Strategic Management © Oxford Fajar Sdn. Bhd. (008974-T) 2010 Chapter 4 Strategic Planning Process: Internal Environmental

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Strategic Management© Oxford Fajar Sdn. Bhd. (008974-T) 2010

Chapter 4

Strategic Planning Process: Internal Environmental Analysis

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LEARNING OBJECTIVES

After reading this chapter, you should be able to: Discuss the different functional areas in the internal

environment. Identify the functions or activities of all the functional

areas. Identify the key internal organizational factors that

affect an organization’s operation. Determine and prioritize the strengths and

weaknesses of an organization.

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Introduction Internal analysis

– Analysis of information obtained from within the company.

– Includes : computations measurements and illustrations:-

• Calculation of operational cost (production and services)

• Fixed costs

• Management training costs, research and the position of the company compare to its competitor.

– Provides more opportunities for participants to understand how their jobs and departments fit into the organization.

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Introduction

– Provides more opportunities for participants to understand how their jobs and departments fit into the organization.

– Enable the employers and employees to perform better when they understand how their work affect the business activities in various functional area.

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Introduction

Internal analysis is the analysis of information obtained from within the company.

It identifies and evaluates the strengths and weaknesses of the company.

Allow strategists to select and layout details of the plans to achieve missions and objectives.

Internal analysis is made in the following major functional areas: – Management– Marketing– Finance– Operation/production

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1. Management

Five basic functions:i. Planning

ii. Organizing

– Involves activities such as setting goals, establishing objectives, devising (workout) strategies to achieve goals and objectives, developing policies and plans, and forecasting

– Determines jobs or tasks to be done, delegating authority, establishing a chain of command and coordinating jobs or tasks

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1. Management (cont.)

iii. Motivating– Means leading and influencing subordinates to get

the jobs done, developing effective channels and managing conflict

iv. Staffing– Focuses on human resource management which

includes recruiting, selecting, training and compensating employees

v. Controlling– Setting standards to ensure the actual results are

consistent with planned results, measuring actual performance, comparing actual to planned standard and taking corrective action

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2. Marketing

Marketing– It refers to the exchange of products or services from the

producer to the user. It begins with determining what users want and need or what services could be provided to create satisfaction.

Marketing Mix– A unique blend of product, distribution, promotion and

pricing strategies designed to produce mutually satisfying exchanges with a target market

– The right mix of the marketing 4Ps (Product, Price, Place and Promotion) determines the company’s position compared to its competitors.

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2. Marketing (cont.)

Product – the 1st “P”– Product is the heart of marketing mix and the

starting point of product offering and product strategy.

– Without knowing what is the product, difficult to design a place strategy, promotion campaign and set price.

– A product will undergo four phases in its life cycle: introductory stage, growth stage, maturity stage, and decline stage.

– Positive product vs negative product

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Figure 4.1 Product life cycle

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Product Life Cycle

– Introductory stage: When a product is newly introduced into the market, it is in phase I. A high-failure rate, little competition, frequent product modification and limited distribution typify the introductory stage of product life cycle.

– Growth stage: As time goes by, sales increase to a maximum (phase II). In this stage, sales typically grow at an increasing rate. Many competitors seem to enter the market, and it is observed that profit rise rapidly in this stage. Sales begin to decline as sales competition intensifies.

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– Maturity stage: A period when sales increase at a decreasing rate indicates the beginning of phase III. Usually, this is the longest stage of the product life cycle. At this stage, the niches marketers emerge which target narrow, well-defined, underserved segments of a market.

– Decline stage: Phase IV shows a long-run drop in sales. The rate of decline is governed by how rapidly consumer tastes and preferences change or is being replaced by substitute products.

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Price– The price of a product will affect the company’s sales

and total revenues. The top management of a company can raise or lower the prices of their products based on their marketing mix analysis.

– The characteristics of product price depend on the elasticity of demand.

– Demand elasticity (e) can be computed as follows:

e = The percentage of change in the quantity demanded The percentage of change in the product’s price

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Place (Distribution)– Place or distribution involves the business activities

concerned with storing and transporting raw materials or finished products to consumers when needed, and the products are in usable condition.

– (Geographic location) Promotion

– The role of promotion is to bring about mutually satisfying exchanges with the target markets by informing, educating, persuading and reminding the

consumers of the benefits of a company or a product.

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3. Financial Use to identify a company’s strength and weaknesses

from the financial perspective. Question concerning the financial position of the

company, its stability and competitiveness could be answered after a thorough and detailed financial analysis.

Adequate capital is the basic foundation to run any business

Cash needs to be generated from various internal and external sources, so that it could be allocated to run different functions in the organization.

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3. Financial Cash control is essential in an organization to ensure

conformity with its intended use. Budgeting play an important role in the allocation of

cash within the company – properly distributed. A good financial planner must be able to manage and

control the use of the company’s funds. To achieve this, proper analysis and planning

needed. There are five main ratios used in evaluating the

company’s financial position.

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3. Financial

i. Liquidity ratio measures the firm’s ability to meet its maturing short-term obligations.

Examples: Current ratio, Quick ratio

ii. Leverage ratio measures the extent to which the firm has been financed by debt.

Examples: Debt-to-asset ratio, Long-term debt-to-equity ratio

iii. Activity ratio measures how effectively the firm uses its resources.

Examples: Inventory turnover, Fixed assets turnover

Five major financial ratios:

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3. Financial (cont.)

iv. Profitability ratio measures the management’s overall effectiveness as shown by the returns generated on sales and investment.

Examples: Gross profit margin, Return on total assets

v. Growth ratio measures the firm’s ability to maintain its economic position in the growth of the economy and industry.

Examples: Sales, Net income

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4. Operation/Production Operation

– Operation can be defined as the process of transforming input/resources (e.g. steel, oil, etc.) into products/outputs that are of higher value to the user.

– Physical transformation– In the form of services.

Without efficient implementation of these activities, a company would encounter failure in running its business.

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4. Operation/Production Operation analysis

– One of the frequently used methods in analysing the link between production and finance is break-even point (BEP) analysis.

– BEP analysis determines what sales volume must reach before the company breaks even (total costs equal total revenues) and no profits are earned.

– Frequently used in analyzing the link between production and finance.

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4. Operation/Production Operation analysis

– Serves as the reminder to the operation manager to ensure that the production is always above the break-even model.

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Figure 4.2 Break-even Point (BEP) Analysis

4. Operation/Production (cont.)

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Break-even Point (BEP) Analysis

– As shown in Figure 4.2, the fixed cost is placed above the variable cost because the operation manager uses it to determine whether production is above the break-even point.

– However, if this is not possible, then the fixed cost needs to be reduced in the event that the variable cost is in the level of high efficiency.

4. Operation/Production (cont.)

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Methods in Identifying Company’s Strength & Weaknesses

In identifying the strengths and weaknesses for a company, the following eight steps need to be followed:

1. List all the internal factors (management, marketing, financial, and operation/production) of a company.

2. Assign an importance score to each internal factor (ranging from 1–10, factors that are important to the business are given high scores and vice versa).

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Methods in Identifying Company’s Strength & Weaknesses (cont.)

3. Determine the weighted average for each internal factor by dividing the importance score of each internal factor with the sum of importance scores. The total of weighted average has to be 1.0 (weighted principle).

4. Assign the capability score to each internal factor (ranging from 1–10, a high score shows that the company is highly capable of dealing with the factors and vice versa).

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5. Determine the weighted capability for each internal factor by multiplying the weighted average with capability, then dividing it with the sum of importance scores.

6. Select 5 factors with highest score of weighted capability as “strengths”.

7. Determine the difference gap between the importance score and the capability score for the internal factors that are left to be chosen (those factors with low scores of weighted capability).

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8. Select 5 factors with largest positive difference gap as “weaknesses”. These internal factors are not only important but the company has problems in overcoming them.

The determination of significant strengths and weaknesses by using spreadsheets is important because it would be more representative (can include more factors), easier and faster.

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All Rights Reserved Ch. 4: 1 Strategic Management © Oxford Fajar Sdn. Bhd. (008974-T) 2010 Chapter 4 Strategic Planning Process: Internal Environmental