CHAPTER 4 Relationships among a firm’s functional

business activities perhaps can be

The Internal Assessment exemplified best by focusing on
The Nature of an Internal Audit organizational culture, an internal
phenomenon that permeates all
All organizations have strengths and departments and divisions of an
weaknesses in the functional areas of organization.
business.No enterprise is equally strong or
weak in all areas. Organizational culture captures the subtle,
elusive, and largely unconscious forces that
The Process of Performing an Internal shape a workplace.
Audit
The process of performing an internal cultural products include values, beliefs,
audit closely parallels the process of rites, rituals, ceremonies, myths, stories,
performing an external audit. legends, sagas, language, metaphors,
Representative managers and employees symbols, heroes, and heroines.
from throughout the firm need to be Management
involved in determining a firm’s strengths The functions of management consist of
and weaknesses. five basic activities:
Financial ratio analysis 1. Planning consists of all those managerial
Exemplifies the complexity of relationships activities related to preparing for the future.
among the functional areas of business. 2. Organizing includes all those managerial
The Resource-Based View (RBV) activities that result in a structure of task
and authority relationships.
Approach to competitive advantage
contends that internal resources are more 3. Motivating involves efforts directed
important for a firm than external factors in toward shaping human behavior.
achieving and sustaining competitive 4. Staffing activities are centered on
advantage. personnel or human resource management.
For a resource to be valuable, it must be 5. Controlling refers to all those managerial
either: activities directed toward ensuring that
Rare resources are resources that other actual results are consistent with planned
competing firms do not possess. results.

Hard to imitate It is also important that Marketing

these same resources be difficult to imitate. Marketing can be described as the process
The third empirical indicator that can make of defining, anticipating, creating, and
resources a source of competitive fulfilling customers’ needs and wants for
advantage is substitutability. products and services. There are seven
basic functions of marketing:
Integrating Strategy and Culture
1. Customer analysis the examination and Financial condition is often considered the
evaluation of consumer needs, desires, and single best measure of a firm’s competitive
wants—involves administering customer position and overall attractiveness to
surveys, analyzing consumer information, investors.
evaluating market positioning strategies,
developing customer profiles, and Finance/Accounting Functions
determining optimal market segmentation According to James Van Horne, the
strategies. functions of finance/accounting comprise
2. Selling Products/Services successful three decisions:
strategy implementation generally rests 1. The investment decision also called
upon the ability of an organization to sell capital budgeting, is the allocation and
some product or service. reallocation of capital and resources to
3. Product and service planning includes projects, products, assets, and divisions of
activities such as test marketing; product an organization.
and brand positioning; devising warranties; 2. The financing decision determines the
packaging; determining product options, best capital structure for the firm and
features, style, and quality; deleting old includes examining various methods by
products; and providing for customer which the firm can raise capital (for
service. example, by issuing stock, increasing debt,
4. Pricing Five major stakeholders affect selling assets, or using a combination of
pricing decisions: consumers, governments, these approaches).
suppliers, distributors, and competitors. 3. The dividend decisions concern issues
5. Distribution includes warehousing, such as the percentage of earnings paid to
distribution channels, distribution coverage, stockholders, the stability of dividends paid
retail site locations, sales territories, over time, and the repurchase or issuance
inventory levels and location, of stock.
transportation carriers, wholesaling, and Basic Types of Financial Ratios
retailing.
Financial ratios are computed from an
6. Marketing research is the systematic organization’s income statement and
gathering, recording, and analyzing of data balance sheet.
about problems relating to the marketing of
goods and services. Key financial ratios can be classified into
the following five types:
7. Cost/Benefit Analysis The seventh 1.Liquidity ratios measure a firm’s ability to
function of marketing is cost/benefit meet maturing short-term obligations.
analysis, which involves assessing the costs, 2.Leverage ratios measure the extent to
benefits, and risks associated with which a firm has been financed by debt.
marketing decisions. 3.Activity ratios measure how effectively a
Finance/Accounting firm is using its resources.
4.Profitability ratios measure
management’s overall effectiveness as Implications of Various Strategies on
shown by the returns generated on sales Production/Operations
and investment. 1. Low-cost provider
2. A high-quality provider
5.Growth ratios measure the firm’s ability 3. Provide great customer service
to maintain its economic position in the 4. Be the first to introduce new products
growth of the economy and industry. 5. Become highly automated
Production/Operations 6. Minimize layoffs
The production/operations function of a Research and Development
business consists of all those activities that The fifth major area of internal operations
transform inputs into goods and services. that should be examined for specific
The Basic Functions (Decisions) Within strengths and weaknesses is research and
Production/Operations development (R&D).
1. Process These decisions include choice of Internal and External R&D
technology, facility layout, process flow
analysis, facility location, line balancing, Cost distributions among R&D activities vary
process control, and transportation by company and industry, but total R&D
analysis. Distances from raw materials to costs generally do not exceed
production sites to customers are a major manufacturing and marketing start-up
consideration. costs.
2. Capacity These decisions include
forecasting, facilities planning, aggregate R&D in organizations can take two basic
planning, scheduling, capacity planning, and forms:
queuing analysis. Capacity utilization is a 1. Internal R&D in which an organization
major consideration. operates its own R&D department.
3. Inventory These decisions involve
managing the level of raw materials, work- 2. Contract R&D in which a firm hires
in-process, and finished goods, especially independent researchers or independent
considering what to order, when to order, agencies to develop specific products.
how much to order, and materials handling.
4. Workforce These decisions involve Management Information Systems
managing the skilled, unskilled, clerical, and
A management information system receives
managerial employees by caring for job
raw material from both the external and
design, work measurement, job
internal evaluation of an organization.
enrichment, work standards, and
motivation techniques. Strategic-Planning Software
5. Quality These decisions are aimed at
ensuring that high-quality goods and Some strategic decision support systems,
services are produced by caring for quality however, are too sophisticated, expensive,
control, sampling, testing, quality or restrictive to be used easily by managers
assurance, and cost control. in a firm.
One strategic-planning software product
that parallels this text and offers managers
and executives a simple yet effective
approach for developing
organizationalnstrategies is CheckMATE.
This personal computer software performs
planning analyses and generates strategies
a firm could pursue.

Value Chain Analysis (VCA)

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.

Benchmarking is an analytical tool used to

determine whether a firm’s value chain
activities are competitive compared to rivals
and thus conducive to winning in the
marketplace.

The Internal Factor Evaluation (IFE) Matrix

A summary step in conducting an internal

strategic-management audit is to construct
an Internal Factor Evaluation (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 those areas.