Vision & Mission

Strategy Formulation

External Opportunities & Threats

Internal Strengths & Weaknesses

Long-Term Objectives

Alternative Strategies

Strategy Selection

Strategic formulation

Internal Audit

• Information from:• Management

• Marketing/sales

• Finance/accounting

• Production/operations

• Research & Development

• Management information Systems

Parallels process of external audit

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?

• Does the firm use strategic management concepts?

• Are objectives/goals measurable? Well communicated?

• Do managers at all levels plan effectively? Do managers delegate well?

Marketing/salesOpportunity 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?

• 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?

Copyright 2007 Prentice Hall

Ch 4 -6

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?

• 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?

• 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?

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)?

• 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 internal-

audit 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

Strengths Weight Rating Weighted Score

1. Owning 42 bases allows Ryanair to operate at a lower cost then competitors.

0.06 4 0.24

2. 92% of bookings being done over the internet lower cost by lower workers needed and telephone usage.

0.04 4 0.16

3. Ryanair being the second largest airlines in Europe is a well known company among European flyers.

0.07 4 0.28

4. 90% of Ryanair’s flights arrive on time. 0.04 4 0.165. Ryanair has created a niche in the market by offering many direct

flights.0.04 4 0.16

6. 284 new routes will allow Ryanair to capture new passenger business.

0.05 4 0.20

7. Profits increased by 204% due to an increase in planes, routes and passengers.

0.10 4 0.40

8. The down turn in the economic cycle and low fares has lead to an increase in traffic growth by 14%.

0.05 3 0.15

9. Ryanair forecast generating over $1 billion in surplus cash. 0.10 4 0.4010. Have 51 new planes. 0.05 3 0.15

Ryanair Internal Evaluation matrix

Weaknesses Weight Rating Weighted Score

1. Low customer loyalty because of a no refund policy and relax attitude on canceling of flights.

0.05 1 0.05

2. Poor customer service leaves an opening for competitors to capture our customers.

0.06 1 0.06

3. Ryanair advertisements may be viewed as poor do to the use of vulgar, explicit, and sexual material.

0.02 1 0.02

4. Ryanair’s lack of major city destinations. 0.05 2 0.105. Low market growth opportunities. 0.05 2 0.106. Staff cost increased by 8%. 0.04 2 0.087. Ryanair charges customers for many ancillaries items that are

free on most other airlines.0.06 1 0.06

8. Maintenance cost increased by 29%. 0.07 1 0.07TOTALS 1.00 2.84

An alternative internal evaluation• Porter’s Value Chain Analysis (VCA) 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.

• Highlights specific activities in a business where competitive strategies can best be applied and indicate where information systems are likely to have a strategic impact

• Moreover the VCA will focus on analysis your company against competitors (benchmarking) and so adopt industrial “best practices”

Value chain AnalysisDetermines 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.

• VCA (really a business process model), firms achieve competitive advantages by being more efficient.

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:– How would you construct an internal evaluation matrix

(8 marks)

– What conclusions could be drawn from using the matrix.(3

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). (8 marks)– How can it improve the organisation’s competitive advantage

(3 marks)

• Distinguish between both approaches to determining the internal environment of an organisation. (8 marks)

Potential exam questions

• Describe 5 questions that can be asked to develop an internal evaluation matrix (5 marks)

• Given a set of an organisations the strengths and weaknesses. Explain how to use a Internal evaluation matrix to perform an internal evaluation. (8 marks)

• Describe, using a suitable example how you would use porter’s model to perform an internal evaluation.

(10 marks)

• Discuss which model you consider to be the most effective in formulating effective strategies (7 marks)