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MGT603 - Strategic Management - Lecture Handout 16

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After reading this lecture you will be able to know that how analytical tools affects the firms internal decisions.

Research and Development

The fifth major area of internal operations that should be examined for specific strengths and weaknesses is research and development (R&D). Many firms today conduct no 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.
The purpose of research and development are as follows:

  • Development of new products before competition
  • Improving product quality
  • Improving manufacturing processes to reduce costs

Organizations invest in R&D because they believe that such investment will lead to superior product or services and give them competitive advantages. Research and development expenditures are directed at developing new products before competitors do, improving product quality, or improving manufacturing processes to reduce costs.
One article on planning emphasized that effective management of the R&D function requires a strategic and operational partnership between R&D and the other vital business functions. A spirit of partnership and mutual trust between general and R&D managers is evident in the best-managed firms today. Managers in these firms jointly explore; assess; and decide the what, when, why, and how much of R&D. Priorities, costs, benefits, risks, and rewards associated with R&D activities are discussed openly and shared. The overall mission of R&D, thus, has become broad-based, including supporting existing businesses, helping launch new businesses, developing new products, improving product quality, improving manufacturing efficiency, and deepening or broadening the company's technological capabilities.
Every organization tries to finance as much project as they can. Therefore, R & D budget is important. What are the bases for the budget?

  • You can try as many products as you can
  • You can use percentage of sales method
  • Budgeting relative to competitors
  • Deciding how many successful new products are needed

Research and Development

The best-managed firms today seek to organize R&D activities in a way that breaks the isolation of R&D from the rest of the company and promotes a spirit of partnership between R&D managers and other managers in the firm. R&D decisions and plans must be integrated and coordinated across departments and divisions by sharing experiences and information. The strategic-management process facilitates this new cross-functional approach to managing the R&D function.

Internal and External R&D

Cost distributions among R&D activities vary by company and industry, but total R&D costs generally do not exceed manufacturing and marketing start-up costs.
Four approaches to determining R&D budget allocations commonly are used:

  1. Financing as many project proposals as possible,
  2. Using a percentage-of-sales method,
  3. Budgeting about the same amount that competitors spend for R&D, or
  4. Deciding how many successful new products are needed and working backward to estimate the required R&D investment.

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. R&D strengths (capabilities) and weaknesses (limitations) play a major role in strategy formulation and strategy implementation. The focus of R&D efforts can vary greatly depending on a firm's competitive strategy. Some corporations attempt to be market leaders and innovators of new products, while others are satisfied to be market followers and developers of currently available products. The basic skills required to support these strategies will vary, depending on whether R&D becomes the driving force behind competitive strategy. In cases where new product introduction is the driving force for strategy, R&D activities must
be extensive. The R&D unit must then be able to advance scientific and technological knowledge, exploit that knowledge, and manage the risks associated with ideas, products, services, and production requirements.

Research and Development Audit Checklist of Questions

Questions such as follows should be asked in performing an R&D audit:

  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 information systems:

MIS is a general name for the academic discipline covering the application of information technology to business problems.
As an area of study it is also referred to as information technology management. The study of information systems is usually a commerce and business administration discipline, and frequently involves software engineering, but also distinguishes itself by concentrating on the integration of computer systems with the aims of the organization. The area of study should not be confused with computer science which is more theoretical in nature and deals mainly with software creation, or computer engineering, which focuses more on the design of computer hardware. IT service management is a practitioner-focused discipline centering on the same general domain. In business, information systems support business processes and operations, decision-making, and competitive strategies.

The functional support role

Information systems support business processes and operations by:

  • Recording and storing accounting records including sales data, purchase data, investment data, and payroll data.
  • Process such records into financial statements such as income statements, balance sheets, ledgers, and management reports, etc.
  • Recording and storing inventory data, work in process data, equipment repair and maintenance data, supply chain data, and other production/operations records
  • Processing these operations records into production schedules, production controllers, inventory systems, and production monitoring systems
  • Recording and storing such human resource records as personnel data, salary data, and employment histories,
  • Recording and storing market data, customer profiles, and customer purchase histories, marketing research data, advertising data, and other marketing records
  • Processing these marketing records into advertising elasticity reports, marketing plans, and sales activity reports
  • Recording and storing business intelligence data, competitor analysis data, industry data, corporate objectives, and other strategic management records

Processing these strategic management records into industry trends reports, market share reports, mission statements, and portfolio models
The bottom line is that the information systems use all of the above to implement, control, and monitor plans, strategies, tactics, new products, new business models or new business ventures.

The decision support role

The business decision-making support function goes one step further. It becomes an integral part -- even a vital part -- of decision -making. It allows users to ask very powerful "What if…?" questions: What if we increase the price by 5%? What if we increase price by 10%? What if we decrease price by 5%? What if we increase price by 10% now, then decrease it by 5% in three months? It also allows users to deal with contingencies: If inflation increases by 5% (instead of 2% as we are assuming), then what do we do? What do we do if we are faced with a strike or a new competitive threat? An organization succeeds or fails based on the quality of its decisions. The enhanced ability to explore "what if" a question is central to analyzing the likely results of possible decisions and choosing those most likely to shape the future as desired. "Business decision-making support function" is a phrase likely to quicken the pulse of no one but an accountant, but, in fact, it is all about turning wonderful dreams into solid realities.

Management Information Systems Audit

  • Do all managers in the firm use the information system to make decisions?
  • Is there a chief information officer or director of information systems position in the firm?
  • Are data in the information system updated regularly?
  • Do managers from all functional areas of the firm contribute input to the information system?
  • Are there effective passwords for entry into the firm’s information system?
  • Are strategists of the firm familiar with the information systems of rival firms?
  • Is the information system user-friendly?
  • Do all users of the information system understand the competitive advantages that information can provide firms?
  • Are computer training workshops provided for users?
  • Is the firm’s system being improved?

Computer Information Systems

Information ties all business functions together and provides the basis for all managerial decisions. It is the cornerstone of all organizations. Information represents a major source of competitive advantage or disadvantage. Assessing a firm's internal strengths and weaknesses in information systems is a critical dimension of performing an internal audit. The company motto of Mitsui, a large Japanese trading company, is "Information is the lifeblood of the company."
A computer information system's purpose is to improve the performance of an enterprise by improving the quality of managerial decisions. An effective information system thus collects, codes, stores, synthesizes, and presents nformation in such a manner that it answers important operating and strategic questions. The heart of an information system is a database containing the kinds of records and data important to managers.
A computer 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. There is a logical flow of material in a computer information system, whereby data is input to the system and transformed into output. Outputs include computer printouts, written reports, tables, charts, graphs, checks, purchase orders, invoices, inventory records, payroll accounts, and a variety of other documents. Payoffs from alternative strategies can be calculated and estimated. Data becomes information only when it is evaluated, filtered, condensed, analyzed, and organized for a specific purpose, problem, individual, or time.
An effective computer information system utilizes computer hardware, software, models for analysis, and a database. Some people equate information systems with the advent of the computer, but historians have traced recordkeeping and no computer data processing to Babylonian merchants living in 3500 B.C. Benefits of an effective information system include an improved understanding of business functions, improved communications, more informed decision making, analysis of problems, and improved control.
Because organizations are becoming more complex, decentralized, and globally dispersed, the function of information systems is growing in importance. Spurring this advance is the falling cost and increasing power of computers. There are costs and benefits associated with obtaining and evaluating information, just as with equipment and land. Like equipment, information can become obsolete and may need to be purged from the system. An effective information system is like a library, collecting, categorizing, and filing data for use by managers throughout the organization. Information systems are a major strategic resource, monitoring environment changes, identifying competitive threats, and assisting in the implementation, evaluation, and control of strategy.
We are truly in an information age. Firms whose information-system skills are weak are at a competitive disadvantage. On the other hand, strengths in information systems allow firms to establish distinctive competencies in other areas. Low-cost manufacturing and good customer service, for example, can depend on a good information system.
A good executive information system provides graphic, tabular, and textual information. Graphic capabilities are needed so current conditions and trends can be examined quickly; tables provide greater detail and enable variance analyses; textual information adds insight and interpretation to data.

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