MGT603 - Strategic Management - Lecture Handout 12

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This Lecture focuses on identifying and evaluating a firm's strengths and weaknesses in the functional areas of business, including management, marketing, finance/accounting, production/operations, research and development, and computer information systems. Relationships among these areas of business are examined. Strategic implications of important functional area concepts are examined. The process of performing an internal audit is described in these lectures.

  • The Nature of an Internal Audit
  • Integrating Strategy and Culture
  • Management
  • Marketing
  • Finance/Accounting
  • Production/Operations
  • Research and Development
  • Management Information Systems
  • The Internal Factor Evaluation Matrix (IFE)

The Internal Factor Evaluation (IFE) Matrix

Great spirits have always encountered violent opposition from mediocre minds.
-- Albert Einstein
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. 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. A thorough understanding of the factors included is more important than the actual numbers. Similar to the EFE Matrix and Competitive Profile Matrix, an IFE Matrix can be developed in five steps:

  1. List key internal factors as identified in the internal-audit process. Use total of from ten to twenty internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. Be as specific as possible, using percentages, ratios, and comparative numbers.
  2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm's industry. Regardless of whether a key factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights. The sum of all weights must equal 1.0.
  3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings are, thus, company based, whereas the weights in Step 2 are industry based.
  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.

Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak internally, whereas scores significantly above 2.5 indicate a strong internal position. Like the EFE Matrix, an IFE Matrix should include from 10 to 20 key factors. The number of factors has no effect upon the range of total weighted scores because the weights always sum to 1.0.
When a key internal factor is both strength and weakness, the factor should be included twice in the IFE Matrix, and a weight and rating should be assigned to each statement. For example, the Playboy logo both helps and hurts Playboy Enterprises; the logo attracts customers to the Playboy magazine, but it keeps the Playboy cable channel out of many markets.
An example of an IFE Matrix for Circus Enterprises is provided in Table. Note that the firm's major strengths are its size, occupancy rates, property, and long-range planning as indicated by the rating of 4. The major weaknesses are locations and recent joint venture. The total weighted score of 2.75 indicates that the firm is above average in its overall internal strength.

A Sample Internal Factor Evaluation Matrix for Circus Circus Enterprises
Key Internal Factors Weight Rating Weighted
Internal Strengths
1. Largest casino company in the United States .05 4 .20
2. Room occupancy rates over 95% in Las Vegas .10 4 .40
3. Increasing free cash flows .05 3 .15
4. Owns one mile on Las Vegas Strip .15 4 .60
5. Strong management team .05 3 .15
6. Buffets at most facilities .05 3 .15
7. Minimal comps provided .05 3 .15
8. Long-range planning .05 4 .20
9. Reputation as family-friendly .05 3 .15
10. Financial ratios .05 3 .15
Internal Weaknesses
1. Most properties are located in Las Vegas .05 1 .05
2. Little diversification .05 2 .10
3. Family reputation, not high rollers .05 2 .10
4. Laughlin properties .10 1 .10
5. Recent loss of joint ventures .10 1 .10
TOTAL 1.00   2.75

In multidivisional firms, each autonomous division or strategic business unit should construct an IFE Matrix. Divisional matrices then can be integrated to develop an overall corporate IFE Matrix.

The Nature of an Internal Audit

Basis for objectives & strategies:

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

Functional business areas:

  • Vary by organization
  • Divisions have differing strengths and weaknesses

Distinctive Competencies:

  • A firm’s strengths that cannot be easily matched or imitated by competitors
  • Building competitive advantage involves taking advantage of distinctive competencies
  • Strategies designed in part to improve on a firm’s weaknesses and turn to strengths

Internal Audit is Parallels process of external audit. It gathers & assimilates information from:

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

Involvement in performing an internal strategic-management audit provides vehicle for understanding nature and effect of decisions in other functional business areas of the firm.
All organizations have strengths and weaknesses in the functional areas of business. No enterprise is equally strong or weak in all areas. Maytag, for example, is known for excellent production and product design, whereas Procter & Gamble is known for superb marketing. Internal strengths/weaknesses, coupled with external opportunities/threats and a clear statement of mission, provide the basis for establishing objectives and strategies. Objectives and strategies are established with the intention of capitalizing upon internal strengths and overcoming weaknesses. The internal-audit part of the strategic-management process is illustrated in Figure below.

Management Model

Key to organizational success: Internal audit creates an environment of Coordination and understanding among managers from all functional areas.

Key Internal Forces

It is not possible in a business policy text to review in depth all the material presented in courses such as marketing, finance, accounting, management, computer information systems, and production/operations; there are many sub areas within these functions, such as customer service, warranties, advertising, packaging, and pricing under marketing.
For different types of organizations, such as hospitals, universities, and government agencies, the functional business areas, of course, differ. In a hospital, for example, functional areas may include cardiology, hematology, nursing, maintenance, physician support, and receivables. Functional areas of a university can include athletic programs, placement services, housing, fund raising, academic research, counseling, and intramural programs. Within large organizations, each division has certain strengths and weaknesses. For example, AT&T is strong in communications and weak in computers.
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. For example, 3M exploits its distinctive competence in research and development by producing a wide range of innovative products. Strategies are designed in part to improve on a firm's weaknesses, turning them into strengths, and maybe even into distinctive competencies.
Some researchers emphasize the importance of the internal audit part of the strategic-management process by comparing it to the external audit.

The Process of Performing an Internal Audit

Functional relationships refer to the Number and complexity increases relative to organization size. 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. The internal audit requires gathering and assimilating information about the firm's management, marketing, finance/accounting, production/operations, research and development (R&D), and computer information systems operations.
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. This is a great benefit because managers and employees perform better when they understand how their work affects other areas and activities of the firm. For example, when marketing and manufacturing managers jointly discuss issues related to internal strengths and weaknesses, they gain a better appreciation of issues, problems, concerns, and needs in all the functional areas. In organizations that do not use strategic management, marketing, finance, and manufacturing managers often do not interact with each other in significant ways. Performing an internal audit, thus, is an excellent vehicle or forum for improving the process of communication in the organization. Communication may be the most important word in
Performing an internal audit requires gathering, assimilating, and evaluating information about the firm's operations. Critical success factors, consisting of both strengths and weaknesses, can be identified and prioritized in the manner discussed later chapters.
The development of conclusions on the 10 to 20 most important organizational strengths and weaknesses can be, as any experienced manager knows, a difficult task, when it involves managers representing various organizational interests and points of view. Developing a 20-page list of strengths and weaknesses could be accomplished relatively easily, but a list of the 10 to 15 most important ones involves significant analysis and negotiation. This is true because of the judgments that are required and the impact which such a list will inevitably have as it is used in the formulation, implementation, and evaluation of strategies.
Strategic management is a highly interactive process that requires effective coordination among management, marketing, finance/accounting, production/operations, R&D, and computer information systems managers. Although the strategic-management process is overseen by strategists, success requires that managers and employees from all functional areas work together to provide ideas and information. Financial managers, for example, may need to restrict the number of feasible options available to operations managers, or R&D managers may develop such good products that marketing managers need to set higher objectives. A key to organizational success is effective coordination and understanding among managers from all functional business areas. Through involvement in performing an internal strategic-management audit, managers from different departments and divisions of the firm come to understand the nature and effect of decisions in other functional business areas in their firm. Knowledge of these relationships is
critical for effectively establishing objectives and strategies.
A failure to recognize and understand relationships among the functional areas of business can be detrimental to strategic management, and the number of those relationships that must be managed increases dramatically with a firm's size, diversity, geographic dispersion, and the number of products or services offered. Governmental and nonprofit enterprises traditionally have not placed sufficient emphasis on relationships among the business functions. For example, some state governments, utilities, universities, and hospitals only recently have begun to establish marketing objectives and policies that are consistent with their financial capabilities and limitations. Some firms place too great an emphasis on one function at the expense of others.

Financial Ratio Analysis:

Financial ratio analysis exemplifies the complexity of relationships among the functional areas of business. A declining return on investment or profit margin ratio could be the result of ineffective marketing, poor management policies, research and development errors, or a weak computer information system. The effectiveness of strategy formulation, implementation, and evaluation activities hinges upon a clear understanding of how major business functions affect one another. For strategies to succeed, a coordinated effort among all the functional areas of business is needed.

Integrating Strategy and Culture

Organizational Culture

Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integration…is considered valid and taught to new members

  • Resistant to change
  • May represent a strength or weakness of the firm

Relationships among a firm's functional business activities perhaps can be exemplified best by focusing on organizational culture, an internal phenomenon that permeates all departments and divisions of an organization. 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." This definition emphasizes the importance of matching external with internal factors in making strategic decisions.
Organizational culture captures the subtle, elusive, and largely unconscious forces that shape a workplace. Remarkably resistant to change, culture can represent a major strength or weakness for the firm. It can be an underlying reason for strengths or weaknesses in any of the major business functions. Defined in Table below cultural products include values, beliefs, rites, rituals, ceremonies, myths, stories, legends, sagas, language, metaphors, symbols, heroes, and heroines. These products or dimensions are levers that strategists can use to influence and direct strategy formulation, implementation, and evaluation activities. An organization's culture compares to an individual's personality in the sense that no organization has the same culture and no individual has the same personality. Both culture and personality are fairly enduring and can be warm, aggressive, friendly, open, innovative, conservative, liberal, harsh, or likable.

Cultural Products and Associated Definitions
Rites Relatively elaborate, dramatic, planned sets of activities that
consolidate various forms of cultural expressions into one event,
carried out through social interactions, usually for the benefit of
an audience
Ceremonial A system of several rites connected with a single occasion or event
Ritual A standardized, detailed set of techniques and behaviors that
manage anxieties, but seldom produce intended, technical
consequences of practical importance
Myth A dramatic narrative of imagined events usually used to explain
origins or transformations of something. Also, an unquestioned
belief about the practical benefits of certain techniques and
behaviors that is not supported by facts
Saga An historical narrative describing the unique accomplishments of
a group and its leaders, usually in heroic terms
Legend A handed-down narrative of some wonderful event that is based
on history but has been embellished with fictional details
Story A narrative based on true events, sometimes a combination of
truth and fiction
Folktale A completely fictional narrative
Symbol Any object, act, event, quality, or relation that serves as a vehicle
for conveying meaning, usually by representing another thing
Language A particular form or manner in which members of a group use
sounds and written signs to convey meanings to each other
Metaphors Shorthand words used to capture a vision or to reinforce old or
new values
Values Life-directing attitudes that serve as behavioral guidelines
Belief An understanding of a particular phenomenon
Heroes/Heroines Individuals whom the organization has legitimized to model
behavior for others
Source: Adapted from H.M. Trice and J.M. Beyer, "Studying Organizational Cultures through
Rites and Ceremonials," Academy of Management Review 9, no. 4 (October 1984): 655.

Dimensions of organizational culture permeate all the functional areas of business. It is something of an art to uncover the basic values and beliefs that are buried deeply in an organization's rich collection of stories, language, heroes, and rituals, but cultural products can represent important strengths and weaknesses. Culture is an aspect of organizations that no longer can be taken for granted in performing an internal strategic-management audit because culture and strategy must work together. Culture can inhibit strategic management:

  • Miss changes in external environment because they are blinded by strongly held beliefs
  • When a culture has been effective in the past, natural tendency to stick with it in future, even during times of major strategic change

The strategic-management process takes place largely within a particular organization's culture. An organization's culture must support the collective commitment of its people to a common purpose. It must foster competence and enthusiasm among managers and employees.
Organizational culture significantly affects business decisions and, thus, must be evaluated during an internal strategic-management audit. If strategies can capitalize on cultural strengths, such as a strong work ethic or highly ethical beliefs, then management often can implement changes swiftly and easily. However, if the firm's culture is not supportive, strategic changes may be ineffective or even counterproductive. A firm's culture can become antagonistic to new strategies, with the result being confusion and disorientation. An organization's culture should infuse individuals with enthusiasm for implementing strategies.
Internal strengths and weaknesses associated with a firm's culture sometimes are overlooked because of the inter functional nature of this phenomenon. It is important, therefore, for strategists to understand their firm as a socio cultural system. Success is often determined by linkages between a firm's culture and strategies. The challenge of strategic management today is to bring about the changes in organizational culture and individual mind-sets necessary to support the formulation, implementation, and evaluation of strategies.


The functions of management consist of five basic activities: planning, organizing, motivating, staffing, and controlling. An overview of these activities is provided in Table.

The Basic Functions of Management
Function Description Stage of Strategic-
Process When Most
Planning Planning consists of all those managerial activities
related to preparing for the future. Specific tasks
include forecasting, establishing objectives, devising
strategies, developing policies, and setting goals.
Strategy Formulation
Organizing Organizing includes all those managerial activities that
result in a structure of task and authority relationships.
Specific areas include organizational design, job
specialization, job descriptions, job specifications,
span of the control, unity of command, coordination,
job design, and job analysis.
Motivating Motivating involves efforts directed toward shaping
human behavior. Specific topics include leadership,
communication, work groups, behavior modification,
delegation of authority, job enrichment, job
satisfaction, needs fulfillment, organizational change,
employee morale, and managerial morale.
Staffing Staffing activities are centered on personnel or human
resource management. Included are wage and salary
administration, employee benefits, interviewing,
hiring, firing, training, management development,
employee safety, affirmative action, equal employment
opportunity, union relations, career development,
personnel research, discipline policies, grievance
procedures, and public relations.
Controlling Controlling refers to all those managerial activities
directed toward ensuring that actual results are
consistent with planned results. Key areas of concern
include quality control, financial control, sales control,
inventory control, and expense control, analysis of
variances, rewards, and sanctions.
Strategy Evaluation

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