STRATEGIC MANAGEMENT REVIEWER

LESSON 1: INTRODUCTION TO STRATEGIC MANAGEMENT

Defining Strategic Management:
Strategic Management is…
 the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization
to achieve its objectives (David and David, 2017).
 Consist of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive
advantage (Dess, et al., 2017)
 the process through which organizations analyze and learn from their internal and external environments, establish
strategic direction, create strategies that are intended to help achieve establish goals, and execute those strategies (St.
John and Harrison).
 that set of managerial decisions and actions that determine the long-run performance of a corporation. (Wheelen, et al.,
2018).
 consist of the analysis, decisions and actions an organization undertakes in order to create and sustain competitive
advantage (Dess, et al., 2017).
 refers to the science of coming up with, evaluating and using strategic plans in the workplace

Strategic management – focuses on integrating management, marketing, finance/accounting, production/operations,

research and development, and computer information systems to achieve organizational success.
 The term strategic management is used synonymously with the term strategic planning.
 The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range
planning, in contrast, tries to optimize for tomorrow the trends of today.
 It is planning your business at the highest possible level. It is the duty of the company’s leader (or leaders). Strategic
management focuses on building a solid underlying structure to your business that will subsequently be fleshed out
through the combined efforts of every individual you employ. It hinges upon answering three key questions:
 What are my business’ objectives?
 What are the best ways to achieve those objectives?
 What resources are required to make that happen?
 A strategic plan is a company’s game plan

Key Attributes of Strategic Management (Dess, et al., 2017):

1. Direct the organization toward overall organizational goals and objectives.
2. It includes multiple stakeholders in decision making. Stakeholders are those individuals, groups, and organization that
have a “stake” in the success of the organization, including owners (shareholders in a publicly held corporation), employees,
customers, suppliers, the community at large, and so on.
3. Needs to incorporate short-term and long-term perspectives.
4. Recognizes trade-offs between efficiency and effectiveness. Some authors have referred to this as the difference between
“doing the right thing” (effectiveness) and “doing things right” (efficiency)

What is a Strategy?
A Strategy – is an idea, plan, and support that firms employ to compete successfully against rivals . (Pitss and Lei)
 A master plan stating how the corporation will achieve its mission and objectives (Wheelen, et al., 2018).
 The means by which long-term objectives will be achieved (David)
 It is a coordinated set of commitments and actions designed to exploit core competencies and gain a competitive
advantage (Hitt, et al., 2020)
 It is designed to help firms achieve competitive advantage.
 A firm has competitive advantage when its strategy has created a superior value for customers and competitors
cannot duplicate it or it is too costly for them to imitate. Strategic competitiveness is achieved when a firm
successfully formulates and implements a value creating strategy (Dess, et al., 2017)
The Stages of Strategic Management Process
Strategic management process – the steps by which management converts a firm’s values, mission, and goals or objectives
into a workable strategy. It consists of three major stages: strategy formulation, strategy implementation and strategy
evaluation.
1. Strategy formulation – includes developing a vision and mission, identifying an organization’s external opportunities and
threats, determine internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies,
and choosing particular strategies to pursue.
2. Strategy implementation – requires a firm to establish annual objectives, devise policies, motivate employees, and
allocate resources so that formulated strategies can be executed. This is often called the “action stage” of strategic
management. It means mobilizing employees and managers to put formulated strategies into action.
3. – is the final stage in strategic management. It includes reviewing bases for current strategies, measuring performance,
and taking corrective actions. Organization activities and performance results are monitored so that actual performance can
be compared with desired performance.

Integrating Intuition and Analysis

Some people recognize that intuition is essential to making good strategic decisions based on their past experiences,
judgment and feelings. They found it useful for making decisions in situation when there is great uncertainty or when it is
necessary to choose from several plausible (credible) alternatives. It is not choosing between an intuitive or analytic
approach to decision making but a complement of analytical thinking and intuitive thinking.
Adapting to Change
 Strategic management process requires that organizations monitor the internal and external events and trends so that
timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing
dramatically. For example: e-commerce, economic/financial crisis, laser surgery, the war on terrorism, the aging
population, and merger mania.
 The need to adapt to change leads organization to key strategic-management questions, such as:
 What kind of business should we become?
 Are we in the right field(s)?
 Should we reshape our business?
 What new competitions are entering our industry?
 What strategies should we pursue?
 How are our customers changing?
 Are new technologies being developed that could put us out of business?

Key Terms in Strategic Management (David and David, 2017):

 Competitive advantage – anything that a firm does especially well compared to rival firms or any resource a firm
possesses that rival firms desire.
 Strategists – are individuals who are most responsible for the success or failure of an organization. Strategists have
various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor,
dean, or entrepreneur. Jay Conger, profess of organizational behavior at the London Business School and author of
Building Leaders, says, “All strategists have to be chief learning officers…”
 Vision statement – answers the question “What do we want to become?” Vision – the desirable future state of an
organization.
 Mission statement – are “enduring statements of purpose that distinguish one business from other similar firms. It
addresses the basic question “What is our business?” Mission – the reason for an organization’s existence.
 External opportunities and external threats – refer to economic, social, cultural, demographic, environmental, political,
legal, governmental, technological, and competitive trends and events that significantly benefit (opportunities) or
harm (threats) an organization in the future. They are largely beyond the control of a single organization. Examples:
wireless revolution, biotechnology, population shifts, high gas prices, changing work values and attitudes, illegal
immigration issues, and increased competition from foreign companies.
 Internal strengths and internal weaknesses – are an organization’s controllable activities that are performed well
(strengths) or poorly (weaknesses). They arise in the management, marketing, finance/accounting, operations and
production, research and development, and management information systems activities of a business. Strengths
and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information.
 Long-term objectives – specific results that an organization seeks to achieve in pursuing its basic mission . Longterm
means more than one year. Objectives should be challenging, measurable, consistent, reasonable, and clear.
 Strategies –are the means by which long-term objectives will be achieved . Business strategies may include geographic
expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture,
liquidation, and joint ventures.
 Annual Objectives – are short-term milestones that organizations much achieve to reach long-term objectives.
 Policies – are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures
established to support efforts to achieve stated objectives. Policies are guides to decision making and address
repetitive or recurring situations.
The Strategic Management Model
The strategic management process can best be studies and applied using a model. Every model represents some kind of
process.

Strategic Management consists of four basic elements (Wheelen, et al. (2018):

1. Environment scanning – the monitoring and evaluating of the external and internal environments and disseminating this
information to key people within the corporation. It is the gathering of information about external conditions and internal
resources and capabilities for use in formulating strategies. It is a careful assessment of a firm’s internal strengths and
weaknesses and external opportunities and threats.
 Purpose: to identify strategic factors—those external and internal elements that will determine the future of the
corporation.
 The simplest way to conduct environmental scanning is through SWOT analysis. SWOT is an acronym used to describe
those particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company.
 External environment – consist of variables (Opportunities and Threats) that are outside the organization and not
typically within the short-run control of top management.
 Internal environment – consist of variables (Strengths and Weaknesses) that are within the organization itself and are
not usually within the short-run control of top management.
2. Strategy formulation – is the process of investigation, analysis, and decision making that provides the company with the
criteria for attaining a competitive advantage.
3. Strategy implementation – is a process by which strategies and policies are put into action through the development of
programs, budgets, and procedures.
4. Strategy evaluation – is a process in which corporate activities and performance results are monitored so that actual
performance can be compared with desired performance.

Benefits of Engaging in Strategic Management

Financial Benefits Research has shown that organizations using strategic management concepts are more profitable and
successful than those that do not. Other benefits of businesses using strategic management concepts:
1) They show significant improvement in sales, profitability, and productivity compared to firms without systematic planning
activities.
2) They are more prepared to face future fluctuations in their external and internal environments
3) They generally exhibit superior long-term financial performance relative to their industry.
4) They make more informed decisions with good anticipation of both short-term and long-term consequences.

Nonfinancial Benefits Strategic management offers other tangible benefits such as:
 enhanced awareness of external threats,
 an improved understanding of competitors’ strategies,
 increased employee productivity,
 reduced resistance to change, and a clearer understanding of performance-reward relationships.
 It also enhances the organization’s problem-prevention capabilities.
  It empowers managers and employees.
 According to Greenly, some nonfinancial benefits of a firm utilizing strategic management are increased discipline,
 improved coordination, enhanced communication, increased forward thinking,
 improved decision-making, increased synergy, and
 more effective allocation of time and resources.

Benefits to a firm that does strategic planning

Enhanced Communication – Deeper/Improved Understanding – Greater commitment – THE RESULT All the managers and
employees on a mission to help the firm succeed

The major benefits of strategic management are according to Wheelen, et al. (2018):
1. Clearer sense of strategic vision for the firm.
2. Sharper focus on what is strategically important.
3. Improved understanding of a rapidly changing environment.
4. Guides the entire management hierarchy.
5. Increases level of profitability.
6. Helps organizations make better strategies
7. Boost managers and employees’ commitment to attain long-term goals.
8. Allows the organization to be more proactive than reactive in shaping its own future.
9. It empowers individuals.
Strategic Decision Making
The distinguishing characteristic of strategic management is its emphasis on strategic decision making. As organizations
grow large more complex with more uncertain environments, decisions become increasing complicated and difficult to
make.

What makes a decision strategic?

A strategic decision deals with the long-run future of the entire organization. It has three characteristics:
1. Rare – strategic decisions are unusual and typically have no precedent to follow.
2. Consequential – it commits substantial resources and demand a great deal of commitment from people at all levels.
3. Directive – set precedents for lesser decision and future actions throughout the organization.

The 8-step strategic decision making process:

1. Evaluate current performance results
2. Review corporate governance
3. Scan and assess the external environment
4. Scan and assess the internal environment
5. Analyze strategic (SWOT) factors
6. Generate, evaluate, and select the best alternative strategy
7. Implement selected strategies
8. Evaluate implemented strategies

Why Some Firms Do No Strategic Planning

Some firms do not engage in strategic, and some firms do strategic planning but receive support from managers and
employees. Some reasons for poor or no strategic planning are as follows:
1. No formal training in strategic management
2. No understanding of the benefits
3. No monetary rewards
4. No punishment for not planning
5. Too busy “firefighting” (resolving internal crises)
6. Waste of time 7. Laziness, effective planning takes time and effort; time is money
8. Content with current success; failure to realize that success today is no guarantee of success tomorrow
9. Overconfidence
10. Prior bad experience with strategic planning

Pitfalls in Strategic Planning

Some pitfalls to watch for and avoid in strategic planning are these:
 Using strategic planning to gain control over decisions and resources
  Doing strategic planning only to satisfy accreditation or regulatory requirements
 Too hastily moving from mission development to strategy formulation
 Failing to communicate the plan to employees, who continue working in the dark
 Top managers making many intuitive decisions that conflict with the formal plan
 Top managers not actively supporting the strategic-planning process

LESSON 2: THE BUSINESS VISION AND MISSION

THE BUSINESS VISION AND MISSION
What do we want to become?
Vision – is the desirable future state of an organization .
 “The portrait of what the organization wants to become.”
 “Goals that are broadest, most general and all inclusive.”
 “Represents a destination that is driven by and evokes passion” (Dess, McNamara, and Eisner)
 “Aspirations for the future without specifying the means necessary to achieve those desired ends.”
 “An idealized picture of the future of an organization.”
Vision statement – a one-sentence statement that answer the basic question, “What do we want to become?” (Fred David)
 A clear vision provides the foundation for developing a comprehensive mission.
 The vision statement should be established first and foremost before the mission statement.
 A company’s roadmap, indicating both what the company wants to become and guiding transformational initiatives by
setting a defined direction for the company’s growth.
What is our Business?
Mission – the purpose or reason why an organization exists.
Mission statement – is an enduring statement of purpose that distinguishes one organization from other similar enterprise.
 It is a declaration of an organization’s “reason for being.” Asking the question “What is our business?” is synonymous to
asking the question “What is our mission?” according to Peter Drucker.
 A clear mission statement is essential for effectively establishing objectives and formulating strategies.
 A formal summary of the aims and values of a company, organization, or individual.
 “Generalized statement of overriding purpose of an organization.”
Vision vs. Mission
 Many organizations develop both a mission statement and a vision statement.
 A strategic vision concern’s a firm’s future business path—“where we are going.” It addresses the following specific
concerns: markets to be pursued; future technology-product-customer focus; and kind of company that management is
trying to create.
 A mission focuses on current business activities—“who we are and what we do.” It addresses the following concerns:
current product and service offerings; customer needs being served; and technological and business capabilities.

Importance (Benefits) of Vision and Mission Statements King and Cleland recommend that organizations carefully develop
a written mission statement in order to keep the following benefits:
1. To ensure unanimity of purpose within the organization
2. To provide a basis, or standard, for allocating organizational resources
3. To establish a general tone or organizational climate
4. To serve as a focal point for individuals to identify with the organization’s purpose and direction
5. To facilitate the translation of objectives into work structure involving the assignment of tasks
6. To specify organizational purposes and then to translate these purposes into objectives in such a way that cost, time, and
performance parameters can be assessed and controlled. Reuben Mark, former CEO of Colgate, maintains that a clear
mission must make sense internationally.
Characteristics of a Mission Statement:
 Broad in scope
 Less than 150 words in length
 Inspiring
 Identify the utility of a firm’s products
 Reveal that the firm is socially responsible
 Reveal that the firm is environmentally responsible
 Include nine components
 Enduring
Mission Statement Components Mission statements can and do vary in length, content, format, and specificity. Since a
mission statement is often the most visible and public part of strategic management process, it is important that it includes
all the essential components:
1. Customers – Who are the firm’s customers?
2. Products or services – What are the firm’s major products or services?
3. Markets – Geographically, where does the firm compete?
4. Technology – Is the firm technologically current? 5. Concern for survival, growth, and profitability – Is the firm committed
to growth and financial soundness?
6. Philosophy – What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
7. Self-concept – What is the firm’s distinctive competence or major competitive advantage?
8. Concern for public image – Is the firm responsive to social, community, and environmental concerns?
9. Concern for employees – Are employees valuable asset of the firm?

ORGANIZATION OBJECTIVES
The need for strategic objectives
 While the vision and mission statements guide the top management on what to achieve and how to go about it, the
strategic objectives specifies what is envisaged behind the vision and mission statement into quantifiable terms.
 Goals – represent the desired general ends toward which efforts are directed.
 Objectives – can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. It
narrows the focus to more specific organizational direction. They are specific and quantified version of goals.
 Long-term objectives – are results desired in pursuing the mission and normally extend beyond one year.
 Short-term objectives – sometimes called “annual objectives,” are designed to achieve the firm’s long-range objectives.
This performance targets normally covers one year or less.
Objectives are essential for organizational success because:
 They state direction
 Aid in evaluation
 Create synergy
 Reveal priorities
 Focus coordination, and
 Basis for effective planning, organizing, motivating, and controlling activities.

Strategic Objectives – a set of organizational goals that are used to operationalize the mission statement and that are
specific and cover a well-defined time frame.
Strategic objectives are characterized by the following:
1. converts vision and mission into specific performance targets;
2. they serve as yardsticks to tract performance;
3. it pushes the firm to be inventive and focused on results;
4. it helps prevents complacency; and
5. it serves as pull or magnet toward common direction
Qualities of Effective Organizational Objectives:
S—Specific (specifies the what, who, and time)
M—Measurable (can be measured in quantitative and qualitative terms)
A—Attainable (reachable, reasonable)
R—Result-oriented (output and outcome-oriented)
T—Time bound (can be attained in a specified time period)
C—Challenging (not too low, not too high, motivating)
C—Consistent (compatible with the mission, consistent in the long-run and the short-run).

STRATEGIC DIRECTION
Strategic direction – is defined in terms of a firm’s vision of where it is heading, the businesses in which it is involved, and its
purpose.
 It is established and communicated through vision, mission, values statement, and/or a code of ethics.
 Some firms don’t have a physical mission statement, but they still have a strategic direction, although it may not be
well-defined or communicated.
Influences on strategic direction
1. internal stakeholders
3. external stakeholders
2. broad environment
4. history and inertia

Strategic Intent vs. Strategic Thrust

 Strategic Intent – connotes a direction and burning desire that a firm would like to pursue with bulldog tenacity
(Sussland , 2000, as cited by Orcullo, 2008).
  The strategic thrust – insinuates a decision-making process biased by senior management view or what is believed as
paradigms (Sussland, 2002, as cited by Orcullo, 2008). It is focusing on the area where the management wants the
company to excel.

ORGANIZATIONAL VALUES AND PURPOSE

 The values of a company state how managers and employees should conduct themselves, how they should do business,
and what kind of organization they should build to help a company achieve its mission.
 The values of an organization define what matters when making decisions and what is rewarded and reinforced.
 Values help a firm define its purpose, which is sometimes called an enterprise strategy, the term used to join ethical and
strategic thinking about an organization. It answers the fundamental question, “What do we stand for?” (St. John and
Harrison, 2012).
 Most organizations incorporate their values into the corporate mission or vision statement directly, or it may be
contained in several documents, such as a values statement, a statement of corporate social responsibility or corporate
citizenship, or a code of ethics.

CPU’S Core Values:

Faith – The act of believing the things God has revealed about Himself and acting on those beliefs. This includes
commitment, cooperation, trust and confidence.
Character – The aggregate features and traits that form the individual’s nature of a person, moral quality, and good report.
This includes honesty, integrity, humility and loyalty.
Justice – Righteousness or lawfulness and fairness. It is observing due process in administering the deserved punishment or
reward. This includes fairness, equality, morality, and peace.
Stewardship – The proper and responsible management of life, position, possessions, and other resources entrusted by God
to man. This includes service, accountability, culture and outreach.
Excellence – The highly commendable quality or feature of a person’s worth and/or deeds. This includes competence,
technology, scholarship and research.

STRATEGIC LEADERSHIP
Several authors have identified a few key characteristics of good strategic leaders that lead to high performance:
1. Vision, eloquence, and consistency
2. Articulation of the business model
3. Commitment
4. Being well-informed
5. Willingness to delegate and empower
6. Astute use of power; and
7. Emotional intelligence

LESSON 3: ETERNAL ASSESSMENT

ENVIRONMENTAL SCANNING
Environmental scanning – is the monitoring, evaluating, and disseminating of information from the external and internal
environments to key people within the organization (Wheelen, et al., 2018).
Organizational environment – is the set of all factors both outside and inside the organization that can affect its progress
toward attaining its goals.
 External environment – outside forces, factors, and conditions
 Internal environment – factors within the organization
THE EXTERNAL ENVIRONMENT
The external environment – represent all external forces, factor, or conditions that exert some degree of impact to the
strategies, decisions and actions taken by the firm.
Two types of external environment: 1) Societal environment and 2) Task environment
1. Macroenvironment (also called Societal or General Environment)– includes general forces that do not directly affect
the short-run activities of the organization but can influence its long-run decisions.
 a. Economic forces – regulates the exchange of materials, money, energy, and information.
b. Social, cultural, demographic, and environmental forces – describes the characteristics of the society and
the natural environment that has an impact on business decisions.
c. Political, governmental, and legal forces – elements that are related to governmental affairs.
d. Technological forces – new approaches to producing goods and services, new procedures, new solutions
2. Task Environment (also called Industry Environment) – those elements or groups that directly affect the
corporation and in turn, are affected by it. These are factors that directly influence a firm and its competitive actions
and competitive responses.

THE EXTERNAL ASSESSMENT

External assessment (or external audit) – is the process of identifying and evaluating trends and events beyond the control
of a single firm.
 An external audit reveals key opportunities and threats confronting an organization so that managers can formulate
strategies to take advantage of the opportunities and avoid or reduce the impact of threats.
 Purpose of external assessment:
 To identify and make a limited list of opportunities that could benefit a firm and threat that should be avoided so
that management can react to environmental changes appropriately and enhance success.

Opportunity – an external condition that if exploited, helps a company achieve strategic competitiveness or benefit a firm.
Threat – an external condition that may harm or hinder a company’s effort o achieve strategic competitiveness.
The Key External Forces. The key external forces can be divided into five broad categories:
1. S-Social, cultural, demographic, and natural environment forces; and
2. P-Political, government, and legal forces;
3. E-Economic forces
4. C-Competitive forces
5. T-Technological forces
Some Important Variables Under Each Key External Forces.
Economic Forces
 GDP trends  Interest rates
 Income levels  Money markets rates
 Inflation  Stock market trends
 Balance of payments  Fluctuation of economies
 Taxation Corporate profits  Economic coalitions of counties.
 Productivity Employments rates
Technological Forces
 Robotics  Biotech
 New products  Analytics
 The Internet of Things  Artificial intelligence
 3D printing  Telecommunication infrastructure
 The cloud  Patent protection
 Mobile devices
Political, Governmental, and Legal Forces
 Laws (local, nat’l)  Elections
 Existing government  Defense policies
 Government attitude toward industries  Monetary policies
 Lobbying efforts of interest groups  Changes in tax laws Import-export regulations
 World currency  Terrorist activity, etc
 Labor markets

Social and Environmental Forces

 Population changes  Age structure Literacy rates
 Attitudes toward careers, product quality,  Educational levels Customs, beliefs, values
customer service, toward foreign people  Lifestyles, buying habits
 Pollution control  Traffic congestion
 Number of births, marriages, deaths  Ethical concerns
Competitive Force
 Rivalry among competing firms
 Potential entry of new competitors
 Potential development of substitute products/services
 Bargaining power of suppliers
 Bargaining power of consumers

The Process of Performing an External Audit

 Involve as many managers and employees as possible
 Gather competitive intelligence and information about external trends in key external factors.
 Assimilate and evaluate the information gathered.
 Rank key external factors from the most important to the least importance.
 Make a final list of the most important key external factors and communicate and distribute widely in the
organization.

The Industry Organization (I/O) View

The Industry Organization (I/O) approach to competitive advantage – advocates that external (industry) factors are more
important than internal factors in a firm achieving competitive advantage.
 Proponents of I/O view, such as Michael Porter, contend that organizational performance will be primarily
determined by industry forces.
 According to I/O advocates and theorists, competitive advantage is determined largely by competitive positioning
within an industry; and that the industry in which a firm chooses to compete has a stronger influence on the firm’s
performance than do the internal functional decision managers make in marketing, finance, and the like.

Competitive Intelligence Programs

Competitive intelligence (CI) – is a systematic and ethical process for gathering and analyzing information about the
competitor’s activities and general business trends to further a business’s own goals (SCIP Web site).
 Good competitive intelligence in business, as in the military, is one of the keys to success. The more information a firm can
obtain about its competitors, the more likely it is that it can formulate and implement effective strategies.

The Competitive Analysis:

Porter’s Five-Forces Model
Porter’s Five Forces Model of competitive analysis is a widely used approach for developing strategies in many industries.
It consist of five forces: rivalry among competing companies, potential entry of new competitors, and potential development
of substitute products, bargaining power suppliers and bargaining power of consumers; that determine the nature of
competitiveness in a given industry.

Rivalry among competing firms

 Usually the most powerful among the five forces
 Intensity of rivalry tends to increase as competitors increase in number, become more equal in size and capability,
as demand for the industry’s products declines, and as price-cutting becomes common. Potential entry of new
competitors
 When entry to industry is easy, the intensity of competition among firm’s increases.
 Existing competitors try to create a barrier to entry. Potential development of substitute products or services
 Firms are in close competition with producers of substitute products in other industries. Bargaining power of
suppliers
 Intense when there are few suppliers, when there are only a few good substitute raw materials, or when switching
cost is high. Bargaining power of consumers
 It represents a major force affecting competition in an industry when customers are large in number or buy in
volume.

Sources of External Information

 Unpublished sources: customer surveys, market research, speeches at professional and shareholders’ meetings,
television programs, interviews and conversations with stakeholders.
 Published sources: periodicals, journals, reports, government documents, abstracts, books, directories, newspapers,
and manuals.
 Online Sources: a company website is usually an excellent place to start finding information about a firm . There are
many excellent websites for gathering strategic information. Great online sources of company and industry information
are IBIS World, Lexis-Nexis Company Dossier, Mergent Online, Regional Business News, Standard & Poor NetAdvantage,
and Value Line Investment Survey

Forecasting Tools and Techniques Forecasts – are educated assumptions about future trends and events. Forecasting is a
complex activity because of factors such as technological innovation, cultural changes, new products, improved, services,
stronger competitors, shifts in government priorities, changing social values, unstable economic conditions, and unforeseen
events.
 Oftentimes managers rely on published forecasts to identify key external opportunities and threats.
 Accurate forecasts can provide major competitive advantage for organizations

Making Assumptions
McConkey defined assumptions as the “best present estimates of the impact of major external factors, over which the
manager has little if any control, but which may exert a significant impact on performance or ability to achieved desired
results.”
Reasonable assumptions based on available information must always be made in formulating strategies. Wild guesses
should be made in planning.

Business Analytics Business Analytics – is an MIS technique that involves using software to mine huge volumes of data to
help executives make decisions. It also called predictive analytics, machine learning, or data mining – a software that
enables a researcher to assess and use the aggregate experience of an organization, which is a priceless strategic asset for a
firm. Business analytics enables a company to benefit from measuring and managing risk.

How to develop an External Factor Evaluation (EFE) Matrix

An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and competitive information. (See David, 2017,
for the steps in preparing and IFE Matrix.
 In an EFE Matrix, the highest possible total weighted score for a firm is 4.0 and the lowest possible total weighted score
is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that a company is responding in
an outstanding way to existing opportunities and threats in its industry. A score of 1.0 indicates that the firm’s
strategies are not capitalizing on opportunities or avoiding external threats.
 See Table 3-9 in the book for an example of an EFE Matrix.

How to create a Competitive Profile Matrix

Competitive Profile Matrix (CPM) – (also called Industry Matrix) summary of the key success factors within a particular
industry that identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s
strategic position.
 The weights and total scores in both a CPM and EFE matrix have the same meaning. However, critical success factors in
a CPM include both internal and external issues; therefore, the ratings refer to strengths and weaknesses, where 4 =
major strength, 3 = minor strength, 2 = minor weaknesses, and 1 = major weaknesses.
 Critical success factors – are the variables that can affect significantly the overall competitive positions of all companies
within any particular industry. They vary from industry to industry and are crucial to determining a company’s ability to
succeed within that industry.
 Key success factors are different from strategic factors. Key success factors deal with an entire industry, whereas,
strategic factors deal with a particular company.

PESTEL Analysis
A to assess political, economic, social, technological, environmental, and legal factors
What is a PESTEL Analysis?
A PESTEL analysis is a strategic framework commonly used to evaluate the business environment in which a firm operates.
Traditionally, the framework was referred to as a PEST analysis, which was an acronym for Political, Economic, Social, and
Technological; in more recent history, the framework was extended to include Environmental and Legal factors as well.
The framework is used by management teams and boards in their strategic planning processes and enterprise risk
management planning. PESTEL analysis is also a very popular tool among management consultants to help their clients
develop innovative product and market initiatives, as well as within the financial analyst community, where factors may
sinfluence model assumptions and financing decisions.
Key points from a PESTEL analysis can be incorporated into other industry and firm-level frameworks, such as Ansoff’s
Matrix, Porter’s 5 Forces, and SWOT Analysis.

Political Factors – Broadly speaking, political factors are those driven by government actions and policies.
Economic Factors – relate to the broader economy and tend to be expressly financial in nature.
Social Factors – tend to be more difficult to quantify than economic ones. They refer to shifts or evolutions in the ways that
stakeholders approach life and leisure, which in turn can impact commercial activity. Social Factor Example: Post-pandemic,
management at a technology firm has had to seriously reevaluate hiring, onboarding, and training practices after an
overwhelming number of employees indicated a preference for a hybrid, work-from-home (WFH) model.
Technological Factors – In today’s business landscape, technology is everywhere – and it’s changing rapidly. Management
teams and analysts alike must understand how technological factors may impact an organization or an industry.
Technological Factor Example: A management team must weigh the practical and the financial implications of transitioning
from on-site physical servers to a cloud-based data storage solution.
Environmental Factors – Environmental factors emerged as a sensible addition to the original PEST framework as the
business community began to recognize that changes to our physical environment can present material risks and
opportunities for organizations.
Examples of environmental considerations are:
 Carbon footprint
 Climate change impacts, including physical and transition risks
 Increased incidences of extreme weather events
 Stewardship of natural resources (like fresh water)
Environmental factors in a PESTEL analysis will overlap considerably with those typically identified in an ESG (Environmental,
Social, and Governance) analysis. In fact, it’s widely believed that the addition of environmental factors to the PESTEL
framework evolved from the growing popularity of movements such as CSR (Corporate Social Responsibility) and ESG.
Legal Factors
Legal factors are those that emerge from changes to the regulatory environment, which may affect the broader economy,
certain industries, or even individual businesses within a specific sector.
They include, but are not limited to:
 Industry regulation
 Licenses and permits required to operate
 Employment and consumer protection laws
 Protection of IP (Intellectual Property)
PESTEL and Financial Analysis Combined, the above six factors can have a profound impact on risks and opportunities for
firms. It’s imperative that the analyst community recognize these and attempt to quantify them in their financial models and
risk assessment tool

LESSON 4: INTERNAL ASSESSMENT

The Internal Audit
Internal Assessment or Audit – is the process of identifying and evaluating a firm’s strengths and weaknesses in the
functional areas of business including the firm’s management, marketing, finance, accounting, production and operations,
research and development (R&D), and management information systems operations.
Internal environment – is the environment that exists inside the organization and normally has immediate and specific
implications for managing the firm.
The importance of internal assessment:
1. it identifies internal strengths and weaknesses
2. it helps develop the ability to change rapidly
3. it assess the firm’s resources, capabilities and core competencies
4. it enables the firm to determine which of these have strategic significance and where the organizational is vulnerable to
attack
By studying the internal environment, firms determine what they can do.
By studying the external environment, firms identify what they might choose to do.

Key Internal Forces

 The key internal forces to be assessed in the internal audit are;
 Management
 Marketing
 Finance/Accounting
  Human Resource Management
 Management information systems
 Production/operations
 R&D
 MIS
 There are other subareas within these functions such as under marketing include: customer service, warranties,
advertising, packaging, and pricing under marketing; which are examined.
 Strategic planning must include a detailed assessment of how the firm is doing in all internal areas.
 The functional areas differ for different types or organizations.
 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

The Process of Performing an Internal Audit

 It requires gathering and assimilating information about the firm’s management, marketing, finance and accounting,
production and operations, R&D, and MIS operations.
 Representative managers and employees from throughout the firm need to be involved in determining the firm’s
strengths and weaknesses. It allows participants to understand how their jobs, departments, and divisions fit into the
whole organization.
 Key factors should be prioritized into the firm’s most important strengths and weaknesses as determined collectively

The Resource-Based View (RBV)

The Resource-Based View (RBV) approach to competitive advantage contends that internal resources are more important
for a firm than external factors in achieving and sustaining competitive advantages. In contrast to the I/O theory,
proponents of the RBV view contend that organizational performance will primarily be determined by internal resources
that can be grouped into three all-encompassing categories: Physical resources, human resources, and organizational
resources. RBV theory asserts that resources are actually what help a firm exploit opportunities and neutralize threats.

Human resources Physical resources Organizational resources

Employees Plant and equipment Financial resources
Training Location Firm structure
Experience Technology Planning process
Intelligence Raw materials Information systems
Knowledge Machines Patents, trademarks, copyrights
Skills Databases
Abilities Organizational reputation
Components of Internal Assessment Leading to Competitive Advantage and Strategic Competitiveness.
Resources – Capabilities – Core Competence – Competitive Advantage – Strategic Competiveness
The basic premise of the RBV is that the mix, type, amount, and nature of a firm’s internal resources should be considered
first and foremost in devising strategies that can lead to sustainable competitive advantage.
 It involved developing and exploiting a firm’s unique resources and capabilities, and continually maintaining and
strengthening those resources. When other firms are unable to duplicate a particular strategy, then the firm has a
sustainable competitive advantage.
 For a resource to be valuable, it must be either: (1) rare, (2) hard to imitate, or (3) not easily substitutable. Often called
empirical indicators, these three characteristics of resources enable a firm to implement strategies that improve its
efficiency and effectiveness and lead to a sustainable competitive advantage.

Resources – are assets, competencies, processes, skills, or knowledge controlled by the corporation.
A resource is a strength if it provides a company with a competitive advantage.
 Tangible resources – assets that can be seen and quantified. Examples: financial resources, organizational
resources, physical resources, and technological resources
 Intangible resources – include assets that typically are rooted deeply in the firm’s history and have accumulated over
time.
They are a superior and more potent source of core competencies. Examples are human resources’ knowledge, trust.
Managerial capabilities, innovation resources, reputational resources.
Capabilities – are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired result.
Capabilities emerge over time through complex interactions among tangible and intangible resources.
Core competencies – are resources and capabilities that serve as a source of a firm’s competitive advantage over rivals.
Distinctive competencies – a firm’s strengths that cannot be easily imitated by competitors.

Integrating Strategy and Culture

 Relationships among functional activities can be assessed by focusing on organizational culture.
 Organizational culture – “the collective assumptions and beliefs that pervade the organization about how business
should be conducted and how employees should behave and should be treated.”  It is taught to new members as the
correct way to perceive, think, and feel.
 Cultural products include: values, beliefs, rites, rituals, ceremonies, myths, stories, legends, sagas, language, metaphors,
symbols, folktales, heroes and heroines

Management
The functions of management consist of five basic activities: planning, organizing, motivating, staffing, and controlling.
Planning – consists of all those managerial activities related to preparing for the future. (Strategy Formulation)
Organizing – includes all those managerial activities that result in a structure of task and authority relationships. (Strategy
Implementation)
Motivating – involves efforts directed toward shaping human behavior. (Strategy Implementation)
Staffing – activities are centered on personnel or human resource management. (Strategy Implementation)
Controlling – refers to all those managerial activities directed toward ensuring that actual results are consistent with
planned results. (Strategy Evaluation)

Management Audit Checklist of Questions

The checklist of questions provided below can help determine specific strengths and weaknesses in the functional area of
business:
1. Does the firm use strategic management concepts?
2. Are company objectives and goals measurable and well communicated?
3. Do mangers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms effective?

Marketing – is the process of defining, anticipating, creating, and fulfilling customer’s needs and wants for products and
services.
 There are seven basic functions of marketing: (1) customer analysis, (2) selling products/services, (3) product and
service planning, (4) pricing, (5) distribution, (6) marketing research, and (7) Cost/benefit analysis.
 Understanding these functions help identify and evaluate marketing strengths and weaknesses.

Cost/ Benefit Analysis – involves assessing the costs, benefits, and risks associated with marketing decisions.
Three steps are required to perform a cost/benefit analysis:
(1) compute the total costs associated with a decision,
(2) estimate the total benefits from the decision, and
(3) compare the total costs with the total benefits. When expected benefits exceed total costs, an opportunity becomes
more attractive.
Key cost/benefit indicators:
1. Net present value (NPV)
2. Present value of benefits (PVB)
3. Present value of costs (PVC)
4. Benefit cost ratio (BCR) = PVB/PVC
5. Net benefit = PVB – PVC
6. NPV/k (where k is the level of funds available)

Finance and Accounting

Financial condition is often considered the single best measure of a firm’s competitive position and overall attractiveness to
investors. Determining an organization’s financial strengths and weaknesses is essential to formulating strategies
effectively. A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow, and equity can eliminate
some strategies as being feasible alternatives.
Financial factors often alter existing strategies and change implementation plan. Finance and accounting functions comprise
three decisions:
 Investment decisions – also called capital budgeting – is the allocation and reallocation of capital and resources to
projects, products, assets, and divisions of an organization.
 Financing decisions – determines the best capital structure for the firm and includes examining various methods by
which fir the firm can raise capital (for example, by issuing stocks, increasing debt, selling assets, or using a
combination of these approaches).
 Dividend decisions – concerns issues such as the percentage of earnings paid to stockholders, the stability of
dividends paid over time, and the repurchase or issuance of stock. Helpful in evaluating a firm’s dividend decisions
are EPS ratio, the dividends-per share ratio, and the price-earnings ratio.

Basic Types of Financial Ratios

1. Liquidity ratios – measure a firm’s ability to meet maturing short-term obligations. Current ration, Quick (or acid test)
ratio
2. Leverage ratios – measure the extent to which a firm has been financed by debt Debt-total-assets ratio, Debt-to-equity
ratio Long-term debt-to-equity ratio, Times-interest-earned (or coverage) ratio.
3. Activity ratios – measure how effectively a firm is using its resources. Inventory turnover. Fixed assets turnover Total
assets turnover, Accounts receivable turnover, Average collection period
4. Profitability ratios – measure management’s overall effectiveness as shown by the returns generated on sales and
investments. Gross profit margin, Operating profit margin, Net profit margin Return on total assets (ROA), Return on
stockholders’ equity (ROE), Earnings per share (EPS), Price-earnings ratio
5. Growth ratios – measure the firm’s ability to maintain its economic position in the growth of the economy and industry.
Sales, Net income, Earnings per share, Dividends per share
The analysis should be conducted on three separate fronts:
1. How has each ratio changed over time? (historical trends)
2. How does each ratio compare to industry norms?
3. How does each ratio compare with key competitors?

Breakeven Analysis. Lowering of prices to compete is usually done by firms because many consumers are price sensitive.
As firms lowers prices, its breakeven (BE) point in terms of units sold increases. The breakeven point – is the quantity of
units that a firm must sell for its total revenues (TR) to equal its total costs (TC).

Finance and Accounting Audit Checklist

1. Where is the firm financially strong and weak as indicated by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Does the firm have good relations with its investors and stockholders?
7. Are the firm’s financial managers experienced and well trained?

Production and Operations

The production/operations function of a business consists of all those activities that transform inputs into goods and
services. It deals with inputs, transformations, and outputs that vary across industries and markets. The basic function or
decision production/operations are: process, capacity, inventory, workforce, and quality.
Production and Operations Audit Checklist
1. Are supplies of raw materials, parts, and subassemblies reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in good condition?
3. Are inventory-control policies, quality control and procedures effective?
4. Are facilities, resources, and markets strategically located?
5. Does the firm have technological competencies?

Research and Development

R&D is the fifth major area of internal operations that should be examined for specific strengths and weaknesses. Many
firms today conduct no R&D and yet many other companies depend on successful R&D activities for survival. Firms investing
in R&D may lead them to develop superior product or services and will give them competitive advantage. Two forms of
R&D: (1) Internal R&D – in which a firm operates its own R&D department, and/or (2) Contract R&D – in which firm hires
independent researchers or agencies to develop specific products. Many companies use both approaches to develop new
products.

Management Information Systems Billions of bits of information are now “in the cloud.” Information ties all business
functions together and provides the basis for all managerial decisions. An MIS’ purpose is to improve the quality of
managerial decisions and thus improving the performance of an enterprise. An effective IS thus collects, codes, stores,
synthesizes, and presents information in such a manger that it answers important operating and strategic questions. It
gathers data about marketing, finance, production, and personnel matters internally, and all environmental factors
externally.
MIS Audit questions include the following:
1. Do all managers in the firm use the information system to make decision?
2. Is there a chief information office or director of IS position in the firm?
3. Are data in the IS updated regularly? Etc.

Value Chain Analysis 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. VCA
aims to identify where low-cost advantages or disadvantages exist anywhere along the value chain from raw material to
customer service activities. VCA can enable a firm to identify its own strengths and weaknesses, especially as compared to
competitors’ value analyses and their own data gathered.

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 market place. Benchmarking entails measuring costs of value chain activities
across an industry to determine “best practices” among competing firms for the purpose of duplicating or improving upon
those best practices. This will enable a firm to take action to improve its competitiveness by identifying (and improving
upon) value chain activities where rival firms have comparable advantages in cost, service, reputation, or operation.