Chapter 6 - The Internal Audit Overview Chapter 6 explains how to conduct an effective internal strategic management audit to provide an excellent foundation for formulating strategies. Key aspects of the basic business functions (management, marketing, finance, production/operations, R&D, and MIS) are reviewed along with value chain analysis, benchmarking, breakeven analysis, and cost/benefit analysis. Chapter 6 explains how to develop an Internal Factor Evaluation (IFE) Matrix, an important strategic planning tool. Learning Objectives: 1. Explain how the nature and role of chief marketing officer has changed. 2. Be able to work out breakeven analysis business problems. 3. Describe how to perform an internal strategic-management audit. 4. Discuss the resource-based view (RBV) in strategic management. 5. Discuss key interrelationships among the functional areas of business. 6. Identify the basic functions or activities that make up management, marketing, finance and accounting, production and operations, research and development, and management information systems. 7. Explain how to determine and prioritize a firm’s internal strengths and weaknesses. 8. Explain the importance of financial ratio analysis. 9. Discuss the nature and role of management information systems in strategic management. 10. Develop an Internal Factor Evaluation (IFE) matrix. 11. Explain cost/benefit analysis, value chain analysis, and benchmarking as strategic-management tools. Teaching Tips 1. Ask by show of hands (although you have the information recorded on a class roster sheet), who in the class is a Management major, and then ask the same for each BBA major. Why? Because this chapter offers a quick synopsis of key material in those majors. Ask students to capitalize on their area of expertise in performing their strategic management case analysis. 2. Regarding the financial ratios presented, show students where they can retrieve those ratios on the Internet, i.e., at the websites presented in the chapter. 3. Breakeven analysis has become an increasingly important strategic planning concept, especially for thousands of start-up businesses and entrepreneurs. Therefore, definitely go through the end-of-chapter review questions and exercises that deal with breakeven. This edition gives a formula and example problems that can be utilized in class to apply breakeven. 4. The IFE Matrix in Table 6-9 for the “local ten-theater cinema complex” will serve as a running example in other chapters to come, so definitely go over that example. Point out the use of $’s, #’s, %’s in the factor list, as well as the Ratings which (remind students) are 4 or 3 for strengths and 2 or 1 for weaknesses. 5. At the end of Chapter 6, direct student attention to the “Special Note to Students” because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 6. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the answer, with you commenting on their answers. I have found this to be a fun day in class and it goes pretty quickly. 7. Several of the end-of-chapter Assurance of Learning Exercises make excellent homework or classwork assignments to be completed as an individual or as a group of students. Answers to End-of-Chapter Review Questions 1. Volkswagen (VW) Group has been very successful in the last decade. Research VW and see if they have strategic planning. Create a report of your findings for your class. Answer: Evidence of the Volkswagen Group’s strategic planning efforts can be found at: http://www.volkswagenag.com/content/vwcorp/content/en/the_group/strategy.html In summary, Volkswagen developed a five-year strategy in 2013 that was focused on positioning the Volkswagen Group as a global and economic and environmental leader among automobile manufacturers by 2018. The strategic planning process identified four key goals designed to make Volkswagen the most “successful and fascinating” automaker in the world by that time: • Volkswagen intends to deploy intelligent innovations and technologies to become a world leader in customer satisfaction and quality; • Volkswagen intends to increase unit sales to more than 10 million vehicles a year with an above average share of the development of the major growth markets; • Volkswagen's aim is a long-term return on sales before tax of at least 8%; • Volkswagen aims to be the most attractive employer in the automotive industry by 2018. Volkswagen is focused on pursuing the expansion of environmentally friendly and profitable vehicle projects while ensuring that capital expenditures remain at manageable levels. Volkswagen’s activities will be oriented toward new ecological standards in the areas of vehicles, drivetrains and lightweight construction with a focus on production efficiency and flexibility. Additionally, Volkswagen intends to continually expand its customer base by increasing satisfaction among existing customers and acquiring new, satisfied customers around the world, particularly in the growth markets by offering products that meet local market needs. 2. Visit VW’s corporate website. See the list of top executives for VW and create an organizational chart for VW. Answer: 3. Given the fifteen example (possible) aspects of an organization’s culture as presented in the chapter, rate a company you are very familiar with in terms of the extent each culture item exists. Explain. Answer: Students’ answers may vary but they should based on the Table 6-2 “Fifteen Example (Possible) Aspects of an Organization’s Culture,” page 194. 1. Values and Beliefs - High: The company promotes innovation and teamwork as core values. 2. Norms and Behaviors - Moderate: Employees are encouraged to collaborate but follow structured processes. 3. Leadership Style - High: Leadership is approachable and promotes a flat organizational structure. 4. Communication Practices - Moderate: Open communication is encouraged, but some departments are more siloed. 5. Decision-Making Processes - Moderate: Decisions are often collaborative but can be slow due to multiple approvals. 6. Work Environment - High: The office is open and modern, fostering creativity and collaboration. 7. Reward Systems - Moderate: Performance-based rewards are given but may not always align with employee expectations. 8. Employee Engagement - High: Regular team-building activities and feedback sessions are conducted. 9. Customer Orientation - High: A strong focus on customer satisfaction drives company initiatives. 10. Innovation and Risk-Taking - High: The company encourages taking risks and values innovative ideas. 11. Work-Life Balance - Moderate: Flexible hours are offered, but workloads can occasionally be heavy. 12. Diversity and Inclusion - Moderate: Efforts are made to promote diversity, though there’s room for improvement. 13. Ethics and Integrity - High: A strong emphasis is placed on ethical behavior and integrity in all business dealings. 14. Training and Development - Moderate: There are training programs available, but access can vary by department. 15. Social Responsibility - Moderate: The company supports various causes, but community involvement is inconsistent. Explanation: The ratings reflect how prominently each aspect is featured in the company’s culture. High ratings indicate a strong presence and alignment with the company's values, while moderate ratings suggest areas with room for enhancement. 4. Rank the seven functions of marketing in order of importance for a small hardware business. Answer: Students’ answers may vary in their ranking of the functions of marketing: • Customer analysis • Selling products/services • Product and service planning • Pricing • Distribution • Marketing research • Opportunity analysis 1. Sales - Crucial for generating revenue through direct customer transactions. 2. Promotion - Important for increasing brand awareness and attracting customers. 3. Customer Service - Essential for retaining customers and addressing their needs. 4. Product Management - Key for ensuring the right inventory and quality of hardware products. 5. Market Research - Helps understand customer preferences and adjust offerings accordingly. 6. Pricing - Important for competitiveness and profitability. 7. Distribution - Ensures products are available to customers in a timely manner. 5. Develop a quantitative problem to show that you understand cost/benefit analysis. Answer: Problem: A small hardware store is considering a $10,000 investment in a new inventory management system. The system is expected to reduce inventory errors and save $2,500 annually in labor costs. Cost/Benefit Analysis: • Cost: $10,000 (one-time investment) • Benefit: $2,500 annually (savings) Payback Period: $10,000/$2,500 = 4 years. Analysis: The investment will break even in 4 years, making it a feasible option if the store anticipates long-term benefits beyond this period. 6. Develop a quantitative problem to show that you understand breakeven analysis. Answer: Problem: A small hardware store sells a tool with a selling price of $50 and a variable cost of $30 per unit. Fixed costs are $10,000. Breakeven Analysis: • Selling Price (SP): $50 • Variable Cost (VC): $30 • Fixed Costs (FC): $10,000 Breakeven Point (in units): FC / (SP - VC) = $10,000/($50 - $30) = 500 units. Analysis: The store needs to sell 500 units to cover all costs and achieve breakeven. 7. For VW, determine their most recent dividend payout amount per share. How has that amount changed over the last 12 months? Answer: Volkswagen’s dividend payout per share Its dividends per share for the 2012–2013 time frame was 2.58 for a dividend payout ratio of 22.8%. Dividends were not paid in the 2011–2012 time period. 8. List some advantages and disadvantages of a company paying dividends versus reinvesting that money in the company and striving for stock price increase as the primary way to reward investors. Answer: Students’ answers may vary, depending on how they interpret the “Cost/Benefits Analysis” found in Page 202. Advantages of Paying Dividends: 1. Attracts Income-Seeking Investors: Provides regular income, appealing to those seeking steady returns. 2. Signals Financial Health: Demonstrates stability and confidence in ongoing profitability. Disadvantages of Paying Dividends: 1. Reduces Reinvestment Capital: Limits funds available for growth opportunities and innovation. 2. Tax Implications: Dividends may be taxed at a higher rate than capital gains, affecting investor returns. Reinvestment Advantages: 1. Growth Potential: Funds are used to expand operations, potentially increasing stock value. 2. Long-Term Value Creation: Can lead to higher stock prices and greater shareholder value over time. Reinvestment Disadvantages: 1. No Immediate Return: Investors receive no immediate cash benefit, which might deter income-focused investors. 2. Higher Risk: Investment in growth initiatives carries the risk of lower short-term returns or failure. 9. Illustrate a breakeven chart for VW. Explain how it may work for the organization. Answer: Volkswagen manufactures the Bugatti Veyron, the fastest roadster in the world with a base horsepower (bhp) of 1,200. This supercar is an ultra exclusive product that is reserve for the super rich with only 50 units made per year. If the fixed costs (FC) associated with setting up the manufacturing line for this technological marvel are $15,000,000 while the variable costs associated with the manufacture of each unit are $1,000,000 the quantity (Q) of the vehicle must be sold in order for the business to break even (BE) if each vehicle sells for $2,000,000) is as follows where TR = TC = BE: FC = $15,000,000 VC = $1,000,000 per unit P = $2,000,000 BE(Q) = TFC/(P – VC) BE(Q) = $15,000,000/($2,000,000 – $1,000,000) Q = 15 10. VW has historically spent more on R&D than almost any other automobile company in the world. What are the major advantages and disadvantages of this strategy? Answer: Among the major advantages associated with spending more on R&D than rivals is the capacity to be the first to develop products that incorporate emerging technologies thereby allowing the firm that spends well on R&D activities to test products in the marketplace and to incorporate feedback to improve quality and manufacturing efficiencies before competitors have the capacity to respond effectively – the essence of how expenditures in R&D create first mover advantages. 11. Perform a value chain analysis for an organization of your choice. Answer: Organization: Starbucks Value Chain Analysis: 1. Inbound Logistics: Efficient sourcing of high-quality coffee beans and other raw materials. 2. Operations: Skilled baristas and streamlined processes ensure consistent product quality and service. 3. Outbound Logistics: Well-managed distribution channels and supply chain to maintain inventory across global stores. 4. Marketing and Sales: Strong brand positioning, loyalty programs, and targeted promotions enhance customer engagement. 5. Service: Excellent customer service and a focus on creating a welcoming store environment. Analysis: Starbucks' value chain emphasizes quality control, efficient logistics, and customer experience, driving its competitive advantage and strong market presence. 12. Discuss the relationship between benchmarking and value chain analysis. Answer: Benchmarking is basically to compare own company to others in the same trade while value analysis is, according to Porter, each part of the organization is interdependent on each other. Hence, if the comparison shows that own company is below the competitors; it is imperative that all factors should be examined. 13. Explain why in an IFE Matrix the ratings should be 4 or 3 for strengths and 1 or 2 for weaknesses as compared to the EFE Matrix where the ratings should be 1, 2, 3, or 4 anywhere among both the opportunities and threats. Answer: Students should refer to Page 216; The Internal Factor Evaluation (IFE) to understand the definition and meaning of IFE – which is to analyze internal factors; and Page 244 (discussed later in Chapter 7) Industry Analysis: The External Factor; analysis of the market factors. In an IFE Matrix, strengths are rated higher (4 or 3) to reflect their positive impact on the organization’s performance, while weaknesses are rated lower (1 or 2) to indicate their detrimental effect. Conversely, in an EFE Matrix, opportunities and threats are rated (1 to 4) based on their potential impact and importance, regardless of their nature. This allows for a balanced assessment of external factors, giving a comprehensive view of how opportunities and threats affect the organization. 14. Compare the financial ratio analysis for VW on the four different websites identified in the chapter. Which site do you like best? Why? Answer: The Morningstar and Yahoo Finance websites offer information in an easy-to-use format. However, the Morningstar website is more comprehensive in the information that is made available for analytical purposes. Specifically, it provides a simple graphical user interface for comparing company performance to the industry average performance on a wide range of metrics. 15. Conduct a Google search for value chain analysis. In a two-page report, expand on the concepts presented in the chapter. Answer: Students will do an internet search on value chain and uses Porter’s Value Chain analys To expand on value chain analysis concepts: Value Chain Analysis Overview Value chain analysis, a concept introduced by Michael Porter, examines the sequence of activities within an organization that adds value to products or services. It helps identify areas where a company can gain a competitive advantage. The value chain consists of primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and support activities (firm infrastructure, human resource management, technology development, and procurement). Primary Activities 1. Inbound Logistics: This involves receiving, warehousing, and managing inventory efficiently. Companies strive to streamline processes to minimize costs and maximize quality, ensuring that raw materials are available for production. 2. Operations: This covers the transformation of inputs into finished products. Efficient operations improve product quality and reduce production costs, enhancing overall efficiency. 3. Outbound Logistics: This involves the distribution of products to customers. Effective outbound logistics ensure timely delivery and customer satisfaction, impacting the company’s reputation and operational costs. 4. Marketing and Sales: This focuses on promoting and selling products. Strategic marketing and effective sales practices help attract and retain customers, boosting revenue. 5. Service: Post-sale services, such as customer support and maintenance, are critical for customer satisfaction and loyalty, influencing repeat business and brand reputation. Support Activities 1. Firm Infrastructure: This includes organizational structure, management, and financial systems that support primary activities. Effective infrastructure facilitates smooth operations and decision-making. 2. Human Resource Management: This involves recruiting, training, and managing employees. Strong HR practices ensure a skilled workforce, driving productivity and innovation. 3. Technology Development: This covers research and development, technology upgrades, and innovation. Leveraging technology can enhance efficiency and create new value propositions. 4. Procurement: This involves sourcing raw materials and supplies. Strategic procurement practices can reduce costs and ensure the quality of inputs, impacting overall value creation. Conclusion Value chain analysis helps companies identify areas of strength and weakness within their operations. By optimizing each component of the value chain, organizations can enhance efficiency, reduce costs, and improve competitive positioning. Understanding and applying these concepts allows businesses to strategically invest in areas that drive growth and profitability. is to compile the report. 16. What competitive advantages would Amazon have over Wal-Mart stores in doing business outside the United States? Answer: In the assessment of Amazon’s competitive advantage over Wal-Mart Stores; students could consider the followings: • Vision & Mission • Analysis (Audit) – Internal and External Environment • Objectives – Establish long term objectives; generate, evaluate and select relevant strategies to achieve these objectives • Strategies – Implement; consider Management issues – Marketing, Finance, Technology, • Management - Measure and Evaluate Performance 17. How could the “process of performing an internal audit” differ across countries given varying management styles globally? Answer: 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, accounting/finance, production/operations, research and development, and management information systems operations. This will differ amongst countries as different countries have different management styles, demographics of people, different tax and laws, etc. 18. Why is sole reliance on financial ratios an ineffective means of deriving internal strengths and weaknesses? Answer: Financial ratios only reflect the financial health of the company as they are computed from an organization’s income statement and balance sheet. They do not take into considerations the other important aspects of the organization such as management, marketing management production/operations, research and development, and management information systems decisions. These factors constitute a firm’s internal strength and weakness 19. Give an example of two resources for a fast-food chain that you believe meet the three “empirical indicators” criteria. Answer: McDonald’s has all the physical resources, such as technology, raw material which are hard to imitate. Furthermore, McDonald’s has organization capabilities may not be easily substitutable. 20. Prepare a culture assessment table as presented in the chapter for a local business that you are familiar with. In other words, rate that business on all 15 culture criteria presented. What are the implications of your ratings on the strategic planning process within that firm? Answer: Depending on the local business chosen, student answers will vary. Students will have to consider the importance of the organization’s culture and its impact upon the business. Depending on the organization’s rating, it may have to emphasize other factors otherwise it may result in barriers of communication, lack of coordination and the inability to adapt to changing condition. 21. Why is human resource management particularly challenging for international firms? Answer: Home country HR culture may be very different from host country; hence, if home country management does not take into considerations the culture affecting a person’s attitude and mentality, there will not be a team spirit towards achieving organization goals. For example if there is an inability of spouses and children to adapt to new environment, it presents a major staffing problem in overseas transfers. Problems include premature terms, job performance declines, resignations, discharges, low morale, marital discord, and general discontent. 22. List some specific characteristics of advertisements in the wake of a global economic recession. Answer: Specific characteristics include: • Take direct aim at competitors, so leaner, meaner and to the point • Be less lavish and glamorous, requiring less production dollars to develop • Be short and sweet, mostly 10- and 15- second ads rather than 30+ seconds • ‘Make you feel good” or “put you in a good mood” • Be more pervasive such as on buses, elevators, cell phones and trucks • Appear less on web sites as banner ads become junk mail • Red will overtake the color orange as the most popular ad choice • More than ever emphasize low price and value versus rivals 23. How do changes in the value of the dollar affect pricing of products of global firms? Answer: As the value of the dollar increases; the global has the following options: • To raise prices in the local currency of a foreign country or risk losing sales and market share. • Keep price steady and face reduced profits. 24. Historically, what has been the attitude of technology firms toward paying dividends? Give some examples. Answer: Technology firms, historically, have given better dividends than other industry. However, with recession, similar to other industries, these firms reduced their dividends. Examples include Ericsson, Sherwin-Williams and Arcerl or Mittal. 25. Describe Singapore as a place to locate a business or begin doing business. Answer: Singapore is a highly developed and successful free market economy. It enjoys a remarkably open and corruption-free environment, stable prices, and a per capita GDP equal to that of the four big western economies. The economy depends heavily on exports, particularly in electronics and manufacturing. The government hopes to establish a new growth path that will be less vulnerable to the external business cycle and will continue efforts to establish Singapore as Southeast Asia's financial and high-tech hub. The Singapore Government is very open to foreign investments with no restrictions. 26. Visit the strategy club website, and describe the strategic planning products offered. Answer: The Strategy Club website has a wide range of strategic planning products available for use ranging from the free Excel template for the construction of a wide range of analyses ranging from S.W.O.T and BCG to EPS/EBIT and the evaluation of financial ratios. The website also makes available detailed descriptions of the academic work that supports the updates made in this edition of the text. Also of interest is a wide range of pedagogical tools designed to improve the students experience ranging from case study guidelines to examples of written case analyses among other useful tools. 27. Develop a value chain analysis for a large global firm and its primary rival firm. Answer: In developing a value chain analysis, students should use Porter’s Value Chain Analysis (CVA) in developing the CVA for such firms. CVA is the process whereby a firm determines the costs associated with organizational activities from purchasing of raw material to end product in marketing. 28. Identify four major strengths and four major weaknesses of your college or university. Rank each factor in terms of importance. Answer: The followings are examples of major strengths and weaknesses, however, students’ answers may vary. Strengths: 1. Academic Reputation (1) - Strong programs and faculty attract high-quality students and faculty. 2. Research Opportunities (2) - Robust research programs provide valuable experiences and contribute to academic advancements. 3. Campus Facilities (3) - Modern facilities and resources enhance the learning environment and student life. 4. Diverse Student Body (4) - A diverse community enriches the learning experience and prepares students for a global workforce. Weaknesses: 1. Funding Constraints (1) - Limited financial resources impact program expansion and faculty hiring. 2. Outdated Technology (2) - Some areas may lag in technological advancements, affecting learning and research. 3. Administrative Bureaucracy (3) - Complex administrative processes can hinder student services and responsiveness. 4. Limited Alumni Network (4) - A less developed alumni network may reduce mentorship and career opportunities for students. 29. Look up financial information about VW. Identify three financial ratios where the firm is weak and three financial ratios the firm is strong. Answer: Using information provided on the www.morningstar.com website (TICKER: VLKAF) on February 15 Volkswagen AG is weaker than the industry average in terms of its Net Margin % (VLKAF: 3.7% vs. Ind. Avg.: 4.3%), Return-on-Assets (VLKAF: 2.2% vs. Ind. Avg.: 3.3%), and Return-on-Equity (VLKAF: 8.4% vs. Ind. Avg.: 12.4%). However, Volkswagen AG is stronger than the industry average in terms of its Net Income Growth (VLKAF: 9.9% vs. Ind. Avg.: 1.0%), Operating Margin % (VLKAF: 6.3% vs. Ind. Avg.: 5.4%), and Debt-to-Equity ratio (VLKAF:. 7 vs. Ind. Avg.: 1.0). 30. What five cultural products do you feel are most important? Justify your selections. Answer: Students could refer to Table 6-1; page 193 “Example Cultural Products Defined” for their answers. Answers do vary, depending on the products selected. 1. Literature: Offers insights into the values, beliefs, and historical experiences of different cultures. Literature shapes and reflects societal norms and provides a deep understanding of cultural narratives. 2. Music: Acts as a universal language that bridges cultural divides, expressing emotions, traditions, and social issues. Music influences and reflects cultural identity and community values. 3. Art: Includes visual arts like painting and sculpture, which capture cultural aesthetics, historical events, and societal issues. Art serves as a means of cultural expression and preservation. 4. Cuisine: Reflects the history, geography, and cultural practices of a region. Cuisine provides a tangible way to experience and understand cultural diversity through flavors and food traditions. 5. Festivals: Celebrate cultural traditions and community values, fostering a sense of identity and continuity. Festivals highlight cultural heritage and offer opportunities for communal participation and cultural exchange. 31. For the company where you work or would like to work, rate the company on the 15 aspects of culture listed in the chapter. Answer: Students’ answers will vary, depending on the type of company the students would like to work in, and then rate on the 15 aspects. Company: Apple Inc. 1. Values and Beliefs - High: Emphasizes innovation, excellence, and customer focus. 2. Norms and Behaviors - High: Fosters a collaborative and high-performance work environment. 3. Leadership Style - High: Encourages visionary leadership and openness. 4. Communication Practices - High: Promotes transparency and open dialogue. 5. Decision-Making Processes - Moderate: Decisions often involve multiple levels of input. 6. Work Environment - High: Modern, creative, and dynamic workspace. 7. Reward Systems - High: Competitive salaries and stock options. 8. Employee Engagement - High: Strong emphasis on employee involvement and feedback. 9. Customer Orientation - High: Strong focus on delivering exceptional customer experiences. 10. Innovation and Risk-Taking - High: Encourages creativity and disruptive innovation. 11. Work-Life Balance - Moderate: Flexible work arrangements, though high expectations may affect balance. 12. Diversity and Inclusion - Moderate: Promotes diversity, but ongoing efforts are needed. 13. Ethics and Integrity - High: Committed to ethical practices and corporate responsibility. 14. Training and Development - High: Offers extensive training and career development opportunities. 15. Social Responsibility - High: Actively engages in environmental and social initiatives. 32. Develop a breakeven chart for a company that simultaneously lays off employees and closes facilities. Answer: In answering this, students should be conversant with Figure 6-6, Page 208 “A Before and After Breakeven Chart when Prices are Lowered and Fixed Costs are increase.” Breakeven Chart Development: 1. Identify Fixed Costs: Include costs associated with facility closures and severance packages. 2. Determine Variable Costs: Adjust for reduced operational costs due to layoffs. 3. Calculate New Revenue: Forecast reduced revenue based on decreased operational capacity. 4. Plot the Chart: • X-Axis: Number of units sold or revenue. • Y-Axis: Total Costs and Revenue. • Fixed Costs Line: Reflects the total of new fixed costs. • Total Costs Line: Includes both fixed and variable costs. • Revenue Line: Shows projected revenue. Analysis: The breakeven point is where the Revenue Line intersects the Total Costs Line, indicating the amount of revenue needed to cover new costs after layoffs and facility closures. 33. Financial ratio analysis should be conducted on three separate fronts. What are these fronts and which is most important? Answer: How has each ratio changed over time? What are the historical trends? How does each ratio compare to industry norms? How does each ratio compare with key competitors? Each financial ratio has its own importance. The first financial ratio enables the company to examine large percentage changes from one year to the next. Comparison of a firm’s ratios within a particular industry can be essential in determining strengths and weaknesses. When competition is very intensive, it is important to compare financial ratio with key competitors. 34. Explain breakeven analysis using three graphs that show changes in breakeven given: 1) a change in price, 2) a change in advertising expenditures, and 3) a change in labor costs. Answer: Students show use the three graphs to show the three changes in costs in two different aspects, the increase in costs, as well as the decrease in costs. 1. Change in Price: • Graph 1: Original Breakeven Analysis • X-Axis: Units Sold • Y-Axis: Costs and Revenue • Fixed Costs Line: Horizontal line showing constant fixed costs. • Total Costs Line: Starts at fixed costs and slopes upward with variable costs. • Revenue Line: Slopes upward based on original price per unit. • Breakeven Point: Intersection of Revenue Line and Total Costs Line. • Graph 2: Increase in Price • Revenue Line: Steeper slope due to higher selling price per unit. • New Breakeven Point: Moves to the left (fewer units needed to cover costs). • Graph 3: Decrease in Price • Revenue Line: Less steep slope due to lower selling price per unit. • New Breakeven Point: Moves to the right (more units needed to cover costs). 2. Change in Advertising Expenditures: • Graph 1: Original Breakeven Analysis • X-Axis: Units Sold • Y-Axis: Costs and Revenue • Fixed Costs Line: Horizontal line showing original fixed costs. • Total Costs Line: Starts at fixed costs and slopes upward with variable costs. • Revenue Line: Slopes upward based on price per unit. • Breakeven Point: Intersection of Revenue Line and Total Costs Line. • Graph 2: Increase in Advertising Expenditures • Fixed Costs Line: Moves upward to reflect higher advertising costs. • Total Costs Line: Starts at the new higher fixed costs. • Breakeven Point: Moves to the right (more units needed to cover higher fixed costs). • Graph 3: Decrease in Advertising Expenditures • Fixed Costs Line: Moves downward to reflect reduced advertising costs. • Total Costs Line: Starts at the new lower fixed costs. • Breakeven Point: Moves to the left (fewer units needed to cover lower fixed costs). 3. Change in Labor Costs: • Graph 1: Original Breakeven Analysis • X-Axis: Units Sold • Y-Axis: Costs and Revenue • Fixed Costs Line: Horizontal line showing original fixed costs. • Total Costs Line: Starts at fixed costs and slopes upward with variable costs. • Revenue Line: Slopes upward based on price per unit. • Breakeven Point: Intersection of Revenue Line and Total Costs Line. • Graph 2: Increase in Labor Costs • Total Costs Line: Becomes steeper due to higher variable costs per unit. • Breakeven Point: Moves to the right (more units needed to cover increased labor costs). • Graph 3: Decrease in Labor Costs • Total Costs Line: Becomes less steep due to lower variable costs per unit. • Breakeven Point: Moves to the left (fewer units needed to cover decreased labor costs). Summary: Breakeven analysis graphs visually demonstrate how changes in price, advertising expenditures, and labor costs affect the breakeven point. Increased prices, decreased advertising costs, and reduced labor costs generally lead to a lower breakeven point, while the opposite changes result in a higher breakeven point. 35. Why is breakeven analysis such an important strategic planning concept? Answer: Financial ratio analysis exemplifies the complexity of relationships among the functional areas of business. All parts of the organization as reflected in the Value Chain Analysis are interdependent on each other to achieve organization goals. 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 management information system. Hence, a breakeven analysis requires the coordination of all departments which is importance to strategic planning concept. 36. What are the basic functions of production/operations in a large manufacturing company? Why are these factors important in an internal strategic management audit? Answer: The basic functions consist of all those activities that transform inputs into goods and services. A manufacturing operation transforms or converts inputs such as raw materials, labor, capital, machines and facilities into finished goods and services. Production / operation activities often represent the largest part of an organization’s human and capital assets. The major costs of producing a product or service are incurred within operations so production/ operations are important in an internal strategic management audit. 37. Explain benchmarking. Answer: 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 requires measuring costs of value chain activities across an industry to determine “best practices” among competitors for the purpose of duplicating or improving those best practices. 38. Go to the www.strategyclub.com website and review the benefits of using the free excel template. Answer: The free Excel template is an incredibly useful tool-one that facilitates the compilation of data and facilitation of the range of analyses required to make rational strategic decisions based on hard data! While the template does not do the work (e.g. research, decision-making) for you it will save you significant time and energy! 39. For the Adidas Cohesion Case, what do you consider to be the company’s four major strengths and four major weaknesses? Answer: Students’ answers may vary, however, the strengths may be: • Official match ball – featuring only eight 3-D panels – ball perfectly round and more accurate; • Bantu language Zulu similar to the Adidas Jabulani • Ball contains eleven colors • 3 decade history of sponsoring largest sporting events Weaknesses: • Currency rates • Consumer discretionary spending • Tax rates • Restricted credits Strengths: 1. Strong Brand Equity: Adidas is recognized globally for its quality and innovation. 2. Innovative Product Lines: Continuous development in sportswear and technology enhances market appeal. 3. Effective Marketing: Strategic sponsorships and endorsements boost brand visibility. 4. Global Distribution Network: Extensive reach across diverse markets ensures wide availability. Weaknesses: 1. High Production Costs: Significant costs associated with maintaining high-quality standards. 2. Dependency on Third-Party Manufacturers: Supply chain disruptions can impact production and delivery. 3. Intense Competition: Faces fierce competition from other leading sportswear brands like Nike and Puma. 4. Fluctuating Consumer Preferences: Rapid changes in fashion trends can affect sales stability. 40. Prepare a financial ratio analysis for Adidas. Include comparative ratios for Adidas. Answer: In this answer, students could use Page 206; Table 6-6 “A Summary of Key Financial Ratios,” as the guidelines for preparing the financial ratio analysis. Financial Ratio Analysis for Adidas (2023): 1. Current Ratio: 1.5 • Industry Average: 1.8 • Interpretation: Adequate liquidity, but slightly below industry average. 2. Return on Equity (ROE): 15% • Industry Average: 14% • Interpretation: Higher than average, indicating strong profitability and efficient use of equity. 3. Debt-to-Equity Ratio: 0.6 • Industry Average: 0.7 • Interpretation: Lower than average, suggesting a more conservative approach to leverage. 4. Gross Margin: 50% • Industry Average: 48% • Interpretation: Higher than average, reflecting strong cost control and pricing power. 41. Explain how Adidas could utilize breakeven analysis. Answer: The breakeven point can be defined as the quantity of units that a firm must sell in order for its total revenue to equal its total cost. Students may refer to Page 207, Figure 6-4 “A Before and After Breakeven Chart When Prices Are Lowered.” Adidas could utilize breakeven analysis to determine the minimum sales volume needed to cover production and operational costs. By analyzing fixed and variable costs, Adidas can set pricing strategies, evaluate new product lines, and assess the financial impact of changes in marketing or production costs. This helps in making informed decisions to ensure profitability and optimize resource allocation. 42. Explain how top executives of Adidas could utilize Porter’s Five Forces Model to aid the firm in strategic planning. Answer: Porter’s Five Forces Model: • Rivalry among competing firms • Potential entry of new competitors • Potential development of substitute products • Bargaining power of suppliers • Bargaining power of consumers • Top executives of Adidas could use of the forces to analyse the external market and its internal strength and weaknesses 43. Since Adidas and Puma are based in the same city, could this close proximity benefit or hinder the two firms 1) cooperating with each other on R&D, or 2) gathering and assimilating competitive intelligence on the other firm? Answer: Students’ answers may vary. Both companies could cooperate and share R&D costs, which are huge costs; however, being too close to each other, their secrets may be more easily gathered by one or the other. 1. Cooperating on R&D: Close proximity could benefit both firms by fostering collaboration on joint projects, sharing research facilities, and leveraging local expertise. However, it might also create competitive tension and complicate intellectual property protection. 2. Gathering Competitive Intelligence: Proximity can facilitate easier and more frequent monitoring of each other’s activities, strategies, and market movements. This can enhance competitive intelligence but also increase the risk of direct competitive confrontations and espionage. 44. Since Adidas is so divisional, how could the company best develop a corporate IFE Matrix for various divisional IFE Matrices? Answer: Students should based their answers on Porter’s Value Chain Analysis. To develop a corporate IFE Matrix for Adidas, considering its divisional structure, the company can follow these steps: 1. Aggregate Divisional IFE Matrices: Compile individual IFE Matrices from each division (e.g., Adidas Performance, Originals, and Lifestyle). Each divisional matrix evaluates internal strengths and weaknesses specific to its market and operations. 2. Weight and Score Divisions: Assign weights to the factors based on their relevance to the overall corporate strategy. Score each division based on its performance in these areas. 3. Calculate Overall Corporate Scores: Aggregate the scores from the divisional matrices to compute a weighted average for the entire corporation. This involves summing up the weighted scores from all divisions. 4. Create Corporate IFE Matrix: Develop the corporate IFE Matrix using the aggregated data. This matrix should reflect the overall internal strategic position of Adidas, highlighting strengths and weaknesses across all divisions and guiding corporate-level strategy. By consolidating divisional insights, Adidas can effectively assess its overall internal environment and make strategic decisions to enhance corporate performance. 45. When is it more important to capitalize on strengths than improve on weaknesses in strategic planning? Answer: Students’ answers may vary; when there is a new entry, company may capitalize on its strength to combat the competitors. It’s more important to capitalize on strengths than improve on weaknesses when: 1. Competitive Advantage: Leveraging strengths can provide a significant competitive edge and differentiate the company in the market. 2. Strategic Focus: The company’s strengths align with its strategic goals, maximizing impact and resource efficiency. 3. Limited Resources: When resources are scarce, focusing on strengths can yield higher returns than investing in weaknesses. 4. Market Opportunities: Exploiting strengths allows the company to seize emerging opportunities more effectively and quickly. 46. Explain what 20 internal factors is a recommended number to include in an IFE Matrix, rather than 10 or 40 total. Answer: Like the EFE Matrix, an IFE Matrix should include from 10–20 key factors. The number of factors has no effects upon the range of total weighted scores because the weights always sum to 10. Including around 20 internal factors in an IFE Matrix is recommended because: 1. Balance: It provides a comprehensive view of an organization’s strengths and weaknesses without overwhelming complexity. 2. Focus: A manageable number allows for a clear, focused assessment of the most impactful internal factors. 3. Relevance: Ensures the factors are significant and relevant, preventing dilution of important issues by excessive detail. 4. Actionability: Facilitates practical analysis and decision-making, making it easier to develop strategic initiatives based on a concise set of key factors. 47. Do you think the RBV view or the I/O theorists view is more important/accurate in performing a strategic analysis? What would be important implications for a business? Answer: There are two different schools of thoughts however RBV vies continued to grow in popularity and continues to seek a better understanding of the relationship between resources and sustained competitive advantage. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 6A: DEVELOP A CORPORATE IFE MATRIX FOR VOLKSWAGEN GROUP Purpose Volkswagen Group is featured in the opening chapter case as a firm that engages in excellent strategic planning. VW has four major geographic business segments. Each of these divisions of VW would prepare their own IFE Matrices, which would be assimilated to develop an overall corporate IFE Matrix. This exercise gives you practice developing divisional IFE Matrices and assimilating those into an overall corporate IFE Matrix. Instructions Step 1: Review VW’s most recent Annual Report in regards to the company’s four geographic business segments, which are North America, South America, Asia-Pacific, and Europe. Step 2: Review the latest S&P Industry Survey for companies that produce and market automobiles. Step 3: Develop a divisional IFE Matrix for each of VW’s business segments. Step 4: Assimilate your divisional IFE Matrices into an overall corporate IFE Matrix for VW. Teaching Notes In developing a Corporate IFE Matrix; the following factors are to be considered: 1. List key internal factors – use a total of 10 to 20 internal factors; include strengths and weaknesses. List strengths first followed by weaknesses. Be specific and use percentages, ratios and comparative numbers. 2. Assign weight to the factors, from 0.0 (not important) to 1.0 (all important) to each factor. Regardless whether a key factor is an internal strength or weakness, factors have the greatest effect on organizational performance should be given the highest weight. 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). Strengths must receive a 3 or 4 rating and weaknesses must receive a 1 or 2 rating. Ratings are 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. When a key internal factor is both strength and a weakness, the factor should be included twice in the IFE Matrix. ASSURANCE OF LEARNING EXERCISE 6B: SHOULD VW DEPLOY MORE RESOURCES OR LESS OUTSIDE OF THE USA? Purpose As indicated in the opening chapter boxed insert, VW receives more revenue from outside its home base of Europe than from inside Europe. This exercise gives you practice analyzing this domestic versus global revenue base so that more effective strategies can be formulated and implemented. Instructions Step 1: Go the VW’s website and review the company’s most recent Annual Report. Be careful to note the financial, management, and marketing information available for each geographic region. Let all regions outside Europe, for purposes of this exercise, be referred to as Global, and Europe be referred to as domestic for VW. Step 2: Go to www.finance.yahoo.com and review the last 45 days of Headlines for VW. Take note of public information related to VW as well as to GM, Ford, Honda, and Toyota. Step 3: Prepare a 3-page executive summary to reveal whether you feel VW should be placing more or less emphasis on operations outside of Europe. Provide supporting tables, #’s, ratios, and narrative. Teaching Notes In answering this, students will review The Resource – Based View (RBV) – internal resources are more important for a firm than external factors; as well Industrial Organization Review (I/O) review – external factors are more important than internal factors in achieving competitive advantage. ASSURANCE OF LEARNING EXERCISE 6C: APPLY BREAKEVEN ANALYSIS Purpose Breakeven analysis is one of the simplest yet underused analytical tools in management. It helps to provide a dynamic view of the relationships between sales, costs and profits. A better understanding of breakeven analysis can enable an organization to formulate and implement strategies more effectively. This exercise will show you how to calculate breakeven points mathematically. The formula for calculating breakeven point is BE Quantity = TFC/P – VC. In other words, the Quantity (Q) or units of product that need to be sold for a firm to breakeven is Total Fixed Costs divided by (Price per Unit 2 Variable Costs per Unit). Instructions Step 1: Lets say an airplane company has Fixed Costs of $100 million and Variable Costs per Unit of $2 million. Planes sell for $3 million each. What is the company’s breakeven point in terms of the number of planes that need to be sold just to breakeven? Step 2: If the airplane company wants to make a profit of $99 million annually, how many planes will it have to sell? Step 3: If the company can sell 200 airplanes in a year, how much annual profit will the firm make? Teaching Notes The breakeven point can be defined as the quantity of unites that a firm must sell in order for its total revenues (TR) to equal its total cost (TC). In this exercise, students will examine the Figure 6-4; page 207, to develop the chart for Breakeven Analysis. ASSURANCE OF LEARNING EXERCISE 6D: PERFORMING A FINANCIAL RATIO ANALYSIS FOR ADIDAS AG Purpose Financial ratio analysis is one of the best techniques for identifying and evaluating internal strengths and weaknesses. Potential investors and current shareholders look closely at firms’ financial ratios, making detailed comparisons to industry averages and to previous periods of time. Financial ratio analysis provides vital input information for developing an IFE Matrix. Instructions Step 1: On a separate sheet of paper, write down numbers 1 to 20. Referring to adidas AG’s income statement and balance sheet, calculate 20 financial ratios for 2013. Step 2: In a second column, indicate whether you consider each ratio to be a strength, weakness, or neutral factor for adidas. Teaching Notes Students will have to understand of the basic types of financial ratios: 1. Liquidity ratios – measure a firm’s ability to meet maturing short-term obligations. 2. Leverage ratios – measure the extent to which a firm has been financed b debt. 3. Activity ratios – measure how effectively a firm using its resources 4. Profitability ratios – measure management’s overall effectiveness as shown by the returns generated on sales and investments. From these ratios, students are able to identify the strength, weakness or neutral factor. ASSURANCE OF LEARNING EXERCISE 6E: CONSTRUCTING AN IFE MATRIX FOR ADIDAS AG Purpose This exercise will give you experience developing an IFE Matrix. Identifying and prioritizing factors to include in an IFE Matrix fosters communication among functional and divisional managers. Preparing an IFE Matrix allows human resource, marketing, production/operations, finance/accounting, R&D, and management information systems managers to articulate their concerns and thoughts regarding the business condition of the firm. This results in an improved collective understanding of the business. Instructions Step 1: Join with two other individuals to form a three-person team. Develop a IFE Matrix for adidas. Be sure to include information on Reebok and TaylorMade. Step 2: Compare your team’s IFE Matrix to other teams’ IFE Matrices. Discuss any major differences. Step 3: What strategies do you think would allow adidas to capitalize on its major strengths? What strategies would allow adidas to improve upon its major weaknesses? Teaching Notes In constructing an IFE Matrix, students will use the following information: 1. List key internal factors – use a total of 10 to 20 internal factors; include strengths and weaknesses. List strengths first followed by weaknesses. Be specific and use percentages, ratios and comparative numbers. 2. Assign weight to the factors, from 0.0 (not important) to 1.0 (all important) to each factor. Regardless whether a key factor is an internal strength or weakness, factors have the greatest effect on organizational performance should be given the highest weight. 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). Strengths must receive a 3 or 4 rating and weaknesses must receive a 1 or 2 rating. Ratings are 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. 6. When a key internal factor is both strength and a weakness, the factor should be included twice in the IFE Matrix. Each group may present different strategies of Adidas. ASSURANCE OF LEARNING EXERCISE 6F: ANALYZING YOUR COLLEGE OR UNIVERSITY’S INTERNAL STRATEGIC SITUATION Purpose This exercise is excellent for doing together as a class. Instructions As a class, determine your college or university’s major internal strengths and weaknesses. List 10 strengths and 10 weaknesses. Then, get everyone in class to rank order their factors with 1 being most important and 10 being least important. Then, gather up everyone’s paper, count the numbers, and in that manner create a prioritized list of the key internal strengths and weaknesses facing your college. Teaching Notes Students should bear in mind the following: 1. Process of doing an internal audit closely parallels the process of performing an external audit. 2. Internal audit requires gathering and assimilating information about College’s management, marketing, finance, operations and management information system. Prioritize key factors so that the College’s most important strengths and weaknesses can be determined. Solution Manual for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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