WHY ARE THE LADIES SHUNNING COACH?
3. Hardcopy Reference Books for Financial Ratios in Most Libraries
a. Robert Morris Associate’s Annual Statement Studies: An excellent source of financial ratio information.
b. Dun & Bradstreet’s Industry Norms & Key Business Ratios: An excellent source of financial ratio information.
Source: Based on a variety of sources.
Chapter Summary
Management, marketing, finance/accounting, production/operations, R&D, and MIS represent the core operations of most businesses and the source of competitive advantages. A strategic- management audit of a firm’s internal operations is vital to organizational health. Many com- panies still prefer to be judged solely on their bottom-line performance. However, it is essential that strategists identify and evaluate internal strengths and weaknesses to effectively formulate and choose among alternative strategies. the Internal Factor Evaluation Matrix, coupled with the Competitive Profile Matrix, the External Factor Evaluation Matrix, and clear statements of vision and mission provide the basic information needed to successfully formulate competitive strategies. the process of performing an internal audit represents an opportunity for managers and employees throughout the organization to participate in determining the future of the firm.
Involvement in the process can energize and mobilize managers and employees.
Understanding both external and internal factors and relationships among them (see SWOt analysis in Chapter 6) is the key to effective strategy formulation. Because both external and internal factors continually change, strategists seek to identify and take advantage of positive changes and buffer against negative changes in a continuing effort to gain and sustain a firm’s competitive advantage. this is the essence and challenge of strategic management, and often- times survival of the firm hinges on this work.
MyManagementLab ®
To complete the problems with the , go to EOC Discussion Questions in the MyLab.
Key terms and Concepts
activity ratios (p. 106) benchmarking (p. 114) breakeven (BE) point (p. 107) capacity utilization (p. 109) capital budgeting (p. 104) collaborative machines (p. 110) controlling (p. 99)
core competence (p. 114) cost/benefit analysis (p. 102) cultural products (p. 94) customer analysis (p. 100) distinctive competencies (p. 92) distribution (p. 102)
dividend decisions (p. 104) downstream activities (p. 119) empirical indicators (p. 93) financial ratio analysis (p. 103) financing decision (p. 104) fixed costs (FC) (p. 107)
functions of finance/accounting (p. 103) functions of management (p. 96) functions of marketing (p. 100) growth ratios (p. 106)
human resource (HR) management (p. 98)
internal audit (p. 92)
Internal Factor Evaluation (IFE) Matrix (p. 116) investment decision (p. 104)
leverage ratios (p. 106) liquidity ratios (p. 106)
management information system (MIS) (p. 112) marketing research (p. 102)
motivating (p. 98)
organizational culture (p. 94) organizing (p. 97)
planning (p. 96) pricing (p. 101)
product and service planning (p. 101) production/operations function (p. 109) profitability ratios (p. 106)
research and development (R&D) (p. 111) resource-based view (RBV) (p. 93) selling (p. 100)
staffing (p. 98) synergy (p. 97) test marketing (p. 101) upstream activities (p. 119) value chain analysis (VCA) (p. 113) variable costs (VC) (p. 108)
Issues for Review and Discussion
4-1. the primary means for gaining and sustaining competi- tive advantages for most companies are shifting down- stream. Explain and discuss this statement.
4-2. In analyzing big data, there is a shift from focusing largely on aggregates or averages to also focusing on outliers, because outliers oftentimes reveal (predict) critical innovations, trends, disruptions, and revolutions on the horizon. Explain and discuss this statement.
4-3. What are some limitations of financial ratio analysis?
4-4. Does RBV theory determine diversification targets?
Explain and discuss.
4-5. true or False: Recent research reveals that the most effective marketing methods for firms with fewer than 500 employees is the company website (50%). Explain.
4-6. What are “collaborative machines”?
4-7. Identify some excellent online resources for finding financial ratio information.
4-8. Marketing is becoming much more technical, as are the duties and responsibilities of chief marketing officers (CMOs). Give four examples of increasing technical aspects of marketing.
4-9. Is a capacity utilization rate of 50 percent good? Why?
4-10. If Netflix increases its advertising expenses by 30 percent while keeping its price and variable costs the same, does that mean the company’s breakeven point will increase 30 percent? Show this calculation for a hypothetical firm.
4-11. What are the limitations of breakeven analysis?
4-12. In the Joy’s Daycare breakeven example in the chapter, how would a $1,000 annual advertising expenditure impact the business breakeven point?
4-13. Explain cost/benefit analysis.
4-14. Explain why communication may be the most impor- tant word in management. What do you think is the most important word in marketing? In finance? In accounting?
4-15. Discuss how the nature of advertisements has changed in the last few years.
4-16. Explain why it is best not to have more than 30 percent of the factors in an IFE Matrix be financial ratios.
4-17. List three firms you are familiar with and give a distinc- tive competence for each firm.
4-18. Give some key reasons why it is essential to prioritize strengths and weaknesses.
4-19. Why may it be easier in performing an internal assess- ment to develop a list of 80 strengths and weaknesses than to decide on the top 20 to use in formulating strategies?
4-20. think of an organization with which you are familiar.
List three resources of that entity that are empirical indicators.
4-21. think of an organization with which you are famil- iar. Rate that entity’s organizational culture on the 15 example dimensions listed in table 4-2.
4-22. If you and a partner were going to visit a foreign country where you have never been before, how much planning would you do ahead of time? What benefit would you expect that planning to provide?
4-23. Even though planning is considered the foundation of management, why do you think it is commonly the task that managers neglect most?
4-24. Are you more organized than the person sitting beside you in class? If not, what problems could that pres- ent in terms of your performance and rank in the class? How analogous is this situation to rival companies?
4-25. List the three ways that financial ratios should be com- pared or used. Which of the three comparisons do you feel is most important? Why?
4-26. Illustrate how value chain activities can become core competencies and eventually distinctive competencies.
Give an example for an organization with which you are familiar.
4-27. In an IFE Matrix, would it be advantageous to list your strengths, and then your weaknesses, in order of decreasing “weight”? Why?
4-28. In an IFE Matrix, a critic may say there is no signifi- cant difference between a “weight” of 0.08 and 0.06.
How would you respond? What is the mathematical difference?
4-29. Why are so many firms raising their dividend payout amounts?
4-30. When someone says dividends paid are double taxed, to what are they referring?
4-31. Draw a breakeven chart to illustrate a drop in labor costs.
4-32. Draw a breakeven chart to illustrate an increase in advertising expenses.
4-33. Draw a breakeven chart to illustrate closing stores.
4-34. Draw a breakeven chart to illustrate lowering price.
4-35. Explain why prioritizing the relative importance of strengths and weaknesses in an IFE Matrix is an important strategic-management activity.
4-36. How can delegation of authority contribute to effective strategic management?
4-37. Which of the three basic functions of finance and accounting do you feel is most important in a small electronics manufacturing concern? Justify your position.
4-38. Explain how you would motivate managers and employees to implement a major new strategy.
4-39. Why do you think production and operations managers often are not directly involved in strategy-formulation activities? Why can this be a major organizational weakness?
4-40. Give two examples of staffing strengths and two exam- ples of staffing weaknesses of an organization with which you are familiar.
4-41. Define, compare, and contrast weights vs. ratings in an EFE Matrix vs. an IFE Matrix.
4-42. If a firm has zero debt in its capital structure, is that always an organizational strength? Why or why not?
4-43. After conducting an internal audit, a firm discovers a total of 100 strengths and 100 weaknesses. What proce- dures then could be used to determine the most impor- tant of these? Why is it important to reduce the total number of key factors?
4-44. Why do you believe cultural products affect all the functions of business?
4-45. Do you think cultural products affect strategy formula- tion, implementation, or evaluation the most? Why?
4-46. Explain the difference between data and information in terms of each being useful to strategists.
4-47. What are the most important characteristics of an effec- tive management information system?
4-48. Do you agree or disagree with the resource-based view theorists that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage? Explain your and their position.
4-49. Define and discuss empirical indicators.
4-50. Define and explain value chain analysis.
4-51. List five financial ratios that may be used by your uni- versity to monitor operations.
4-52. Explain benchmarking.
MyManagementLab ®
Go to the Assignments section of your MyLab to complete these writing exercises.
4-53. List three ways that financial ratios should be compared or used. Which of the three comparisons do you feel is most important? Why?
4-54. Would you ever pay out dividends when your firm’s annual net profit is negative? Why or why not? What effect could this have on a firm’s strategies?
AssurAnce of LeArning exercises
exercise 4A
Apply Breakeven Analysis
Purpose
Breakeven analysis is one of the simplest yet underused analytical tools in management. It helps pro- vide a dynamic view of the relationships among 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 break even is total fixed costs (tFC) divided by (Price per Unit – Variable Costs per Unit).
Instructions
Step 1 Let’s 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 break even?
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?
exercise 4B
Compare Netflix with Redbox
Purpose
Showcased at the beginning of this chapter, Netflix and rival Expedia rely almost exclusively on their website for business. thus, it is obviously essential in this industry to have the most effective, effi- cient, and user-friendly website possible. this exercise gives you practice in identifying key strengths and weaknesses for two rival firms.
Instructions
Step 1 Visit the Netflix and the Redbox websites and study their features, prices, ease of naviga- tion, user friendliness, and general layout.
Step 2 Which of the two companies’ websites reveal most effectively “the best movies” for the week? What are the best movies being rented this week?
Step 3 Prepare an analysis and report for Netflix’s website manager to reveal how her company can improve its performance by improving its website.
exercise 4c
Perform a Financial Ratio Analysis for Hershey Company
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 analyses provide vital input information for developing an IFE Matrix.
Instructions
Step 1 Using the resources listed in table 4-10, find as many Hershey financial ratios as possible.
Record your sources. Report your research to your classmates and your professor.
exercise 4D
Construct an IFE Matrix for Hershey Company
Purpose
this exercise will give you experience in developing an IFE Matrix. Identifying and prioritizing fac- tors to include in an IFE Matrix fosters communication among functional and divisional managers.
Preparing an IFE Matrix allows human resource, marketing, production and operations, finance and accounting, R&D, and MIS 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 team IFE Matrix for Hershey. Use information from Exercise 1B on page 35.
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 Hershey to capitalize on its major strengths? What strategies would allow Hershey to improve on its major weaknesses?
exercise 4e
Construct an IFE Matrix for Your University
Purpose
this exercise gives you the opportunity to evaluate your university’s major strengths and weaknesses.
As will become clearer in the next chapter, an organization’s strategies are largely based on striving to take advantage of strengths and improving on weaknesses.
Instructions
Step 1 Join with two other individuals to form a three-person team. Develop a team IFE Matrix for your university. You may use the strengths and weaknesses determined in Exercise 1D on page 36.
Step 2 What was your team’s total weighted score?
Step 3 Compare your team’s IFE Matrix to other teams’ IFE matrices. Discuss any major differences.
Step 4 What strategies do you think would allow your university to capitalize on its major strengths?
What strategies would allow your university to improve on its major weaknesses?
exercise 4f
Applying Research-Based View (RBV) theory
Purpose
this exercise reveals how a firm can utilize RBV theory to identify, gain, and sustain competitive advantages.
Instructions
Step 1 Develop a “Resources” by “Empirical Indicators” Matrix. Place on the left side 10 key re- sources of a firm with which you are familiar. Across the top are the three empirical indica- tors: Rare, Nonimitatable, and Nonsubstitutable. Along the far bottom and far right of your matrix, add a row and a column to record “total Summed Values.”
Step 2 Within your matrix, rate each resource on each indicator on a 1 to 5 scale, where 1 is excep- tionally low and 5 is exceptionally high in terms that the resource is Rare, Nonimitatable, and/or Nonsubstitutable.
Step 3 Sum the rows and columns to determine the extent that each resource and empirical indica- tor is being utilized effectively.
Step 4 Discuss implications of your analysis.
(Note to Professors—See the Chapter IM for an additional, excellent exercise for this chapter)
mini-cAse on BuffALo wiLD wings, inc. (BwLD)
WHAt DO OUtStANDING MANAGEMENt, MARKEtING, AND FINANCE EXECUtIVES DO tOGEtHER?
One answer to this question is that they work for Buffalo Wild Wings (BWW). Founded in 1982 and headquartered in Minneapolis, Minnesota, BWW is a fast-growing owner, operator, and franchisor of restaurants featuring Buffalo- and New York-style chicken wings and more. the menu offers 21 signature sauces and seasonings with flavor sensations ranging from Sweet BBQ to Blazin’. Each res- taurant features an extensive multimedia system for watching favorite sporting events. the company has received hundreds of “Best Wings” and “Best Sports Bar” awards from across the country. there are currently more than 1,100 Buffalo Wild Wings locations in the United States, Canada, and Mexico.
Management, marketing, and finance executives at BWW recently celebrated the college foot- ball bowl season by sponsoring the inaugural BWW Citrus Bowl on New Year’s Day. the com- pany launched the “Million Dollar Bowl Pick ’Em Challenge,” whereby from December 8 through December 19, guests can visit the GameBreak gaming platform in BWW restaurants and, on their mobile devices or desktop, pick the winners of all 39 college football bowl games. If a guest picks all games correctly, he or she will win $1,000,000, and if there is no million-dollar winner, the player with the most correct picks will win $10,000. Also, as a promotion, customers can access the GameBreak app and play a game called “Gametime Pick ’Em.” this game asks fans to predict the winner of any bowl game yet to be played for a chance to win B-Dubs prize packs, which include a $125 BWW gift card and additional Dr Pepper merchandise.
During the recent BWW Citrus Bowl, when the Missouri tigers played the Minnesota Golden Gophers, thousands of fans made their local Buffalo Wild Wings their headquarters to “tablegate” and enjoy the game with flavorful wings, cold beverages, and an all-day, in-restaurant GameBreak Live competition. Guests competed to score the most points on GameBreak Live—earning triple points during the BWW Citrus Bowl (1 pm to 4 pm Et). the guest earning the most points that day won a grand prize trip for four to the 2016 BWW Citrus Bowl, while those who came in 2nd through 75th received a $50 BWW gift card.
Buffalo Wild Wings had significant brand presence during the game—for example, 100 kids from the local Orlando Boys and Girls Clubs received tickets to the game to be a part of the action. Between quarters during the game, BWW presented its annual contribution to their charitable partner, the Boys and Girls Club of America. Buffalo Wild Wings President and CEO, Sally Smith, presented the win- ning team with the newly designed BWW Citrus Bowl trophy.
Source: timolina/Fotolia
Questions
1. From a management perspective, do you think the college football expenditures by BWW are warranted? Why?
2. From a marketing perspective, do you think the college football expenditures by BWW are warranted? Why?
3. From a finance perspective, do you think the college football expenditures by BWW are warranted? Why?
4. Management, marketing, and finance executives do not always agree, so how could differences in opinion be resolved?
5. As BWW spends more on advertising, does its breakeven point go up or down? Illustrate.
6. How does BWW’s approach to marketing compare to recent trends regarding how to best spend advertising dollars?
Source: Company documents and a variety of sources.
Current Readings
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Davenport, thomas H. “What Businesses Can Learn from Sports Analytics.” MIT Sloan Management Review 55, no.
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George, Gerard, Martine R. Haas, and Alex Pentland. “Big Data and Management.” Academy of Management Journal (April 2014): 321–338.
Hayashi, Alden M. “thriving in a Big Data World.” MIT Sloan Management Review 55, no. 2 (2014): 35–39.
Howard, Dana, W. Glynn Mangold, and tim Johnston.
“Managing Your Social Campaign Strategy Using Facebook, twitter, Instagram, Youtube & Pinterest: An Interview with Dana Howard, Social Media Marketing Manager.” Business Horizons 57, no. 5 (2014): 657–665.
Kiron, David, Pamela Kirk Prentice, and Renee Boucher Ferguson. “Raising the Bar with Analytics.” MIT Sloan Management Review 55, no. 2 (2014): 29–33.
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Endnotes
1. Reprinted by permission of the publisher from
“Integrating Strength–Weakness Analysis into Strategic Planning,” by William King, Journal of Business Research 2, no. 4: 481. Copyright 1983 by Elsevier Science Publishing Co., Inc.
2. Robert Grant, “the Resource-Based theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review (Spring 1991): 116.
3. J. B. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17 (1991): 99–120;
J. B. Barney, “the Resource-Based theory of the Firm,”
Organizational Science 7 (1996): 469; J. B. Barney, “Is the Resource-Based ‘View’ a Useful Perspective for Strategic Management Research? Yes.” Academy of Management Review 26, no. 1 (2001): 41–56.
4. Edgar Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985), 9.
5. John Lorsch, “Managing Culture: the Invisible Barrier to Strategic Change,” California Management Review 28, no.
2 (1986): 95–109.
6. Y. Allarie and M. Firsirotu, “How to Implement Radical Strategies in Large Organizations,” Sloan Management Review (Spring 1985): 19.