Transcript
Unit 2
Defining strategic intent: Vision, Mission, Business definition, Goals
and Objectives.
STRATEGIC INTENT
The foundation for the strategic management is laid by the hierarchy of strategic intent. The concept of
strategic intent makes clear WHAT AN ORGANISATION STANDS FOR, Harvard Business Review,
1989 described the concept in its infancy. Hamed and Prahalad coined the term strategic intent. A few
aspects about strategic intent are as follows:
It is an obession with an organization.
This obession may even be out of proportion to their resources and capabilities.
Introduction to Strategic Management
It envisions a derived leadership position and establishes the criterion, the organization will use to chart
its progress.
It involves the following:
Creating and Communicating a vision
Designing a mission statement
Defining the business
Setting objectives
Vision serves the purpose of stating what an organization wishes to achieve in the long run.
Mission relates an organization to society.
Business explains the business of an organization in terms of customer needs, customer groups and
alternative technologies.
Objectives state what is to be achieved in a given time period. The strategic intent concept also
encompasses an active management process that includes focussing the organization‟s attention on the
essence of winning. The concept of stretch and leverage is relevant in this context.
VISION It is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become. A
few definitions are as follows: Kotter “description of something (an organization, corporate culture, a
business, a technology, an activity) in the future. The definition itself is comprehensive and states
clearly the futuristic position. Miller and Dess defined vision as the “category of intentions that are
broad, all inclusive and forward thinking”
The definition lays stress on the following:
Broad and all inclusive intentions;
Vision is forward thinking process.
A few important aspects regarding vision are as follows:
It is more of a dream than articulated idea.
It is an aspiration of organization. Organization has to strive and exert to
achieve it.
It is powerful motivator to action.
Vision articulates the position of an organization which it may attain in distant future.
Strategic Framework Envisioning
This is the process of creating vision. It is a difficult and complex task. A well conceived vision must
have: Core Ideology ,Envisioned Future
Core Ideology will remain unchanged. It has the enduring character. It consists of core values and core
purpose. Core values are essential tenets of an organization. Core purpose is related to the reasoning of
the existence of an organization.
Envisioned Future will basically deal with following:
l The long term objectives of the organization.
l Clear description of articulated future.
Advantages of having a Vision
A few benefits accruing to an organization having a vision are as follows:
They foster experimentation.
Vision promotes long term thinking.
Visions foster risk taking.
They can be used for the benefit of people.
They make organizations competitive, original and unique.
Good vision represent integrity.
They are inspiring and motivating to people working in an organization.
Example
Caterpillar
Be the global leader in customer value.
Nike
1960s: Crush Adidas
Current: To be the number one athletic company in the world
Boeing
1950: Become the dominant player in commercial aircraft and bring the world into the jet age.
Current: People working together as one global enterprise for aerospace leadership
MISSION The mission statements stage the role that organization plays in society. It is one of the popular
philosophical issue which is being looked into business managers since last two decades.
Definition
A few definitions of mission are as follows:
Hynger and Wheelen “ purpose or reason for the organization‟s existence.
David F. Harvey states “ A mission provides the basis of awareness of a sense of purpose, the
competitive environment, degree to which the firm‟s mission fits its capabilities and the opportunities
which the government offers.
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Strategic Framework Thompson states mission as the “ essential purpose of the organization,
concerning
particularly why it is in existence, the nature of the business it is in, and the customers it seeks to serve
and satisfy.
The above definition reveals the following:
i) It is the essential purpose of organization.
ii) It answers “ why the organization is in existence”.
iii) It is the basis of awareness of a sense of purpose.
iv) It fits its capabilities and the opportunities which government offers.
Nature
A few points regarding nature of mission statement are as follows:
It gives social reasoning. It specifies the role which the organization plays in society. It
is the basic reason for existence.
It is philosophical and visionary and relates to top management values. It has long term
perspective.
It legitimises societal existence.
It has stylistic objectives. It reflects corporate philosophy, identity, character and image
of organization.
Characteristics
In order to be effective, a mission statement should posses the following characteristics.
i) A mission statement should be realistic and achievable. Impossible statements do not motivate people.
Aims should be developed in such a way so that may become feasible.
ii) It should neither be too broad nor be too narrow. If it is broad, it will become meaningless. A
narrower mission statement restricts the activities of organization. The mission statement should be
precise.
iii) A mission statement should not be ambiguous. It must be clear for action. Highly philosophical
statements do not give clarity.
iv) A mission statement should be distinct. If it is not distinct, it will not have any impact. Copied
mission statements do not create any impression.
v) It should have societal linkage. Linking the organization to society will build long term perspective in
a better way.
vi) It should not be static. To cope up with ever changing environment, dynamic aspects be looked into.
vii) It should be motivating for members of the organization and of society. The employees of the
organization may enthuse themselves with mission statement.
viii) The mission statement should indicate the process of accomplishing objectives. The clues to
achieve the mission will be guiding force.
Examples of Mission Statement
A few examples of mission statement (academically not accepted) are as follows:
India Today “ The complete new magazine”.
Bajaj Auto, “Value for Money for Years”.
HCL, “To be a world class Competitor”.
HMT, “Timekeepers of the Nation”.
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OBJECTIVES AND GOALS
Objectives refer to the ultimate end results which are to be accomplished by the overall plan over a
specified period of time. The vision, mission and business definition determine the business philosophy to
be adopted in the long run. The goals and objectives are set to achieve them.
Meaning
Objectives are openended attributes denoting a future state or out come and are stated in general
terms.
When the objectives are stated in specific terms, they become goals to be attained.
In strategic management, sometimes, a different viewpoint is taken.
Goals denote a broad category of financial and non-financial issues that a firm sets for itself.
Objectives are the ends that state specifically how the goals shall be achieved.
It is to be noted that objectives are the manifestation of goals whether specifically stated or not.
Introduction to Strategic Management
Difference between objectives and goals
The points of difference between the two are as follows:
The goals are broad while objectives are specific.
The goals are set for a relatively longer period of time.
Goals are more influenced by external environment.
Goals are not quantified while objectives are quantified.
Broadly, it is more convenient to use one term rather than both. The difference between the two is simply
a matter of degree and it may vary widely.
Need for Establishing Objectives
The following points specifically emphasize the need for establishing objectives:
Objectives provide yardstick to measure performance of a department or SBU or organization.
Objectives serve as a motivating force. All people work to achieve the objectives.
Objectives help the organization to pursue its vision and mission. Long term perspective is translated in
short-term goals.
Objectives define the relationship of organization with internal and external environment.
Objectives provide a basis for decision-making. All decisions taken at all levels of management are
oriented towards accomplishment of objectives.
What Objectives should be set?
According to Peter Druker, objectives should be set in the area of market standing, innovation roductivity,
physical and financial resources, profitability, manager performance and development, worker
performance and attitude and public responsibility. Researchers have identified the following areas for
setting objectives:
Profit Objective: It is the most important objective for any business enterprise. In order to earn a profit,
an enterprise has to set multiple objectives in key result areas such as market share, new product
development, quality of service etc. Ackoff calls them performance objectives.
Marketing Objective may be expressed as: “to increase market share to 20 percent within five years” or
“to increase total sales by 10 percent annually”. They are related to a functional area.
Productivity Objective may be expressed in terms of ratio of input to output. This objective may also be
stated in terms of cost per unit of production.
Product Objective may be expressed in terms of product development, product diversification, branding
etc.
Social Objective may be described in terms of social orientation. It may be tree plantation or provision of
drinking water or development of parks or setting up of community centers.
Financial Objective relates to cash flow, debt equity ratio, working capital, new issues, stock exchange
operations, collection periods, debt instruments etc. For example a company may state to decrease the
collection period to 30 days by the end of this year.
Strategic Framework Human resource Objective may be described in terms of absenteeism, turnover,
number of grievances, strikes and lockouts etc. An example may be “to reduce absenteeism to less then
10 percent by the end of six months”.
Characteristics of Objectives
The following are the characteristics of corporate objectives:
i) They form a hierarchy. It begins with broad statement of vision and mission and ends with key specific
goals. These objectives are made achievable at the lower level.
ii) It is impossible to identify even one major objective that could cover all possible relationships and
needs. Organizational problems and relationship cover a multiplicity of variables and cannot be integrated
into one objectives. They may be economic objectives, social objectives, political objectives etc. Hence,
multiplicity of objectives forces the strategists to balance those diverse interests.
iii) A specific time horizon must be laid for effective objectives. This timeframe helps the strategists to
fix targets.
iv) Objectives must be within reach and is also challenging for the employees.
If objectives set are beyond the reach of managers, they will adopt a defeatist attitude. Attainable
objectives act as a motivator in the organization.
v) Objectives should be understandable. Clarity and simple language should be the hallmarks. Vague
and ambiguous objectives may lead to wrong course of action.
vi) Objectives must be concrete. For that they need to be quantified. Measurable objectives help the
strategists to monitor the performance in a better way.
vii) There are many constrants internal as well as external which have to be considered in objective
setting. As different objectives compete for scarce resources, objectives should be set within constraints.
Environmental Appraisal—Concept of environment, components of
environment (Economic, legal, social, political and technological).
Environmental scanning techniques- ETOP, QUEST and SWOT
(TOWS).
Organizations do not exist in a vacuum. Many factors enter into the forming of a company's
strategy. Each exists within a complex network of environmental forces.
These forces, conditions, situations, events, and relationships over which the organization has little
control are referred to collectively as the organization's environment.
In general terms, environment can be broken down into three areas:
The macroenvironment, or general environment (remote environment) - that is, economic, social,
political and legal systems in the country; operating environment - that is, competitors, markets,
customers, regulatory agencies, and stakeholders; and the internal environment - that is,
employees, managers, union, and board directors.
In formulating a strategy, the strategic decision makers must analyze conditions internal to the
organization as well as conditions in the external environment, which are described in the following
sections.
Analysis Of The Macroenvironment
An organizations ignores the macroenvironment at its own great peril. Many studies support the concept
that there are needs to be a link between the organization's strategic decisions and its environment.
All organizations are affected by four macroenvironmental forces: political-legal, economic,
technological, and social. An organizations ignores the macroenvironment at its own great peril. Many
studies support the concept that there are needs to be a link between the organization's strategic decisions
and its environment.
All organizations are affected by four macroenvironmental forces: political-legal, economic,
technological, and social.
Political And Regulatory Forces
Political-legal forces include the outcomes of elections, legislation, and court judgments, as well as the
decisions rendered by various commissions and agencies. The political sector of the environment presents
actual and potential restriction on the way an organization operates.
Among the most important government actions are: regulation, taxation, expenditure, takeover
(creating a crown corporation, and privatization. The differences among local, national, and
international subsectors of the political environment are often quite dramatic. Political instability in some
areas makes the very form of government subject to revolutionary changes.
In addition the basic system of government and the laws the system promulgates, the political
environment might include such issues as monitoring government policy toward income tax, relative
influence of unions, and policies concerning utilization of natural resources.
Political activity my also have a significant impact on three additional governmental functions
influencing a firm's external environment:
* Supplier function. Government decisions regarding creation and accessibility of private businesses to
government-owned natural resources and national stockpiles of agricultural products will profoundly
affect the viability of some firm's strategies.
* Customer function. Government demand for products and services can create, sustain, enhance, or
eliminate many market opportunities.
* Competitor function. The government can operate as an almost unbeatable competitor in the
marketplace, Therefore, knowledge of government strategies can help a firm to avoid unfavorable
confrontation with government as a competitor
Economic forces
Economic forces refer to the nature and direction of the economy in which business operates. Economic
factors have a tremendous impact on business firms. The general state of the economy (e.g., depression,
recession, recovery, or prosperity), interest rate, stage of the economic cycle, balance of payments,
monetary policy, fiscal policy, are key variables in corporate investment, employment, and pricing
decisions.
The impact of growth or decline in gross national product and increases or decreases in interest rates,
inflation, and the value of the dollar are considered as prime examples of significant impact on business
operations.
To asses the local situation, an organization might seek information concerning the economic base and
future of the region and the effects of this outlook on wage rates, disposable income, unemployment, and
the transportation and commercial base. The state of world economy is most critical for organizations
operating in such areas.
Technological Forces
Technological forces influence organizations in several ways. A technological innovation can have a
sudden and dramatic effect on the environment of a firm. First, technological developments can
significantly alter the demand for an organization's or industry's products or services.
Technological change can decimate existing businesses and even entire industries, since its shifts demand
from one product to another. Moreover, changes in technology can affect a firm's operations as well its
products and services.
These changes might affect processing methods, raw materials, and service delivery. In international
business, one country's use of new technological developments can make another country's products
overpriced and noncompetitive. In general,
Technological trends include not only the glamorous invention that revolutionizes our lives, but also
the gradual painstaking improvements in methods, in materials, in design, in application,
unemployment, and the transportation and commercial base. They diffusion into new industries
and efficiency" (John Argenti).
The rate of technological change varies considerably from one industry to another. In electronics, for
example change is rapid and constant, but in furniture manufacturing, change is slower and more gradual.
Changing technology can offer major opportunities for improving goal achievements or threaten the
existence of the firm. Therefore, "the key concerns in the technological environment involve building the
organizational capability to (1) forecast and identify relevant developments - both within and beyond the
industry, (2) assess the impact of these developments on existing operations, and (3) define opportunities"
(Mark C. Baetz and Paul W. Beamish).
These capabilities should result in the creation of a technological strategy. Technological strategy deals
with "choices in technology, product design and development, sources of technology and R&D
management and funding" (R. Burgeleman and M. Maidique).
The effect that changing technology can have upon the competition in an industry is also dealt with other
chapters. Technological forecasting can help protect and improve the profitability of firms in growing
industries.
Technological forces influence organizations in several ways. A technological innovation can have a
sudden and dramatic effect on the environment of a firm. First, technological developments can
significantly alter the demand for an organization's or industry's products or services.
Technological change can decimate existing businesses and even entire industries, since its shifts demand
from one product to another. Moreover, changes in technology can affect a firm's operations as well its
products and services.
These changes might affect processing methods, raw materials, and service delivery. In international
business, one country's use of new technological developments can make another country's
products overpriced and noncompetitive. In general,
Technological trends include not only the glamorous invention that revolutionizes our lives, but also the
gradual painstaking improvements in methods, in materials, in design, in application, unemployment, and
the transportation and commercial base. They diffusion into new industries and efficiency" (John
Argenti).
The rate of technological change varies considerably from one industry to another. In electronics, for
example change is rapid and constant, but in furniture manufacturing, change is slower and more
gradual.
Changing technology can offer major opportunities for improving goal achievements or threaten the
existence of the firm. Therefore, "the key concerns in the technological environment involve building
the organizational capability to (1) forecast and identify relevant developments - both within and
beyond the industry, (2) assess the impact of these developments on existing operations, and (3)
define opportunities" (Mark C. Baetz and Paul W. Beamish).
These capabilities should result in the creation of a technological strategy. Technological strategy deals
with "choices in technology, product design and development, sources of technology and R&D
management and funding" (R. Burgeleman and M. Maidique).
The effect that changing technology can have upon the competition in an industry is also dealt with other
chapters. Technological forecasting can help protect and improve the profitability of firms in growing
industries.
Social Forces Social forces include traditions, values, societal trends, consumer psychology, and a society's expectations
of business.
The following are some of the key concerns in the social environment: ecology (e.g., global
warming, pollution); demographics (e.g., population growth rates, aging work force in
industrialized countries, high educational requirements); quality of life (e.g., education, safety,
health care, standard of living); and noneconomic activities (e.g., charities).
Moreover, social issues can quickly become political and even legal issues. Social forces are often most
important because of their effect on people's behaviour. For an organization to survive, the product or
service must be wanted, thus consumer behaviour is considered as a separate environmental behaviour.
Behaviour factors also affect organisations internally, that is, the employees and management.
A society's expectations of business present other opportunities and constraints. These expectations
emanate from diverse groups referred to as stakeholders. Stakeholders include a firm's owners
(stockholders), members of the board of directors, managers and operating employees, suppliers,
creditors, distributors, customers, and other interest groups - at the broadest level, stakeholders include the
general public.
Determining the exact impact of social forces on an organization is difficult at best. However, assessing
the changing values, attitudes, and demographic characteristics of an organization's customers is an
essential element in establishing organizational objectives.
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats.
By definition, Strengths (S) and Weaknesses (W) are considered to be internal
factors over which you have some measure of control. Also, by definition,
Opportunities (O) and Threats (T) are considered to be external factors over
which you have essentially no control.
SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the
business and its environment. Its key purpose is to identify the strategies that will create a firm specific
business model that will best align an organization‟s resources and capabilities to the requirements of the
environment in which the firm operates. In other words, it is the foundation for evaluating the internal
potential and limitations and the probable/likely opportunities and threats from the external environment.
It views all positive and negative factors inside and outside the firm that affect the success. A consistent
study of the environment in which the firm operates helps in forecasting/predicting the changing trends
and also helps in including them in the decision-making process of the organization.
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below-
Strengths- Strengths are the qualities that enable us to accomplish the organization‟s mission. These are
the basis on which continued success can be made and continued/sustained. Strengths can be either
tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and
qualities your employees possess (individually and as a team) and the distinct features that give your
organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of
an organization, which includes human competencies, process capabilities, financial resources, products
and services, customer goodwill and brand loyalty. Examples of organizational strengths are huge
financial resources, broad product line, no debt, committed employees, etc.
Weaknesses- Weaknesses are the qualities that prevent us from accomplishing our mission and achieving
our full potential. These weaknesses deteriorate influences on the organizational success and growth.
Weaknesses are the factors which do not meet the standards we feel they should meet. Weaknesses in an
organization may be depreciating machinery, insufficient research and development facilities, narrow
product range, poor decision-making, etc. Weaknesses are controllable. They must be minimized and
eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other
examples of organizational weaknesses are huge debts, high employee turnover, complex decision
making process, narrow product range, large wastage of raw materials, etc.
Opportunities- Opportunities are presented by the environment within which our organization operates.
These arise when an organization can take benefit of conditions in its environment to plan and execute
strategies that enable it to become more profitable. Organizations can gain competitive advantage by
making use of opportunities. Organization should be careful and recognize the opportunities and grasp
them whenever they arise. Selecting the targets that will best serve the clients while getting desired results
is a difficult task. Opportunities may arise from market, competition, industry/government and
technology. Increasing demand for telecommunications accompanied by deregulation is a great
opportunity for new firms to enter telecom sector and compete with existing firms for revenue.
Threats- Threats arise when conditions in external environment jeopardize the reliability and profitability
of the organization‟s business. They compound the vulnerability when they relate to the weaknesses.
Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. Examples of
threats are - unrest among employees; ever changing technology; increasing competition leading to excess
capacity, price wars and reducing industry profits; etc.
Advantages of SWOT Analysis
SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a
great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses
build on their strengths, correct their weakness and protect against internal weaknesses and external
threats. They also keep a watch on their overall business environment and recognize and exploit new
opportunities faster than its competitors.
SWOT Analysis helps in strategic planning in following manner-
It is a source of information for strategic planning.
Builds organization‟s strengths.
Reverse its weaknesses.
Maximize its response to opportunities.
Overcome organization‟s threats.
It helps in identifying core competencies of the firm.
It helps in setting of objectives for strategic planning.
It helps in knowing past, present and future so that by using past and current data, future plans can be
chalked out.
SWOT Analysis provide information that helps in synchronizing the firm‟s resources and capabilities
with the competitive environment in which the firm operates.SWOT ANALYSIS FRAMEWORK
Limitations of SWOT Analysis
SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very
simple because of which the organizations might overlook certain key strategic contact which may occur.
Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very
subjective as there is great degree of uncertainty in market. SWOT Analysis does stress upon the
significance of these four aspects, but it does not tell how an organization can identify these aspects for
itself.
There are certain limitations of SWOT Analysis which are not in control of management.
These include-
Price increase;
Inputs/raw materials;
Government legislation;
Economic environment;
Searching a new market for the product which is not having overseas market due to import restrictions;
etc.
Internal limitations may include-
Insufficient research and development facilities;
Faulty products due to poor quality control;
Poor industrial relations;
Lack of skilled and efficient labour; etc
Internal Analysis
Internal Appraisal – The internal environment, organizational capabilities in
various functional areas and Strategic Advantage Profile. Methods and
techniques used for organisational appraisal (Value chain analysis, Financial
and non financial analysis, historical analysis, Industry standards and
benchmarking, Balanced scorecard and key factor rating). Identification of
Critical Success Factors (CSF).Case study
The Value Chain
To better understand the activities through which a firm develops a competitive advantage and creates
shareholder value, it is useful to separate the business system into a series of value-generating activities
referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a
generic value chain model that comprises a sequence of activities found to be common to a wide range of
firms. Porter identified primary and support activities as shown in the following diagram:
The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities,
thereby resulting in a profit margin.
The primary value chain activities are:
Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to
manufacturing as they are required.
Operations: the processes of transforming inputs into finished products and services.
Outbound Logistics: the warehousing and distribution of finished goods.
Marketing & Sales: the identification of customer needs and the generation of sales.
Service: the support of customers after the products and services are sold to them.
These primary activities are supported by:
The infrastructure of the firm: organizational structure, control systems, company culture, etc.
Human resource management: employee recruiting, hiring, training, development, and compensation.
Technology development: technologies to support value-creating activities.
Procurement: purchasing inputs such as materials, supplies, and equipment.
The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so
that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the
value chain. It is in these activities that a firm has the opportunity to generate superior value. A
competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better
differentiation.
Technology and the Value Chain
Because technology is employed to some degree in every value creating activity, changes in technology
can impact competitive advantage by incrementally changing the activities themselves or by making
possible new configurations of the value chain.
Various technologies are used in both primary value activities and support activities:
Inbound Logistics Technologies
Transportation
Material handling
Material storage
Communications
Testing
Information systems
Operations Technologies
Process
Materials
Machine tools
Material handling
Packaging
Maintenance
Testing
Building design & operation
Information systems
Outbound Logistics Technologies
Transportation
Material handling
Packaging
Communications
Information systems
Marketing & Sales Technologies
Media
Audio/video
Communications
Information systems
Service Technologies
Testing
Communications
Information systems
QUANTITATIVE ASSESSMENT As mentioned above, financial data is only the most basic and universally accepted approach in assessing
a firm. However we must understand that such an analysis is only the beginning for a thorough internal
analysis. It is often found useful to go beyond the financial analysis to fully quantify organization‟s
strengths and weaknesses and therefore it is discussed in detail here.
Financial Quantitative Analysis Traditionally financial analysis emphasizes on the study of financial ratios which is commonly known as
ratio analysis.
i) Profitability ratios provide information regarding a firm‟s overall economic performance.
ii) Liquidity ratios measure a firm‟s capacity to meet its short term financial obligations
iii) Leverage ratios indicate a firm‟s financial risk that is the relative proposition of its debt to its equity.
The first enables to assess the financial returns of a firm and the associated risk with it is assessed by its
financial liabilities or debt. The latter is measured by liquidity or leverage ratios.
iv) Activity ratios reflect a firm‟s efficient or inefficient use of its resources. The operational part is
analyzed by the activity ratios. Inspite of their wide acceptability, financial analysis does not provide
insights into aspects like development time for new products or brand recall value which are also
important in understanding strengths and weaknesses from other perspectives. Few of such non-financial
quantitative meaures can be listed as – number of patents; quality assessment; new product development;
customer complaints; employees turnover, etc.
The following gives a brief list of different ratios used under Ratio Analysis by managers for their
organization. However, for their right kind of interpretation and analytical references you are
recommended to refer to Chapter on Ratio
Analysis from texts on Financial Management. Ratio analysis evaluates a set of financial ratios, looks at trends in those ratios and compares them to the
average values for other companies in the industry.
1. Liquidity Ratio – measures the ability of a company to meet its imminent financial obligations
known as liquidity. This indicates how the company is assured in meeting its obligations and is
protected from any technical insolvency.
Two such ratios are:
Current Ratios: Current Assets/Current Liabilities Quick Ratios: Current Assets – Inventory/Current
Liabilities
2. Activity Ratio – measures organizations‟ efficiency in generating sales and making collections.
Inventory Turnover = Sales/Inventory
Average Collection Period = Accounts Receivables/Sales Per day
Total Asset Turnover = Sales/Total Sales
Fixed Asset Turnover = Sales/Net Fixed Assets
3. Leverage Ratio – indicates the amount of financing provided by the owners.
These ratios evaluate default risk in debt payments.
Debt ration = Total Liabilities/Total Assets
Debt on Equity = Total Liability/Total Common Equity
4. Profitability Ratio – the ability to generate profits is a key measure of the
managerial success. Some important profit ratios are –
Profit Margins = Net Income/Sales
Return on Assets = Net Income/Assets
Return on Equity = Net Income/Total Common Equity
QUALITATIVE ASSESSMENT Often it has been found that quantitative analysis alone is not sufficient to understand any organization‟s
strengths and weaknesses. Particularly the factors related to human resources, organizational culture and
its temperament towards creativity and innovation are few which can be understood only through
qualitative information. Qualitative information also supplements quantitative data in uderstanding basic
concepts of what customers value and how they feel about a given product. The exhibit provides you with
few relevant guiding points to assess a broad range of important qualitative factors. A detailed study of
qualitative assessment has been taken up in Block V.
COMPARISON STANDARDS In order to arrive at some meaningful conclusion regarding strengths and weaknesses, the above analysis
should be supported by appropriate standards for comparison, for example, Industry norms, Historical
performance and Benchmarks. These are three commonly accepted comparison standards which are often
found useful for internal analysis by the organizations.
Industry Norms
The industry norms compare the performance of an organization in the same industry or sector against a
set of agreed performance indicators. Data on industry norms are widely available and can be found from
several published sources. Using such data and comparing an organization against others in its industry
helps the organization
Strategic Analysis understand its true position. In case of the healthcare sector, such indicators can be
mortality index, doctors per 100 beds, nurses per 100 beds, waiting time per inpatient‟s treatment, waiting
time per outpatient treatment, patient‟s trust in doctors. The danger of industry norms comparison is that
the whole industry may be performing badly and losing out competitively to other industries. Another
problem with such comparisons may also arise as the boundaries of industries are coming down through
competitive activity and industry convergence. For example publishing houses are evolving into multiple
media groups working around the infotainment industry.
Moreover talking of industry norms, it is an average indictor and organizations must endeavour in beating
them rather meeting them. In order to understand how they have been doing so it is always suggested that
industry norm comparisons are supplemented with analysis on organization‟s own historical performance.
Historical Comparisons
Historical comparisons look at the performance of an organization in relation to previous years in order to
identify significant changes. Organizations must endeavour to improve their performance over time in
order to remain competitive and over power the performance of comeptitors. It must try to beat its own
best in future, which would call for continuous improvement. However in case of the historical
comparison it also entails scope for complacency since the organizations compare their rate of
improvement over years with that of competitors and it is possible that the latter may itself be operating at
a relatively lower average. Such historical trends can even be misleading when they entail changes
made on a very small base.
Benchmarking Benchmarking compares an organization‟s performance against „best in class‟ performance wherever that
is found. Managers seek out the best examples of a particular practice in other companies as part of an
effort to improve the corresponding practice in their own firm. When the search for best practices is
limited to competitors, the process is called competitive benchmarking. Other times managers may seek
out the best practices regardless of what industry they are in, called functional benchmarking.
Benchmarking provides the motivation annd the means many firms need to seriously rethink how their
organizations perform certain tasks. A comprehensive internal analysis of an organization‟s strengths and
weaknesses must however utilize all three types of comprison standards. For instance, an organization
can study industry norms to assess where it stands in terms of number of complaints generated regarding
defects during guarantee period of a product. Then it could benchmark the organization that is best at
controlling the defects. Based on the benchmarking results it could implement major new programmes
and track improvements in these programmes over time using, historical comparisons.
The Balance Scorecard This concept offers a well-rounded evaluation that views the firm from different complimentary
perspectives as is shown below:
The four perspectives of the Balanced Scorecard
Financial E V A / Profitability / Growth
Customer Differentiation / Cost / Quick Response
Operations Product Development / Demand Management / Order Fulfillment
Organizational Leadership / Organizational Learning / Ability to change
Source: Adapted from Miller Allex, Strategic Management
Looking at the flow chart we can very well understand that performance as assessed in one perspective
supports performance in other areas and therefore we need to consider all four perspectives in carrying
out a complete internal analysis. We will discuss this in detail in Block V.
Methods of assessing internal strengths and weaknesss Having understood the two frameworks which
guide managers for assessing any organization‟s strengths and weaknesses, now we will discuss
quantitative and qualitative factors, which help in the internal assessment of any organization. However,
since every organizations‟ creation of wealth is the primary goal, any assessment has to focus on
measuring the variety of means that contribute to the creation of wealth. The creation of wealth depends
largely on providing superior value for customers and this is possible when the organizations have
efficient and effective operations with necessary capabilities. The required capabilities depend on the
employees, their skills and motivation levels. Normally any quantitative analysis starts with financial
analysis, yet in order to have an in-depth assessment of a firm‟s strengths and weaknesses, managers go
deeper into the information available on other areas as well which contribute to the firm‟s financial
performance. Some of these require qualitative measurement while others may require qualitative
assessment.
THE CRITICAL SUCCESS FACTOR (CSF) Critical success factors are those which contribute to organization‟s success in a competitive environment
and therefore the organization needs to improve on them since poor results may lead to declining
performance. Organizations depending on the environment they operate in and their own internal
conditions can identify relevant critical success factors. However, literature on strategy suggests few
general sources
Internal Analysis of critical success factors that have been identified based on empirical research. They
are as follows:
Industry Characteristics: Industry specific critical success factors are factors critical for the performance
of an industry. For example in hospitality industry excellent and customized service, wide presence and
an excellent booking and reservation system is critical. Similarly for an airline industry fuel efficiency,
load factors and an excellent reservation system are critical.
Competitive Position: Critical success factors for a firm may also be determined by its relative position
with respect to its competitors. In some instances, industry is dominated by few large players and their
actions lead to determining the critical success factors for the industry which smaller players have to
ensure for their success. For example, for the pathological laboratory centers earlier the CSF was
authentic, hygienic and scientific testing facilities until few big players added service features like door to
door sample collection or home delivery of reports. Very soon approachability and ease became the
additional CSFs for the players. General environment viewed from any of the dimensions may determine
the CSFs. Most simply put in years of drought, availability of water is at premium and having access to
assured source of water can become the critical success factor for many industries like tanneries etc. For
the same industry considering
Environmental norms, adhering to anti pollution standards becomes critical success factor.
Organizational Developments – On many occasions developments within the organizations, force internal
considerations to become temporary critical success factors
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