Chapter 4

The Internal Assessment

 Chapter Outline

The Nature of an Internal Audit

The Resource-Based View (RBV)

Integrating Strategy & Culture

Chapter Outline (cont’d)

Management

Marketing

Opportunity Analysis
Chapter Outline (cont’d)

Finance/Accounting

Production/Operations

Research & Development

 Chapter Outline (cont’d)

Management Information Systems

Value Chain Analysis

The Internal Factor Evaluation (IFE) Matrix

Internal Assessment

The biggest levers you’ve got to change a

company are strategy, structure, and culture. If I
could pick two, I’d pick strategy and culture. –
Wayne Leonard, CEO, Entergy

When you are ignorant of the enemy

but know yourself, your chances of winning or
losing are equal. If ignorant both of your enemy
and of yourself, you are sure to
be defeated in every battle. -
Sun Tzu
Nature of an Internal Audit

Functional Areas of Business have

-- Strengths

-- Weaknesses
Nature of an Internal Audit

Basis for Objectives & Strategies

• Internal strengths/weaknesses
• External opportunities/threats
• Clear statement of Vision & mission
Key Internal Forces

Functional Business Areas:

Vary by organization
Divisions have differing strengths &
weaknesses
Key Internal Forces

Distinctive Competencies:

Firm’s strengths that cannot be easily

matched or imitated by competitors
Key Internal Forces

Distinctive Competencies:

Building competitive advantage involves

taking advantage of distinctive
competencies
Key Internal Forces

Distinctive Competencies:
Strategies designed to improve on a
firm’s weaknesses and turn to strengths
and maybe even into distinctive
competencies.
Internal Audit

Parallels process of external audit

•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management information Systems
Internal Audit

-Involvement in performing an internal

strategic-management audit provides
vehicle for understanding nature and
effect of decisions in other functional
business areas of the firm
- Make it a SHARED PROCESS
Internal Audit

Key to Organizational Success

Coordination & understanding among

managers from all functional areas i.e.
marketing, accounting, finance, HR etc
Internal Audit

Functional Relationships

Number and complexity increases

relative to organization size
Internal Audit

Exemplifies/illustrates complexity of
relationships among functional areas of
the business
Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important

than external factors.
Internal resources are most important for
achieving and sustaining Competitive
Advantage.
Resource Based View (RBV)

3 All Encompassing Categories

1. Physical resources
2. Human resources
3. Organizational resources
Resource Based View (RBV)

For a resource to be valuable, it must

have these empirical/tested Indicators

 Rare
 Hard to imitate
 Not easily substitutable
Integrating Strategy & Culture

Organizational Culture

Pattern of behavior developed by an

organization as it learns to cope with its
problem of external adaptation and internal
integration and that has worked well enough
to be considered valid and to be taught to
new members as the correct way to
perceive, think, and feel
Integrating Strategy & Culture

Organizational Culture

 Resistant to change may represent:

 Strength
 Weakness
Integrating Strategy & Culture

Values

Legends Beliefs

Heroes
Cultural Rites
Products

Symbols Rituals
Myths
Copyright 2007 Prentice Hall Ch 4 -24
Integrating Strategy & Culture

Organizational Culture Can Inhibit

Strategic Management

 Miss external changes due to strongly

held beliefs
 Natural tendency to “hold the course”
even during times of strategic change
 U.S. Versus Foreign Cultures

To successfully compete in world markets, U.S.

managers must obtain a better knowledge of
historical, cultural, and religious forces that
motivate and drive people in other countries.
Copyright 2007 Prentice Hall Ch 4 -27
Copyright 2007 Prentice Hall Ch 4 -28
Management

Functions of Management

1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Management

Planning

 Beginning of management process

 Bridge between present & future
 Improves likelihood of attaining
desired results
Management

Forecasting

Establishing objectives

Planning Devising strategies

Developing policies

Setting goals
Management

Organizing

 Achieves coordinated effort

 Defines task & authority relationships
 Departmentalization
 Delegation of authority
Management

Organizational design
Job specialization
Job descriptions
Job specifications
Organizing Span of control
Unity of command
Coordination
Job design
Job analysis
Management

Motivating

 Influencing to accomplish specific

objectives
 Communication – major component
Management

Leadership
Communication
Work groups
Job enrichment
Motivating
Job satisfaction
Needs fulfillment
Organizational change
Morale
Management - Motivating
Self-Transcendence

Copyright 2007 Prentice Hall Ch 4 -37

Management

Staffing

 Personnel management
 Human resources management
Management

Wage & salary admin.

Employee benefits
Interviewing
Hiring
Staffing
Discharging
Training
Management development
Labor relations
Management

Controlling

 Establishing performance standards

 Ensure actual operations conform to
planned operations
 Taking corrective actions
Management

Quality
Financial
Sales
Inventory
Controlling
Expense
Analysis of variance
Rewards
Sanctions
Management Audit Checklist

••Does
Does the
the firm
firm use
use strategic
strategic management
management
concepts?
concepts?
••Are
Are objectives/goals
objectives/goals measurable?
measurable? Well
Well
communicated?
communicated?
••Do
Do managers
managers at at all
all levels
levels plan
plan
effectively?
effectively?
Management Audit Checklist

••Do
Do managers
managers delegate
delegate well?
well?
••Is
Is the
the organization’s
organization’s structure
structure
appropriate?
appropriate?
••Are
Are job
job descriptions
descriptions clear?
clear?
••Are
Are job
job specifications
specifications clear?
clear?
••Is
Is employee
employee morale
morale high?
high?
Management Audit Checklist

••Is
Is employee
employee absenteeism
absenteeism low?
low?
••Is
Is employee
employee turnover
turnover low?
low?
••Are
Are the
the reward
reward mechanisms
mechanisms effective?
effective?
••Are
Are the
the organization’s
organization’s control
control
mechanisms
mechanisms effective?
effective?
Marketing

1. Defining
2. Anticipating
3. Creating
4. Fulfilling
For Customer Needs/Wants for
Products/Services
Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies
Marketing

Advertising
Sales
Promotion
Selling
Products/Services Publicity
Sales force management
Customer relations
Dealer relations
Marketing

Test marketing
Brand positioning
Devising warrantees
Planning
Product/Service Packaging
Product features/options
Product style
Quality
Marketing

Forward integration
Discounts
Credit terms
Pricing
Condition of sale
Markups
Costs
Unit pricing
Marketing

Warehousing
Channels
Coverage
Distribution Retail site locations
Sales territories
Inventory levels
Transportation
Marketing

Data collection
Marketing Research Data input
Data analysis
Support business functions
Marketing

Assessing costs

Assessing benefits
Opportunity
Analysis
Assessing risks

Cost/benefit/risk analysis
Marketing
Opportunity Analysis
1. Are markets segmented effectively?
2. Is the organization positioned well among
competitors?
3. Has the firm’s market share been
increasing?
4. Are the distribution channels reliable &
cost effective?
5. Is the sales force effective?
Marketing
Opportunity Analysis
6. Does the firm conduct market research?
7. Are product quality & customer service
good?
8. Are the firm’s products/services priced
appropriately?
9. Does the firm have effective promotion,
advertising, & publicity strategies?
Marketing
Opportunity Analysis

10. Are the marketing planning & budgeting

effective?
11. Do the firm’s marketing managers have
adequate experience and training?
Finance/Accounting

 Determining financial strengths &

weaknesses is key to strategy
formation
Finance/Accounting
Finance/Accounting Functions

1. Investment decision (Capital budgeting)

2. Financing decision
3. Dividend decision
Basic Financial Ratios

Firm’s ability to meet its

short-term obligations

Liquidity Ratios Ratios

Current ratio
Quick (or acid test) ratio
Basic Financial Ratios

Extent of debt financing

Ratios
Leverage Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest earned
Basic Financial Ratios

Effective use of firm’s

resources
Activity Ratios
Ratios

Inventory-turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment
Profitability Ratios
Ratios

Gross profit margin

Operating profit margin
Net profit margin
Return on total assets (ROA)
Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment
Profitability Ratios
(cont’d) Ratios

Return on stockholders equity

Earnings per share
Price-earnings ratio
Basic Financial Ratios

Firm’s ability to maintain

economic position, in
Growth Ratios the growth of the
economy

Ratios

Earnings per share

Dividends per share
Trend Analysis

Copyright 2007 Prentice Hall Ch 4 -65

Finance/Accounting Audit

••Where
Where isis the
the firm
firm strong/weak
strong/weak as as
indicated
indicated byby financial
financial ratio
ratio analysis?
analysis?
••Can
Can the
the firm
firm raise
raise short-term
short-term capital
capital as
as
needed?
needed?
••Can
Can the
the firm
firm raise
raise long-term
long-term capital
capital as
as
needed
needed through
through debt debt and/or
and/or equity?
equity?
Finance/Accounting Audit

••Does
Does the
the firm
firm have
have sufficient
sufficient working
working
capital?
capital?
••Are
Are capital
capital budgeting
budgeting procedures
procedures
effective?
effective?
••Are
Are dividend
dividend payout
payout policies
policies reasonable?
reasonable?
••Are
Are the
the firm’s
firm’s financial
financial managers
managers
experienced
experienced && well well trained?
trained?
Finance/Accounting Audit

Effective
Effective Financial
Financial Analysis
Analysis Requires:
Requires:
1.
1. Analysis
Analysis of
of how
how the
the ratios
ratios have
have
changed
changed over
over time
time
2.
2. How
How the
the ratios
ratios compare
compare to to industry
industry
norms
norms
3.
3. How
How the
the ratios
ratios compare
compare with
with key
key
competitors
competitors
Production/Operations

Production/Operations Functions: TRANSFORM

inputs into goods and services.
The basic functional decisions made are
 Process
 Capacity
 Inventory
 Workforce
 Quality
Production/Operations

Facility design
Technology selection
Facility layout
Process Process flow analysis
Facility location
Line balancing
Process control
Production/Operations

Forecasting
Facilities planning
Capacity Aggregate planning
Scheduling
Capacity planning
Queuing analysis
Production/Operations

Raw materials
Inventory Work in process
Finished goods
Materials handling
Production/Operations

Job design
Work measurement
Workforce Job enrichment
Work standards
Motivation techniques
Production/Operations

Quality control
Sampling
Quality Testing
Quality assurance
Cost Control
Production/Operations Audit

••Are
Are suppliers
suppliers of of materials,
materials, parts,
parts, etc.
etc.
reliable
reliable and
and reasonable?
reasonable?
••Are
Are facilities,
facilities, equipment
equipment && machinery
machinery inin
good
good condition?
condition?
••Are
Are inventory-control
inventory-control policies
policies and
and
procedures
procedures effective?
effective?
Production/Operations Audit

••Are
Are quality-control
quality-control policies
policies && procedures
procedures
effective?
effective?
••Are
Are facilities,
facilities, resources,
resources, and
and markets
markets
strategically
strategically located?
located?
••Does
Does the
the firm
firm have
have technological
technological
competencies?
competencies?
Research & Development

Research & Development Functions

 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs
Research & Development
Financing as many
projects as possible

Use percent-of-sales
method
R&D Budgets
Budgeting relative to
competitors

How many successful

new products are
needed
Research & Development Audit

••Are
Are the
the R&D
R&D facilities
facilities adequate?
adequate?
••IfIf R&D
R&D is
is outsourced,
outsourced, is is itit cost
cost effective?
effective?
••Are
Are the
the R&D
R&D personnel
personnel wellwell qualified?
qualified?
••Are
Are R&D
R&D resources
resources allocated
allocated effectively?
effectively?
Research & Development Audit

••Are
Are MIS
MIS and
and computer
computer systems
systems
adequate?
adequate?
••Is
Is communication
communication between
between R&D
R&D && other
other
organizational
organizational units
units effective?
effective?
••Are
Are present
present products
products technologically
technologically
competitive?
competitive?
Management Information
Systems
Purpose
 Improve performance of an enterprise by
improving the quality of managerial
decisions
 “Information is lifeblood of any company”
 Data become information only when they
are evaluated, filtered, condensed,
analyzed, and organized for a specific
purpose, problem, individual, or time.
Management Information
Systems

• Information Systems
• CIO/CTO
• Security
• User-friendly
• E-commerce
Management Information
Systems Audit

••Do
Do managers
managers useuse the
the information
information system
system
to
to make
make decisions?
decisions?
••Is
Is there
there aa CIO
CIO or
or Director
Director ofof Information
Information
Systems
Systems position
position in
in the
the firm?
firm?
••Is
Is data
data updated
updated regularly?
regularly?
Management Information
Systems Audit

••Do
Do managers
managers from from allall functional
functional areas
areas
contribute
contribute input
input toto the
the information
information system?
system?
••Are
Are there
there effective
effective passwords
passwords for for entry
entry
into
into the
the firm’s
firm’s information
information system?
system?
••Are
Are strategists
strategists ofof the
the firm
firm familiar
familiar with
with the
the
information
information systems
systems of of rival
rival firms?
firms?
Management Information
Systems Audit

••Is
Is the
the information
information system
system user-friendly?
user-friendly?
••Do
Do all
all users
users understand
understand the
the competitive
competitive
advantages
advantages that that information
information can
can provide?
provide?
••Are
Are computer
computer training
training workshops
workshops provided
provided
for
for users?
users?
••Is
Is the
the firm’s
firm’s system
system being
being improved?
improved?
 Value Chain Analysis (VCA)
• Add value to your product/service in every stage
it passes through
• Value chain analysis (VCA) refers to the process
whereby a firm determines the costs associated
with organizational activities from purchasing raw
materials to manufacturing product(s) to
marketing those products.
• According to Porter, the business of a firm can
best be described as a value chain, in which total
revenues minus total costs of all activities
undertaken to develop and market a product or
service yields value.
 Value Chain Analysis (VCA)
• It is continuous process
• Add value at minimum costs
• VCA provides how to allay your weaknesses
and consolidate strengths
 Benchmarking
• Benchmarking is the process of comparing one's
business processes and performance to industry bests
or best practices from other companies or standards.
• Dimensions typically measured are quality, time and
cost.
• The objectives of benchmarking are
(1)to determine what and
where improvements are called for,
(2)to analyze how other
organizations achieve their high performance levels,
and
(3)to use this information to improve performance.
Benchmarking + VCA
 Internal Factor Evaluation, IFE Matrix
• This strategy-formulation tool summarizes and evaluates the
major strengths and weaknesses in the functional areas of a
business, and
• It also provides a basis for identifying and evaluating
relationships among those areas.
• Intuitive judgments are required in developing an IFE Matrix
• Similar to the EFE Matrix and Competitive Profile Matrix
described in Chapter 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).
Copyright 2007 Prentice Hall Ch 4 -91
Copyright 2007 Prentice Hall Ch 4 -92
For Review (Chapter 4)

Key Terms & Concepts

Activity Ratios Cost/Benefit Analysis

Capital Budgeting Cultural Products

Communication Distinctive Competencies

Controlling Distribution
For Review (Chapter 4)

Key Terms & Concepts

Functions of
Dividend Decision
Finance/Accounting

Empirical Indicators Functions of Management

Financial Ratio Analysis Functions of Marketing

Functions of Production/
Financing Decision
Operations
For Review (Chapter 4)

Key Terms & Concepts

Growth Ratios Investment Decision

Human Resource
Leverage Ratios
Management

Internal Audit Liquidity Ratios

Internal Factor Evaluation Management Information

(IFE) Matrix Systems
For Review (Chapter 4)

Key Terms & Concepts

Motivating Personnel Management

Opportunity Analysis Planning

Organizational Culture Pricing

Product & Service

Organizing
Planning
For Review (Chapter 4)

Key Terms & Concepts

Production/Operations
Selling
Functions

Profitability Ratios Staffing

Research & Development Synergy

Resource Based View

Test Marketing
(RBV)
For Review (Chapter 4)

Key Terms & Concepts

Value Chain Analysis

(VCA)
Questions