4.

1 Introduction

Internal audit is an independent appraisal function established by the management of an

organisation for the review of the internal control system as a service to the organisation. It
objectively examines, evaluates and reports on the adequacy of internal control as a contribution to
the proper, economic and effective use of resources.The
internal audit is a helpful tool to
evaluate the company's strengths and weaknesses in all areas of business.
There are no enterprise is equally strong or weak in all areas. Objectives and
strategies are established with the intention of capitalizing upon internal strength
and overcoming weaknesses.

In this chapter, we will discuss about the internal audit for Estee Lauder
companies.

4.2 Strength

There are the strengths of the Estee Lauder Companies:

1. Financial Position

• Sales increase 3 percent due to growth in Estee Lauder’s

products.

• The net increases reflect sales growth in all geographic regions.

• Operating income decrease 15 percent.

• Long-term debt decrease 4.6 percent.

2. Finances by Product

• Increase 2 percent due to new product launches.

• Make up net sales increase 6 percent reflecting growth from

makeup artist brand.

• Hair care net sales increased 16 percent due to sales growth

from Bumble and Bumble and Aveda products.

3. Finances by Geographic Region

• Led by group in the United Stated will increased sales by 3

percent.

• Strategy growth in China combined with positive result in Korea

and Hong Kong will increase sales of this region.

4. Marketing
 • An Estee Lauder company is a first cosmetic firm offer shopping
via internet.

• Estee Lauder Company provides high services and remains the

best venue.

• The skincare business continues to mitigate to pharmacy.

5. Promotion

• An Estee Lauder company is a first cosmetic company to offer

free samples and gift-with-purchased.

• Estee Lauder Company uses celebrities as endorsers in

testimonial advertising for commercial on television and
magazines.

6. Price

• Estee Lauder prices vary from product to product and from

brand to brand, but tend to be in the mid-high to high range of
the industry.

• Prestige pricing appears to be an effective strategy given their

target markets.

4.3 Weaknesses

There are the weaknesses of the Estee Lauder Companies:

1. Financial Position

• Increase in cost of sales.

2. Finances by Product

• Net sales of fragrance products by Estee Lauder decrease 4

percent as the company continue to struggle in the fragrance
products, particularly in the Americas region.

3. Finances by Geographic Region

• Strength of US dollar decrease sales of the Estee Lauder’s

products in Japan and Australia.
4.4 Distinctive Competencies

Distinctive Competencies is a firm's strength that cannot be easily matched

or limited by competitors. In order to build it, the competitive advantage
involves taking advantage of distinctive competencies. Finally, strategies
designed to improve a firm's weaknesses and turn into strength.

There are several distinctive competencies can be defined within Estee

Lauder Companies:

1. The product lines which cover 4 areas for beauty which is skin care,
makeup, fragrances and hair care.

2. Sold over 130 countries with different brand names.

3. Global license to use actor/actress name as a product brand names.

4. Range of product that cover for men and woman.

4.5 IFE Matrix

4.5.1 Steps in Preparing IFE Matrix

A summary step in conducting an internal strategic-management audit

is to construct an 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.
There are the 5 steps of an IFE Matrix:

1. List key internal factors as identified in the internal-audit process.

Use a total of from 10 to 20 internal factors, including both
strengths and weaknesses. List strengths first and then
weaknesses. Be as specific as possible, using percentages, ratios
and comparative numbers. Recall the Edward Deming said, “In God
we trust. Everyone else bring data”

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-
important) to each factor. The weight assigned to a given factor
indicates the relative importance of the factor to being successful
in the firm’s industry. Regardless of whether a key factor is an
internal strengths or weaknesses, factors considered to have the
greatest effect on organizational performance should be assigned
the highest weights. The sum of all weights must equal 1.0.
 3. Assign a 1 to 4 rating to each factor to indicate whether that factor
represents a major weakness must receive (rating=1), a minor
weakness (rating=2), a minor strength (rating=3) or a major
strength (rating=4). Note that strengths must receive a 3 or 4
rating and weaknesses must receive a 1 or 2 rating. Ratings are
thus 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 score each variable to determine the total

weighted score for the organization.

4.5.2 IFE Matrix

Key Internal Factors Weight Rating Weighted

Score

Strengths

Sales increase 3 percent due to 0.10 4 0.40

growth in Estee Lauder’s products.

The net increases reflect sales 0.02 3 0.06

growth in all geographic regions.

Operating income decrease 15 0.02 3 0.06

percent.

Long-term debt decrease 4.6 0.04 4 0.16

percent.

Increase 2 percent due to new 0.03 3 0.09

product launches.

Make up net sales increase 6 0.10 4 0.40

percent reflecting growth from
makeup artist brand.

Hair care net sales increased 16 0.03 4 0.12

percent due to sales growth from
Bumble and Bumble and Aveda
products.

Led by group in the United Stated 0.05 3 0.15

will increased sales by 3 percent.

Strategy growth in China combined 0.06 3 0.18

with positive result in Korea and
Hong Kong will increase sales of
this region.

An Estee Lauder company is a first 0.08 4 0.32

cosmetic firm offer shopping via
internet.

Estee Lauder Company provides 0.07 4 0.28

high services and remains the best
venue.

The skincare business continues to 0.04 3 0.12

mitigate to pharmacy.

An Estee Lauder company is a first 0.08 4 0.32

cosmetic company to offer free
samples and gift-with-purchased.

Estee Lauder Company uses 0.10 4 0.40

celebrities as endorsers in
testimonial advertising for
commercial on television and
magazines.

Estee Lauder prices vary from 0.05 3 0.15

product to product and from brand
to brand, but tend to be in the mid-
high to high range of the industry.

Prestige pricing appears to be an 0.04 3 0.12

effective strategy given their
target markets.

Weaknesses

Increase in cost of sales. 0.03 1 0.03

Net sales of fragrance products by 0.02 2 0.04

Estee Lauder decrease 4 percent
as the company continue to
struggle in the fragrance products,
particularly in the Americas region.

Strength of US dollar decrease 0.04 1 0.04

sales of the Estee Lauder’s
 products in Japan and Australia.

Total 1.00 3.40

4.6 Conclusion

For conclusion, management, marketing, finance/accounting, operations, research

and development represent the core business or operation of Estee Lauder
businesses. There are lots of competitors that compete with Estee Lauder.
Therefore, a competitive advantage is needed in order to allow them take
advantage over their rival firm. This is why internal audit is very important part. The
EFE Matrix, Competitive Profile Matrix, IFE Matrix and clear statements of vision and
mission provide the basic information needed to represents an opportunity to the
organization in order to determine the firm future.