Chapter 4

The Internal Assessment

Strategic Management:
Concepts & Cases
13th Edition
Fred David

Copyright 2011 Pearson

Ch 4 -1

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Ch 4 -2

Internal Audit

Identify strengths and weaknesses in

Management
Marketing
Finance and accounting
Production and operations
Research and development
Management information systems

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Ch 4 -3

Nature of an Internal Audit

Basis for Objectives & Strategies

Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission

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Ch 4 -4

Key Internal Forces

Distinctive Competencies:
Firms

strengths that cannot be

easily matched or imitated by
competitors

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Ch 4 -5

Key Internal Forces

Distinctive Competencies:
Building

competitive advantage
involves taking advantage of
distinctive competencies

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Ch 4 -6

Internal Audit Process

Parallels process of external audit
Information

gathered from:

Management

Marketing

Finance/accounting

Production/operations

Research & development

Management information systems

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Ch 4 -7

Internal Audit
Managers

and employees from

all areas provide information
A

team of managers then selects

10 to 15 key organizational
strengths and weaknesses to
focus on
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Ch 4 -8

Internal Audit
Financial Ratio Analysis

Exemplifies complexity of
relationships among functional areas
of the business

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Ch 4 -9

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 . . . is considered valid
and taught to new members as the correct
way to perceive, think, and feel

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Ch 4 -10

Integrating Strategy & Culture

Organizational Culture

Resistant to change

May represent:

Strength

Weakness
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Ch 4 -11

Integrating Strategy & Culture

Values
Beliefs

Legends

Heroes

Symbols

Cultural
Products

Myths

Rites

Rituals

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Ch 4 -12

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
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Ch 4 -13

Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis

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Ch 4 -14

Marketing
Customer surveys
Consumer information
Customer
Analysis

Market positioning
strategies
Customer profiles
Market segmentation
strategies
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Ch 4 -15

Finance/Accounting

1. Investment decision (Capital

budgeting)
2. Financing decision
3. Dividend decision

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Ch 4 -16

Basic Financial Ratios

Firms ability to meet its

short-term obligations
Liquidity Ratios

Ratios
Current ratio
Quick (or acid test) ratio

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Ch 4 -17

Basic Financial Ratios

Extent of debt financing

Leverage Ratios

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

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Ch 4 -18

Basic Financial Ratios

Effective use of firms
resources
Activity Ratios

Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period

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Ch 4 -19

Basic Financial Ratios

Effectiveness shown by
returns on sales and
investment
Profitability Ratios

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

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Ch 4 -20

Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment
Profitability Ratios
(contd)

Ratios
Return on stockholders
equity (ROE)
Earnings per share
Price-earnings ratio

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Ch 4 -21

Basic Financial Ratios

Firms ability to
maintain economic
position
Growth Ratios

Ratios
Sales
Net Income
Earnings per share
Dividends per share

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Ch 4 -22

Finance/Accounting Audit
1.

2.
3.

4.
5.

Where is the firm financially strong/weak as

indicated by financial ratio analysis?
Can the firm raise needed short-term capital?
Can the firm raise needed long-term capital
through debt and/or equity?
Does the firm have sufficient working capital?
Are capital budgeting procedures effective?

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Ch 4 -23

Finance/Accounting Audit
6.
7.

8.

9.

Are dividend payout policies reasonable?

Does the firm have good relations with its
investors and stockholders?
Are the firms financial managers
experienced and well trained?
Is the firms debt situation excellent?

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Ch 4 -24

Production/Operations
Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality
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Ch 4 -25

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,and
and
offices
offices in
in good
good condition?
condition?
Are
Are inventory-control
inventory-control policies
policies and
and
procedures
procedures effective?
effective?

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Ch 4 -26

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?

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Ch 4 -27

Research & Development

Research & Development Functions

Development of new products before

competitors

Improving product quality

Improving manufacturing processes to

reduce costs

These functions can be done internally or

externally
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Ch 4 -28

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-effective?
cost-effective?
Are
Are the
the R&D
R&D personnel
personnel well
well qualified?
qualified?
Are
Are R&D
R&D resources
resources allocated
allocated effectively?
effectively?

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Ch 4 -29

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 and
and
other
other organizational
organizational units
units effective?
effective?
Are
Are present
present products
products technologically
technologically
competitive?
competitive?

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Ch 4 -30

Management Information Systems

Purpose

Improve performance of an
enterprise by improving the quality
of managerial decisions

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Ch 4 -31

Management Information Systems

Audit

Do all managers use the information system

to make decisions?
Is there a CIO or Director of Information
Systems position in the firm?
Are data updated regularly?
Do managers from all functional areas
contribute input to the information system?
Are there effective passwords for entry into
the firms information system?
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Ch 4 -32

Management Information Systems

Audit

Are strategists of the firm familiar with the

information systems of rival firms?
Is the information system user-friendly?
Do all users understand the competitive
advantages that information can provide?
Are computer training workshops provided for
users?
Is the firms system being improved?
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Ch 4 -33

Internal Factor Evaluation (IFE) Matrix

1. List key internal factors

2. Assign a weight ranging from 0.0 to 1.0
3. Assign a 1 to 4 rating to each factor
4. Multiply the weight times the rating
5. Sum the weighted scores

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Ch 4 -34