Chapter 4

The Internal Assessment

Strategic Management:
Concepts & Cases
10th Edition
Fred David

Ch 4 -1
Chapter Outline

The Nature of an Internal Audit

The Resource-Based View (RBV)

Integrating Strategy & Culture

Ch 4 -2
Chapter Outline (contd)

Management

Marketing

Opportunity Analysis

Ch 4 -3
Chapter Outline (contd)

Finance/Accounting

Production/Operations

Research & Development

Ch 4 -4
Chapter Outline (contd)

Management Information Systems

The Internal Factor Evaluation (IFE) Matrix

Ch 4 -5
Internal Assessment

The biggest levers youve got to change a

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

Weak leadership can wreck the soundest

strategy.
Sun Zi

Ch 4 -6
The Nature of an Internal
Audit

Functional Areas of Business

-- Strengths

-- Weaknesses

Ch 4 -7
Nature of an Internal Audit

Basis for Objectives & Strategies

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

Ch 4 -8
Key Internal Forces

Functional Business Areas:

Vary by organization
Divisions have differing strengths &
weaknesses

Ch 4 -9
Key Internal Forces

Distinctive Competencies:

Firms strengths that cannot be easily

matched or imitated by competitors

Ch 4 -10
Key Internal Forces

Distinctive Competencies:

Building competitive advantage involves

taking advantage of distinctive
competencies

Ch 4 -11
Key Internal Forces

Distinctive Competencies:

Strategies designed to improve on a

firms weaknesses and turn to strengths

Ch 4 -12
Internal Audit

Parallels process of external audit

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

Ch 4 -13
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

Ch 4 -14
Internal Audit

Key to Organizational Success

Coordination & understanding among

managers from all functional areas

Ch 4 -15
Internal Audit

Functional Relationships

Number and complexity increases

relative to organization size

Ch 4 -16
Internal Audit

Financial Ratio Analysis

Exemplifies complexity of relationships

among functional areas of the business

Ch 4 -17
Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important

than external factors

Ch 4 -18
Resource Based View (RBV)

3 All Encompassing Categories

1. Physical resources
2. Human resources
3. Organizational resources

Ch 4 -19
Resource Based View (RBV)

Empirical Indicators

Rare
Hard to imitate
Not easily substitutable

Ch 4 -20
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 integrationis considered valid
and taught to new members

Ch 4 -21
Integrating Strategy & Culture

Organizational Culture

Resistant to change
May represent
Strength
Weakness

Ch 4 -22
Integrating Strategy & Culture

Values

Legends Beliefs

Cultural
Heroes Rites
Products

Symbols Rituals
Myths

Ch 4 -23
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

Ch 4 -24
Management

Functions of Management

1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling

Ch 4 -25
Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Ch 4 -26
Management

Planning

Beginning of management process

Bridge between present & future
Improves likelihood of attaining
desired results

Ch 4 -27
Management

Forecasting

Establishing objectives

Planning Devising strategies

Developing policies

Setting goals

Ch 4 -28
Management

Organizing

Achieves coordinated effort

Defines task & authority relationships
Departmentalization
Delegation of authority

Ch 4 -29
Management

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

Ch 4 -30
Management

Motivating

Influencing to accomplish specific

objectives
Communication major component

Ch 4 -31
Management

Leadership
Communication
Work groups
Job enrichment
Motivating
Job satisfaction
Needs fulfillment
Organizational change
Morale

Ch 4 -32
Management

Staffing

Personnel management
Human resources management

Ch 4 -33
Management

Wage & salary admin.

Employee benefits
Interviewing
Hiring
Discharging
Staffing
Training
Management development
Affirmative Action
EEO
Labor relations

Ch 4 -34
Management

Controlling

Establishing performance standards

Ensure actual operations conform to
planned operations
Taking corrective actions

Ch 4 -35
Management

Quality
Financial
Sales
Inventory
Controlling
Expense
Analysis of variance
Rewards
Sanctions

Ch 4 -36
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?

Ch 4 -37
Management Audit Checklist

Do
Do managers
managers delegate
delegate well?
well?
Is
Is the
the organizations
organizations 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?

Ch 4 -38
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 organizations
organizations control
control
mechanisms
mechanisms effective?
effective?

Ch 4 -39
Marketing

Customer Needs/Wants for Products/Services

1. Defining
2. Anticipating
3. Creating
4. Fulfilling

Ch 4 -40
Marketing
Marketing Functions

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

Ch 4 -41
Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies

Ch 4 -42
Marketing

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

Ch 4 -43
Marketing

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

Ch 4 -44
Marketing

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

Ch 4 -45
Marketing

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

Ch 4 -46
Marketing

Data collection
Marketing Research Data input
Data analysis
Support business functions

Ch 4 -47
Marketing

Assessing costs

Assessing benefits
Opportunity
Analysis
Assessing risks

Cost/benefit/risk analysis

Ch 4 -48
Marketing
Opportunity Analysis

1. Are markets segmented effectively?

2. Is the organization positioned well among
competitors?
3. Has the firms market share been
increasing?
4. Are the distribution channels reliable &
cost effective?
5. Is the sales force effective?

Ch 4 -49
Marketing
Opportunity Analysis

6. Does the firm conduct market research?

7. Are product quality & customer service
good?
8. Are the firms products/services priced
appropriately?
9. Does the firm have effective promotion,
advertising, & publicity strategies?

Ch 4 -50
Marketing
Opportunity Analysis

10. Are the marketing planning & budgeting

effective?
11. Do the firms marketing managers have
adequate experience and training?

Ch 4 -51
Finance/Accounting

Determining financial strengths &

weaknesses key to strategy
formation

Ch 4 -52
Finance/Accounting
Finance/Accounting Functions

1. Investment decision (Capital budgeting)

2. Financing decision
3. Dividend decision

Ch 4 -53
Basic Financial Ratios

Firms ability to meet its

short-term obligations

Liquidity Ratios
Ratios

Current ratio
Quick (or acid test) ratio

Ch 4 -54
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

Ch 4 -55
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

Ch 4 -56
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)

Ch 4 -57
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

Ch 4 -58
Basic Financial Ratios

Firms ability to maintain

economic position

Growth Ratios Ratios

Sales
Net income
Earnings per share
Dividends per share

Ch 4 -59
Finance/Accounting Audit

Where
Where is is the
the firm
firm strong/weak
strong/weak indicated
indicated
by
by 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 debtdebt and/or
and/or equity?
equity?

Ch 4 -60
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 firms
firms financial
financial managers
managers
experienced
experienced && well well trained?
trained?

Ch 4 -61
Production/Operations

Production/Operations Functions

Process
Capacity
Inventory
Workforce
Quality

Ch 4 -62
Production/Operations

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

Ch 4 -63
Production/Operations

Forecasting
Facilities planning
Capacity Aggregate planning
Scheduling
Capacity planning
Queuing analysis

Ch 4 -64
Production/Operations

Raw materials
Inventory Work in process
Finished goods
Materials handling

Ch 4 -65
Production/Operations

Job design
Work measurement
Workforce Job enrichment
Work standards
Motivation techniques

Ch 4 -66
Production/Operations

Quality control
Sampling
Quality Testing
Quality assurance
Cost Control

Ch 4 -67
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?

Ch 4 -68
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?

Ch 4 -69
Research & Development

Research & Development Functions

Development of new products before

competitors
Improving product quality
Improving manufacturing processes to
reduce costs

Ch 4 -70
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

Ch 4 -71
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?

Ch 4 -72
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?

Ch 4 -73
Management Information
Systems

Purpose

Improve performance of an enterprise by

improving the quality of managerial
decisions.

Ch 4 -74
Management Information
Systems

Information Systems
CIO/CTO
Security
User-friendly
E-commerce

Ch 4 -75
Management Information
Systems Audit

Do
Do managers
managers use use the
the information
information system
system
to
to make
make decisions?
decisions?
Is
Is there
there aa CIO
CIO or
or Director
Director of of information
information
systems
systems position
position in
in the
the firm?
firm?
Is
Is data
data updated
updated regularly?
regularly?

Ch 4 -76
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 firms
firms 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?

Ch 4 -77
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 firms
firms system
system being
being improved?
improved?

Ch 4 -78
 IFE Gateway Computers (2003)
Wtd
Key Internal Factors Weight Rating
Score

Strengths
1. Several new senior executive with world-
0.05 4 0.40
class skills and leadership experience
2. Continuous decline in operating costs
0.05 3 0.15
and cost of goods sold
3. Well-known brand name 0.05 3 0.15
4. Consumer Reports (Sept 2002)
0.10 4 0.40
recommended Gateway 500X as #1
5. As a direct seller, Gateway holds high
0.05 3 0.15
brand recognition

Ch 4 -79
 IFE Gateway Computers (2003)
Wtd
Key Internal Factors Weight Rating
Score

Strengths (contd)
6. Gateway is diversifying into non-PC
0.10 3 0.30
products
7. Good relationship with its suppliers. 0.05 4 0.20
8. Economies of scale, the 6th largest PC
0.05 4 0.20
maker I the world
9. Gateway retails stores excellent 0.05 3 0.15

Ch 4 -80
 IFE Gateway Computers (2003)
Wtd
Key Internal Factors Weight Rating
Score

Weaknesses
1. High operating expense (22% of revenue
0.05 3 0.15
vs. 10% for Dell)
2. Almost no budget for R&D vs. Dells 18%
0.10 1 0.05
of revenue
3. Low return on assets ratio 0.025 1 0.10

4. No niche market 0.025 2 0.05

Ch 4 -81
 IFE Gateway Computers (2003)
Wtd
Key Internal Factors Weight Rating
Score

Weaknesses (contd)
5. Shortage of cash due to successive
0.10 2 0.20
losses
6. Limited number Gateway stores 0.05 2 0.10

7. Weak performance in overseas market 0.10 2 0.20

TOTAL 1.00 2.85

Ch 4 -82
For Review (Chapter 4)

Key Terms & Concepts

Activity Ratios Cost/Benefit Analysis

Capital Budgeting Cultural Products

Communication Distinctive Competencies

Controlling Distribution

Ch 4 -83
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

Ch 4 -84
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

Ch 4 -85
For Review (Chapter 4)

Key Terms & Concepts

Motivating Personnel Management

Opportunity Analysis Planning

Organizational Culture Pricing

Product & Service

Organizing
Planning

Ch 4 -86
For Review (Chapter 4)

Key Terms & Concepts

Production/Operations
Selling
Functions

Profitability Ratios Staffing

Research & Development Synergy

Resource Based View

Test Marketing
(RBV)

Ch 4 -87
For Review (Chapter 4)

Key Terms & Concepts

Value Chain Analysis

(VCA)

Ch 4 -88