Module 4
The Internal Assessment
Ch 4 -1
Ch 4 -2
Internal Assessment
“Great
spirits have always encountered
violent opposition from mediocre minds.”
– Albert Einstein
“Weak leadership can wreck the soundest
strategy.”
– Sun Tzu
Ch 4 -3
Internal Audit

Identify strengths and weaknesses in
Management
 Marketing
 Finance and accounting
 Production and operations
 Research and development
 Management information systems

Ch 4 -4
Nature of an Internal Audit
Basis for Objectives & Strategies



Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
Ch 4 -5
Key Internal Forces
Distinctive Competencies:
Firm’s
strengths that cannot be
easily matched or imitated by
competitors
Ch 4 -6
Key Internal Forces
Distinctive Competencies:
Building
competitive advantage
involves taking advantage of
distinctive competencies
Ch 4 -7
Internal Audit Process
Parallels process of external audit
Information
gathered from:

Management

Marketing

Finance/accounting

Production/operations
Research & development


Management information systems
Ch 4 -8
Internal Audit
Involvement in performing an
internal strategic-management audit
provides a vehicle for understanding
the nature and effect of decisions in
other functional business areas of
the firm
Ch 4 -9
Ch 4 -10
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
Ch 4 -11
Internal Audit
Financial Ratio Analysis
Exemplifies complexity of
relationships among functional areas
of the business
Ch 4 -12
Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more
important than external factors
Ch 4 -13
Resource Based View (RBV)
Three All-Encompassing Categories
1.
Physical resources
2.
Human resources
3.
Organizational resources
Ch 4 -14
Resource Based View (RBV)
Empirical Indicators

Rare

Hard to imitate

Not easily substitutable
Ch 4 -15
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
Ch 4 -16
Integrating Strategy & Culture
Organizational Culture

Resistant to change

May represent:

Strength

Weakness
Ch 4 -17
Integrating Strategy & Culture
Values
Beliefs
Legends
Heroes
Symbols
Cultural
Products
Myths
Rites
Rituals
Ch 4 -18
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 -19
Management
Functions of Management
1.
Planning
2.
Organizing
3.
Motivating
4.
Staffing
5.
Controlling
Ch 4 -20
Management
Function
Stage When Most
Important
Planning
Strategy Formulation
Organizing
Strategy Implementation
Motivating
Strategy Implementation
Staffing
Strategy Implementation
Controlling
Strategy Evaluation
Ch 4 -21
Management
Planning

Beginning of management process

Bridge between present & future

Improves likelihood of attaining desired
results
Ch 4 -22
Management
Developing a mission
Forecasting future events
and trends
Planning
Establishing objectives
Choosing strategies to
pursue
Ch 4 -23
Planning
 Synergy
Can develop through planning
 Exists when everyone pulls
together as a team that knows
what it wants to achieve

Ch 4 -24
Management
Organizing

Achieves coordinated effort

Defines task & authority relationships

Determines who does what

Determines who reports to whom
Ch 4 -25
Management
 Organizing
Breaking down tasks into jobs
 Combining jobs to form
departments
 Delegating authority

Ch 4 -26
Management
Motivating

Influencing to accomplish specific objectives

Four components include:

Leadership

Group dynamics

Communication

Organizational change
Ch 4 -27
Management
Staffing

Personnel management

Human resource management
Ch 4 -28
Management
Staffing








Recruiting
Interviewing
Testing
Selecting
Orienting
Training
Developing
Caring for







Evaluating
Rewarding
Disciplining
Promoting
Transferring
Demoting
Dismissing
Ch 4 -29
Management
Controlling

Establishing performance standards

Ensure actual operations conform to
planned operations

Taking corrective actions
Ch 4 -30
Management
Controlling
1. Establish performance standards
2. Measure individual and organizational
performance
3. Compare actual performance to
planned performance standards
4. Take corrective action
Ch 4 -31
Management Audit Checklist



Does the firm use strategic
management concepts?
Are objectives/goals measurable? Well
communicated?
Do managers at all levels plan
effectively?
Ch 4 -32
Management Audit Checklist





Do managers delegate well?
Is the organization’s structure
appropriate?
Are job descriptions clear?
Are job specifications clear?
Is employee morale high?
Ch 4 -33
Management Audit Checklist




Is employee absenteeism low?
Is employee turnover low?
Are the reward mechanisms effective?
Are the organization’s control
mechanisms effective?
Ch 4 -34
Marketing
Customer Needs or Wants for Products
and Services
1. Defining
2. Anticipating
3. Creating
4. Fulfilling
Ch 4 -35
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 -36
Marketing
Customer surveys
Consumer information
Customer
Analysis
Market positioning
strategies
Customer profiles
Market segmentation
strategies
Ch 4 -37
Marketing
Selling
Products/Services
Advertising
Sales Promotion
Publicity
Personal Selling
Sales force management
Customer relations
Dealer relations
Ch 4 -38
Ch 4 -39
Marketing
Product/Service
Planning
Test marketing
Brand positioning
Devising warranties
Packaging
Product features/options
Product style
Quality
Deleting old products
Providing for customer
service
Ch 4 -40
Marketing
Pricing
Major Stakeholders
Consumers
Governments
Suppliers
Distributors
Competitors
Ch 4 -41
Marketing
Distribution
Warehousing
Distribution channels
Retail site locations
Sales territories
Inventory levels
Transportation
Wholesaling
Retailing
Ch 4 -42
Marketing
Gather data
Marketing Research
Record data
Analyze data
Ch 4 -43
Marketing
Assessing costs
Cost/Benefit
Analysis
Assessing benefits
Assessing risks
Ch 4 -44
Marketing Audit
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?
Ch 4 -45
Marketing Audit
6. Does the firm conduct market research?
7. Are product quality & customer service
good?
8. Are the firm’s products and services
priced appropriately?
9. Does the firm have effective promotion,
advertising, and publicity strategies?
Ch 4 -46
Marketing Audit
10. Are the marketing, planning, and
budgeting effective?
11. Do the firm’s marketing managers have
adequate experience and training?
12. Is the firm’s Internet presence excellent
as compared to rivals?
Ch 4 -47
Finance/Accounting
1. Investment decision (Capital
budgeting)
2. Financing decision
3. Dividend decision
Ch 4 -48
Basic Financial Ratios
Firm’s ability to meet its
short-term obligations
Liquidity Ratios
Ratios
Current ratio
Quick (or acid test) ratio
Ch 4 -49
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 -50
Basic Financial Ratios
Effective use of firm’s
resources
Ratios
Activity Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
Ch 4 -51
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)
Ch 4 -52
Basic Financial Ratios
Effectiveness shown by
returns on sales &
investment
Profitability Ratios
(cont’d)
Ratios
Return on stockholders’
equity (ROE)
Earnings per share
Price-earnings ratio
Ch 4 -53
Basic Financial Ratios
Firm’s ability to
maintain economic
position
Ratios
Growth Ratios
Sales
Net Income
Earnings per share
Dividends per share
Ch 4 -54
Growth Ratios
Ratio

Sales

Annual percentage
growth in
Total sales

Net Income

Profits

Earnings per share

EPS

Dividends per share

Dividends per share
Ch 4 -55
Ch 4 -56
Ch 4 -57
Ch 4 -58
Ch 4 -59
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?
Ch 4 -60
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 firm’s financial managers
experienced and well trained?
Is the firm’s debt situation excellent?
Ch 4 -61
Production/Operations
Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality
Ch 4 -62
Ch 4 -63
Production/Operations Audit
•Are suppliers of materials, parts, etc.
reliable and reasonable?
•Are facilities, equipment, machinery, and
offices in good condition?
•Are inventory-control policies and
procedures effective?
Ch 4 -64
Production/Operations Audit
•Are quality-control policies & procedures
effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?
Ch 4 -65
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
Ch 4 -66
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 -67
Research & Development Audit
•Are the R&D facilities adequate?
•If R&D is outsourced, is it cost-effective?
•Are the R&D personnel well qualified?
•Are R&D resources allocated effectively?
Ch 4 -68
Research & Development Audit
•Are MIS and computer systems
adequate?
•Is communication between R&D and
other organizational units effective?
•Are present products technologically
competitive?
Ch 4 -69
Management Information Systems
Purpose

Improve performance of an
enterprise by improving the quality
of managerial decisions
Ch 4 -70
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 firm’s information system?
Ch 4 -71
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 firm’s system being improved?
Ch 4 -72
Value Chain Analysis

The process whereby a firm determines
the costs associated with:




Purchasing raw materials
Manufacturing products
Marketing products
And compares them to the value chain
of rival firms
Ch 4 -73
Value Chain Analysis

Core competencies

Distinctive competencies

Benchmarking
Ch 4 -74
Transforming Value Chain Activities into Sustained
Competitive Advantage
Value
Chain
Activities
Are
Identified
and
Assessed
Core
Competencies
Arise in Some
Activities
Some Core
Competencies
Evolve into
Distinctive
Competencies
Some
Distinctive
Competencie
s Yield
Sustained
Competitive
Advantages
Ch 4 -75
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
Ch 4 -76