Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -1

Chapter 4 The Internal Assessment

Strategic Management: Concepts & Cases

13th Edition

Fred David

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -2

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -3

Internal Audit

Identify strengths and weaknesses in Management Marketing Finance and accounting Production and operations Research and development Management information systems

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -4

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

Nature of an Internal Audit

Basis for Objectives & Strategies

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -5

Key Internal Forces

Distinctive Competencies:

Firm’s strengths that cannot be easily matched or imitated by competitors

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -6

Key Internal Forces

Distinctive Competencies:

Building competitive advantage involves taking advantage of distinctive competencies

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -7

Internal Audit Process

Information gathered from:Management

Marketing

Finance/accounting

Production/operations

Research & development

Management information systems

Parallels process of external audit

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -8

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

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -9

Internal Audit

Exemplifies complexity of relationships among functional areas of the business

Financial Ratio Analysis

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -10

Integrating Strategy & 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

Organizational Culture

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -11

Integrating Strategy & Culture

Organizational Culture

Resistant to change

May represent:

Strength

Weakness

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -12

CulturalProducts

Values

Legends Beliefs

Heroes Rites

Symbols RitualsMyths

Integrating Strategy & Culture

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -13

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

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -14

Marketing

Marketing Functions

1. Customer analysis

2. Selling products/services

3. Product & service planning

4. Pricing

5. Distribution

6. Marketing research

7. Opportunity analysis

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -15

Customer Analysis

Customer surveys

Consumer information

Market positioning strategies

Customer profiles

Market segmentation strategies

Marketing

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -16

Finance/Accounting

1. Investment decision (Capital budgeting)

2. Financing decision

3. Dividend decision

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -17

Firm’s ability to meet its short-term obligations

Ratios

Current ratioQuick (or acid test) ratio

Basic Financial Ratios

Liquidity Ratios

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -18

Extent of debt financing

Ratios

Debt-to-total assetsDebt-to-equity

Long-term debt-to-equityTimes-interest-earned

Basic Financial Ratios

Leverage Ratios

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -19

Effective use of firm’s resources

Ratios

Inventory turnoverFixed assets turnoverTotal assets turnover

Accounts receivable turnoverAverage collection period

Basic Financial Ratios

Activity Ratios

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -20

Effectiveness shown by returns on sales and

investment

Ratios

Gross profit marginOperating profit margin

Net profit marginReturn on total assets (ROA)

Basic Financial Ratios

Profitability Ratios

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -21

Effectiveness shown by returns on sales &

investment

Ratios

Return on stockholders’ equity (ROE)

Earnings per sharePrice-earnings ratio

Basic Financial Ratios

Profitability Ratios(cont’d)

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -22

Firm’s ability to maintain economic

position

Ratios

SalesNet Income

Earnings per shareDividends per share

Basic Financial Ratios

Growth Ratios

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -23

Finance/Accounting Audit

1. Where is the firm financially strong/weak as indicated by financial ratio analysis?

2. Can the firm raise needed short-term capital?

3. Can the firm raise needed long-term capital through debt and/or equity?

4. Does the firm have sufficient working capital?

5. Are capital budgeting procedures effective?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -24

Finance/Accounting Audit

6. Are dividend payout policies reasonable?

7. Does the firm have good relations with its investors and stockholders?

8. Are the firm’s financial managers experienced and well trained?

9. Is the firm’s debt situation excellent?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -25

Production/Operations

Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -26

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?

•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?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -27

Production/Operations Audit

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

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

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -28

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

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -29

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?

•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?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -30

Research & Development Audit

•Are MIS and computer systems adequate?•Is communication between R&D and other organizational units effective?•Are present products technologically competitive?

•Are MIS and computer systems adequate?•Is communication between R&D and other organizational units effective?•Are present products technologically competitive?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -31

Management Information Systems

Purpose

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

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -32

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?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -33

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?

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 4 -34

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