1

Ch 4 -1

Chapter 4

The Internal Assessment

Ch 4 -2

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

Internal strengths/weaknesses

External opportunities/threats

Clear statement of mission

Nature of an Internal Audit

Basis for Objectives & Strategies

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

2

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

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

Ch 4 -9

Internal Audit

Exemplifies complexity of

relationships among functional areas

of the business

Financial Ratio Analysis

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

Ch 4 -11

Integrating Strategy & Culture

Organizational Culture

Resistant to change

May represent:

Strength

Weakness

Ch 4 -12

Cultural

Products

Values

Legends Beliefs

Heroes Rites

Symbols RitualsMyths

Integrating Strategy & Culture

3

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

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

Ch 4 -15

Customer

Analysis

Customer surveys

Consumer information

Market positioning

strategies

Customer profiles

Market segmentation

strategies

Marketing

Ch 4 -16

Finance/Accounting

1. Investment decision (Capital

budgeting)

2. Financing decision

3. Dividend decision

Ch 4 -17

Firm’s ability to meet its

short-term obligations

Ratios

Current ratio

Quick (or acid test) ratio

Basic Financial Ratios

Liquidity Ratios

Ch 4 -18

Extent of debt financing

Ratios

Debt-to-total assets

Debt-to-equity

Long-term debt-to-equity

Times-interest-earned

Basic Financial Ratios

Leverage Ratios

4

Ch 4 -19

Effective use of firm’s

resources

Ratios

Inventory turnover

Fixed assets turnover

Total assets turnover

Accounts receivable turnover

Average collection period

Basic Financial Ratios

Activity Ratios

Ch 4 -20

Effectiveness shown by

returns on sales and

investment

Ratios

Gross profit margin

Operating profit margin

Net profit margin

Return on total assets (ROA)

Basic Financial Ratios

Profitability Ratios

Ch 4 -21

Effectiveness shown by

returns on sales &

investment

Ratios

Return on stockholders’

equity (ROE)

Earnings per share

Price-earnings ratio

Basic Financial Ratios

Profitability Ratios

(cont’d)

Ch 4 -22

Firm’s ability to

maintain economic

position

Ratios

Sales

Net Income

Earnings per share

Dividends per share

Basic Financial Ratios

Growth Ratios

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?

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?

5

Ch 4 -25

Production/Operations

Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality

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?

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?

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

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?

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?

6

Ch 4 -31

Management Information Systems

Purpose

Improve performance of an

enterprise by improving the quality

of managerial decisions

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?

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?

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