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Chapter 4

The Internal Assessment

Strategic Management:
Concepts & Cases
13th Edition
Fred David

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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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Nature of an Internal Audit

Basis for Objectives & Strategies

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

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Key Internal Forces

Distinctive Competencies:

Firm’s strengths that cannot be


easily matched or imitated by
competitors

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Key Internal Forces

Distinctive Competencies:

Building competitive advantage


involves taking advantage of
distinctive competencies

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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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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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Internal Audit

Financial Ratio Analysis

Exemplifies complexity of
relationships among functional areas
of the business

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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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Integrating Strategy & Culture

Organizational Culture

 Resistant to change
 May represent:
 Strength
 Weakness

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Integrating Strategy & Culture

Values

Legends Beliefs

Cultural
Heroes Rites
Products

Symbols Rituals
Myths

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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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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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Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies

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Finance/Accounting

1. Investment decision (Capital


budgeting)
2. Financing decision

3. Dividend decision

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Basic Financial Ratios

Firm’s ability to meet its


short-term obligations

Liquidity Ratios
Ratios

Current ratio
Quick (or acid test) ratio

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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

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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

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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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Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment

Profitability Ratios Ratios


(cont’d)
Return on stockholders’
equity (ROE)
Earnings per share
Price-earnings ratio

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Basic Financial Ratios

Firm’s ability to
maintain economic
position

Ratios
Growth Ratios
Sales
Net Income
Earnings per share
Dividends per share

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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?

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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?

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Production/Operations

Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality

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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?

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Production/Operations Audit

•Are quality-control policies & procedures


effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?

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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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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?

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Research & Development Audit

•Are MIS and computer systems


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

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Management Information Systems

Purpose

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

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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?
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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?

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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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