NATURE OF INTERNAL AUDIT Pattern of behavior that has been
developed by an organization as it learns to
All organizations have strengths and weaknesses in cope with its problem of external adaptation the functional areas of business. No enterprise is and internal integration, and that has equally strong or weak in all areas. worked well enough to be considered valid Internal Factors + External Factors + Clear Mission and to be taught to new members as the Statement Basis for Objectives & Strategies correct way to perceive, think, and feel. Remarkably resistant to change KEY INTERNAL FORCES Must work together with strategies Is important to be integrated especially in Weaknesses Strengths Distinctive cross-cultural firms Competencies Competitive Advantage Should infuse individuals with enthusiasm PROCESS OF PERFORMING AN INTERNAL for implementing strategies AUDIT Gathering, assimilating, and evaluating MANAGEMENT information about the firms operations. the organization and coordination of the activities Excellent vehicle for improving the process of a business in order to achieve defined of communication in the organization. objectives. Provides more opportunity for participants to understand how their The Functions Of Management Consist Of jobs, departments, and divisions fit Five Basic Activities: into the whole organization. Planning -is the process by which one Managers from different determines whether to attempt a task, departments and divisions of the works out the most effective way of firm understand the nature and reaching desired objectives, and prepares to effect of decisions in other functional overcome unexpected difficulties with business areas in the firm. adequate resources The Resource-Based View (RBV) Organizing -its purpose is to achieve Internal Resources are more important for a firm coordinated effort by defining task and than external factors in achieving and sustaining authority relationships and determining who competitive advantage. Resources are what does what and who reports to whom actually help a firm exploit opportunities and Motivating -is the process of influencing people neutralize threats. to accomplish specific objectives Internal Resources Categories The motivating includes at least four Physical Resources major components: Human Resources Leadership,Group Dynamics, Organizational Resources Communication, and Organizational Change Empirical Indicators Characteristics of resources enabling a firm to implement strategies that Staffing -its activities are centered on personnel improve its efficiency and effectiveness and to lead or human resource management a sustainable competitive advantage. Controlling -includes all those activities Rare undertaken to ensure that actual operations Hard to imitate conform to planned operations Not easily substitutable Contolling consists of four basic Integrating Strategy and Culture steps: Organizational Culture Establishing performance standards Measuring individual and organizational performance compute the total costs Comparing actual performance to associated with a decision planned performance standards estimate the total benefits from Taking corrective actions the decision compare the total costs with the MARKETING - the process of defining, total benefits anticipating, creating, and fulfilling customers needs and wants for products and services Finance/Accounting Financial condition is often considered the single Basic Functions Of Marketing best measure of a firms competitive position and Customer Analysis the examination and overall attractiveness to investors. evaluation of consumer needs, desires, and Finance/Accounting Function wants Investment decision is the allocation and Selling Products/Services includes many reallocation of capital and resources to projects, marketing activities, such as advertising, products, assets, and divisions of an organization. sales promotion, publicity, personal selling, Financing decision determines the best capital sales force management, customer structure for the firm and includes examining relations, and dealer relations various methods by which the firm can raise Product and Service Planning includes capital. activities such as test marketing; product Key Financial Ratios Debt-to-equity ratio and brand positioning; devising warranties; Debt-to-total-assets ratio packaging; determining product options, Dividend decision determines the amount of features, style, and quality; deleting old funds that are retained in a firm compared to the products; and providing for customer amount paid out to stockholders. service Financial Ratios Pricing Earnings-per-share ratio Five Major Stakeholders affect Dividends-per-share ratio Price-earnings ratio pricing decisions: Consumers Reasons for paying dividends Governments Paying cash dividends is customary Suppliers Dividends represent a sales point for Distributors investment bankers Competitors Shareholders often demand Distribution includes warehousing, distribution dividends A myth exists that paying dividends channels, distribution coverage, retail site will result in a higher stock price locations, sales territories, inventory levels and location, transportation carriers, Financial ratios wholesaling, and retailing The most widely used method for determining an Marketing Research is the systematic organizations strengths and weaknesses in the gathering, recording, and analyzing of data investment, financing, and dividend areas. about problems relating to the marketing of Types of Financial Ratios goods and services. 1) Liquidity ratios Opportunity Analysis involves assessing the a) Current ratio costs, benefits, and risks associated with Current assets marketing decisions Current liabilities b) Quick ratio Three Steps are required to perform a cost/benefit analysis: Current assets minus Net income inventory Total stockholders Current liabilities equity 2) Leverage ratios f) Earnings per share a) Debt-to-total-assets ratio Net income Total debt # of shares of Total assets common stock b) Debt-to-equity ratio outstanding Total asset g) Price-earnings ratio Total stockholders Market price per equity share c) Long-term debt-to-equity ratio Earnings per share Long-term debt 5) Growth ratios Total stockholders (a) Sales equity (b) Net income d) Times-interested-earned ratio (c) Earnings per share Profits before interest (d) Dividends per share and taxes Total interest charges PRODUCTION/OPERATIONS FUNCTION 3) Activity ratios Consists of all those activities that transform a) Inventory turnover inputs into goods and services. Sales Inventory of finished PRODUCTION/OPERATIONS MANAGEMENT goods Deals with inputs, transformations, and b) Fixed assets turnover outputs that vary across industries and Sales markets. Fixes assets MANUFACTURING OPERATIONS c) Total assets turnover Transforms or converts inputs such as raw Sales materials, labor, capital, machines, and Total assets d) Accounts receivable turnover facilities into finished goods and services Annual credit sales The Basic Functions (Decisions) Within Accounts receivable Production/Operations e) Average collection period A. PROCESS Accounts receivable 1. Choice of technology Total credit sales/365 2. Facility layout days 3. Process flow analysis 4) Profitability ratios 4. Facility location a) Gross profit margin 5. Line balancing Sales minus cost of 6. Process control goods sold 7. Transportation analysis sales B. CAPACITY b) Operating profit margin 1. Forecasting Earnings before interest and taxes 2. Facilities planning Sales 3. Aggregate planning c) Net profit margin 4. Scheduling Net Income 5. Capacity planning Sales 6. Queuing analysis d) Return on total assets C. INVENTORY Net income Managing the level of raw materials, work- Total assets e) Return on stockholders equity in-process, and finished goods. D. WORKFORCE 1) Financing as many project proposals as Managing the skilled, unskilled, clerical, and possible; managerial employees by caring for job 2) Using a percentage-of-sales method; design, work measurement, job enrichment, 3) Budgeting about the same amount that work standards, and motivation techniques. competitors spend for R&D; or E. QUALITY 4) Deciding how many successful new Ensuring that high-quality goods and products are needed and working backward services are produced by caring for quality to estimate the required R&D investment. control, sampling, testing, quality TWO BASIC FORMS assurance, and cost control. 1) Internal R&D 2) Contract R&D PRODUCTION/OPERATION ACTIVITIES FACTORS MAKING SUCCESSFUL Represent the largest part of an DEVELOPMENT OF NEW PRODUCTS MORE organizations human and capital assets. DIFFICULT AND RISKY CROSS-TRAINING OF EMPLOYEES 1. A shortage of ideas for new products Can increase efficiency, quality, productivity 2. Increased global competition and job satisfaction. 3. Increased market segmentation RESEARCH AND DEVELOPMENT 4. Strong special-interest groups The correlation between R&D 5. Increased government regulations expenditures and successful product launches is not high. Fifth major area of internal operations that MANAGEMENT INFORMATION SYSTEM should be examined for specific strength INFORMATION and weaknesses 1. Ties all business functions together Directed at: 2. Provides the basis for all managerial a.) developing new products before decisions competitors; 3. Data become information only when they b.) improving product quality; and are evaluated, filtered, condensed, c.) improving manufacturing processes to analyzed, and organized for a specific reduce costs. purpose, problem, individual, or time. Strategic and operational partnership Purpose: To improve the performance of an between R&D and the other vital business enterprise by improving the quality of functions is a requirement for an effective managerial decisions. management of the R&D function THE OVERALL MISSION OF R&D 1.) Supporting existing businesses; 2.) Helping launch new businesses; 3.) Developing new products; 4.) Improving product quality; 5.) Improving manufacturing efficiency; and 6.) Deepening or broadening the companys technological VALUE CHAIN ANALYSIS capabilities. VALUE CHAIN INTERNAL AND EXTERNAL R&D The business of a firm in which total revenues FOUR APPROACHES minus total costs of all activities undertaken to develop and market a product or service yields 3.) Assign a 1-to-4 rating to each factor to value. indicate whether that factor represents: VALUE CHAIN ANALYSIS Rating 1.) Process whereby a firm determines the costs 1 a major weakness associated with organizational activities from 2 a minor weakness purchasing raw materials to manufacturing 3 a minor strength product(s) to marketing those products. 4 a major strength 2.) Aims to identify where low-cost advantages 4.) Multiply each factors weight by its or disadvantages exist anywhere along the value rating to determine a weighted score for chain from raw material to customer service each variable. activities. 5.) Sum the weighted scores for each variable to determine the total weighted score for the organization. STEPS IN THE VALUE CHAIN ANALYSIS 1. Divide a firms operations into specific activities or business processes. 2. The analyst attempts to attach a cost to each discrete activity, and the costs could be in terms of both time and money. 3. The analyst converts the cost data into information by looking for competitive cost strengths and weaknesses that may yield competitive advantage or disadvantage. A core competence is a VCA that a firm performs especially well. When a core competence evolves into a major competitive advantage, then it is called a distinctive competence. BENCHMARKING An analytical tool used to determine whether a firms VCA are competitive compared to rivals and thus conducive to winning in the marketplace.
THE INTERNAL FACTOR EVALUATION
MATRIX Summarizes and evaluates the major strengths and weaknesses in the functional areas of a business 5 steps in developing an IFE Matrix 1.) List key internal factors as identified in the internal-audit process. 2.) Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor.