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CHAPTER 4

THE INTERNAL ASSESSMENT

•ER IKA S. N IC O L AS , M BA , R EB
CHAPTER OBJECTIVES
1. Describe how to perform an internal strategic-
management audit.
2. Discuss the Resource-Based View (RBV) in strategic
management.
3. Discuss key interrelationships among the functional
areas of business.
4. Identify the basic functions or activities that make up
management, marketing, finance/accounting,
production/ operations, research and development,
and management.
CHAPTER OBJECTIVES
5. Explain how to determine and prioritize a firm’s
internal strengths and weaknesses.
6. Explain the importance of financial ratio analysis.
7. Discuss the nature and role of management
information systems in strategic management.
8. Develop an Internal Factor Evaluation (IFE) Matrix.
9. Explain benchmarking as a strategic management
tool.
Internal Audit
Identify strengths and weaknesses in
Management
Marketing
Finance and accounting
Production and operations
Research and development
Management information systems
Nature of an Internal Audit
Basis for Objectives & Strategies

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

Distinctive Competencies:

Firm’s set of unique capabilities


allowing them to gain advantage
DISTINCTIVE COMPETENCIES OF

STARBUCKS
Quality and variety of Coffee
Employee Friendly
Consistency
Location
Brand Image

HP
MBWA
Employee Friendly
DISTINCTIVE COMPETENCIES VS COMPETITIVE
ADVANTAGE

•DISTINCTIVE
COMPETENCY

making shoes constructed of


leather and suede uppers.
COMPETITIVE ADVANTAGE
•COMPETITIVE ADVANTAGE:

HUSH PUPPIES ICON


Key Internal Forces

Distinctive Competencies:

Building competitive advantage


involves taking advantage of
distinctive competencies
Internal Audit Process
Parallels process of external audit

Information gathered from:


 Management
 Marketing
 Finance/accounting
 Production/operations
 Research & development
 Management information systems
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
Internal Audit

Financial Ratio Analysis

Exemplifies complexity of
relationships among functional areas
of the business
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
Integrating Strategy & Culture

Organizational Culture

 Resistant to change
 May represent:
 Strength
 Weakness
Integrating Strategy & Culture

Values

Legends Beliefs

Cultural
Heroes Rites
Products

Symbols Rituals
Myths
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
Marketing
Marketing Functions
1. Customer analysis

2. Selling products/services

3. Product & service planning

4. Pricing

5. Distribution

6. Marketing research

7. Opportunity analysis
Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies
Finance/Accounting

1. Investment decision (Capital


budgeting)
2. Financing decision

3. Dividend decision
Basic Financial Ratios

Firm’s ability to meet


its short-term
obligations

Liquidity Ratios
Ratios

Current ratio
Quick (or acid test) ratio
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
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
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)
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
Basic Financial Ratios

Firm’s ability to
maintain economic
position

Ratios
Growth Ratios
Sales
Net Income
Earnings per share
Dividends per share
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?
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?
Production/Operations

Production/Operations Functions
 Process
 Capacity
 Inventory
 Workforce
 Quality
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?
Production/Operations Audit

•Are quality-control policies & procedures


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

•Are MIS and computer systems


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

Purpose

 Improve performance of an
enterprise by improving the quality
of managerial decisions
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?
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?
• In a world where customer preferences are volatile,
the identity of customers is changing, and the
technologies for serving customer requirements are
continually formulating long-term strategy. When the
external environment is in a state of flux,the firm’s
own resources and capabilities may be a much more
stable basis on which to define its identity. Hence, a
definition of a business in terms of what it is capable
of doing may offer a more durable basis for strategy
than a definition based upon the needs which the
business seeks to satisfy.

•Robert Grant
RESOURCE-BASED VIEW
The Resource-Based View (RBV) approach to
competitive advantage contends that internal
resources are more important for a firm than
external factors in achieving and sustaining
competitive advantage.
RBV theory asserts that resources are
actually what helps a firm exploit opportunities and
neutralize threats.
RBV
RESOURCE-BASED VIEW

For a resource to be valuable, it must be either


(1) rare, (2) hard to imitate, or (3) not easily
substitutable. Often called empirical
indicators, these three characteristics of
resources enable a firm to implement
strategies that improve its efficiency and
effectiveness and lead to a sustainable
competitive advantage.
VALUE CHAIN ANALYSIS
Value chain analysis (VCA) refers to the process whereby
a firm determines the costs associated with
organizational activities from purchasing raw
materials to manufacturing product(s) to marketing
those products. VCA aims to identify where low-cost
advantages or disadvantages exist anywhere along
the value chain from raw material to customer service
activities.
•Ch
4-
BENCHMARKING
Benchmarking is an analytical tool used to determine whether
a firm’s value chain activities are competitive compared to
rivals and thus conducive to winning in the marketplace.
Benchmarking entails measuring costs of value chain
activities across an industry to determine “best practices”
among competing firms for the purpose of duplicating or
improving upon those best practices. Benchmarking
enables a firm to take action to improve its competitiveness
by identifying (and improving upon) value chain activities
where rival firms have comparative advantages in cost,
service, reputation, or operation.
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
ORGANIZATIONAL CULTURE YES, TRUE

•Copyright © 2011 Pearson Education, Inc. •Ch 4


•Publishing as Prentice Hall -48