The Internal Assessment: Strategic Management: Concepts & Cases 10 Edition Fred David

Chapter 4
The Internal Assessment
Strategic Management:
Concepts & Cases
10th Edition
Fred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Ch 4 -1
Copyright 2005 Prentice Hall
Chapter Outline
The Nature of an Internal Audit
The Resource-Based View (RBV)
Integrating Strategy & Culture
Ch 4 -2
Chapter Outline (cont’d)
Management
Marketing
Opportunity Analysis
Ch 4 -3
Finance/Accounting
Production/Operations
Research & Development
Ch 4 -4
Management Information Systems
The Internal Factor Evaluation (IFE) Matrix
Ch 4 -5
Internal Assessment
The biggest levers you’ve got to change a

company are strategy, structure, and culture.
If I could pick two, I’d pick strategy and
culture. –
Wayne Leonard, CEO, Entergy
Weak leadership can wreck the soundest

strategy. –
Sun Zi
Ch 4 -6
The Nature of an Internal
Audit
Functional Areas of Business
-- Strengths
-- Weaknesses
Ch 4 -7
Nature of an Internal Audit
Basis for Objectives & Strategies
 Internal strengths/weaknesses
 External opportunities/threats
 Clear statement of mission
Ch 4 -8
Key Internal Forces
Functional Business Areas:
Vary by organization
Divisions have differing strengths &
weaknesses
Ch 4 -9
Key Internal Forces
Distinctive Competencies:
Firm’s strengths that cannot be easily

matched or imitated by competitors
Ch 4 -10
Key Internal Forces
Building competitive advantage involves

taking advantage of distinctive
competencies
Ch 4 -11
Key Internal Forces
Strategies designed to improve on a

firm’s weaknesses and turn to strengths
Ch 4 -12
Internal Audit
Parallels process of external audit
•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management information Systems
Ch 4 -13
Internal Audit
Involvement in performing an internal

strategic-management audit provides
vehicle for understanding nature and
effect of decisions in other functional
business areas of the firm
Ch 4 -14
Internal Audit
Key to Organizational Success
Coordination & understanding among

managers from all functional areas
Ch 4 -15
Internal Audit
Functional Relationships
Number and complexity increases

relative to organization size
Ch 4 -16
Internal Audit
Financial Ratio Analysis
Exemplifies complexity of relationships

among functional areas of the business
Ch 4 -17
Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important

than external factors
Ch 4 -18
3 All Encompassing Categories
1. Physical resources
2. Human resources
3. Organizational resources
Ch 4 -19
Empirical Indicators
 Rare
 Hard to imitate
 Not easily substitutable
Ch 4 -20
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
Ch 4 -21
Organizational Culture
 Resistant to change
 May represent
 Strength
 Weakness
Ch 4 -22
Values
Legends Beliefs
Heroes
Cultural Rites
Products
Symbols Rituals
Myths
Ch 4 -23
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 -24
Management
Functions of Management
1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
Ch 4 -25
Management
Stage When Most
Function Important
Planning Strategy Formulation
Organizing Strategy Implementation
Motivating Strategy Implementation
Staffing Strategy Implementation
Controlling Strategy Evaluation
Ch 4 -26
Management
Planning
 Beginning of management process

 Bridge between present & future
 Improves likelihood of attaining
desired results
Ch 4 -27
Management
Forecasting
Establishing objectives
Planning Devising strategies
Developing policies
Setting goals
Ch 4 -28
Management
Organizing
 Achieves coordinated effort

 Defines task & authority relationships
 Departmentalization
 Delegation of authority
Ch 4 -29
Management
Organizational design
Job specialization
Job descriptions
Job specifications
Organizing Span of control
Unity of command
Coordination
Job design
Job analysis
Ch 4 -30
Management
Motivating
 Influencing to accomplish specific

objectives
 Communication – major component
Ch 4 -31
Management
Leadership
Communication
Work groups
Job enrichment
Motivating
Job satisfaction
Needs fulfillment
Organizational change
Morale
Ch 4 -32
Management
Staffing
 Personnel management
 Human resources management
Ch 4 -33
Management
Wage & salary admin.

Employee benefits
Interviewing
Hiring
Discharging
Staffing
Training
Management development
Affirmative Action
EEO
Labor relations
Ch 4 -34
Management
Controlling
 Establishing performance standards

 Ensure actual operations conform to
planned operations
 Taking corrective actions
Ch 4 -35
Management
Quality
Financial
Sales
Inventory
Controlling
Expense
Analysis of variance
Rewards
Sanctions
Ch 4 -36
Management Audit Checklist
•Does the firm use strategic management

concepts?
•Are objectives/goals measurable? Well
communicated?
•Do managers at all levels plan
effectively?
Ch 4 -37
•Do managers delegate well?

•Is the organization’s structure
appropriate?
•Are job descriptions clear?
•Are job specifications clear?
•Is employee morale high?
Ch 4 -38
•Is employee absenteeism low?

•Is employee turnover low?
•Are the reward mechanisms effective?
•Are the organization’s control
mechanisms effective?
Ch 4 -39
Marketing
Customer Needs/Wants for Products/Services
1. Defining
2. Anticipating
3. Creating
4. Fulfilling
Ch 4 -40
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 -41
Marketing
Customer surveys
Consumer information
Market positioning
Customer
strategies
Analysis
Customer profiles
Market segmentation
strategies
Ch 4 -42
Marketing
Advertising
Sales
Promotion
Selling
Products/Services Publicity
Sales force management
Customer relations
Dealer relations
Ch 4 -43
Marketing
Test marketing
Brand positioning
Devising warrantees
Planning
Product/Service Packaging
Product features/options
Product style
Quality
Ch 4 -44
Marketing
Forward integration
Discounts
Credit terms
Pricing
Condition of sale
Markups
Costs
Unit pricing
Ch 4 -45
Marketing
Warehousing
Channels
Coverage
Distribution Retail site locations
Sales territories
Inventory levels
Transportation
Ch 4 -46
Marketing
Data collection
Marketing Research Data input
Data analysis
Support business functions
Ch 4 -47
Marketing
Assessing costs
Assessing benefits
Opportunity
Analysis
Assessing risks
Cost/benefit/risk analysis
Ch 4 -48
Marketing
1. Are markets segmented effectively?

2. Is the organization positioned well among
competitors?
3. Has the firm’s market share been
increasing?
4. Are the distribution channels reliable &
cost effective?
5. Is the sales force effective?
Ch 4 -49
Marketing
6. Does the firm conduct market research?

7. Are product quality & customer service
good?
8. Are the firm’s products/services priced
appropriately?
9. Does the firm have effective promotion,
advertising, & publicity strategies?
Ch 4 -50
Marketing
10. Are the marketing planning & budgeting

effective?
11. Do the firm’s marketing managers have
adequate experience and training?
Ch 4 -51
Finance/Accounting
 Determining financial strengths &

weaknesses key to strategy
formation
Ch 4 -52
Finance/Accounting
Finance/Accounting Functions
1. Investment decision (Capital budgeting)

2. Financing decision
3. Dividend decision
Ch 4 -53
Basic Financial Ratios
Firm’s ability to meet its

short-term obligations
Liquidity Ratios
Ratios
Current ratio
Quick (or acid test) ratio
Ch 4 -54
Extent of debt financing
Ratios
Leverage Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest earned
Ch 4 -55
Effective use of firm’s

resources
Activity Ratios Ratios
Inventory-turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
Ch 4 -56
Effectiveness shown by
returns on sales &
investment
Profitability Ratios
Ratios
Gross profit margin

Operating profit margin
Net profit margin
Return on total assets (ROA)
Ch 4 -57
Effectiveness shown by
returns on sales &
investment
Profitability Ratios
(cont’d) Ratios
Return on stockholders equity

(ROE)
Earnings per share
Price-earnings ratio
Ch 4 -58
Firm’s ability to maintain

economic position
Growth Ratios Ratios
Sales
Net income
Earnings per share
Dividends per share
Ch 4 -59
Finance/Accounting Audit
•Where is the firm strong/weak indicated

by financial ratio analysis?
•Can the firm raise short-term capital as
needed?
•Can the firm raise long-term capital as
needed through debt and/or equity?
Ch 4 -60
Finance/Accounting Audit
•Does the firm have sufficient working

capital?
•Are capital budgeting procedures
effective?
•Are dividend payout policies reasonable?
•Are the firm’s financial managers
experienced & well trained?
Ch 4 -61
Production/Operations Functions
 Process
 Capacity
 Inventory
 Workforce
 Quality
Ch 4 -62
Facility design
Technology selection
Facility layout
Process Process flow analysis
Facility location
Line balancing
Process control
Ch 4 -63
Forecasting
Facilities planning
Capacity Aggregate planning
Scheduling
Capacity planning
Queuing analysis
Ch 4 -64
Raw materials
Inventory Work in process
Finished goods
Materials handling
Ch 4 -65
Job design
Work measurement
Workforce Job enrichment
Work standards
Motivation techniques
Ch 4 -66
Quality control
Sampling
Quality Testing
Quality assurance
Cost Control
Ch 4 -67
Production/Operations Audit
•Are suppliers of materials, parts, etc.

reliable and reasonable?
•Are facilities, equipment & machinery in
good condition?
•Are inventory-control policies and
procedures effective?
Ch 4 -68
Production/Operations Audit
•Are quality-control policies & procedures

effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?
Ch 4 -69
Research & Development Functions
 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs
Ch 4 -70
Financing as many
projects as possible
use percent-of-sales
method
R&D Budgets
Budgeting relative to
competitors
How many successful

new products are
needed
Ch 4 -71
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 -72
Research & Development Audit
•Are MIS and computer systems

adequate?
•Is communication between R&D & other
organizational units effective?
•Are present products technologically
competitive?
Ch 4 -73
Management Information
Systems
Purpose
 Improve performance of an enterprise by

improving the quality of managerial
decisions.
Ch 4 -74
Systems
 Information Systems
 CIO/CTO
 Security
 User-friendly
 E-commerce
Ch 4 -75
Systems Audit
•Do managers use the information system

to make decisions?
•Is there a CIO or Director of information
systems position in the firm?
•Is data updated regularly?
Ch 4 -76
Systems Audit
•Do managers from all functional areas

contribute input to the information system?
•Are there effective passwords for entry
into the firm’s information system?
•Are strategists of the firm familiar with the
information systems of rival firms?
Ch 4 -77
Systems Audit
•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 -78
IFE– Gateway Computers (2003)
Wtd
Key Internal Factors Weight Rating
Score
Strengths
1. Several new senior executive with world-
0.05 4 0.40
class skills and leadership experience
2. Continuous decline in operating costs
0.05 3 0.15
and cost of goods sold
3. Well-known brand name 0.05 3 0.15
4. Consumer Reports (Sept 2002)
0.10 4 0.40
recommended Gateway 500X as #1
5. As a direct seller, Gateway holds high
0.05 3 0.15
brand recognition
Ch 4 -79
Wtd
Score
Strengths (cont’d)
6. Gateway is diversifying into non-PC
0.10 3 0.30
products
7. Good relationship with its suppliers. 0.05 4 0.20
8. Economies of scale, the 6th largest PC
0.05 4 0.20
maker I the world
9. Gateway retails stores excellent 0.05 3 0.15
Ch 4 -80
Wtd
Score
Weaknesses
1. High operating expense (22% of revenue
0.05 3 0.15
vs. 10% for Dell)
2. Almost no budget for R&D vs. Dell’s 18%
0.10 1 0.05
of revenue
3. Low return on assets ratio 0.025 1 0.10
4. No niche market 0.025 2 0.05
Ch 4 -81
Wtd
Score
Weaknesses (cont’d)
5. Shortage of cash due to successive
0.10 2 0.20
losses
6. Limited number Gateway stores 0.05 2 0.10
7. Weak performance in overseas market 0.10 2 0.20
TOTAL 1.00 2.85
Ch 4 -82
For Review (Chapter 4)
Key Terms & Concepts
Activity Ratios Cost/Benefit Analysis
Capital Budgeting Cultural Products
Communication Distinctive Competencies
Controlling Distribution
Ch 4 -83
Functions of
Dividend Decision
Finance/Accounting
Empirical Indicators Functions of Management
Financial Ratio Analysis Functions of Marketing
Functions of Production/
Financing Decision
Operations
Ch 4 -84
Growth Ratios Investment Decision
Human Resource
Leverage Ratios
Management
Internal Audit Liquidity Ratios
Internal Factor Evaluation Management Information

(IFE) Matrix Systems
Ch 4 -85
Motivating Personnel Management
Opportunity Analysis Planning
Organizational Culture Pricing
Product & Service

Organizing
Planning
Ch 4 -86
Selling
Functions
Profitability Ratios Staffing
Research & Development Synergy
Resource Based View

Test Marketing
(RBV)
Ch 4 -87
Value Chain Analysis

(VCA)
Ch 4 -88

The Internal Assessment: Strategic Management: Concepts & Cases 10 Edition Fred David

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Chapter 4

The Internal Assessment

The Nature of an Internal Audit

The Resource-Based View (RBV)

Integrating Strategy & Culture

Research & Development

Management Information Systems

The Internal Factor Evaluation (IFE) Matrix

The biggest levers you’ve got to change a

Weak leadership can wreck the soundest

Functional Areas of Business

Basis for Objectives & Strategies

Functional Business Areas:

Firm’s strengths that cannot be easily

Building competitive advantage involves

Strategies designed to improve on a

Parallels process of external audit

Involvement in performing an internal

Key to Organizational Success

Coordination & understanding among

Number and complexity increases

Financial Ratio Analysis

Exemplifies complexity of relationships

Approach to Competitive Advantage

Internal resources are more important

3 All Encompassing Categories

Pattern of behavior developed by an

Organizational Culture Can Inhibit

 Miss external changes due to strongly

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

 Beginning of management process

Planning Devising strategies

 Achieves coordinated effort

 Influencing to accomplish specific

Wage & salary admin.

 Establishing performance standards

•Does the firm use strategic management

•Do managers delegate well?

•Is employee absenteeism low?

Customer Needs/Wants for Products/Services

1. Are markets segmented effectively?

6. Does the firm conduct market research?

10. Are the marketing planning & budgeting

 Determining financial strengths &

1. Investment decision (Capital budgeting)

Firm’s ability to meet its

Extent of debt financing

Effective use of firm’s

Activity Ratios Ratios

Gross profit margin

Return on stockholders equity

Firm’s ability to maintain

Growth Ratios Ratios

•Where is the firm strong/weak indicated

•Does the firm have sufficient working

•Are suppliers of materials, parts, etc.

•Are quality-control policies & procedures

Research & Development Functions

 Development of new products before

How many successful