Chapter 4

The Internal Assessment

Strategic Management:
Concepts & Cases
17th Edition
Global Edition
Fred David

Ch 4 -1
Ch 4 -2
Internal Assessment

“Great spirits have always encountered

violent opposition from mediocre minds.”
– Albert Einstein

“Weak leadership can wreck the soundest

strategy.”
– Sun Tzu

Ch 4 -3
Nature of an Internal Audit

Basis for Objectives & Strategies

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

Ch 4 -4
Key Internal Forces

Distinctive Competencies:
Firm’s strengths that cannot be
easily matched or imitated by
competitors
Building competitive advantage

involves taking advantage of

distinctive competencies
Ch 4 -5
Internal Audit Process
Parallels process of external audit

Information gathered from:

 Management
 Sales and Marketing
 Finance/Accounting
 Production/Operations
 Research & Development
 Management Information Systems

Ch 4 -6
Internal Audit

Involvement in performing an internal strategic-

management audit provides a vehicle for
understanding the nature and effect of decisions
in other functional business areas of the firm

 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 -7
Internal Audit

Financial Ratio Analysis

Exemplifies complexity of
relationships among functional areas
of the business

Ch 4 -8
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

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

Ch 4 -9
Integrating Strategy & Culture

Values

Legends Beliefs

Heroes
Cultural Rites
Products

Symbols Rituals
Myths

Ch 4 -10
Management
Functions of Management Stage When Most
Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Ch 4 -11
Management
 Beginning of management process
 Bridge between present & future
 Improves likelihood of attaining desired results

Developing a mission
Forecasting future events
Planning and trends
Establishing objectives
Choosing strategies to
pursue
Ch 4 -12
Planning

 Synergy
 Can develop through planning
 Exists when everyone pulls

together as a team that knows

what it wants to achieve

Ch 4 -13
Management
Organizing
 Achieves coordinated effort
 Defines task & authority relationships
 Determines who does what
 Determines who reports to whom
 Breaking down tasks into jobs
 Combining jobs to form departments
 Delegating authority

Ch 4 -14
Management
Motivating
 Influencing to accomplish specific objectives
 Four components include:
 Leadership
 Group dynamics
 Communication
 Organizational change

Ch 4 -15
Management

Staffing

 Personnel management
 Human resource management

Ch 4 -16
Management
Staffing
 Recruiting  Evaluating
 Interviewing  Rewarding
 Testing  Disciplining
 Selecting  Promoting
 Orienting  Transferring
 Training  Demoting
 Developing  Dismissing
 Caring for
Ch 4 -17
Management
Controlling

1. Establish performance standards

2. Measure individual and organizational
performance
3. Compare actual performance to
planned performance standards
4. Take corrective action
Ch 4 -18
Management Audit Checklist

•• Does
Does the
the firm
firm use
use strategic
strategic management
management
concepts?
concepts?
•• Are
Are objectives/goals
objectives/goals measurable?
measurable? Well
Well
communicated?
communicated?
•• Do
Do managers
managers at at all
all levels
levels plan
plan
effectively?
effectively?
•• Do
Do managers
managers delegate
delegate well?
well?

Ch 4 -19
Management Audit Checklist

•• Is
Is the
the organization’s
organization’s structure
structure appropriate?
appropriate?
•• Are
Are job
job descriptions
descriptions clear?
clear?
•• Are
Are job
job specifications
specifications clear?
clear?
•• Is
Is employee
employee morale
morale high?
high?
•• Is
Is employee
employee absenteeism
absenteeism low?
low?
•• Is
Is employee
employee turnover
turnover low?
low?
•• Are
Are the
the reward
reward mechanisms
mechanisms effective?
effective?
•• Are
Are the
the organization’s
organization’s control
control mechanisms
mechanisms
effective?
effective?

Ch 4 -20
Marketing
Customer Needs or Wants for Products and
Services

1. Defining Marketing Functions

2. Anticipating 1. Customer analysis

2. Selling products/services
3. Creating 3. Product & service planning
4. Pricing
4. Fulfilling 5. Distribution
6. Marketing research
7. Opportunity analysis

Ch 4 -21
Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies

Ch 4 -22
Marketing

Selling Product/Service
Products/Services Planning

Test marketing
Brand positioning
Advertising Devising warranties
Sales Promotion Packaging
Publicity Product features/options
Personal Selling Product style
Sales force management Quality
Customer relations Deleting old products
Dealer relations Providing for customer
service
Ch 4 -23
Marketing

Pricing Distribution
Major Stakeholders

Warehousing
Distribution channels
Consumers
Retail site locations
Governments
Sales territories
Suppliers
Inventory levels
Distributors
Transportation
Competitors
Wholesaling
Retailing

Ch 4 -24
Marketing

Cost/Benefit
Marketing Research Analysis

Gather data Assessing costs

Record data Assessing benefits

Analyze data Assessing risks

Ch 4 -25
 Marketing Audit
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?
6. Does the firm conduct market research?
7. Are product quality & customer service good?
8. Are the firm’s products and services priced appropriately?
9. Does the firm have effective promotion, advertising, and publicity
strategies?
10. Are the marketing, planning, and budgeting effective?
11. Do the firm’s marketing managers have adequate experience and
training?
12. Is the firm’s Internet presence excellent as compared to rivals?

Ch 4 -26
Finance/Accounting

1. Investment decision (Capital

budgeting)
2. Financing decision
3. Dividend decision

Ch 4 -27
Basic Financial Ratios

Liquidity Ratios Leverage Ratios

Firm’s ability to meet its Extent of debt financing

short-term obligations
Ratios
Ratios
Debt-to-total assets
Current ratio Debt-to-equity
Quick (or acid test) ratio Long-term debt-to-equity
Times-interest-earned

Ch 4 -28
Basic Financial Ratios
Activity Ratios
Effective use of firm’s
resources
Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover Return on stockholders’ equity (ROE)
Accounts receivable turnover
Average collection period
Profitability Ratios
Effectiveness shown by returns
on sales and investment
Ratios
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)
Earnings per share
Price-earnings ratio
Ch 4 -29
Basic Financial Ratios

Firm’s ability to
maintain economic
position

Ratios
Growth Ratios

Sales
Net Income
Earnings per share
Dividends per share

Ch 4 -30
Ch 4 -31
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?
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?

Ch 4 -32
Production/Operations

Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality

Ch 4 -33
Ch 4 -34
Production/Operations Audit
•• Are
Aresuppliers
suppliersof ofmaterials,
materials,parts,
parts,etc.
etc.reliable
reliableand
and
reasonable?
reasonable?
•• Are
Arefacilities,
facilities,equipment,
equipment,machinery,
machinery,and
andoffices
officesin
in
good
goodcondition?
condition?
•• Are
Areinventory-control
inventory-controlpolicies
policiesand
andprocedures
procedures
effective?
effective?
•• Are
Arequality-control
quality-controlpolicies
policies&&procedures
procedureseffective?
effective?
•• Are
Arefacilities,
facilities,resources,
resources,and
andmarkets
marketsstrategically
strategically
located?
located?
•• Does
Doesthethefirm
firmhave
havetechnological
technologicalcompetencies?
competencies?

Ch 4 -35
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 -36
Research & Development Audit

•• Are
Arethe
theR&D
R&Dfacilities
facilitiesadequate?
adequate?
•• IfIfR&D
R&Disisoutsourced,
outsourced,isisititcost-effective?
cost-effective?
•• Are
Arethe
theR&D
R&Dpersonnel
personnelwell wellqualified?
qualified?
•• Are
AreR&D
R&Dresources
resourcesallocated
allocatedeffectively?
effectively?
•• Are
AreMIS
MISand
andcomputer
computersystems
systemsadequate?
adequate?
•• Is
Iscommunication
communicationbetween
betweenR&DR&Dandandother
other
organizational
organizationalunits
unitseffective?
effective?
•• Are
Arepresent
presentproducts
productstechnologically
technologicallycompetitive?
competitive?

Ch 4 -37
Management Information Systems

Purpose

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

Ch 4 -38
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? 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 -39
Internal (factor) evaluation matrix

 The IFE is a summary of the internal audit

 Summarizes internal strengths and
weaknesses within the functional areas of the
business.
 Identifies and evaluates cross-functional
relationships; e.g. marketing and finance.
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

Ch 4 -41
Internal factor evaluation (IFE)
 List key internal factors as identified in the internal-audit process. Use a
total from ten to twenty internal factors including both strengths and
weaknesses.
 Assign a weight ranging from 0 (not important) to 1.0 (very important).
The weight indicates the relative importance of the factor to being
successful in the firm’s industry. The sum of all the weights must equal
1.0.
 Assign a 1-4 rating to each factor to indicate whether that factor
represents a major weakness (1), minor weakness (2), minor strength (3),
or major strength (4).
 Multiply each factor’s weight by its rating to determine a weighted score
for each variable.
 Sum the weighted scores for each variable to determine the total
weighted score for the organization.
 Total weighted scores of below 2.5 indicate an internally weak
organization.