1

__________________________________________________________________________ 2

THE INTERNAL
__________________________________________________________________________
3

AUDIT 4
 REPORTERS
1
1 2
JAYSON BULLANDAY MARY ANJEANETTE BELINGON
2

3 4 4
CHERISHTONE BUSTO JHANA MARIE ALLAPITAN
 REPORTER
1

1
2

JAYSON BULLANDAY
 LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following: 1

 Describe the nature and role of an internal assessment in formulating

2
strategies.
 Discuss why organizational culture is so important in formulating strategies.
 Identify the basic functions (activities) that make up management and their 3
relevance in formulating strategies.
 Identify the basic functions of marketing and their relevance in formulating
strategies. 4
 Discuss the nature and role of finance/accounting, production/operations,
research and development, and management information systems in
formulating strategies.
 Explain value chain analysis and its relevance in formulating strategies.
 Develop and use an Internal Factor Evaluation (IFE) Matrix.
 1
THE NATURE OF AN INTERNAL AUDIT
2
 All organizations have strengths and weaknesses in the functional
areas of business. No enterprise is equally strong or weak in all
areas. 3
 Internal strengths and weaknesses, coupled with external
opportunities and threats and clear vision and mission statements, 4
provide the basis for establishing objectives and strategies.
 KEY INTERNAL FORCES 1

 It is impossible in a strategic-management text to review in depth all 2

the material presented in courses such as marketing, finance,
accounting, management, management information systems, and
3
production and operations. However, strategic planning must include
a detailed assessment of how the firm is doing in all internal areas.
4
 For different types of organizations, such as hospitals, universities,
and government agencies, the functional business areas differ.
 THE PROCESS OF GAINING COMPETITIVE ADVANTAGE
1
IN A FIRM
 Strengths that cannot be easily matched or imitated by competitors are called 2
distinctive competencies.
 Building competitive advantages involves taking advantage of distinctive
competencies. Strategies are designed in part to improve on a firm’s 3
weaknesses, turning them into strengths—and maybe even into distinctive
competencies.
FIGURE 6-1 4
 The process of performing an internal audit 1

2
 The process of performing an internal audit closely parallels the
process of performing an external audit. Representative managers
and employees from throughout the firm need to be involved in 3
determining a firm’s strengths and weaknesses.
 Compared to the external audit, the process of performing an
4
internal audit provides more opportunity for participants to
understand how their jobs, departments, and divisions fit into the
whole organization.
 1
 Strategic planning is most successful when managers and
employees from all functional areas work together to 2
provide ideas and information.
3
 A key to organizational success is effective coordination
and understanding among managers from all functional 4
business areas.
 The resource-based view 1

 The resource-based view (RBV) approach to competitive advantage

contends that internal resources are more important for a firm than 2
external factors in achieving and sustaining competitive advantage.
3
 Proponents of the RBV theory contend that organizational
performance will primarily be determined by internal resources that
4
can be grouped into three all- encompassing categories: 
 (1) Physical resources;
 (2) Human resources; and 
 (3) Organizational resources
 1
 A firm’s resources can be tangible or intangible.
 Resource-based view theory asserts that resources are actually
what helps a firm exploit opportunities and neutralize threats. 2
 The basic premise of the RBV is that the mix, type, amount, and
nature of a firm’s internal resources should be considered first and 3
foremost in devising strategies that can lead to sustainable
competitive advantage.
4
 A resource can be considered valuable to the extent that it is (1)
rare, (2) hard to imitate, or (3) not easily substitutable.
 Integrating strategy and culture 1

 Every business entity has a unique organizational culture that 2

impacts strategic-planning activities.
3
 Organizational culture is “a pattern of behavior that has been
developed by an organization as it learns to cope with its problem 4
of external adaptation and internal integration, and that has
worked well enough to be considered valid and to be taught to
new members as the correct way to perceive, think, and feel.
 Cultural products include values, beliefs, rites, rituals, ceremonies, myths,
stories, legends, sagas, language, metaphors, symbols, folktales, and heroes and
heroines. 1

4
 1

 Dimensions of organizational culture permeate all

2
the functional areas of business. It is something of an
art to uncover the basic values and beliefs that are
3
deeply buried in an organization’s rich collection of
stories, language, heroes, and rituals, but cultural
4
products can represent both important strengths and
weaknesses.
 The strategic-management process takes place largely within a
particular organization’s culture. Lorsch found that executives in 1
successful companies are emotionally committed to the firm’s
culture, but he concluded that culture can inhibit strategic 2
management in two basic ways:
 (1) Managers frequently miss the significance of changing external
conditions because they are blinded by strongly held beliefs; and  3
 (2) When a particular culture has been effective in the past, the
natural response is to stick with it in the future, even during times 4
of major strategic change.
 Organizational culture significantly affects business decisions and
must therefore be evaluated during an internal strategic-
management audit.
1

4
 1

 Internal strengths and weaknesses associated with a 2

firm’s culture sometimes are overlooked because of the
inter-functional nature of this phenomenon. This is a key
3
reason why strategists need to view and understand
their firm as a sociocultural system.
4
 REPORTER

2
2

MARY ANJEANETTE BELINGON

 2

MANAGEMENT & MARKETING FUNCTIONS 3

4
Management is the process of working with people and
resources to effectively and efficiently accomplish organizational
goals and objectives.

Functions of Management 2
(1) Planning
It consists of all those managerial activities related to 3
preparing for the future, such as forecasting, establishing
objectives, devising strategies, and developing policies. 4
(2) Organizing
It includes all those managerial activities that result in a
structure of task and authority relationships.
Sequential activities:

i. Breaking down tasks into jobs

One man draws the wire, another straightens it, a third cuts it,
a fourth points it, a fifth grinds it at the top for receiving the
2
head. Ten men working in this manner can produce 48,000 pins
in a single day, but if they had all wrought separately and
independently, each might at best produce twenty pins in a 3
day. – Adam Smith
ii. Combining jobs to form departments results in an
organizational structure, span of control, and a chain of 4
command.
iii.Delegating authority
“You can tell how good a manager is by observing how his or
her department functions when he or she isn’t there.”
(3) Motivating
It involves efforts directed toward shaping human behavior.
That can just as well be demagoguery. It is not “making friends
and influencing people.” That is flattery. Leadership is the lifting of
a person’s vision to higher sights, the raising of a person’s 2
performance to a higher standard, the building of a person’s
personality beyond its normal limitations. – Drucker
3
(4) Staffing
It refers to human resource (HR) activities, such as recruiting, 4
interviewing, testing, selecting, orienting, training, developing,
caring for, evaluating, rewarding, disciplining, promoting, and
retaining the people, skills and talents necessary to meet current
and future organizational needs.
 2
(5) Controlling
It refers to all those managerial activities undertaken to
ensure that actual operations conform to planned operations 3
such as conducting performance evaluations and taking
necessary action to minimize inefficiencies.
4
Basic steps on controlling activities: 2
i. Establishing performance standards
ii. Measuring individual and organizational performance 3
iii.Comparing actual performance to planned performance
standards
iv. Taking corrective actions 4
Management Audit Checklist of Questions:

1. Does the firm use strategic-management concepts?

2. Are company objectives and goals measurable and well 2
communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well? 3
5. Is the organization’s structure appropriate?
6. Are job descriptions and job specifications clear? 4
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms
effective?
  
Marketing is the process of defining, anticipating, creating, and
fulfilling customers’ needs and wants for products and services.
2
 

Functions of marketing 3

(1) Customer analysis

4
It is the examination and evaluation of consumer needs, desires,
and wants.
(2) Selling products and services
It includes many marketing activities, such as advertising, sales
promotion, publicity and personal selling. The effectiveness of
various selling tools for consumer and industrial products varies.
2
The only way you can directly measure the effect of advertising is
in direct marketing, which is a targeted promotion that provides an
immediate point of sale, like an email campaign that encourages 3
recipients to make a direct purchase or inquiry. - George Parker

(3) Product and service planning 4

It includes activities such as test marketing; product and brand
positioning; deleting old products; and providing for customer
service.
(4) Pricing
Major stakeholders affect pricing decisions:
i. Consumers
ii. Governments
iii.Suppliers 2
iv. Distributors
v. Competitors
3
(5) Distribution
Most producers today do not sell their goods directly 4
to consumers. Various marketing entities act as
intermediaries; they bear a variety of names such as
wholesalers, retailers, brokers, facilitators, agents,
vendors—or simply distributors.
(6) Marketing research
It is the systematic gathering, recording, and analyzing of
data about problems relating to the marketing of goods and 2
services.
Looking at the competition is the company’s best form of
market research. The majority of our strategic successes are 3
ideas that we borrow from the marketplace, usually from a
small regional or local competitor. In each case, we spot a 4
promising new idea, improve on it, and then out-execute our
competitor.
- President of PepsiCo
(7) Cost/benefit analysis
It involves assessing the costs, benefits, and risks 2
associated with marketing decisions.

Steps to perform a cost/benefit analysis: 3

i. Compute the total costs associated with a decision, 4

ii. Estimate the total benefits from the decision, and
iii.Compare the total costs with the total benefits.
Cost/benefit indicators, including the following:

2
i. Net present value (NPV)
ii. Present value of benefits (PVB)
iii.Present value of costs (PVC) 3
iv. Benefit cost ratio (BCR) = PVB/PVC
v. Net benefit = PVB - PVC 4
vi.NPV/k (where k is the level of funds available)
 
Marketing Audit Checklist of Questions:

1. Are markets segmented effectively?

2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and cost effective? 2
5. Does the firm have an effective sales organization?
6. Does the firm conduct market research?
3
7. Are product quality and customer service good?
8. Are the firm’s products and services priced appropriately?
9. Does the firm have an effective promotion, advertising, and publicity 4
strategy?
10. Are 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?
 REPORTER

3 3

CHERISHTONE BUSTO
 ______________

TOPICS
______________

 Finance and Accounting

3
 Production/Operations
4
 Research and Development
  Finance and Accounting

 Financial condition is often considered the single-best measure

of a firm’s competitive position and overall attractiveness to
investors. 3

Determining an organization’s financial strengths and

weaknesses is essential to effectively formulating strategies. 4

Financial factors often alter existing strategies and change

implementation plans.
 Finance/Accounting Functions
 According to James Van Horne, the functions of finance/accounting
comprise three decisions:

1. Investment decision or capital budgeting - It is the allocation and reallocation

of capital and resources to projects, products, assets, and divisions of an organization.

2. Financing decision - determines the best capital structure for the firm and includes
examining various methods by which the firm can raise capital. 3
i. debt-to-equity ratio
ii. debt-to-total-assets ratio.
4
3. Dividend decision - concern issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and the repurchase or issuance of
stock.
i. earnings-per-share ratio
ii. dividends-per-share ratio
iii. price-earnings ratio
 Financial ratio analysis

 It is the most widely used method for determining an organization’s

strengths and weaknesses in the investment, financing, and dividend 3
areas.

 Financial ratios are equally applicable in for-profit and nonprofit 4

organizations.
 Financial ratios

 Are computed from an organization’s income statement and balance

sheet.

 Computing financial ratios reflects a situation at just one point in time. 3

 Comparing ratios over time and to industry averages is more likely to
result in meaningful statistics that can be used to identify and evaluate 4
strengths and weaknesses.
 Financial ratio analysis should be conducted on three separate
fronts:

1. How has each ratio changed over time?

3

2. How does each ratio compare to industry norms?

4

3. How does each ratio compare with key competitors?

 Limitations of financial ratio

 different accounting treatment (i.e., depreciation, inventory

evaluation, R&D expenditures, pension plan costs, mergers, and
taxes) 3
 not very “actionable” in terms of revealing potential strategies
needed (i.e., because they generally are based on 4
performance of the overall firm).
3

4
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4
3

4
 Breakeven (BE) point

 Quantity of units that a firm must sell for its total revenues (TR) to equal its
total costs (TC).

4
3

4
  Production/Operations

 The production/operations function of a business consists of all those activities that

transform inputs into goods and services.
 A manufacturing operation transforms or converts inputs such as raw materials,
labor, capital, machines, and facilities into finished goods and services.
3
 Capacity utilization, The extent to which a manufacturing plant’s output reaches
its potential output 4
 The higher the capacity utilization, the better; otherwise, equipment may sit idle.

 Collaborative machines, Increase in production settings, a new breed of robots

working alongside people.
Suggested by Roger Schroeder

4
3

4
3

4
 Research and Development

Includes activities that companies undertake to innovate and

introduce new products and services. It is often the first stage in 3
the development process. The goal is typically to take new
products and services to market and add to the company's
bottom line 4
 Research and Development

Includes activities that companies undertake to innovate and

introduce new products and services. It is often the first stage in 3
the development process. The goal is typically to take new
products and services to market and add to the company's
bottom line 4
 Internal and External Research and Development

(1)financing as many project proposals as possible,

(2) using a percentage-of-sales method,
(3) budgeting about the same amount that competitors spend for R&D, or
(4) Deciding how many successful new products are needed and working
backward to estimate the required R&D investment.
3

4
 Most firms have no choice but to continually develop new and improved
products because of changing consumer needs and tastes, new technologies,
shortened product life cycles, and increased domestic and foreign competition.
3

4
 REPORTER

4 4

JHANA MARIE ALLAPITAN

Management Information Systems Audit

4
Questions such as the following should be asked when conducting this audit:
1. Do all managers in the firm use the information system to make decisions?
2. Is there a chief information officer or director of information systems position in the
firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm contribute input to the information
system?
5. Are there effective passwords for entry into the firm’s information system?
6. Are strategists of the firm familiar with the information systems of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand the competitive advantages that 4
information can provide firms?
9. Are computer training workshops provided for users of the information system?
10. Is the firm’s information system continually being improved in content and user-
friendliness?
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. Value chain analysis aims to identify where low-cost
advantages or disadvantages exist anywhere along the value chain
from raw material to customer service activities

Benchmarking 4
Is an analytical tool used to determine whether a firm’s value
chain analysis is competitive compared to those of rivals and thus
conducive to winning in the marketplace.
 
4
4
 The Internal Factor Evaluation Matrix

1. List key internal factors as identified in the internal-audit process. Use a total
of 20 internal factors, including both strengths and weaknesses. List strengths
first and then weaknesses. Be as specific as possible, using percentages, ratios,
and comparative numbers. Recall that Edward Deming said, “In God we trust.
Everyone else bring data.” Include actionable factors that can provide insight
regarding strategies to pursue. For example, the factor “Our Quick Ratio is 2.1
versus industry average of 1.8” is not actionable, whereas the factor “Our
chocolate division’s ROI increased from 8 to 15 percent in South America” is 4
actionable. Also, be as divisional as possible, because consolidated data
oftentimes is not as revealing
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to
each factor. The weight assigned to a given factor indicates the relative
importance of the factor to being successful in the firm’s industry. Regardless of
whether a key factor is an internal strength or weakness, factors considered to
have the greatest effect on organizational performance should be assigned the
highest weights. The sum of all weights must equal 1.0.

3. Assign a 1 to 4 rating to each factor to indicate whether that factor represents a

major weakness (rating = 1), a minor weakness (rating = 2), a minor strength
(rating = 3), or a major strength (rating = 4). Note that strengths must receive a 3
or 4 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus 4
company-based, whereas the weights in step 2 are industry-based.
4. Multiply each factor’s weight by its rating to determine a weighted score
for each variable.

5. Sum the weighted scores for each variable to determine the total
weighted score for the
organization.
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CHAPTER SUMMARY
END OF REPORT…
THANK YOU!!!