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08/31/2023
IU,BECO,MGMT, Strategic management
CHAPTER-FOUR
INTERNAL ENVIRONMENT ASSESSMENT
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Objectives

 At the end of this unit students will be able to:

 Define the internal environment.
 Explain the nature of internal audit.
 Evaluate the relationship among the functional
areas of business.

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2.1 The Nature of an Internal Audit

 All organizations have strengths and

weaknesses in the functional areas of
business.
 No enterprise is equally strong or weak in
all areas.
 Internal strengths and weaknesses,
coupled with external opportunities and
threats and clear vision and mission
statements, provide the basis for
establishing objectives and strategies.

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Cont`d…..

 It also known as organizational analysis, is concerned with

identifying and developing an organizations resource and
competencies.
 It also creates an environment of coordination and
understanding among managers from all functional areas.
 It gathers & assimilates information from
 Management,
 Marketing,
 Finance/ accounting,
 Production/operations,
 Research & development, and
 Management information systems.

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Cont`d…

 The Messages of this chapter is that a firm’s ability to

gain and sustain competitive advantage is partly driven
by core competencies—unique strengths that are
embedded deep within a firm.
 Core competencies allow a firm to differentiate its products and
services from those of its rivals, creating higher value for the
customer or offering products and services of comparable value at
lower cost.
 are Unique strengths, embedded deep within a firm, that allow a
firm to differentiate its products and services from those of its
rivals, creating higher value for the customer or offering products
and services of comparable value at lower cost.

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Cont`d…

 A firm's strengths that cannot be easily matched or

imitated by competitors are called distinctive
competencies.
 Building competitive advantages involves taking
advantage of distinctive competencies.
 Strategies are designed in part to improve on a firm's
weaknesses, turning them into strengths, and may be
even into distinctive competencies.

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Key internal forces

 Key internal forces which are attached with the functions

includes
 Management,
 Marketing,
 Finance,
 Operations, Research &Development, and
 Management Information System.

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Management

 It consist of five basic activities: planning, organizing,

motivating, staffing, and controlling.
 Planning: - forecasting, establishing objectives, devising
strategies, developing policies, and setting goals. Preparing the
future [Strategy Formulation]
 Organizing: organizational design, specialization, job analysis,
and span of the control, unity of command, coordination, and job
design. Creating structural r/ships [Strategy Implementation].
 Motivating: - leadership, communication, delegation of authority,
job enrichment, job satisfaction, needs fulfillment, organizational
change, employee morale, and managerial morale.

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Cont`d..

 Staffing: - employee benefits, recruitment & selection,

training & development, employee safety, affirmative
action, union relations, HRD, grievance procedures, and
public relations.
 Controlling- quality control, financial control, sales
control, inventory control, expense control, analysis of
variances, rewards, and sanctions.

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Example

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Marketing

 It is the process of defining, anticipating, creating, and

fulfilling customers' needs and wants for products and
services.
 There are seven basic functions of marketing:
 Customer Analysis: the examination and evaluation of
consumer needs, desires, and wants
 involves administering customer surveys, analyzing
consumer information, evaluating market positioning
strategies, developing customer profiles, and
determining optimal market segmentation strategies.
(Mission statement.)

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Cont`d…

 Selling Products/Services: includes advertising, sales

promotion, publicity, personal selling, sales force
management, customer relations, and dealer relations.
–Important for market penetration strategy
–Personal selling for industrial goods companies, and
advertising for consumer goods companies.
 Pricing: Five major stakeholders affect pricing decisions
include: consumers, governments, suppliers, distributors
and competitors.
 Strategists should view pricing from both short and long term
perspectives, b/se competitors can copy price changes with
relative ease.

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Cont`d….

 Product and Service Planning: includes test

marketing; product and brand positioning; devising
warranties; packaging; determining product options,
product features, product style, and product quality;
deleting old products; and providing for customer
service.
 Particularly important when a company is pursuing product
development or diversification.
 Test markets allow an organization to test alternative marketing
plans and to forecast future sales of new products.
 Test marketing is used more frequently by consumer goods
companies than by industrial goods companies.
 Help to avoid losses by revealing weak products before large-scale
production starts.

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Cont`d..

 Distribution:- warehousing, channels, coverage, retail

site locations, sales territories, inventory levels and
location, transportation carriers, wholesaling, and
retailing.
 Important when a firm strives to implement a market
development or forward integration strategy.

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Cont`d,…

 Marketing Research: - the systematic gathering,

recording, and analyzing of data about problems relating
to the marketing of goods and services.
 It can uncover critical strengths and weaknesses of the firm
 Opportunity Analysis: - involves assessing the costs,
benefits, and risks associated with marketing decisions.
 Three steps are required to perform a cost/benefit analysis for
social resp.
1. Compute the total costs associated with a decision,
2. Estimate the total benefits from the decision, and
3. Compare the total costs with the total benefits.

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Example

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ACCOUNTING / FINANCE

 Financial condition is often considered the single best

measure of a firm's competitive position and overall
attractiveness to investors which Include firm’s liquidity,
leverage, working capital, profitability, asset utilization,
cash flow, and equity.
 Finance/Accounting Functions comprise 3 decisions.
 Investment decision (Capital budgeting)
 Financing decision
 Dividend decision

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Cont`d,,,

 Financial ratio analysis – firms’ strengths and

weaknesses in the investment, financing, and dividend
areas.
 A. Investment /capital budgeting: is the allocation
and reallocation of capital and resources to projects,
products, assets, and divisions of an organization.
 B.The financing decision: concerns determining
the best capital structure for the firm and includes
examining various methods by which the firm can
raise capital. Two key financial ratios measuring
firm's financing decisions effectiveness are the debt-
to-equity ratio and the debt-to-total-assets ratio.
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Cont`d…

 C. Dividend decisions: issues like the percentage of

earnings paid to stockholders, the stability of dividends
paid over time, and the repurchase or issuance of stock.

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PRODUCTION/OPERATIONS

 Consists of all those activities that transform inputs

into goods and services.
 Production/OM deals with inputs, transformations,
and outputs that vary across industries and markets.

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RESEARCH AND
DEVELOPMENT
 Firms pursuing a product development strategy
especially need to have a strong R&D orientation.
 The purpose of research and development are as follows:
–Development of new products before competition
–Improving product quality
–Improving manufacturing processes to reduce costs.
•And thereby, produce a competitive advantage.

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Cont`d….

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MANAGEMENT INFORMATION SYSTEM
(MIS)

 The application of information technology to business

problems.
 It concentrates on the integration of computer systems
with the aims of the organization.
 Should not be confused with computer science which is
more theoretical in nature and deals mainly with
software creation, or computer engineering, which
focuses more on the design of computer hardware.
 Information systems support business processes and
operations, decision-making, and competitive strategies.

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Cont`d,…

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an Internal Audit

 Step 1:-Gathering and articulating information from the

above mentioned functional areas.
 Step 2:-Identifying and prioritizing the critical success
factors, consisting of both strengths and weaknesses.
 Step 3:- Evaluating the key internal forces and
disseminating the final list to the organizational community.
 To create effective coordination and understanding among
managers from all functional business areas.
 

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2.3 Value chain analysis

IU,BECO,MGMT, Strategic management 08/31/2023