CHAPTER FOUR
Internal Environment Assessment
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Chapter outline
4.1. The nature of an internal audit
4.2. The Process of Performing an Internal
Audit
4.3. Relationship among the functional areas
of business
4.4. The Value Chain analysis
4.5. Internal Factor Evaluation (IFE) Matrix
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The Nature of Internal Audit
The Strengths and Weakness of the Firm
– A Firm’s Tangible & Intangible Resources combine with
Firm’s Capabilities to create Distinctive Competencies
– Distinctive Competencies – those activities that a firm
performs better than any competing firm
– Sustained Competitive Advantage – firms that
possess and exploit costly to imitate, rare, and
valuable resources & capabilities in choosing
and implementing their strategies may enjoy a
period of sustained competitive advantage and
above normal economic profit.
Tangible Resources:
Dow Chemical’s research laboratory and facilities
Intel’s semiconductor fabrication facilities
AT&T’s network of wire, cable, and satellites …
Intangible Resources:
Toyota’s well-known and trusted brand names,
New Season’s good reputation,
Intel’s knowledgeable and creative workforce,
Sun Microsystems’ unifying corporate culture,
Subway’s international experience with different country’s
regulations on franchising,
Norm Thompson Outfitters’ visionary leader with strong
motivation and communications skills,…
Capabilities
Emerge over time through complex interaction between
and among tangible and intangible resources.
Become stronger and more valuable strategically through
repetition and practice.
Skills and knowledge of firm’s employees, including
functional expertise (human capital)
Examples:
• Toyota’s efficient distribution systems - Just-in-time (JIT)
delivery, strong supplier relationships, and well-trained
inventory specialists.
• L.L. Bean’s customer segmentation procedures and systems -
database management systems, effective market research
efforts and strong supplier relationships.
• Nike’s new product development procedures – creative
workforce and innovation-driven culture, strong leadership, and
effective market research.
Distinctive Competencies
Question of Value: Do a firm’s resources and capabilities
enable the firm to respond to neutralize external threats
and/or capitalize on external opportunities?
Question of Rarity: Is a resource or capability currently
controlled by only a small number of competing firms?
Question of Inimitability: Do firms without the resource or
capability face a cost disadvantage in obtaining or
developing it?
Question of Organization: Are a firm’s other policies and
procedures organized to support the use of its valuable,
rare, and costly to imitate resources and/or capabilities?
Internal Analyses
By studying the internal
environment, firms identify
what they can do
Unique resources,
capabilities, and core
competencies
(sustainable
competitive
advantage)
• STRENGTH = factor that is better than:
– past performance
– key competitors
– industry as a whole
• WEAKNESS = factor that is worse than:
– past performance
– key competitors
– industry as a whole
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Internal Audit
Parallels process of external audit
Information from:
Management
Marketing
Finance/accounting
Production/operations
Research & Development
Management information Systems
General Management Factors
• Structure of the organization
• Organizational Culture
• Record in Achieving Objectives
• Top management skills, capabilities, &
interests.
• Reputation of the Organization and Top
Management
• Social Responsibility record
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Human Resource Management
• Number of employees
• Unionization
• Employee skills and morale
• Recognition/promotion/reward systems
• Training programs; educational
reimbursement
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Marketing
Marketing Functions
Customer analysis
Selling products/services
Product & service planning
Pricing
Distribution
Marketing research
Opportunity analysis
Operations (Manufacturing or Service Firms)
• Quality Initiatives
– Quality certifications
• Location of facilities
• Outsourcing
• Raw material costs and availability
• Economies of scale
– decreasing fixed costs/ unit when producing more
• Re-engineering
• Percentage of cost of goods sold to sales
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Research & Development
Research & Development Functions
Development of new products before
competitors
Improving product quality
Improving manufacturing processes to reduce
costs
Management Information
Systems
• Information Systems
• Security
• User-friendly
• E-commerce
Purpose of Internal Analysis
• Identify and evaluate what’s going on inside
the firm.
• The goal is to assess what are strengths and
what are weaknesses.
• Critical in making decisions about the future of
the organization.
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Challenge of Internal Analysis
How do we effectively manage current core
competencies while simultaneously
developing new ones?
How do we assemble bundles of resources,
capabilities and core competencies to create
value for customers?
How do we learn to change rapidly?
Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies
Uncertainty regarding characteristics of the general and
the industry environments, competitors’ actions, and
customers’ preferences
Complexity regarding the interrelated causes shaping a
firm’s environments and perceptions of the environments
Intraorganizational Conflicts among people making
managerial decisions and those affected by them
Some commonly used techniques
for internal analysis
Single Businesses Multiple Businesses
Resource Audit Portfolio Analysis
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis
Both Single and Multiple Businesses
Core Competencies
Shareholder Value Analysis
Value Chain Analysis
• Examines contributions of individual activities to overall
level of customer value and ultimately financial
performance.
• Customer value: product differentiation, low cost, and/or
responsiveness
Value Chain Analysis
• Primary Activities • Secondary Activities
¨ Inbound Logistics ¨ Firm Infrastructure
¨ Operations ¨ Human Resource
¨ Outbound Logistics Management
¨ Marketing and Sales ¨ Technology
¨ Customer Service Development
¨ Procurement
Internal Factor Evaluation (IFE) Matrix
• A summary step in conducting an internal strategic-
management audit is to construct an Internal Factor
Evaluation (IFE) Matrix.
• This strategy-formulation tool summarizes and evaluates the
major strengths and weaknesses in the functional areas of a
business, and it also provides a basis for identifying and
evaluating relationships among those areas.
• Intuitive judgments are required in developing an IFE Matrix,
so the appearance of a scientific approach should not be
interpreted to mean this is an all powerful technique.
• A thorough understanding of the factors included is more
important than the actual numbers. Similar to the EFE Matrix
and Competitive Profile Matrix, an IFE Matrix can be
developed in five steps:
