Chapter 4 Making an Internal Assessment

Nature of an Internal Audit

Basis for Establishing Objectives & Strategies

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

Internal Audit

An excellent vehicle for improving the Provides more opportunity to process of communication within the understand how jobs, departments organization and division fit into the organization

Parallels process of external audit

gather information
assimilate information

Information from:
Management Marketing Finance/accounting

evaluate information

Production/operations Research & Development Management Information Systems

 Requires effective coordination among management, marketing, finance accounting, production operations, research & development, and management information systems managers to understand the nature and effect of decisions in different areas of a firm

Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important than external factors in achieving and sustaining competitive advantage

Resource Based View (RBV)

Three All Encompassing Categories

1. Physical resources

2. Human resources
3. Organizational resources
Resources are actually what helps a firm to exploit opportunities and neutralize threats

Resource Based View (RBV)

Basic Premise to consider in devising strategies Amount Mix

Type
Empirical Indicators

Nature

Rare Hard to imitate Not easily substitutable

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 integrationis considered valid and taught to new members

Integrating Strategy & Culture

Values Legends Beliefs

Heroes

Cultural Products

Rites

Symbols

Myths

Rituals

Management
Function Planning Organizing Motivating Staffing Controlling Stage When Most Important
Strategy Formulation

Strategy Implementation

Strategy Implementation

Strategy Implementation

Strategy Evaluation

Marketing
Customer Needs/Wants for Products/Services

1. Defining 2. Anticipating

3. Creating
4. Fulfilling

Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services 3. Product & service planning

4. Pricing
5. Distribution 6. Marketing research 7. Opportunity analysis

Finance/Accounting
Finance/Accounting Functions

1. Investment decision (Capital budgeting) 2. Financing decision 3. Dividend decision 4. Financial analysis Key financial ratios

Production/Operations
Production/Operations Functions
Process Capacity

Inventory
Workforce Quality

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 CIO/CTO Security User-friendly E-commerce

Managerial Questions Checklist

Does the firm use strategic-management concepts? Are company objectives and goals measurable and well communicated? Do managers at all hierarchical levels plan effectively? Do managers delegate authority well? Is the organizations structure appropriate? Are job descriptions and specifications clear? Is employee morale high? Are employee turnover and absenteeism low? Are organizational reward and control mechanisms effective?

Marketing Audit Checklist

Are markets segmented effectively? Is the organization positioned well among competitors? Has the firms market share been increasing? Are present channels of distribution reliable and costeffective? Does the firm have an effective sales organization? Does the firm conduct market research? Are product quality and customer service good? Are the firms products and services priced appropriately? Does the firm have an effective promotion, advertising, and publicity strategy? Are marketing planning and budgeting effective?

Accounting Audit Checklist

Where is the firm financially strong and weak as indicated by financial ratio analysis? Can the firm raise needed short-term capital? Can the firm raise needed long-term capital through debt and/or equity? Does the firm have sufficient working capital? Are capital budgeting procedures effective? Are dividend payout policies reasonable? Does the firm have good relations with its investors and stockholders? Are the firms financial managers experienced and well trained?

Liquidity ratios measure a firms ability to meet maturing short-term obligations.

Accounting Ratios
How has each ratio changed over time? 2. How does each ratio compare to industry norms? 3. How does each ratio compare with key competitors? BNI

Current ratio Quick (acid-test) ratio

Leverage ratios measure the extent to which a firm has been financed by debt.

Debt-to-total-assets ratio Debt-to-equity ratio Long-term debt-to-equity ratio Times-interest-earned (coverage) ratio
Activity ratios measure how effectively a firm is using its resources.

Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period
Profitability ratios measure managements overall effectiveness as shown by returns generated on sales and investment.

Gross profit margin Operating profit margin Net profit margin Return on total assets Return on stockholders equity Earnings per share Price-earnings ratio
Growth ratios measure the firms ability to maintain its economic position in the growth of the economy and industry.

Sales Net income Earnings per share Dividends per share

Production/Operations Audit Checklist

Are suppliers of raw materials, parts, and subassemblies reliable and reasonable? Are facilities, equipment, machinery, and offices in good condition? Are inventory-control policies and procedures effective? Are quality-control policies and procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies?

R&D Audit Checklist of Questions

Does the firm have R&D facilities? Are they adequate? If outside R&D firms are used, are they cost effective? Are the organizations R&D personnel well qualified? Are R&D resources allocated effectively? Are management information and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive?

Information Systems Audit Checklist Do all managers in the firm use the information system to make
decisions? Is there a chief information officer or director of information systems position in the firm? Are data in the information system updated regularly? Do managers from all functional areas of the firm contribute input to the information system? Are there effective passwords for entry into the firms information system? Are strategists of the firm familiar with the information systems of rival firms? Is the information system user friendly? Do all users of the information system understand the competitive advantages that information can provide firms? Are computer training workshops provided for users of the information system? Is the firms information system continually being improved in content and user-friendliness?