Chapter 4

The Internal Assessment

Strategic Management: Concepts & Cases 13th Edition Fred David

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Ch 4 -1

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Ch 4 -2

Internal Audit

Identify strengths and weaknesses in

Management Marketing Finance and accounting Production and operations Research and development Management information systems

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Nature of an Internal Audit

Basis for Objectives & Strategies

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

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Ch 4 -4

Key Internal Forces

Distinctive Competencies:
Firms

strengths that cannot be easily matched or imitated by competitors

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Ch 4 -5

Key Internal Forces

Distinctive Competencies:
Building

competitive advantage involves taking advantage of distinctive competencies

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Ch 4 -6

Internal Audit Process

Parallels process of external audit
Information

gathered from:

Management Marketing Finance/accounting Production/operations

Research & development

Management information systems
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Internal Audit
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
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Internal Audit
Financial Ratio Analysis

Exemplifies complexity of relationships among functional areas of the business

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Ch 4 -9

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

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Ch 4 -10

Integrating Strategy & Culture

Organizational Culture

Resistant to change

May represent:

Strength

Weakness
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Integrating Strategy & Culture

Values Legends Beliefs

Heroes

Cultural Products

Rites

Symbols

Myths

Rituals

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Ch 4 -12

Integrating Strategy & Culture

Organizational Culture Can Inhibit Strategic Management

Miss external changes due to strongly held beliefs Natural tendency to hold the course even during times of strategic change
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Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services 3. Product & service planning

4. Pricing
5. Distribution 6. Marketing research 7. Opportunity analysis
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Marketing
Customer surveys Consumer information Customer Analysis Market positioning strategies Customer profiles

Market segmentation strategies

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Finance/Accounting

1. Investment decision (Capital

budgeting)
2. Financing decision 3. Dividend decision

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Ch 4 -16

Basic Financial Ratios

Firms ability to meet its short-term obligations

Liquidity Ratios

Ratios
Current ratio Quick (or acid test) ratio

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Ch 4 -17

Basic Financial Ratios

Extent of debt financing

Ratios
Leverage Ratios

Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest-earned

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Ch 4 -18

Basic Financial Ratios

Effective use of firms resources Ratios
Activity Ratios Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period

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Ch 4 -19

Basic Financial Ratios

Effectiveness shown by returns on sales and investment
Profitability Ratios

Ratios
Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA)

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Ch 4 -20

Basic Financial Ratios

Effectiveness shown by returns on sales & investment
Profitability Ratios (contd)

Ratios Return on stockholders equity (ROE) Earnings per share Price-earnings ratio

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Ch 4 -21

Basic Financial Ratios

Firms ability to maintain economic position Ratios
Growth Ratios

Sales Net Income Earnings per share Dividends per share

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Ch 4 -22

Finance/Accounting Audit
1.

2. 3.

4. 5.

Where is the firm financially strong/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?

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Ch 4 -23

Finance/Accounting Audit
6. 7.

8.

9.

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? Is the firms debt situation excellent?

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Ch 4 -24

Production/Operations
Production/Operations Functions

Process Capacity

Inventory
Workforce

Quality
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Production/Operations Audit
Are suppliers of materials, parts, etc. reliable and reasonable? Are facilities, equipment, machinery, and offices in good condition? Are inventory-control policies and procedures effective?

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Ch 4 -26

Production/Operations Audit
Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies?

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Ch 4 -27

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

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Research & Development Audit

Are the R&D facilities adequate? If R&D is outsourced, is it cost-effective? Are the R&D personnel well qualified? Are R&D resources allocated effectively?

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Ch 4 -29

Research & Development Audit

Are MIS and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive?

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Ch 4 -30

Management Information Systems

Purpose

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

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Ch 4 -31

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 firms information system?
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Management Information Systems Audit

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 firms system being improved?
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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

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Ch 4 -34