the internal assessment

The Internal Assessment

Ch 4 -1SM04

The biggest levers you’ve got to change a company are strategy, structure, and culture. If I could pick two, I’d pick strategy and culture. –Wayne Leonard, CEO, Entergy

SM04Ch 4

-2

Internal Assessment

Weak leadership can wreck the soundest strategy. – Sun Zi

-- Strengths

-- Weaknesses

The Nature of an Internal Audit

Functional Areas of Business

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

SM04 Ch 4 -4

Nature of an Internal Audit

Basis for Objectives & Strategies

Key Internal Forces

Functional Business Areas:

Vary by organization

Divisions have differing strengths & weaknesses

Ch 4 -5SM04

Key Internal Forces

Distinctive Competencies:

Firm’s strengths that cannot be easily matched or imitated by competitors

Ch 4 -6SM04

Key Internal Forces


Building competitive advantage involves taking advantage of distinctive competencies

Ch 4 -7SM04

Key Internal Forces


Strategies designed to improve on a firm’s weaknesses and turn to strengths

Ch 4 -8SM04

Ch 4 -9

Expertise in gasoline enginetechnology and small

engine design

Example: Honda’s Distinctive Competence

Example: Honda’s Distinctive Competence

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Ch 4 -10

Example: Intel’s Distinctive Competence

Example: Intel’s Distinctive Competence

Design of complex chipsfor personal computers

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Ch 4 -11

Superb marketing-distribution skills and R&D capabilities in five core

technologies - fats, oils, skin chemistry, surfactants, emulsifiers

Example: Procter & Gamble’s Core Competences

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Ch 4 -12

Expertise in electronic technology and ability to translate the expertise into innovative products —miniaturized

radios and video cameras; TVs and MP3 players with unique features,

attractively designed PCs

Example: Sony’s Core Competence

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SM04 Ch 4 -13

Internal Audit

•Information from:•Management

•Marketing

•Finance/accounting

•Production/operations

•Research & Development

•Management information Systems

Parallels process of external audit

Internal Audit

Involvement in performing an internal strategic-management audit provides vehicle for understanding nature and effect of decisions in other functional business areas of the firm

Ch 4 -14SM04

Internal Audit

Coordination & understanding among managers from all functional areas

Key to Organizational Success

Ch 4 -15SM04

SM04 Ch 4 -16

Internal Audit

Number and complexity increases relative to organization size

Functional Relationships

SM04 Ch 4 -17

Internal Audit

Exemplifies complexity of relationships among functional areas of the business

Financial Ratio Analysis

SM04Ch 4 -18

Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important than external factors

SM04Ch 4 -19


3 All Encompassing Categories

1. Physical resources

2. Human resources

3. Organizational resources

SM04Ch 4 -20


Empirical Indicators

Rare

Hard to imitate

Not easily substitutable

SM04 Ch 4 -21

Integrating Strategy & 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

Organizational Culture

SM04Ch 4 -22


Organizational Culture

Resistant to change

May represent

Strength

Weakness

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Ch 4 -23

CulturalProducts

Values

Legends Beliefs

Heroes Rites

Symbols RitualsMyths


SM04Ch 4 -24


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

SM04Ch 4 -25

Management

Functions of Management

1. Planning

2. Organizing

3. Motivating

4. Staffing

5. Controlling

SM04Ch 4 -26

Management

Planning

Stage When Most ImportantFunction

Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing

Controlling

Strategy Implementation

Strategy Evaluation

SM04Ch 4 -27

Management

Planning

Beginning of management process

Bridge between present & future

Improves likelihood of attaining desired results

SM04Ch 4 -28

Planning

Forecasting

Establishing objectives

Devising strategies

Developing policies

Setting goals

Management

SM04Ch 4 -29

Management

Organizing

Achieves coordinated effort

Defines task & authority relationships

Departmentalization

Delegation of authority

SM04Ch 4 -30

Organizing

Organizational designJob specializationJob descriptions

Job specificationsSpan of control

Unity of commandCoordinationJob design

Job analysis

Management

SM04Ch 4 -31

Management

Motivating

Influencing to accomplish specific objectives

Communication – major component

SM04Ch 4 -32

Motivating

LeadershipCommunication

Work groupsJob enrichmentJob satisfactionNeeds fulfillment

Organizational changeMorale

Management

SM04Ch 4 -33

Management

Staffing

Personnel management

Human resources management

SM04Ch 4 -34

Staffing

Wage & salary admin.Employee benefits

InterviewingHiring

DischargingTraining

Management developmentAffirmative Action

EEOLabor relations

Management

SM04Ch 4 -35

Management

Controlling

Establishing performance standards

Ensure actual operations conform to planned operations

Taking corrective actions

SM04Ch 4 -36

Controlling

QualityFinancial

SalesInventoryExpense

Analysis of varianceRewardsSanctions

Management

SM04Ch 4 -37

Management Audit Checklist

•Does the firm use strategic management concepts?•Are objectives/goals measurable? Well communicated?•Do managers at all levels plan effectively?

•Does the firm use strategic management concepts?•Are objectives/goals measurable? Well communicated?•Do managers at all levels plan effectively?

SM04Ch 4 -38


•Do managers delegate well?•Is the organization’s structure appropriate?•Are job descriptions clear?•Are job specifications clear?•Is employee morale high?

•Do managers delegate well?•Is the organization’s structure appropriate?•Are job descriptions clear?•Are job specifications clear?•Is employee morale high?

SM04Ch 4 -39


•Is employee absenteeism low?•Is employee turnover low?•Are the reward mechanisms effective?•Are the organization’s control mechanisms effective?

•Is employee absenteeism low?•Is employee turnover low?•Are the reward mechanisms effective?•Are the organization’s control mechanisms effective?

SM04Ch 4 -40

Marketing

Customer Needs/Wants for Products/Services

1. Defining

2. Anticipating

3. Creating

4. Fulfilling

SM04Ch 4 -41

Marketing

Marketing Functions

1. Customer analysis

2. Selling products/services

3. Product & service planning

4. Pricing

5. Distribution

6. Marketing research

7. Opportunity analysis

SM04Ch 4 -42

Customer Analysis

Customer surveys

Consumer information

Market positioning strategies

Customer profiles

Market segmentation strategies

Marketing

SM04Ch 4 -43

AdvertisingSales

PromotionPublicity

Sales force managementCustomer relations

Dealer relations

Marketing

Selling Products/Services

SM04Ch 4 -44

Test marketingBrand positioning

Devising warranteesPackaging

Product features/optionsProduct style

Quality

Marketing

Planning Product/Service

SM04Ch 4 -45

Forward integrationDiscounts

Credit termsCondition of sale

MarkupsCosts

Unit pricing

Marketing

Pricing

SM04Ch 4 -46

WarehousingChannelsCoverage

Retail site locationsSales territoriesInventory levelsTransportation

Marketing

Distribution

SM04Ch 4 -47

Data collectionData input

Data analysisSupport business functions

Marketing

Marketing Research

SM04Ch 4 -48

Assessing costs

Assessing benefits

Assessing risks

Cost/benefit/risk analysis

Marketing

Opportunity Analysis

SM04Ch 4 -49

Marketing


1. Are markets segmented effectively?

2. Is the organization positioned well among competitors?

3. Has the firm’s market share been increasing?

4. Are the distribution channels reliable & cost effective?

5. Is the sales force effective?

SM04Ch 4 -50

Marketing


6. Does the firm conduct market research?

7. Are product quality & customer service good?

8. Are the firm’s products/services priced appropriately?

9. Does the firm have effective promotion, advertising, & publicity strategies?

SM04Ch 4 -51

Marketing


10.Are the marketing planning & budgeting effective?

11.Do the firm’s marketing managers have adequate experience and training?

SM04Ch 4 -52

Finance/Accounting

Determining financial strengths & weaknesses key to strategy formation

SM04Ch 4 -53

Finance/Accounting

Finance/Accounting Functions

1. Investment decision (Capital budgeting)

2. Financing decision

3. Dividend decision

SM04Ch 4 -54

Firm’s ability to meet its short-term obligations

Ratios

Current ratioQuick (or acid test) ratio

Basic Financial Ratios

Liquidity Ratios

SM04Ch 4 -55

Extent of debt financing

Ratios

Debt-to-total assetsDebt-to-equity

Long-term debt-to-equityTimes-interest earned


Leverage Ratios

SM04Ch 4 -56

Effective use of firm’s resources

Ratios

Inventory-turnoverFixed assets turnoverTotal assets turnover

Accounts receivable turnoverAverage collection period


Activity Ratios

SM04Ch 4 -57

Effectiveness shown by returns on sales &

investment

Ratios

Gross profit marginOperating profit margin

Net profit marginReturn on total assets (ROA)


Profitability Ratios

SM04Ch 4 -58

Effectiveness shown by returns on sales &

investment

Ratios

Return on stockholders equity (ROE)

Earnings per sharePrice-earnings ratio


Profitability Ratios(cont’d)

SM04Ch 4 -59

Firm’s ability to maintain economic position

Ratios

SalesNet income

Earnings per shareDividends per share


Growth Ratios

SM04Ch 4 -60

Finance/Accounting Audit

•Where is the firm strong/weak indicated by financial ratio analysis?•Can the firm raise short-term capital as needed?•Can the firm raise long-term capital as needed through debt and/or equity?

•Where is the firm strong/weak indicated by financial ratio analysis?•Can the firm raise short-term capital as needed?•Can the firm raise long-term capital as needed through debt and/or equity?

SM04Ch 4 -61

Finance/Accounting Audit

•Does the firm have sufficient working capital?•Are capital budgeting procedures effective?•Are dividend payout policies reasonable?•Are the firm’s financial managers experienced & well trained?

•Does the firm have sufficient working capital?•Are capital budgeting procedures effective?•Are dividend payout policies reasonable?•Are the firm’s financial managers experienced & well trained?

SM04Ch 4 -62

Production/Operations

Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality

SM04Ch 4 -63

Facility designTechnology selection

Facility layoutProcess flow analysis

Facility locationLine balancingProcess control


Process

SM04Ch 4 -64

ForecastingFacilities planning

Aggregate planningScheduling

Capacity planningQueuing analysis


Capacity

SM04Ch 4 -65

Raw materialsWork in processFinished goods

Materials handling


Inventory

SM04Ch 4 -66

Job designWork measurement

Job enrichmentWork standards

Motivation techniques


Workforce

SM04Ch 4 -67

Quality controlSamplingTesting

Quality assuranceCost Control


Quality

SM04Ch 4 -68

Production/Operations Audit

•Are suppliers of materials, parts, etc. reliable and reasonable?•Are facilities, equipment & machinery in good condition?•Are inventory-control policies and procedures effective?

•Are suppliers of materials, parts, etc. reliable and reasonable?•Are facilities, equipment & machinery in good condition?•Are inventory-control policies and procedures effective?

SM04Ch 4 -69

Production/Operations Audit

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

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

SM04Ch 4 -70

Research & Development

Research & Development Functions

Development of new products before competitors

Improving product quality

Improving manufacturing processes to reduce costs

SM04Ch 4 -71

Financing as many projects as possible

use percent-of-sales method

Budgeting relative to competitors

How many successful new products are

needed

Research & Development

R&D Budgets

SM04Ch 4 -72

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?

•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?

SM04Ch 4 -73

Research & Development Audit

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

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

SM04 Ch 4 -74

Management Information Systems

Purpose

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

• Information Systems• CIO/CTO• Security• User-friendly• E-commerce

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Management Information Systems

SM04Ch 4 -76

Management Information Systems Audit

•Do managers use the information system to make decisions?•Is there a CIO or Director of information systems position in the firm?•Is data updated regularly?

•Do managers use the information system to make decisions?•Is there a CIO or Director of information systems position in the firm?•Is data updated regularly?

SM04Ch 4 -77


•Do managers from all functional areas contribute input to the information system?•Are there effective passwords for entry into the firm’s information system?•Are strategists of the firm familiar with the information systems of rival firms?

•Do managers from all functional areas contribute input to the information system?•Are there effective passwords for entry into the firm’s information system?•Are strategists of the firm familiar with the information systems of rival firms?

SM04Ch 4 -78


•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 firm’s system being improved?

•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 firm’s system being improved?

IFE– Gateway Computers (2003)

Key Internal Factors Weight RatingWtd

Score

Strengths1. Several new senior executive with world-class skills and leadership experience

0.05 4 0.40

2. Continuous decline in operating costs and cost of goods sold

0.05 3 0.15

3. Well-known brand name 0.05 3 0.15

4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1

0.10 4 0.40

5. As a direct seller, Gateway holds high brand recognition

0.05 3 0.15

SM04 Ch 4 -79



Score

Strengths (cont’d)6. Gateway is diversifying into non-PC products

0.10 3 0.30

7. Good relationship with its suppliers. 0.05 4 0.20

8. Economies of scale, the 6th largest PC maker I the world

0.05 4 0.20

9. Gateway retails stores excellent 0.05 3 0.15

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Score

Weaknesses1. High operating expense (22% of revenue vs. 10% for Dell)

0.05 3 0.15

2. Almost no budget for R&D vs. Dell’s 18% of revenue

0.10 1 0.05

3. Low return on assets ratio 0.025 1 0.10

4. No niche market 0.025 2 0.05

SM04 Ch 4 -81



Score

Weaknesses (cont’d)5. Shortage of cash due to successive losses

0.10 2 0.20

6. Limited number Gateway stores 0.05 2 0.10

7. Weak performance in overseas market 0.10 2 0.20

TOTAL 1.00 2.85

SM04 Ch 4 -82

the internal assessment

Documents

internal auditinformation

internal auditbasis

internal integrationis

internal auditnumber

internal assessmentch

soundest strategy

firms strengths

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