1 Lecture 3 The Nature of an Internal Audit Integrating Strategy and Culture Management Marketing Finance/Accounting Production/Operations Research and.

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Lecture 3 The Nature of an Internal Audit Integrating Strategy and Culture Management Marketing Finance/Accounting Production/Operations Research and Development Management Information Systems The Internal Factor Evaluation Matrix (IFE)

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Nature of an Internal AuditAll organizations –

Strengths Weaknesses

Basis for objectives & strategies: Internal strengths/weaknesses External opportunities/threats Clear statement of mission

Key to organizational success: Coordination and understanding among managers from all

functional areas

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Key Internal ForcesDistinctive Competencies

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

Building competitive advantage involves taking advantage of distinctive competencies

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

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Internal Audit Parallels process of external audit Gather & assimilate information from:

• Management• Marketing• Finance/accounting• Production/operations• Research & development• Management information systems

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Integrating Strategy and 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

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Integrating Strategy and Culture

Organizational Culture -- Resistant to change May represent a strength or weakness of

the firm

Cultural productsValues beliefsVirtualMythsStorieslegends sagas

SymbolsHeroesLanguage

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Integrating Strategy and Culture

Culture can inhibit strategic management:

Miss changes in external environment because they are blinded by strongly held beliefs

When a culture has been effective in the past, natural tendency to stick with it in future, even during times of major strategic change

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Functions of ManagementFunctions of Management

Planning

Stage When Most ImportantFunction

Strategy Formulation

Organizing

Strategy Implementation

Motivating

Strategy Implementation

Staffing

Controlling

Strategy Implementation

Strategy Evaluation

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Functions of Management

Planning

Start of the process Bridge between present and future Increases likelihood of achieving desired

results

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PlanningPlanning

Planning

Forecasting

Establishing objectives

Devising strategies

Developing policies

Setting goals

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Functions of Management

Organizing

Achieve coordinated effort Defining task and authority relationships Departmentalization Delegation of authority

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OrganizingOrganizing

Organizing

Organizational design

Job specializationJob descriptions

Job specificationsSpan of control

Unity of commandCoordinationJob design

Job analysis

Organizing

Organizational design

Job specializationJob descriptions

Job specificationsSpan of control

Unity of commandCoordinationJob design

Job analysis

Organizing

Organizational designJob specializationJob descriptions

Job specificationsSpan of control

Unity of commandCoordinationJob design

Job analysis

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Functions of Management

Motivating

Influencing people to accomplish specific objectives

Communication is a major component

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MotivatingMotivating

Motivating

LeadershipCommunication

Work groupsJob enrichmentJob satisfactionNeeds fulfillment

Organizational change

Morale

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Functions of Management

Staffing

Personnel management Human resources management

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StaffingStaffing

Staffing

Wage & salary adminEmployee benefits

InterviewingHiringFiring

TrainingManagement development

SafetyAffirmative action

Labor relationsCareer development

Discipline procedures

Management

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Functions of Management

Controlling

Ensure actual operations conform to planned operations

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ControllingControlling

Controlling

Quality controlFinancial control

Sales controlInventory controlExpense control

Analysis of variancesRewardsSanctions

Management

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Management Audit 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 organization’s structure appropriate? Are job descriptions and job specifications clear? Is employee morale high? Are employee turnover and absenteeism low? Are organizational reward and control mechanisms

effective?

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Marketing

Process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services

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Marketing

Customer analysis• Selling products/services• Product and service planning• Marketing research• Opportunity analysis

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MarketingMarketing

Customer analysis

Customer surveys

Consumer information

Market positioning strategies

Customer profiles

Market segmentation strategies

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MarketingMarketing

Selling Products/services

Advertising

Sales

Promotion

Publicity

Sales force management

Customer relations

Dealer relations

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MarketingMarketing

Product/service planning

Test marketing

Brand positioning

Devising warrantees

Packaging

Product features/options

Product style

Quality

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MarketingMarketing

Marketing research

Data collection

Data input

Data analysis

Support all business functions

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MarketingMarketing

Opportunity Analysis

Assessing costs

Assessing benefits

Assessing risks

Cost/benefit/risk analysis

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Marketing Audit Are markets segmented effectively? Is the organization positioned well among competitors? Has the firm’s market share been increasing? Are present channels of distribution reliable and cost effective? Does the firm have an effective sales force? Does the firm conduct market research? Are product quality and customer service good? Are the firm's products/services priced appropriately? Does the firm have an effective promotion, advertising, and

publicity strategy? Are marketing planning and budgeting effective? Do the firm’s marketing mangers have adequate experience and

training?

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Finance/Accounting

Determining financial strengths and weaknesses key to strategy formulation

Investment decision (Capital budgeting) Financing decision Dividend decision

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Basic Financial RatiosBasic Financial Ratios

Liquidity ratios

Firm’s ability to meet its short-term obligations

Ratios

Current ratio

Quick (or acid-test)

ratio

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Leverage ratios

• Extent of debt financing

Ratios

Debt-to-total-assets

Debt-to-equity

Long-term debt-to-equity

Times-interest earned

Basic Financial RatiosBasic Financial Ratios

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Activity ratios

• Effective use of firm’s resources

Ratios

Inventory-turnover

Fixed assets turnover

Total assets turnover

Accounts receivable turnover

Average collection period

Basic Financial RatiosBasic Financial Ratios

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Profitability ratios

• Effectiveness shown by returns on sales and investment

Ratios

Gross profit margin

Operating profit margin

Net profit margin

Return on total assets (ROA)

Basic Financial RatiosBasic Financial Ratios

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Profitability ratios(continued)

• Effectiveness shown by returns on sales and investment

Ratios

Return on stockholders’ equity (ROE)

Earnings per share

Price-earnings ratio

Basic Financial RatiosBasic Financial Ratios

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Growth ratios

• Firm’s ability to maintain economic position

Ratios

Sales

Net income

Earnings per share

Dividends per share

Basic Financial RatiosBasic Financial Ratios

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Where is the firm 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 firm’s financial managers experienced and well

trained?

Finance/Accounting Audit

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Process Capacity Inventory Workforce Quality

Production/Operations

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Process

Design of facility

Choice of technology

Facility layout

Process flow analysis

Facility location

Line balancing

Process control

Production/Operations

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Capacity

Forecasting

Facilities planning

Aggregate planning

Scheduling

Capacity planning

Queuing analysis

Production/Operations

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Inventory

Raw material

Work in process

Finished goods

Materials handling

Production/Operations

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Workforce

Job design

Work measurement

Job enrichment

Work standards

Motivation techniques

Production/Operations

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Quality

Quality control

Sampling

Testing

Quality assurance

Cost control

Production/Operations

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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? Development of new products before competition Improving product quality Improving manufacturing processes to reduce costs

Production/Operations Audit

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R&D budgets

Financing as many projects as possible

Use percentage-of-sales method

Budgeting relative to competitors

Deciding how many successful new

products are needed

Research and Development

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Does the firm have R&D facilities? Are they adequate?

If outside R&D firms are used, are they cost effective? Are the organization’s 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?

Research and Development Audit

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Purpose – Improve performance of an enterprise by improving the

quality of managerial decisions. Information Systems CIO/CTO Security User-friendly E-commerce

Management Information Systems

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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 strategists of the firm familiar with the information systems of

rival firms? Is the information system user-friendly? Are computer training workshops provided for users? Is the firm’s system being improved?

Management Information Systems Audit

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Internal Analysis (IFE)Five-Step Process:Five-Step Process: List key internal factors (10-20)

Strengths & weaknesses Assign weight to each (0 to 1.0)

Sum of all weights = 1.0 Assign 1-4 rating to each factor

Firm’s current strategies response to the factor Multiply each factor’s weight by its rating

Produces a weighted score Sum the weighted scores for each

Determines the total weighted score for the organization Highest possible weighted score for the organization is 4.0; the

lowest, 1.0. Average = 2.5

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.153.05 Financial ratios

.153.05 Reputation as family-friendly

.204.05 Long-range planning

.153.05 Minimal comps provided

.153.05 Buffets at most facilities

.153.05 Strong management team

.604.15 Owns 1 mile on Las Vegas strip

.153.05 Increasing free cash flows

.404.10 Room occupancy rates over 95%

.204.05 Largest casino company in world

Weighted

scoreRatingWeight

Mandalay BayInternal Strengths

Internal Analysis (IFE)

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2.751.0TOTAL (including Strengths)

.101.10Recent loss of joint ventures

.101.10Laughlin properties

.102.05Family reputation, not high rollers

.102.05Little diversification

.051.05Most properties located in Las Vegas

Weighted

scoreRatingWeight

Mandalay BayInternal Weaknesses

Internal Analysis (IFE)

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Mandalay Bay (in the previous example), has a total weighted score of 2.75 indicating that the firm is above average in its overall internal strength

Internal Analysis (IFE)