1 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)
Dec 26, 2015
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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)