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Chapter 4 The Internal Assessment

Strategic Management: Concepts & Cases

12th Edition

Fred David

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Nature of an Internal Audit

– Strengths

– Weaknesses

Functional Areas of Business

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Key Internal Forces

Functional Business Areas:

Vary by organization

Divisions have differing strengths & weaknesses

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Key Internal Forces

Distinctive Competencies:

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

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Key Internal Forces

Distinctive Competencies:

Building competitive advantage involves taking advantage of distinctive competencies

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Internal Audit

•Information from:•Management

•Marketing

•Finance/accounting

•Production/operations

•Research & development

•Management information systems

Parallels process of external audit

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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

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Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important than external factors

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Resource Based View (RBV)

Three All-Encompassing Categories

1. Physical resources

2. Human resources

3. Organizational resources

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Resource Based View (RBV)

Empirical Indicators

Rare

Hard to imitate

Not easily substitutable

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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

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CulturalProducts

Values

Legends Beliefs

Heroes Rites

Symbols RitualsMyths

Integrating Strategy & Culture

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U.S. Versus Foreign Cultures

Japan: wa China : guanxi Korea: inhuwa

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Management

Functions of Management

1. Planning

2. Organizing

3. Motivating

4. Staffing

5. Controlling

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Management

Planning

Stage When Most ImportantFunction

Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing

Controlling

Strategy Implementation

Strategy Evaluation

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Planning

Forecasting

Establishing objectives

Devising strategies

Developing policies

Setting goals

Management

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Organizing

Organizational designJob specializationJob descriptions

Job specificationsSpan of control

Unity of commandCoordinationJob design

Job analysis

Management

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Motivating

LeadershipCommunication

Work groupsJob enrichmentJob satisfactionNeeds fulfillment

Organizational changeMorale

Management

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Staffing

Wage & salary admin.Employee benefits

InterviewingHiring

DischargingTraining

Management developmentAffirmative action

EEOLabor relations

Management

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Controlling

QualityFinancial

SalesInventoryExpense

Analysis of varianceRewardsSanctions

Management

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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?

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Management Audit Checklist

•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?

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Management Audit Checklist

•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?

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Marketing

Customer Needs/Wants for Products/Services

1. Defining

2. Anticipating

3. Creating

4. Fulfilling

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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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Customer Analysis

Customer surveys

Consumer information

Market positioning strategies

Customer profiles

Market segmentation strategies

Marketing

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AdvertisingSales promotion

PublicitySales force management

Customer relationsDealer relations

Marketing

Selling Products/Services

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Test marketingBrand positioning

Devising warranteesPackaging

Product features/optionsProduct style

Quality

Marketing

Planning Product/Service

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Forward integrationDiscounts

Credit termsCondition of sale

MarkupsCosts

Unit pricing

Marketing

Pricing

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WarehousingChannelsCoverage

Retail site locationsSales territoriesInventory levelsTransportation

Marketing

Distribution

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Data collectionData input

Data analysisSupport business functions

Marketing

Marketing Research

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Assessing costs

Assessing benefits

Assessing risks

Cost/benefit/risk analysis

Marketing

Opportunity Analysis

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Marketing

Opportunity Analysis

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?

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Marketing

Opportunity Analysis

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, and publicity strategies?

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Marketing

Opportunity Analysis

10.Are the marketing, planning, and budgeting effective?

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

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Finance/Accounting

Determining financial strengths & weaknesses key to strategy formation

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Finance/Accounting

Finance/Accounting Functions

1. Investment decision (Capital budgeting)

2. Financing decision

3. Dividend decision

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Firm’s ability to meet its short-term obligations

Ratios

Current ratioQuick (or acid test) ratio

Basic Financial Ratios

Liquidity Ratios

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Extent of debt financing

Ratios

Debt-to-total-assetsDebt-to-equity

Long-term debt-to-equityTimes-interest-earned

Basic Financial Ratios

Leverage Ratios

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Effective use of firm’s resources

Ratios

Inventory turnoverFixed assets turnoverTotal assets turnover

Accounts receivable turnoverAverage collection period

Basic Financial Ratios

Activity Ratios

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Effectiveness shown by returns on sales &

investment

Ratios

Gross profit marginOperating profit margin

Net profit marginReturn on total assets (ROA)

Basic Financial Ratios

Profitability Ratios

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Effectiveness shown by returns on sales &

investment

Ratios

Return on stockholders’ equity (ROE)

Earnings per sharePrice-earnings ratio

Basic Financial Ratios

Profitability Ratios(cont’d)

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Firm’s ability to maintain economic position

Ratios

SalesNet income

Earnings per shareDividends per share

Basic Financial Ratios

Growth Ratios

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Natural Environment PerspectiveEU Countries Impose Curbs on Use of Chemicals Tough new laws start in 2008 Use of some 30,000 chemicals need to be documented Cease using 1,500 of the most dangerous chemicals EU countries need to cut emissions

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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?

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Finance/Accounting Audit

Effective Financial Analysis Requires:1. Analysis of how the ratios have

changed over time2. How the ratios compare to industry

norms3. How the ratios compare with key

competitors

Effective Financial Analysis Requires:1. Analysis of how the ratios have

changed over time2. How the ratios compare to industry

norms3. How the ratios compare with key

competitors

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Production/Operations

Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality

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Global PerspectiveAuto Industry Work Week and Hourly Pay Variation

Germany $44.05

U.S. $33.95

Canada $29.17

Japan $27.38

France $26.34

S. Korea $15.82

Mexico $ 3.50

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Facility designTechnology selection

Facility layoutProcess flow analysis

Facility locationLine balancingProcess control

Production/Operations

Process

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ForecastingFacilities planning

Aggregate planningScheduling

Capacity planningQueuing analysis

Production/Operations

Capacity

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Raw materialsWork in processFinished goods

Materials handling

Production/Operations

Inventory

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Job designWork measurement

Job enrichmentWork standards

Motivation techniques

Production/Operations

Workforce

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Quality controlSamplingTesting

Quality assuranceCost control

Production/Operations

Quality

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Production/Operations Audit

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

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

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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?

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Research & Development

Research & Development Functions

Development of new products before competitors

Improving product quality

Improving manufacturing processes to reduce costs

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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

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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?

•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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Research & Development Audit

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

•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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Management Information Systems

Purpose

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

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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?

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Management Information Systems Audit

•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?

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Management Information Systems Audit

•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?

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