Chapter 4 The Internal Assessment Strategic Management: Concepts & Cases 13th Edition Fred David Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Identify strengths and weaknesses in Internal Audit Identify strengths and weaknesses in Management Marketing Finance and accounting Production and operations Research and development Management information systems Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal strengths/weaknesses External opportunities/threats Nature of an Internal Audit Basis for Objectives & Strategies Internal strengths/weaknesses External opportunities/threats Clear statement of mission Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Key Internal Forces Distinctive Competencies: Firm’s strengths that cannot be easily matched or imitated by competitors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Key Internal Forces Distinctive Competencies: Building competitive advantage involves taking advantage of distinctive competencies Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Information gathered from: Internal Audit Process Parallels process of external audit Information gathered from: Management Marketing Finance/accounting Production/operations Research & development Management information systems Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Managers and employees from all areas provide information 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal Audit Financial Ratio Analysis Exemplifies complexity of relationships among functional areas of the business Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Integrating Strategy & Culture Organizational Culture Resistant to change May represent: Strength Weakness Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Integrating Strategy & Culture Values Beliefs Legends Heroes Rites Cultural Products Symbols Rituals Myths Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Marketing Functions Customer analysis Selling products/services Product & service planning Pricing Distribution Marketing research Opportunity analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Marketing Customer surveys Consumer information Market positioning strategies Customer profiles Market segmentation strategies Customer Analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Investment decision (Capital budgeting) Financing decision Finance/Accounting Investment decision (Capital budgeting) Financing decision Dividend decision Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Firm’s ability to meet its short-term obligations Ratios Current ratio Quick (or acid test) ratio Liquidity Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Extent of debt financing Ratios Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest-earned Leverage Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Effective use of firm’s resources Ratios Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period Activity Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Effectiveness shown by returns on sales and investment Basic Financial Ratios Effectiveness shown by returns on sales and investment Ratios Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Profitability Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Effectiveness shown by returns on sales & investment Ratios Return on stockholders’ equity (ROE) Earnings per share Price-earnings ratio Profitability Ratios (cont’d) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Firm’s ability to maintain economic position Basic Financial Ratios Firm’s ability to maintain economic position Ratios Sales Net Income Earnings per share Dividends per share Growth Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Finance/Accounting Audit 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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Finance/Accounting Audit 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? Is the firm’s debt situation excellent? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Production/Operations Functions Process Capacity Inventory Workforce Quality Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Audit Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Audit Are MIS and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems Purpose Improve performance of an enterprise by improving the quality of managerial decisions Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 firm’s information system? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 firm’s system being improved? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Internal Factor Evaluation (IFE) Matrix List key internal factors Assign a weight ranging from 0.0 to 1.0 Assign a 1 to 4 rating to each factor Multiply the weight times the rating Sum the weighted scores Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall