Lecture 4

The Internal Audit

Business Ethics/Social Responsibility/Environmental Sustainability Issues

Perform
External Audit

Implement
Strategies–
Generate, Implement
Develop Vision Establish Marketing, Measure
Evaluate, Strategies–
and Mission Long-term Finance, and Evaluate
and Select Management
Statements Objectives Accounting, Performance
Strategies Issues
R&D, and MIS
Issues

Perform
Internal Audit

Global/International Issues

Strategy Strategy Strategy

Formulation Implementation Evaluation 2

1
 Learning Objectives
1. Describe the nature and role of an internal assessment in
formulating strategies.
2. Discuss why organizational culture is so important in
formulating strategies.
3. Identify the basic functions (activities) that make up
management and their relevance in formulating strategies.
4. Identify the basic functions of marketing and their
relevance in formulating strategies.
5. Discuss the nature and role of finance and accounting in
formulating strategies.

Learning Objectives
6. Discuss the nature and role of production/operations in
formulating strategies.
7. Discuss the nature and role of research and development
(R&D) in formulating strategies.
8. Discuss the nature and role of management information
systems (MIS) in formulating strategies.
9. Explain value chain analysis and its relevance in
formulating strategies.
10. Develop and use an Internal Factor Evaluation (IFE)
Matrix.

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 Key Internal Forces
• Distinctive competencies
– A firm's strengths that cannot be easily matched or imitated
by competitors

• Building competitive advantages involves taking advantage

of distinctive competencies.

Weaknesses  Strengths  Distinctive Competencies  Competitive Advantage

The Process of Performing an Internal Audit

• The internal audit
– Requires gathering, assimilating, and prioritizing information
about the firm's management, marketing, finance, accounting,
production/operations, research and development (R&D), and
management information systems operations
– Provides more opportunity for participants to understand how
their jobs, departments, and divisions fit into the whole firm

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 The Resource-Based View (RBV)
• Internal resources are more important for a firm than
external factors in achieving and sustaining competitive
advantage

The Resource-Based View (RBV)

• Proponents of the RBV contend that organizational
performance will primarily be determined by internal
resources that can be grouped into three all-encompassing
categories:
– Physical resources
– Human resources
– Organizational resources

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 The Resource-Based View (RBV)
• For a resource to be valuable, it must be either:
– (1) rare
– (2) hard to imitate
– or (3) not easily substitutable.

• These three characteristics of resources are called

Empirical Indicators
• These enable a firm to implement strategies that improve
its efficiency and effectiveness and lead to a sustainable
competitive advantage.

Integrating Strategy and Culture

• Organizational culture significantly affects planning
activities.
• If strategies can capitalize on cultural strengths, such as a
strong work ethic or highly ethical beliefs, then
management often can swiftly and easily implement
changes.

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5
 Organizational Culture
• A pattern of behavior that has been developed by an
organization as it learns to cope with its problem of
external adaptation and internal integration and that has
worked well enough to be considered valid and to be taught
to new members as the correct way to perceive, think, and
feel.

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Cultural Products
• Values • Sagas
• Beliefs • Language
• Rites • Metaphors
• Rituals • Symbols
• Ceremonies • Folktales
• Myths • Heroes and heroines
• Stories
• Legends

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6
 Fifteen Example (Possible) Aspects of
an Organization’s Culture

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Management
• The functions of management consist of five basic
activities:
– Planning
– Organizing
– Motivating
– Staffing
– Controlling

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 The Basic Functions of Management
• Planning: forecasting, establishing objectives, devising
strategies, and developing policies
• Organizing: organizational design, job specialization, job
descriptions, span of control, coordination, job design, and
job analysis
• Motivating: leadership, communication, work groups,
behavior modification, delegation of authority, job
enrichment, job satisfaction, needs fulfillment,
organizational change, employee morale, and managerial
morale

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The Basic Functions of Management

• Staffing: wage and salary administration, employee
benefits, interviewing, hiring, firing, training, management
development, employee safety, equal employment
opportunity, and union relations
• Controlling: quality control, financial control, sales
control, inventory control, expense control, analysis of
variances, rewards, and sanctions

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8
 Management Audit Checklist
1. Does the firm use strategic-management concepts?
2. Are company objectives and goals measurable and well
communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization's structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms
effective?

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Marketing
• The process of defining, anticipating, creating, and
fulfilling customers’ needs and wants for products and
services

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9
 Functions of Marketing

Customer analysis
Selling products and services
Product and service planning
Pricing
Distribution
Marketing research
Cost/benefit analysis
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Marketing
• Customer Analysis
– The examination and evaluation of consumer needs, desires,
and wants
– Involves administering customer surveys, analyzing
consumer information, evaluating market positioning
strategies, developing customer profiles, and determining
optimal market segmentation strategies

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10
 Selling Products and Services
• Includes many marketing activities, such as
– Advertising
– Sales promotion
– Publicity
– Personal selling
– Sales force management
– Customer relations, and
– Dealer relations

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Product and Service Planning

• Includes activities such as
– Test marketing;
– Product and brand positioning;
– Devising warranties;
– Packaging;
– Determining product options,
– Features, style, and quality;
– Deleting old products; and
– Providing for customer service

• Important when a company is pursuing product

development or diversification

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 Pricing
• Five major stakeholders affect pricing decisions:
consumers, governments, suppliers, distributors, and
competitors
• Sometimes an organization will pursue a forward
integration strategy primarily to gain better control over
prices charged to consumers.

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Distribution
• Includes warehousing, distribution channels, distribution
coverage, retail site locations, sales territories, inventory
levels and location, transportation carriers, wholesaling,
and retailing
• Especially important when a firm is striving to implement a
market development or forward integration strategy

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 Marketing Research
• The systematic gathering, recording, and analyzing of data
about problems relating to the marketing of goods and
services
• Can uncover critical strengths and weaknesses

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Cost/Benefit Analysis
• Three steps are required:
– Compute the total costs associated with a decision
– Estimate the total benefits from the decision
– Compare the total costs with the total benefits

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 Marketing Audit Checklist
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and cost
effective?
5. Does the firm have an effective sales organization?
6. Does the firm conduct market research?

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Marketing Audit Checklist

7. Are product quality and customer service good?
8. Are the firm's products and services priced appropriately?
9. Does the firm have an effective promotion, advertising,
and publicity strategy?
10. Are marketing, planning, and budgeting effective?
11. Do the firm's marketing managers have adequate
experience and training?
12. Is the firm's Internet presence excellent as compared to
rivals?

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 Finance/Accounting Functions
• The functions of finance/accounting comprise three
decisions:
– 1. The investment decision
– 2. The financing decision
– 3. The dividend decision

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Finance/Accounting Functions
• Investment Decision (Capital Budgeting)
– The allocation and reallocation of capital and resources to
projects, products, assets, and divisions of an organization

• Financing Decision
– Determines the best capital structure for the firm and includes
examining various methods by which the firm can raise
capital

• Dividend Decisions
– Concern issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and
the repurchase or issuance of stock
– Determine the amount of funds that are retained in a firm
compared to the amount paid out to stockholders 30

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 Finance/Accounting Functions
1. How has each ratio changed over time?
2. How does each ratio compare to industry norms?
3. How does each ratio compare with key competitors?

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A Summary of Key Financial Ratios

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A Summary of Key Financial Ratios

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A Summary of Key Financial Ratios

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 Finance/Accounting Audit Checklist
1. Where is the firm financially strong and weak as indicated
by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt
and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?

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Finance/Accounting Audit Checklist

6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its investors and
stockholders?
8. Are the firm's financial managers experienced and well
trained?
9. Is the firm's debt situation excellent?

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 Production/Operations
• Consists of all those activities that transform inputs into
goods and services
• Production/operations management deals with inputs,
transformations, and outputs that vary across industries and
markets.

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The Basic Functions (Decisions) Within

Production/Operations

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Implications of Various Strategies on
Production/Operations

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Implications of Various Strategies on

Production/Operations

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 Production/Operations Audit Checklist
1. Are supplies of raw materials, parts, and subassemblies
reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in good
condition?
3. Are inventory-control policies and procedures effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically
located?
6. Does the firm have technological competencies?

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Research and Development Audit

1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization's R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems
adequate?
6. Is communication between R&D and other organizational
units effective?
7. Are present products technologically competitive?

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 Management Information Systems
• Receives raw material from both external and internal
evaluation of an organization
• Improves the performance of an enterprise by improving
the quality of managerial decisions
• Collects, codes, stores, synthesizes, and presents
information in such a manner that it answers important
operating and strategic questions

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Management Information Systems Audit

1. Do all managers in the firm use the information system to
make decisions?
2. Is there a chief information officer or director of
information systems position in the firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm
contribute input to the information system?
5. Are there effective passwords for entry into the firm's
information system?

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 Management Information Systems Audit
6. Are strategists of the firm familiar with the information
systems of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand the
competitive advantages that information can provide
firms?
9. Are computer training workshops provided for users of
the information system?
10. Is the firm’s information system continually being
improved in content- and user-friendliness?

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Value Chain Analysis (VCA)

• Refers to the process whereby a firm determines the costs
associated with organizational activities from purchasing
raw materials to manufacturing product(s) to marketing
those products
• Aims to identify where low-cost advantages or
disadvantages exist anywhere along the value chain from
raw material to customer service activities

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 Transforming Value Chain Activities into
Sustained Competitive Advantage

Core Some Core Some Distinctive

Value Chain
Competencies Competencies Competencies Yield
Activities Are
Arise in Evolve into Sustained
Identified and
Some Distinctive Competitive
Assessed
Activities Competencies Advantages

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Benchmarking
• An analytical tool used to determine whether a firm's value
chain activities are competitive compared to rivals and thus
conducive to winning in the marketplace
• Entails measuring costs of value chain activities across an
industry to determine “best practices”

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The Internal Factor Evaluation (IFE) Matrix
1. List key internal factors as identified in the internal-audit
process.
2. Assign a weight that ranges from 0.0 (not important) to
1.0 (all-important) to each factor.
3. Assign a 1-to-4 rating to each factor to indicate whether
that factor represents a strength or weakness.
4. Multiply each factor's weight by its rating to determine a
weighted score for each variable.
5. Sum the weighted scores for each variable to determine
the total weighted score for the organization.

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A Sample Internal Factor Evaluation Matrix for

a Retail Computer Store

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