MODULE 4

THE INTERNAL ASSESSMENT

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

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/accounting in formulating strategies.

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.

SUGGESTED READINGS

 Strategic Management: A Competitive Advantage Approach, Concepts and Cases, 6 th Ed.,

Fred R. David/Forest R. David (Chapter 6)
 Professor’s PPT
 MODULE 4
THE INTERNAL ASSESSMENT

NATURE OF AN INTERNAL AUDIT

- Internal audit is part of strategic management process.

- Internal strengths and weaknesses, coupled with external opportunities and threats and clear
vision and mission statements, provide the basis for establishing objectives and strategies.
- Objectives and strategies are established with the intention of capitalizing on internal strengths
and overcoming weaknesses.

KEY INTERNAL FACTORS

- A complete internal assessment is vital to help a firm formulate, implement, and evaluate
strategies to enable it to gain and sustain competitive advantages.
- Regardless of the type or size of firm, effective strategic planning hinges on identification and
prioritization of internal strengths and weaknesses.
- Distinctive competencies
o A firm’s strengths that cannot be easily matched or imitated by competitors
o Building competitive advantages involves taking advantage of distinctive competencies.

THE PROCESS OF PERFORMING AN INTERNAL AUDIT

- Compared to the external audit, the process of performing an internal audit provides more
opportunity for participants to understand how their jobs, departments, and divisions fit into
the whole organization. This is a great benefit because managers and employees perform better
when they understand how their work affects other areas and activities of the firm.
- The internal audit requires gathering and assimilating information about the firm’s
management, marketing, finance/accounting, production/operations, research and
development (R&D), and management information systems operations.

THE RESOURCE-BASED VIEW (RBV) APPROACH

- It contends that internal resources are more important for a firm than external factors in
achieving and sustaining competitive advantage.
- The Resource-Based View (RBV) approach contends that internal resources are more important
for a firm than external factors in achieving and sustaining competitive advantage.
- 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 enable a firm to implement strategies
that improve its efficiency and effectiveness and lead to a sustainable competitive advantage.
INTERGRATING STRATEGY AND CULTURE

- Organizational culture is “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.”
- Organizational culture significantly affects business decisions and thus must be evaluated during
an internal strategic-management audit.
- 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.
- Cultural products include values, beliefs, rites, rituals, ceremonies, myths, stories, legends,
sagas, language, metaphors, symbols, folktales, and heroes and heroines. These products or
dimensions are levers that strategists can use to influence and direct strategy formulation,
implementation, and evaluation activities.

MANAGEMENT

- The functions of management consist of five basic activities: planning, organizing, motivating,
staffing, and controlling. These activities must be examined in strategic planning because an
organization should continually capitalize on its strengths and improve on its weaknesses in
these five areas.

BASIC FUNCTION OF MANAGEMENT:

A. PLANNING - consists of all those managerial activities related to preparing for the future,
such as forecasting, establishing objectives, devising strategies, and developing policies.
B. ORGANIZING - includes all those managerial activities that result in a structure of task and
authority relationships, such as organizational design, job specialization, job descriptions,
span of control, coordination, job design, and job analysis.
C. MOTIVATING - involves efforts directed toward shaping human behavior. Specific topics
include leadership, communication, work groups, behavior modification, delegation of
authority, job enrichment, job satisfaction, needs fulfillment, organizational change,
employee morale, and managerial morale.
D. STAFFING - refers to human resource (HR) activities, such as wage and salary
administration, employee benefits, interviewing, hiring, firing, training, management
development, employee safety, equal employment opportunity, and union relations.
E. CONTROLLING - refers to all those managerial activities directed toward ensuring that
actual results are consistent with planned results. Key areas of concern include quality
control, financial control, sales control, inventory control, expense control, analysis of
variances, rewards, and sanctions.

Controlling consists of four basic steps:

1. Establishing performance standards
2. Measuring individual and organizational performance
 3. Comparing actual performance to planned performance standards
4. Taking corrective actions

MANAGEMENT AUDIT CHECKLIST OF QUESTIONS

- The following checklist of questions can help determine specific strengths and weaknesses in the
functional area of business.
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?

MARKETING

- Marketing can be described as the process of defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and services.

7 BASIC FUNCTIONS OF MARKETING

1. 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.
2. Selling products or services - successful strategy implementation generally rests on the
ability of an organization to sell some product or service.
3. 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. Product and service
planning is particularly important when a company is pursuing product development or
diversification. One of the most effective product and service planning techniques is test
marketing.
4. Pricing - five major stakeholders affect pricing decisions: consumers, governments,
suppliers, distributors, and competitors.
5. Distribution - includes warehousing, distribution channels, distribution coverage, retail site
locations, sales territories, inventory levels and location, transportation carriers,
wholesaling, and retailing.
6. Marketing research - is the systematic gathering, recording, and analyzing of data about
problems relating to the marketing of goods and services.
 7. Cost/Benefit analysis - involves assessing the costs, benefits, and risks associated with
marketing decisions.
o Three steps are required to perform a cost/benefit analysis:
(1) compute the total costs associated with a decision,
(2) estimate the total benefits from the decision, and
(3) compare the total costs with the total benefits.

o When expected benefits exceed total costs, an opportunity becomes more attractive.

o Government agencies across the world rely on a basic set of key cost/benefit indicators,
including the following:
1. Net present value (NPV)
2. Present value of benefits (PVB)
3. Present value of costs (PVC)
4. Benefit cost ratio (BCR) = PVB/PVC
5. Net benefit = PVB - PVC
6. NPV/k (where k is the level of funds available)

MARKETING AUDIT CHECKLIST OF QUESTIONS

- The following questions about marketing must be examined in strategic planning:
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?
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?

FINANCE AND ACCOUNTING

- Financial condition is often considered the single-best measure of a firm’s competitive position
and overall attractiveness to investors. Determining an organization’s financial strengths and
weaknesses is essential to effectively formulating strategies.
- The functions of finance/accounting comprise three decisions:
1. Investment decision - the allocation and reallocation of capital and resources to projects,
products, assets, and divisions of an organization.
2. Financing decision - determines the best capital structure for the firm and includes
examining various methods by which the firm can raise capital.
3. 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.
FINANCE AND ACCOUTING 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?

FINANCE/ACCOUNTING AUDIT CHECKLIST OF QUESTIONS

- Some finance/accounting questions that should be examined in any strategic analysis of the firm
are given here:
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 or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
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?

PROODUCTIONS/OPERATIONS
- The production/operations function of a business 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.
- A manufacturing operation transforms or converts inputs such as raw materials, labor, capital,
machines, and facilities into finished goods and services. The extent to which a manufacturing
 plant’s output reaches its potential output is called capacity utilization, a key strategic variable.
The higher the capacity utilization, the better; otherwise, equipment may sit idle.
-

PRODUCTIONS/OPERATIONS AUDIT CHECKLIST OF QUESTIONS

- Questions such as the following should be examined:
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?
RESEARCH AND DEVELOPMENT (R&D)
- The fifth major area of internal operations that should be examined for specific strengths and
weaknesses as input into formulating strategies is research and development (R&D).
- Organizations invest in R&D because they believe that such an investment will lead to a superior
product or service and will give them competitive advantages.

INTERNAL AND EXTERNAL RESEARCH AND DEVELOPMENT

- Four approaches to determining research and development budget allocations commonly are
used:
(1) financing as many project proposals as possible,
(2) using a percentage-of-sales method,
(3) budgeting about the same amount that competitors spend for r&d, or
 (4) deciding how many successful new products are needed and working backward to estimate
the required r&d investment.

- The strengths (capabilities) and weaknesses (limitations) of R&D play a major role in strategy
formulation and strategy implementation.

R&D AUDIT CHECKLIST OF QUESTIONS

- Questions such as the following should be asked in performing a 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?

MANAGEMENT INFORMATION SYSTEMS (MIS)

- A purpose of a management information system is to improve the performance of an enterprise
by improving the quality of managerial decisions.
- An effective information system thus collects, codes, stores, synthesizes, and presents
information in such a manner that it answers important operating and strategic questions.
- A management information system (MIS) receives raw material from both the external and
internal evaluation of an organization.

MANAGEMENT INFORMATION SYSTEMS AUDIT CHECKLIST OF QUESTIONS

- Questions such as the following should be asked when conducting this 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?
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?
VALUE CHAIN ANALYSIS (VCA)
- 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.
- Value chain analysis aims to identify where low-cost advantages or disadvantages exist
anywhere along the value chain from raw material to customer service activities.
- The VCA process can enable a firm to better identify its own strengths and weaknesses,
especially as compared to competitors’ value chain analyses and their own data examined over
time.

BENCHMARKING
- Benchmarking is an analytical tool used to determine whether a firm’s value chain analysis is
competitive compared to those of rivals and thus conducive to winning in the marketplace.
- Benchmarking enables a firm to take action to improve its competitiveness by identifying (and
improving on) value chain activities where rival firms have comparative advantages in cost,
service, reputation, or operation.

THE INTERNAL FACTOR EVALUATION MATRIX (IFE MATRIX)

- A summary step in conducting an internal strategic-management audit is to construct an
Internal Factor Evaluation (IFE) Matrix.
- This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in
the functional areas of a business, and it also provides a basis for identifying and evaluating
relationships among those areas. Intuitive judgments are required in developing an IFE Matrix,
so the appearance of a scientific approach should not be interpreted to mean this is an all-
powerful technique.
- A thorough understanding of the factors included is more important than the actual numbers.
- an IFE Matrix can be developed in five steps:
 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 major
weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a
major strength (rating = 4).
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.

SUMMARY

Management, marketing, finance/accounting, production/operations, R&D, and MIS represent

the core operations of most businesses and the source of competitive advantages. A strategic
management audit of a firm’s internal operations is vital to organizational health. Many companies still
prefer to be judged solely on their bottom-line performance. However, it is essential that strategists
identify and evaluate internal strengths and weaknesses to effectively formulate and choose among
alternative strategies. The Internal Factor Evaluation Matrix, coupled with the Competitive Profile
Matrix, the External Factor Evaluation Matrix, and clear statements of vision and mission provide the
basic information needed to successfully formulate competitive strategies. The process of performing an
internal audit represents an opportunity for managers and employees throughout the organization to
participate in determining the future of the firm.

Involvement in the process can energize and mobilize managers and employees. Understanding
both external and internal factors and relationships among them is the key to effective strategy
formulation. Because both external and internal factors continually change, strategists seek to identify
and take advantage of positive changes and buffer against negative changes in a continuing effort to
gain and sustain a firm’s competitive advantage. This is the essence and challenge of strategic
management, and oftentimes survival of the firm hinges on this work.

REVIEW QUESTIONS

1. Given the 15 example (possible) aspects of an organization’s culture as presented in the chapter,
rate a company you are very familiar with in terms of the extent to which each culture item
exists. Explain.
2. Rank the seven functions of marketing in order of importance for a small hardware business.
3. Why is breakeven analysis such an important strategic planning concept?
4. What are the basic functions of production/operations in a large manufacturing company? Why
are these factors important in an internal strategic management audit?
5. Explain benchmarking