Lecture 5
The Internal Assessment
How frequently should we verify
strategies?
Nature of an Internal Audit
Basis for Objectives & Strategies
Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
Internal Audit
Parallels process of external audit
•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management Information Systems
Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important than
external factors
Resource Based View (RBV)
Three All Encompassing Categories
1. Physical resources
2. Human resources
3. Organizational resources
Resource Based View (RBV)
Empirical Indicators
Rare
Hard to imitate
Not easily substitutable
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
Integrating Strategy & Culture
Values
Legends Beliefs
Heroes
Cultural Rites
Products
Symbols Rituals
Myths
Management
Stage When Most
Function Important
Planning Strategy Formulation
Organizing Strategy Implementation
Motivating Strategy Implementation
Staffing Strategy Implementation
Controlling Strategy Evaluation
Marketing
Customer Needs/Wants for Products/Services
1. Defining
2. Anticipating
3. Creating
4. Fulfilling
Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
Finance/Accounting
Finance/Accounting Functions
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
4. Financial analysis – Key financial ratios
Production/Operations
Production/Operations Functions
Process
Capacity
Inventory
Workforce
Quality
Research & Development
Research & Development Functions
Development of new products before
competitors
Improving product quality
Improving manufacturing processes to
reduce costs
Management Information Systems
Information Systems
CIO/CTO
Security
User-friendly
E-commerce
Managerial Questions
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 specifications clear?
Is employee morale high?
Are employee turnover and absenteeism low?
Are organizational reward and control mechanisms
effective?
Marketing Audit Checklist
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 organization?
Does the firm conduct market research?
Are product quality and customer service good?
Are the firm’s products and 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 managers have adequate experience
and training?
Accounting Audit Checklist
Where is the firm financially 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?
Accounting Ratios
Liquidity ratios measure a firm’s ability to meet maturing short-term obligations.
Current ratio
Quick (acid-test) ratio
Leverage ratios measure the extent to which a firm has been financed by debt.
Debt-to-total-assets ratio
Debt-to-equity ratio
Long-term debt-to-equity ratio
Times-interest-earned (coverage) ratio
Activity ratios measure how effectively a firm is using its resources.
How has each ratio changed over
Inventory turnover
time?
Fixed assets turnover
2. How does each ratio compare
to industry norms?
Total assets turnover
Accounts receivable turnover
Average collection period 3. How does each ratio compare
Profitability ratios measure management’s overall effectiveness as shown by returns generated on
sales and investment.
with key competitors?
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets
Return on stockholders’ equity
Earnings per share
Price-earnings ratio
Growth ratios measure the firm’s ability to maintain its economic position in the growth of the
economy and industry.
Sales
Net income
Earnings per share
Dividends per share
Production/Operations
Audit Checklist
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?
Carroll’s four responsibility
of business.
