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Chapter 4
The Internal Assessment
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice Hall
Ch 4 -1
Chapter Outline
The Nature of an Internal Audit
The Resource-Based View (RBV)
Integrating Strategy & Culture
Copyright 2007 Prentice Hall
Ch 4 -2
Chapter Outline (cont’d)
Management
Marketing
Opportunity Analysis
Copyright 2007 Prentice Hall
Ch 4 -3
Chapter Outline (cont’d)
Finance/Accounting
Production/Operations
Research & Development
Copyright 2007 Prentice Hall
Ch 4 -4
Chapter Outline (cont’d)
Management Information Systems
The Internal Factor Evaluation (IFE) Matrix
Copyright 2007 Prentice Hall
Ch 4 -5
Internal Assessment
The biggest levers you’ve got to change a
company are strategy, structure, and culture.
If I could pick two, I’d pick strategy and
culture. –
Wayne Leonard, CEO, Entergy
Weak leadership can wreck the soundest
strategy. –
Sun Zi
Copyright 2007 Prentice Hall
Ch 4 -6
Nature of an Internal Audit
Functional Areas of Business
-- Strengths
-- Weaknesses
Copyright 2007 Prentice Hall
Ch 4 -7
Nature of an Internal Audit
Basis for Objectives & Strategies



Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
Copyright 2007 Prentice Hall
Ch 4 -8
Key Internal Forces
Functional Business Areas:
Vary by organization
Divisions have differing strengths &
weaknesses
Copyright 2007 Prentice Hall
Ch 4 -9
Key Internal Forces
Distinctive Competencies:
Firm’s strengths that cannot be easily
matched or imitated by competitors
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Ch 4 -10
Key Internal Forces
Distinctive Competencies:
Building competitive advantage involves
taking advantage of distinctive
competencies
Copyright 2007 Prentice Hall
Ch 4 -11
Key Internal Forces
Distinctive Competencies:
Strategies designed to improve on a
firm’s weaknesses and turn to strengths
Copyright 2007 Prentice Hall
Ch 4 -12
Internal Audit
Parallels process of external audit
•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management information Systems
Copyright 2007 Prentice Hall
Ch 4 -13
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
Copyright 2007 Prentice Hall
Ch 4 -14
Internal Audit
Key to Organizational Success
Coordination & understanding among
managers from all functional areas
Copyright 2007 Prentice Hall
Ch 4 -15
Internal Audit
Functional Relationships
Number and complexity increases
relative to organization size
Copyright 2007 Prentice Hall
Ch 4 -16
Internal Audit
Financial Ratio Analysis
Exemplifies complexity of relationships
among functional areas of the business
Copyright 2007 Prentice Hall
Ch 4 -17
Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important
than external factors
Copyright 2007 Prentice Hall
Ch 4 -18
Resource Based View (RBV)
3 All Encompassing Categories
1. Physical resources
2. Human resources
3. Organizational resources
Copyright 2007 Prentice Hall
Ch 4 -19
Resource Based View (RBV)
Empirical Indicators
 Rare
 Hard to imitate
 Not easily substitutable
Copyright 2007 Prentice Hall
Ch 4 -20
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
Copyright 2007 Prentice Hall
Ch 4 -21
Integrating Strategy & Culture
Organizational Culture
 Resistant to change
 May represent:
 Strength
 Weakness
Copyright 2007 Prentice Hall
Ch 4 -22
Integrating Strategy & Culture
Values
Beliefs
Legends
Heroes
Symbols
Copyright 2007 Prentice Hall
Cultural
Products
Myths
Rites
Rituals
Ch 4 -23
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 2007 Prentice Hall
Ch 4 -24
U.S. Versus Foreign Cultures
To successfully compete in world markets, U.S.
managers must obtain a better knowledge of
historical, cultural, and religious forces that
motivate and drive people in other countries.
Copyright 2007 Prentice Hall
Ch 4 -25
Copyright 2007 Prentice Hall
Ch 4 -26
Management
Functions of Management
1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
Copyright 2007 Prentice Hall
Ch 4 -27
Management
Function
Stage When Most
Important
Planning
Strategy Formulation
Organizing
Strategy Implementation
Motivating
Strategy Implementation
Staffing
Strategy Implementation
Controlling
Strategy Evaluation
Copyright 2007 Prentice Hall
Ch 4 -28
Management
Planning
 Beginning of management process
 Bridge between present & future
 Improves likelihood of attaining
desired results
Copyright 2007 Prentice Hall
Ch 4 -29
Management
Forecasting
Establishing objectives
Planning
Devising strategies
Developing policies
Setting goals
Copyright 2007 Prentice Hall
Ch 4 -30
Management
Organizing
 Achieves coordinated effort
 Defines task & authority relationships
 Departmentalization
 Delegation of authority
Copyright 2007 Prentice Hall
Ch 4 -31
Management
Organizing
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Organizational design
Job specialization
Job descriptions
Job specifications
Span of control
Unity of command
Coordination
Job design
Job analysis
Ch 4 -32
Management
Motivating
 Influencing to accomplish specific
objectives
 Communication – major component
Copyright 2007 Prentice Hall
Ch 4 -33
Management
Motivating
Copyright 2007 Prentice Hall
Leadership
Communication
Work groups
Job enrichment
Job satisfaction
Needs fulfillment
Organizational change
Morale
Ch 4 -34
Management
Staffing
 Personnel management
 Human resources management
Copyright 2007 Prentice Hall
Ch 4 -35
Management
Staffing
Copyright 2007 Prentice Hall
Wage & salary admin.
Employee benefits
Interviewing
Hiring
Discharging
Training
Management development
Affirmative Action
EEO
Labor relations
Ch 4 -36
Management
Controlling
 Establishing performance standards
 Ensure actual operations conform to
planned operations
 Taking corrective actions
Copyright 2007 Prentice Hall
Ch 4 -37
Management
Controlling
Copyright 2007 Prentice Hall
Quality
Financial
Sales
Inventory
Expense
Analysis of variance
Rewards
Sanctions
Ch 4 -38
Management Audit Checklist
•Does the firm use strategic management
concepts?
•Are objectives/goals measurable? Well
communicated?
•Do managers at all levels plan
effectively?
Copyright 2007 Prentice Hall
Ch 4 -39
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?
Copyright 2007 Prentice Hall
Ch 4 -40
Management Audit Checklist
•Is employee absenteeism low?
•Is employee turnover low?
•Are the reward mechanisms effective?
•Are the organization’s control
mechanisms effective?
Copyright 2007 Prentice Hall
Ch 4 -41
Marketing
Customer Needs/Wants for Products/Services
1. Defining
2. Anticipating
3. Creating
4. Fulfilling
Copyright 2007 Prentice Hall
Ch 4 -42
Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
Copyright 2007 Prentice Hall
Ch 4 -43
Marketing
Customer surveys
Consumer information
Customer
Analysis
Market positioning
strategies
Customer profiles
Market segmentation
strategies
Copyright 2007 Prentice Hall
Ch 4 -44
Marketing
Selling
Products/Services
Copyright 2007 Prentice Hall
Advertising
Sales
Promotion
Publicity
Sales force management
Customer relations
Dealer relations
Ch 4 -45
Marketing
Planning
Product/Service
Copyright 2007 Prentice Hall
Test marketing
Brand positioning
Devising warrantees
Packaging
Product features/options
Product style
Quality
Ch 4 -46
Marketing
Pricing
Copyright 2007 Prentice Hall
Forward integration
Discounts
Credit terms
Condition of sale
Markups
Costs
Unit pricing
Ch 4 -47
Marketing
Distribution
Copyright 2007 Prentice Hall
Warehousing
Channels
Coverage
Retail site locations
Sales territories
Inventory levels
Transportation
Ch 4 -48
Marketing
Marketing Research
Copyright 2007 Prentice Hall
Data collection
Data input
Data analysis
Support business functions
Ch 4 -49
Marketing
Assessing costs
Assessing benefits
Opportunity
Analysis
Assessing risks
Cost/benefit/risk analysis
Copyright 2007 Prentice Hall
Ch 4 -50
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?
Copyright 2007 Prentice Hall
Ch 4 -51
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, & publicity strategies?
Copyright 2007 Prentice Hall
Ch 4 -52
Marketing
Opportunity Analysis
10. Are the marketing planning & budgeting
effective?
11. Do the firm’s marketing managers have
adequate experience and training?
Copyright 2007 Prentice Hall
Ch 4 -53
Finance/Accounting
 Determining financial strengths &
weaknesses key to strategy
formation
Copyright 2007 Prentice Hall
Ch 4 -54
Finance/Accounting
Finance/Accounting Functions
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
Copyright 2007 Prentice Hall
Ch 4 -55
Basic Financial Ratios
Firm’s ability to meet its
short-term obligations
Liquidity Ratios
Ratios
Current ratio
Quick (or acid test) ratio
Copyright 2007 Prentice Hall
Ch 4 -56
Basic Financial Ratios
Extent of debt financing
Ratios
Leverage Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest earned
Copyright 2007 Prentice Hall
Ch 4 -57
Basic Financial Ratios
Effective use of firm’s
resources
Activity Ratios
Ratios
Inventory-turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
Copyright 2007 Prentice Hall
Ch 4 -58
Basic Financial Ratios
Effectiveness shown by
returns on sales &
investment
Profitability Ratios
Ratios
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)
Copyright 2007 Prentice Hall
Ch 4 -59
Basic Financial Ratios
Effectiveness shown by
returns on sales &
investment
Profitability Ratios
(cont’d)
Ratios
Return on stockholders equity
(ROE)
Earnings per share
Price-earnings ratio
Copyright 2007 Prentice Hall
Ch 4 -60
Basic Financial Ratios
Firm’s ability to maintain
economic position
Growth Ratios
Ratios
Sales
Net income
Earnings per share
Dividends per share
Copyright 2007 Prentice Hall
Ch 4 -61
Finance/Accounting Audit
•Where is the firm strong/weak as
indicated by financial ratio analysis?
•Can the firm raise short-term capital as
needed?
•Can the firm raise long-term capital as
needed through debt and/or equity?
Copyright 2007 Prentice Hall
Ch 4 -62
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?
Copyright 2007 Prentice Hall
Ch 4 -63
Finance/Accounting Audit
Effective Financial Analysis Requires:
1. Analysis of how the ratios have
changed over time
2. How the ratios compare to industry
norms
3. How the ratios compare with key
competitors
Copyright 2007 Prentice Hall
Ch 4 -64
Production/Operations
Production/Operations Functions
 Process
 Capacity
 Inventory
 Workforce
 Quality
Copyright 2007 Prentice Hall
Ch 4 -65
Production/Operations
Process
Copyright 2007 Prentice Hall
Facility design
Technology selection
Facility layout
Process flow analysis
Facility location
Line balancing
Process control
Ch 4 -66
Production/Operations
Capacity
Copyright 2007 Prentice Hall
Forecasting
Facilities planning
Aggregate planning
Scheduling
Capacity planning
Queuing analysis
Ch 4 -67
Production/Operations
Inventory
Copyright 2007 Prentice Hall
Raw materials
Work in process
Finished goods
Materials handling
Ch 4 -68
Production/Operations
Workforce
Copyright 2007 Prentice Hall
Job design
Work measurement
Job enrichment
Work standards
Motivation techniques
Ch 4 -69
Production/Operations
Quality
Copyright 2007 Prentice Hall
Quality control
Sampling
Testing
Quality assurance
Cost Control
Ch 4 -70
Production/Operations Audit
•Are suppliers of materials, parts, etc.
reliable and reasonable?
•Are facilities, equipment & machinery in
good condition?
•Are inventory-control policies and
procedures effective?
Copyright 2007 Prentice Hall
Ch 4 -71
Production/Operations Audit
•Are quality-control policies & procedures
effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?
Copyright 2007 Prentice Hall
Ch 4 -72
Research & Development
Research & Development Functions
 Development of new products before
competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs
Copyright 2007 Prentice Hall
Ch 4 -73
Research & Development
Financing as many
projects as possible
Use percent-of-sales
method
R&D Budgets
Budgeting relative to
competitors
How many successful
new products are
needed
Copyright 2007 Prentice Hall
Ch 4 -74
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 2007 Prentice Hall
Ch 4 -75
Research & Development Audit
•Are MIS and computer systems
adequate?
•Is communication between R&D & other
organizational units effective?
•Are present products technologically
competitive?
Copyright 2007 Prentice Hall
Ch 4 -76
Management Information
Systems
Purpose
 Improve performance of an enterprise by
improving the quality of managerial
decisions.
Copyright 2007 Prentice Hall
Ch 4 -77
Management Information
Systems





Information Systems
CIO/CTO
Security
User-friendly
E-commerce
Copyright 2007 Prentice Hall
Ch 4 -78
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?
Copyright 2007 Prentice Hall
Ch 4 -79
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?
Copyright 2007 Prentice Hall
Ch 4 -80
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?
Copyright 2007 Prentice Hall
Ch 4 -81
Copyright 2007 Prentice Hall
Ch 4 -82
Copyright 2007 Prentice Hall
Ch 4 -83
For Review (Chapter 4)
Key Terms & Concepts
Activity Ratios
Cost/Benefit Analysis
Capital Budgeting
Cultural Products
Communication
Distinctive Competencies
Controlling
Distribution
Copyright 2007 Prentice Hall
Ch 4 -84
For Review (Chapter 4)
Key Terms & Concepts
Dividend Decision
Functions of
Finance/Accounting
Empirical Indicators
Functions of Management
Financial Ratio Analysis
Functions of Marketing
Financing Decision
Functions of Production/
Operations
Copyright 2007 Prentice Hall
Ch 4 -85
For Review (Chapter 4)
Key Terms & Concepts
Growth Ratios
Investment Decision
Human Resource
Management
Leverage Ratios
Internal Audit
Liquidity Ratios
Internal Factor Evaluation
(IFE) Matrix
Management Information
Systems
Copyright 2007 Prentice Hall
Ch 4 -86
For Review (Chapter 4)
Key Terms & Concepts
Motivating
Personnel Management
Opportunity Analysis
Planning
Organizational Culture
Pricing
Organizing
Product & Service
Planning
Copyright 2007 Prentice Hall
Ch 4 -87
For Review (Chapter 4)
Key Terms & Concepts
Production/Operations
Functions
Selling
Profitability Ratios
Staffing
Research & Development
Synergy
Resource Based View
(RBV)
Test Marketing
Copyright 2007 Prentice Hall
Ch 4 -88
For Review (Chapter 4)
Key Terms & Concepts
Value Chain Analysis
(VCA)
Copyright 2007 Prentice Hall
Ch 4 -89