Chapter 4

The Internal Assessment

Strategic Management:
Concepts & Cases
13th Edition
Global Edition
Fred David

Dr.Sarah Yassein Ch 4 -1
Dr.Sarah Yassein Ch 4 -2
Internal Assessment

“Great spirits have always encountered

violent opposition from mediocre minds.”
– Albert Einstein

“Weak leadership can wreck the soundest

strategy.”
– Sun Tzu

Dr.Sarah Yassein Ch 4 -3
Internal Audit

 All organizations have strengths and

weaknesses in the functional areas of
business.
 No enterprise is equally strong or weak in all
areas. Maytag, for example, is known for
excellent production and product design,
whereas Procter & Gamble is known for
excellent marketing.

Dr.Sarah Yassein Ch 4 -4
Internal Audit
 Identify strengths and weaknesses in
 Management
 Marketing

 Finance and accounting

 Production and operations

 Research and development

 Management information systems

Dr.Sarah Yassein Ch 4 -5
Nature of an Internal Audit

Basis for Objectives & Strategies

 Internal strengths/weaknesses
 External opportunities/threats
 Clear statement of mission

Dr.Sarah Yassein Ch 4 -6
Key Internal Forces

 It is not possible in a strategic-management

to review in depth all the material presented
in courses such as marketing, finance,
accounting, management, management
information systems, and
production/operations; there are many
subareas within these functions, such as
customer service, warranties, advertising,
packaging, and pricing under marketing.

Dr.Sarah Yassein Ch 4 -7
Key Internal Forces

 For different types of organizations, such as

hospitals, universities, and government
agencies, the functional business areas, of
course, differ. In a hospital, for example,
functional areas may include cardiology,
nursing, maintenance, and physician support.

Dr.Sarah Yassein Ch 4 -8
 Functional areas of a university can
include athletic programs, educational
services, academic research, and
counseling, and recreational programs.

 Within large organizations, each division

has certain strengths and weaknesses.

Dr.Sarah Yassein Ch 4 -9
Key Internal Forces

Distinctive Competencies:
Firm’s strengths that cannot be
easily matched or imitated by
competitors

Dr.Sarah Yassein Ch 4 -10

Key Internal Forces

Distinctive Competencies:

Building competitive advantage

involves taking advantage of
distinctive competencies

Dr.Sarah Yassein Ch 4 -11

Internal Audit Process
Parallels process of external audit

Information gathered from:

Management
Marketing
Finance/accounting
Production/operations
Research & development
Management information systems
Dr.Sarah Yassein Ch 4 -12
Internal Audit

Involvement in performing an
internal strategic-management audit
provides a vehicle for understanding
the nature and effect of decisions in
other functional business areas of
the firm

Dr.Sarah Yassein Ch 4 -13

Dr.Sarah Yassein Ch 4 -14
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
Dr.Sarah Yassein Ch 4 -15
Internal Audit
 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. For example, when
marketing and manufacturing managers jointly discuss issues
related to internal strengths and weaknesses, they gain a better
appreciation of the issues, problems, concerns, and needs of all
the functional areas.

Dr.Sarah Yassein Ch 4 -16

Internal Audit
 Performing an internal audit thus is an
excellent vehicle for improving the process of
communication in the organization.

Dr.Sarah Yassein Ch 4 -17

 Internal Audit
Financial Ratio Analysis
Exemplifies complexity of relationships
among functional areas of the business.

•A declining return on investment or profit margin ratio

could be the result of ineffective marketing, poor
management policies, research and development errors,
or a weak management information system.

Dr.Sarah Yassein Ch 4 -18

Internal Audit

 The effectiveness of strategy formulation,

implementation, and evaluation activities
hinges upon a clear understanding of how
major business functions affect one
another.
 For strategies to succeed, a coordinated
effort among all the functional areas of
business is needed.

Dr.Sarah Yassein Ch 4 -19

Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more

important than external factors

Dr.Sarah Yassein Ch 4 -20

Resource Based View (RBV)

Three All-Encompassing Categories

1. Physical resources
2. Human resources
3. Organizational resources

Dr.Sarah Yassein Ch 4 -21

Resource Based View (RBV)

Empirical Indicators

 Rare
 Hard to imitate
 Not easily substitutable

Dr.Sarah Yassein Ch 4 -22

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

Dr.Sarah Yassein Ch 4 -23

Integrating Strategy & Culture

Organizational Culture

 Resistant to change
 May represent:
 Strength
 Weakness

Dr.Sarah Yassein Ch 4 -24

Integrating Strategy & Culture

Values

Legends Beliefs

Heroes
Cultural Rites
Products

Symbols Rituals
Myths

Dr.Sarah Yassein Ch 4 -25

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
Dr.Sarah Yassein Ch 4 -26
Management

Functions of Management

1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
Dr.Sarah Yassein Ch 4 -27
Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Dr.Sarah Yassein Ch 4 -28

Management

Planning

 Beginning of management process

 Bridge between present & future
 Improves likelihood of attaining desired
results

Dr.Sarah Yassein Ch 4 -29

Management

Developing a mission

Forecasting future events

and trends
Planning
Establishing objectives

Choosing strategies to
pursue

Dr.Sarah Yassein Ch 4 -30

Planning

 Synergy

 Can develop through planning

 Exists when everyone pulls

together as a team that knows

what it wants to achieve

Dr.Sarah Yassein Ch 4 -31

Management
Organizing

 Achieves coordinated effort

 Defines task & authority relationships
 Determines who does what
 Determines who reports to whom

Dr.Sarah Yassein Ch 4 -32

Management

 Organizing

 Breaking down tasks into jobs

 Combining jobs to form

departments
 Delegating authority

Dr.Sarah Yassein Ch 4 -33

Management
Motivating
 Influencing to accomplish specific objectives
 Four components include:
 Leadership
 Group dynamics
 Communication
 Organizational change
Dr.Sarah Yassein Ch 4 -34
Management

Staffing

 Personnel management
 Human resource management

Dr.Sarah Yassein Ch 4 -35

Management
Staffing
 Recruiting  Evaluating
 Interviewing  Rewarding
 Testing  Disciplining
 Selecting  Promoting
 Orienting  Transferring
 Training  Demoting
 Developing  Dismissing
 Caring for
Dr.Sarah Yassein Ch 4 -36
Management

Controlling

 Establishing performance standards

 Ensure actual operations conform to
planned operations
 Taking corrective actions

Dr.Sarah Yassein Ch 4 -37

Management
Controlling

1. Establish performance standards

2. Measure individual and organizational

performance
3. Compare actual performance to
planned performance standards
4. Take corrective action
Dr.Sarah Yassein 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?

Dr.Sarah Yassein 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?

Dr.Sarah Yassein 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?

Dr.Sarah Yassein Ch 4 -41

Marketing

Customer Needs or Wants for Products

and Services

1. Defining

2. Anticipating

3. Creating

4. Fulfilling

Dr.Sarah Yassein 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

Dr.Sarah Yassein Ch 4 -43

Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies

Dr.Sarah Yassein Ch 4 -44

Marketing

Advertising
Sales Promotion
Publicity
Selling
Products/Services Personal Selling
Sales force management
Customer relations
Dealer relations

Dr.Sarah Yassein Ch 4 -45

Dr.Sarah Yassein Ch 4 -46
Marketing

Test marketing
Brand positioning
Devising warranties
Packaging
Product/Service Product features/options
Planning Product style
Quality
Deleting old products
Providing for customer
service

Dr.Sarah Yassein Ch 4 -47

Marketing

Consumers
Governments
Pricing
Suppliers
Major Stakeholders Distributors
Competitors

Dr.Sarah Yassein Ch 4 -48

Marketing

Warehousing
Distribution channels
Retail site locations
Distribution Sales territories
Inventory levels
Transportation
Wholesaling
Retailing

Dr.Sarah Yassein Ch 4 -49

Marketing

Gather data

Marketing Research Record data

Analyze data

Dr.Sarah Yassein Ch 4 -50

Marketing

Assessing costs

Cost/Benefit Assessing benefits

Analysis

Assessing risks

Dr.Sarah Yassein Ch 4 -51

Marketing Audit
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?

Dr.Sarah Yassein Ch 4 -52

Marketing Audit

6. Does the firm conduct market research?

7. Are product quality & customer service

good?
8. Are the firm’s products and services
priced appropriately?
9. Does the firm have effective promotion,
advertising, and publicity strategies?

Dr.Sarah Yassein Ch 4 -53

Marketing Audit

10. Are the 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?

Dr.Sarah Yassein Ch 4 -54

Finance/Accounting

1. Investment decision (Capital

budgeting)
2. Financing decision

3. Dividend decision

Dr.Sarah Yassein 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

Dr.Sarah Yassein 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

Dr.Sarah Yassein Ch 4 -57

Basic Financial Ratios

Effective use of firm’s

resources

Ratios
Activity Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period

Dr.Sarah Yassein Ch 4 -58

Basic Financial Ratios

Effectiveness shown by
returns on sales and
investment

Profitability Ratios Ratios

Gross profit margin

Operating profit margin
Net profit margin
Return on total assets (ROA)

Dr.Sarah Yassein Ch 4 -59

Basic Financial Ratios

Effectiveness shown by
returns on sales &
investment

Profitability Ratios Ratios

(cont’d)
Return on stockholders’
equity (ROE)
Earnings per share
Price-earnings ratio

Dr.Sarah Yassein Ch 4 -60

Basic Financial Ratios

Firm’s ability to
maintain economic
position

Ratios
Growth Ratios
Sales
Net Income
Earnings per share
Dividends per share

Dr.Sarah Yassein Ch 4 -61

Growth Ratios

Ratio Annual percentage

growth in
 Sales  Total sales

 Net Income  Profits

 Earnings per share  EPS

 Dividends per share  Dividends per share

Dr.Sarah Yassein Ch 4 -62

Dr.Sarah Yassein Ch 4 -63
Dr.Sarah Yassein Ch 4 -64
Dr.Sarah Yassein Ch 4 -65
Dr.Sarah Yassein Ch 4 -66
Finance/Accounting Audit

1. Where is the firm financially strong/weak as

indicated by financial ratio analysis?
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?

Dr.Sarah Yassein Ch 4 -67

Finance/Accounting Audit

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?

Dr.Sarah Yassein Ch 4 -68

Production/Operations

Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality

Dr.Sarah Yassein Ch 4 -69

Dr.Sarah Yassein Ch 4 -70
Production/Operations Audit

••Are
Are suppliers
suppliers of of materials,
materials, parts,
parts, etc.
etc.
reliable
reliable and
and reasonable?
reasonable?
••Are
Are facilities,
facilities, equipment,
equipment, machinery,
machinery, andand
offices
offices in
in good
good condition?
condition?
••Are
Are inventory-control
inventory-control policies
policies and
and
procedures
procedures effective?
effective?

Dr.Sarah Yassein Ch 4 -71

Production/Operations Audit

••Are
Are quality-control
quality-control policies
policies && procedures
procedures
effective?
effective?
••Are
Are facilities,
facilities, resources,
resources, and
and markets
markets
strategically
strategically located?
located?
••Does
Does the
the firm
firm have
have technological
technological
competencies?
competencies?

Dr.Sarah Yassein Ch 4 -72

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
Dr.Sarah Yassein 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

Dr.Sarah Yassein Ch 4 -74

Research & Development Audit

••Are
Are the
the R&D
R&D facilities
facilities adequate?
adequate?
••IfIf R&D
R&D is
is outsourced,
outsourced, is is itit cost-effective?
cost-effective?
••Are
Are the
the R&D
R&D personnel
personnel wellwell qualified?
qualified?
••Are
Are R&D
R&D resources
resources allocated
allocated effectively?
effectively?

Dr.Sarah Yassein Ch 4 -75

Research & Development Audit

••Are
Are MIS
MIS and
and computer
computer systems
systems
adequate?
adequate?
••Is
Is communication
communication between
between R&DR&D and
and
other
other organizational
organizational units
units effective?
effective?
••Are
Are present
present products
products technologically
technologically
competitive?
competitive?

Dr.Sarah Yassein Ch 4 -76

Management Information Systems

Purpose

 Improve performance of an
enterprise by improving the quality
of managerial decisions

Dr.Sarah Yassein Ch 4 -77

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?

Dr.Sarah Yassein Ch 4 -78

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?

Dr.Sarah Yassein Ch 4 -79

Value Chain Analysis

 The process whereby a firm determines

the costs associated with:
 Purchasing raw materials
 Manufacturing products
 Marketing products
 And compares them to the value chain
of rival firms

Dr.Sarah Yassein Ch 4 -80

Value Chain Analysis

 Core competencies

 Distinctive competencies

 Benchmarking

Dr.Sarah Yassein Ch 4 -81

Transforming Value Chain Activities into Sustained
Competitive Advantage

Value
Value Some
Some
Chain
Chain Some
SomeCore
Core Distinctive
Distinctive
Core
Core
Activities
Activities Competencies
Competencies Competencies
Competencies
Competencies
Competencies
Are
Are Evolve
Evolveinto
into Yield
Yield
Arise
AriseininSome
Some
Identified
Identified Distinctive
Distinctive Sustained
Sustained
Activities
Activities
and
and Competencies
Competencies Competitive
Competitive
Assessed
Assessed Advantages
Advantages

Dr.Sarah Yassein Ch 4 -82

Internal Factor Evaluation (IFE) Matrix

1. List key internal factors

2. Assign a weight ranging from 0.0 to 1.0
3. Assign a 1 to 4 rating to each factor
4. Multiply the weight times the rating
5. Sum the weighted scores

Dr.Sarah Yassein Ch 4 -83

All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

Dr.Sarah Yassein Ch 4 -84