The Internal Assessment (4827)

Strategic Plan Formulation
The Internal Assessment

How frequently should we verify strategies?
•Copyright
2007 Prentice
Hall
Internal Audit
 Identify strengths and weaknesses in

 Management
 Marketing
 Finance and accounting
 Production and operations
 Research and development
 Management information systems
Nature of an Internal Audit
Basis for Objectives & Strategies
 Internal strengths/weaknesses
 External opportunities/threats
 Clear statement of mission
•Ch 4 -4
Key Internal Forces
Distinctive Competencies:
 Firm’s strengths that cannot
be easily matched or imitated
by competitors
•Ch 4 -5
Key Internal Forces
Distinctive Competencies:
 Building competitive advantage
involves taking advantage of
distinctive competencies
•Ch 4 -6
Internal Audit Process
Information gathered from:

 Management
 Marketing
 Finance/accounting
 Production/operations
 Research & development
 Management information systems
•Ch 4 -7
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
•Ch 4 -8
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
•Ch 4 -9
Organizational Culture
 Resistant to change
 May represent:
 Strength
 Weakness
Values
Legends Beliefs
Cultural
Heroes Rites
Products
Symbols Myths Rituals

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
Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
Marketing
Customer surveys
Consumer information
Customer Market positioning

Analysis strategies
Customer profiles
Market segmentation
strategies
Finance/Accounting
1. Investment decision (Capital

budgeting)
2. Financing decision
3. Dividend decision
Internal Audit
Financial Ratio Analysis
Exemplifies complexity of
relationships among functional areas
of the business
•Ch 4 -16
Basic Financial Ratios
Firm’s ability to meet its

short-term obligations
Liquidity Ratios
Ratios
Current ratio
Quick (or acid test) ratio
Extent of debt financing
Ratios
Leverage Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest-earned
Effective use of firm’s

resources
Ratios
Activity Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
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)
Effectiveness shown by
returns on sales &
investment
Profitability Ratios Ratios

(cont’d)
Return on stockholders’
equity (ROE)
Earnings per share
Price-earnings ratio
Firm’s ability to
maintain economic
position
Ratios
Growth Ratios
Sales
Net Income
Earnings per share
Dividends per share
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?
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?
Production/Operations
Production/Operations Functions
 Process
 Capacity
 Inventory
 Workforce
 Quality
Audit
•Are suppliers of materials, parts, etc.

reliable and reasonable?
•Are facilities, equipment, machinery, and
offices in good condition?
•Are inventory-control policies and
procedures effective?
Audit
•Are quality-control policies & procedures

effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?
Research & Development
 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs
 These functions can be done internally or
externally
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?
Research & Development Audit
•Are MIS and computer systems

adequate?
•Is communication between R&D and
other organizational units effective?
•Are present products technologically
competitive?
Management Information Systems
Purpose
 Improve performance of an
enterprise by improving the quality
of managerial decisions
•Ch 4 -31
•Ch
4-
32
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?
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?
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
How frequently should we verify strategies?
•Copyright
2007 Prentice
Hall
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Strategic Plan Formulation

The Internal Assessment

 Identify strengths and weaknesses in

Basis for Objectives & Strategies

Information gathered from:

 Managers and employees from all areas

Pattern of behavior developed by an

Symbols Myths Rituals

Organizational Culture Can Inhibit

3. Product & service planning

Customer Market positioning

1. Investment decision (Capital

Firm’s ability to meet its

Extent of debt financing

Effective use of firm’s

Profitability Ratios Ratios

Gross profit margin

Profitability Ratios Ratios

1. Where is the firm financially strong/weak as

6. Are dividend payout policies reasonable?

•Are suppliers of materials, parts, etc.

•Are quality-control policies & procedures

 Development of new products before

•Are the R&D facilities adequate?

•Are MIS and computer systems

 Do all managers use the information system to make

 Are strategists of the firm familiar with the information

1. List key internal factors

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