Chapter 4

The Internal Assessment

Strategic
Management:
Concepts & Cases
11th Edition
Fred David

Ch 4 -1
Copyright 2007 Prentice Hall
How frequently should we verify strategies?

Ch 4 -2
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 Nature of an Internal Audit

Basis for Objectives & Strategies

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

Ch 4 -3
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 Internal Audit

Parallels process of external audit

•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management Information Systems

Ch 4 -4
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 Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important

than external factors

Ch 4 -5
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 Resource Based View (RBV)

Three All Encompassing Categories

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

Ch 4 -6
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 Resource Based View (RBV)

Empirical Indicators

 Rare
 Hard to imitate
 Not easily substitutable

Ch 4 -7
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 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

Ch 4 -8
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Integrating Strategy & Culture

Values

Legends Beliefs

Cultural
Heroes Rites
Products

Symbols Rituals
Myths

Ch 4 -9
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 Ch 4 -10
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Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Ch 4 -11
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 Marketing

Customer Needs/Wants for Products/Services

1. Defining
2. Anticipating
3. Creating
4. Fulfilling

Ch 4 -12
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 Marketing
Marketing Functions

1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis

Ch 4 -13
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 Finance/Accounting
Finance/Accounting Functions

1. Investment decision (Capital budgeting)

2. Financing decision
3. Dividend decision
4. Financial analysis – Key financial ratios

Ch 4 -14
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 Production/Operations

Production/Operations Functions

 Process
 Capacity
 Inventory
 Workforce
 Quality

Ch 4 -15
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 Research & Development

Research & Development Functions

 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to
reduce costs

Ch 4 -16
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 Management Information
Systems

 Information Systems
 CIO/CTO
 Security
 User-friendly
 E-commerce

Ch 4 -17
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 Ch 4 -18
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 Ch 4 -19
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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?

Ch 4 -20
Copyright 2007 Prentice Hall
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?
Ch 4 -21
Copyright 2007 Prentice Hall
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?
Ch 4 -22
Copyright 2007 Prentice Hall
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.
 How has each ratio



Debt-to-total-assets ratio
Debt-to-equity ratio changed over time?
 Long-term debt-to-equity ratio





Times-interest-earned (coverage) ratio
Activity ratios measure how effectively a firm is using its resources.
Inventory turnover
 2. How does each ratio



Fixed assets turnover
Total assets turnover compare to industry
 Accounts receivable turnover


 Average collection period
Profitability ratios measure management’s overall effectiveness as
norms?
shown by returns generated on sales and investment.



Gross profit margin
Operating profit margin  3. How does each ratio
 Net profit margin



Return on total assets
Return on stockholders’ equity
compare with key
Earnings per share




 Price-earnings ratio
Growth ratios measure the firm’s ability to maintain its economic position
competitors?
in the growth of the economy and industry.



Sales
Net income  BNI
 Earnings per share
 Dividends per share

Ch 4 -23
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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?
Ch 4 -24
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R&D Audit Checklist of Questions

 Does the firm have R&D facilities? Are they

adequate?
 If outside R&D firms are used, are they cost
effective?
 Are the organization’s R&D personnel well qualified?
 Are R&D resources allocated effectively?
 Are management information and computer systems
adequate?
 Is communication between R&D and other
organizational units effective?
 Are present products technologically competitive?
Ch 4 -25
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Information Systems Audit Checklist
 Do all managers in the firm use the information system to make
decisions?
 Is there a chief information officer or director of information systems
position in the firm?
 Are data in the information system updated regularly?
 Do managers from all functional areas of the firm 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?
 Is the information system user friendly?
 Do all users of the information system understand the competitive
advantages that information can provide firms?
 Are computer training workshops provided for users of the
information system?
 Is the firm’s information system continually being improved in content
and user-friendliness?
Ch 4 -26
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