The document discusses conducting an internal audit to identify a company's key strengths and weaknesses. It describes evaluating different functional areas including management, marketing, finance, production, research and development, and management information systems. Financial ratios are also analyzed to assess the company's financial position. The internal audit process involves gathering information from different departments and identifying 10-15 most important strengths and weaknesses to focus on.

1. 1
Ch 4 -1
Chapter 4The Internal Assessment
Ch 4 -2
Ch 4 -3
Internal Audit
Identify strengths and weaknesses in
Management
Marketing
Finance and accounting
Production and operations
Research and development
Management information systems
Ch 4 -4
Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
Nature of an Internal Audit
Basis for Objectives & Strategies
Ch 4 -5
Key Internal Forces
Distinctive Competencies:
Firm’s strengths that cannot be easily matched or imitated by competitors
Ch 4 -6
Key Internal Forces
Distinctive Competencies:
Building competitive advantage involves taking advantage of distinctive competencies

2. 2
Ch 4 -7
Internal Audit Process
Information gathered from:
Management
Marketing
Finance/accounting
Production/operations
Research & development
Management information systems
Parallels process of external audit
Ch 4 -8
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 -9
Internal Audit
Exemplifies complexity of relationships among functional areas of the business
Financial Ratio Analysis
Ch 4 -10
Integrating Strategy & 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
Organizational Culture
Ch 4 -11
Integrating Strategy & Culture
Organizational Culture
Resistant to change
May represent:
Strength
Weakness
Ch 4 -12
Cultural
Products
Values
Legends
Beliefs
Heroes
Rites
Symbols
Rituals
Myths
Integrating Strategy & Culture

3. 3
Ch 4 -13
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
Ch 4 -14
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 -15
Customer
Analysis
Customer surveys
Consumer information
Market positioning strategies
Customer profiles
Market segmentation strategies
Marketing
Ch 4 -16
Finance/Accounting
1.Investment decision (Capital budgeting)
2.Financing decision
3.Dividend decision
Ch 4 -17
Firm’s ability to meet its short-term obligations
Ratios
Current ratio
Quick (or acid test) ratio
Basic Financial Ratios
Liquidity Ratios
Ch 4 -18
Extent of debt financing
Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest-earned
Basic Financial Ratios
Leverage Ratios

4. 4
Ch 4 -19
Effective use of firm’s resources
Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
Basic Financial Ratios
Activity Ratios
Ch 4 -20
Effectiveness shown by returns on sales and investment
Ratios
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)
Basic Financial Ratios
Profitability Ratios
Ch 4 -21
Effectiveness shown by returns on sales & investment
Ratios
Return on stockholders’ equity (ROE)
Earnings per share
Price-earnings ratio
Basic Financial Ratios
Profitability Ratios(cont’d)
Ch 4 -22
Firm’s ability to maintain economic position
Ratios
Sales
Net Income
Earnings per share
Dividends per share
Basic Financial Ratios
Growth Ratios
Ch 4 -23
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?
Ch 4 -24
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?

5. 5
Ch 4 -25
Production/Operations
Production/Operations Functions
Process
Capacity
Inventory
Workforce
Quality
Ch 4 -26
Production/Operations 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?
Ch 4 -27
Production/Operations Audit
•Are quality-control policies & procedures effective?
•Are facilities, resources, and markets strategically located?
•Does the firm have technological competencies?
Ch 4 -28
Research & Development
Research & Development Functions
Development of new products beforecompetitors
Improving product quality
Improving manufacturing processes to reduce costs
These functions can be done internally or externally
Ch 4 -29
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?
Ch 4 -30
Research & Development Audit
•Are MIS and computer systems adequate?
•Is communication between R&D and other organizational units effective?
•Are present products technologically competitive?

6. 6
Ch 4 -31
Management Information Systems
Purpose
Improve performance of an enterprise by improving the quality of managerial decisions
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?
Ch 4 -33
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?
Ch 4 -34
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