NATURE OF INTERNAL AUDIT Pattern of behavior that has been

developed by an organization as it learns to

All organizations have strengths and weaknesses in cope with its problem of external adaptation
the functional areas of business. No enterprise is and internal integration, and that has
equally strong or weak in all areas. worked well enough to be considered valid
Internal Factors + External Factors + Clear Mission and to be taught to new members as the
Statement Basis for Objectives & Strategies correct way to perceive, think, and feel.
Remarkably resistant to change
KEY INTERNAL FORCES Must work together with strategies
Is important to be integrated especially in
Weaknesses Strengths Distinctive
cross-cultural firms
Competencies Competitive Advantage
Should infuse individuals with enthusiasm
PROCESS OF PERFORMING AN INTERNAL
for implementing strategies
AUDIT
Gathering, assimilating, and evaluating
MANAGEMENT
information about the firms operations.
the organization and coordination of the activities
Excellent vehicle for improving the process
of a business in order to achieve defined
of communication in the organization.
objectives.
Provides more opportunity for
participants to understand how their
The Functions Of Management Consist Of
jobs, departments, and divisions fit
Five Basic Activities:
into the whole organization.
Planning -is the process by which one
Managers from different
determines whether to attempt a task,
departments and divisions of the
works out the most effective way of
firm understand the nature and
reaching desired objectives, and prepares to
effect of decisions in other functional
overcome unexpected difficulties with
business areas in the firm.
adequate resources
The Resource-Based View (RBV)
Organizing -its purpose is to achieve
Internal Resources are more important for a firm
coordinated effort by defining task and
than external factors in achieving and sustaining
authority relationships and determining who
competitive advantage. Resources are what
does what and who reports to whom
actually help a firm exploit opportunities and
Motivating -is the process of influencing people
neutralize threats.
to accomplish specific objectives
Internal Resources Categories
The motivating includes at least four
Physical Resources
major components:
Human Resources
Leadership,Group Dynamics,
Organizational Resources
Communication, and Organizational Change
Empirical Indicators Characteristics of resources
enabling a firm to implement strategies that
Staffing -its activities are centered on personnel
improve its efficiency and effectiveness and to lead
or human resource management
a sustainable competitive advantage.
Controlling -includes all those activities
Rare
undertaken to ensure that actual operations
Hard to imitate
conform to planned operations
Not easily substitutable
Contolling consists of four basic
Integrating Strategy and Culture
steps:
Organizational Culture
Establishing performance standards
Measuring individual and
 organizational performance
Comparing actual performance to
planned performance standards
Taking corrective actions
MARKETING - the process of defining,
anticipating, creating, and fulfilling customers
needs and wants for products and services
Basic Functions Of Marketing
Customer Analysis the examination and
evaluation of consumer needs, desires, and
wants
Selling Products/Services includes many
marketing activities, such as advertising,
sales promotion, publicity, personal selling,
sales force management, customer
relations, and dealer relations
Product and Service Planning includes
activities such as test marketing; product
and brand positioning; devising warranties;
packaging; determining product options,
features, style, and quality; deleting old
products; and providing for customer
service
Pricing
Five Major Stakeholders affect
pricing decisions:
Consumers
Governments
Suppliers
Distributors
Competitors
Distribution includes warehousing, distribution
channels, distribution coverage, retail site
locations, sales territories, inventory levels
and location, transportation carriers,
wholesaling, and retailing
Marketing Research is the systematic
gathering, recording, and analyzing of data
about problems relating to the marketing of
goods and services.
Opportunity Analysis involves assessing the
costs, benefits, and risks associated with
marketing decisions
Three Steps are required to perform
a cost/benefit analysis:
compute the total costs
associated with a decision
estimate the total benefits from
the decision
compare the total costs with the
total benefits
Finance/Accounting
Financial condition is often considered the single
best measure of a firms competitive position and
overall attractiveness to investors.
Finance/Accounting Function
Investment decision is the allocation and
reallocation of capital and resources to projects,
products, assets, and divisions of an organization.
Financing decision determines the best capital
structure for the firm and includes examining
various methods by which the firm can raise
capital.
Key Financial Ratios
Debt-to-equity ratio
Debt-to-total-assets ratio
Dividend decision determines the amount of
funds that are retained in a firm compared to the
amount paid out to stockholders.
Financial Ratios
Earnings-per-share ratio
Dividends-per-share ratio
Price-earnings ratio
Reasons for paying dividends
Paying cash dividends is customary
Dividends represent a sales point for
investment bankers
Shareholders often demand
dividends
A myth exists that paying dividends
will result in a higher stock price
Financial ratios
The most widely used method for determining an
organizations strengths and weaknesses in the
investment, financing, and dividend areas.
Types of Financial Ratios
1) Liquidity ratios
a) Current ratio
Current assets
Current liabilities
b) Quick ratio
 Current assets minus Net income
inventory Total stockholders
Current liabilities equity
2) Leverage ratios f) Earnings per share
a) Debt-to-total-assets ratio Net income
Total debt # of shares of
Total assets common stock
b) Debt-to-equity ratio outstanding
Total asset g) Price-earnings ratio
Total stockholders Market price per
equity share
c) Long-term debt-to-equity ratio Earnings per share
Long-term debt 5) Growth ratios
Total stockholders (a) Sales
equity (b) Net income
d) Times-interested-earned ratio (c) Earnings per share
Profits before interest (d) Dividends per share
and taxes
Total interest charges PRODUCTION/OPERATIONS FUNCTION
3) Activity ratios Consists of all those activities that transform
a) Inventory turnover
inputs into goods and services.
Sales
Inventory of finished PRODUCTION/OPERATIONS MANAGEMENT
goods Deals with inputs, transformations, and
b) Fixed assets turnover outputs that vary across industries and
Sales markets.
Fixes assets MANUFACTURING OPERATIONS
c) Total assets turnover Transforms or converts inputs such as raw
Sales
materials, labor, capital, machines, and
Total assets
d) Accounts receivable turnover facilities into finished goods and services
Annual credit sales The Basic Functions (Decisions) Within
Accounts receivable Production/Operations
e) Average collection period A. PROCESS
Accounts receivable 1. Choice of technology
Total credit sales/365 2. Facility layout
days
3. Process flow analysis
4) Profitability ratios 4. Facility location
a) Gross profit margin 5. Line balancing
Sales minus cost of 6. Process control
goods sold 7. Transportation analysis
sales B. CAPACITY
b) Operating profit margin
1. Forecasting
Earnings before
interest and taxes 2. Facilities planning
Sales 3. Aggregate planning
c) Net profit margin 4. Scheduling
Net Income 5. Capacity planning
Sales 6. Queuing analysis
d) Return on total assets C. INVENTORY
Net income
Managing the level of raw materials, work-
Total assets
e) Return on stockholders equity in-process, and finished goods.
D. WORKFORCE
Managing the skilled, unskilled, clerical, and
managerial employees by caring for job
design, work measurement, job enrichment,
work standards, and motivation techniques.
E. QUALITY
Ensuring that high-quality goods and
services are produced by caring for quality
control, sampling, testing, quality
assurance, and cost control.
PRODUCTION/OPERATION ACTIVITIES
Represent the largest part of an
organizations human and capital assets.
CROSS-TRAINING OF EMPLOYEES
Can increase efficiency, quality, productivity
and job satisfaction.
RESEARCH AND DEVELOPMENT
The correlation between R&D
expenditures and successful product
launches is not high.
Fifth major area of internal operations that
should be examined for specific strength
and weaknesses
Directed at:
a.) developing new products before
competitors;
b.) improving product quality; and
c.) improving manufacturing processes to
reduce costs.
Strategic and operational partnership
between R&D and the other vital business
functions is a requirement for an effective
management of the R&D function
THE OVERALL MISSION OF R&D
1.) Supporting existing businesses;
2.) Helping launch new businesses;
3.) Developing new products;
4.) Improving product quality;
5.) Improving manufacturing efficiency;
and
6.) Deepening or broadening the
companys technological
capabilities.
INTERNAL AND EXTERNAL R&D
FOUR APPROACHES
1) Financing as many project proposals as
possible;
2) Using a percentage-of-sales method;
3) Budgeting about the same amount that
competitors spend for R&D; or
4) Deciding how many successful new
products are needed and working backward
to estimate the required R&D investment.
TWO BASIC FORMS
1) Internal R&D
2) Contract R&D
FACTORS MAKING SUCCESSFUL
DEVELOPMENT OF NEW PRODUCTS MORE
DIFFICULT AND RISKY
1. A shortage of ideas for new products
2. Increased global competition
3. Increased market segmentation
4. Strong special-interest groups
5. Increased government regulations
MANAGEMENT INFORMATION SYSTEM
INFORMATION
1. Ties all business functions together
2. Provides the basis for all managerial
decisions
3. Data become information only when they
are evaluated, filtered, condensed,
analyzed, and organized for a specific
purpose, problem, individual, or time.
Purpose: To improve the performance of an
enterprise by improving the quality of
managerial decisions.
VALUE CHAIN ANALYSIS
VALUE CHAIN
The business of a firm in which total revenues
minus total costs of all activities undertaken to
 develop and market a product or service yields 3.) Assign a 1-to-4 rating to each factor to
value. indicate whether that factor represents:
VALUE CHAIN ANALYSIS Rating
1.) Process whereby a firm determines the costs 1 a major weakness
associated with organizational activities from 2 a minor weakness
purchasing raw materials to manufacturing 3 a minor strength
product(s) to marketing those products. 4 a major strength
2.) Aims to identify where low-cost advantages 4.) Multiply each factors weight by its
or disadvantages exist anywhere along the value rating to determine a weighted score for
chain from raw material to customer service each variable.
activities. 5.) Sum the weighted scores for each
variable to determine the total weighted
score for the organization.
STEPS IN THE VALUE CHAIN ANALYSIS
1. Divide a firms operations into specific
activities or business processes.
2. The analyst attempts to attach a cost to
each discrete activity, and the costs
could be in terms of both time and
money.
3. The analyst converts the cost data into
information by looking for competitive
cost strengths and weaknesses that may
yield competitive advantage or
disadvantage.
A core competence is a VCA that a firm
performs especially well.
When a core competence evolves into a
major competitive advantage, then it is
called a distinctive competence.
BENCHMARKING
An analytical tool used to determine
whether a firms VCA are competitive
compared to rivals and thus conducive to
winning in the marketplace.

THE INTERNAL FACTOR EVALUATION

MATRIX
Summarizes and evaluates the major
strengths and weaknesses in the functional
areas of a business
5 steps in developing an IFE Matrix
1.) List key internal factors as identified in
the internal-audit process.
2.) Assign a weight that ranges from 0.0
(not important) to 1.0 (all-important) to
each factor.