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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
for implementing strategies
Gathering, assimilating, and evaluating
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.
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
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
Organizational Culture
Establishing performance standards
Measuring individual and
organizational performance compute the total costs
Comparing actual performance to associated with a decision
planned performance standards estimate the total benefits from
Taking corrective actions the decision
compare the total costs with the
MARKETING - the process of defining, total benefits
anticipating, creating, and fulfilling customers
needs and wants for products and services Finance/Accounting
Financial condition is often considered the single
Basic Functions Of Marketing best measure of a firms competitive position and
Customer Analysis the examination and overall attractiveness to investors.
evaluation of consumer needs, desires, and Finance/Accounting Function
wants Investment decision is the allocation and
Selling Products/Services includes many reallocation of capital and resources to projects,
marketing activities, such as advertising, products, assets, and divisions of an organization.
sales promotion, publicity, personal selling, Financing decision determines the best capital
sales force management, customer structure for the firm and includes examining
relations, and dealer relations various methods by which the firm can raise
Product and Service Planning includes capital.
activities such as test marketing; product Key Financial Ratios
Debt-to-equity ratio
and brand positioning; devising warranties;
Debt-to-total-assets ratio
packaging; determining product options,
Dividend decision determines the amount of
features, style, and quality; deleting old funds that are retained in a firm compared to the
products; and providing for customer amount paid out to stockholders.
service Financial Ratios
Pricing Earnings-per-share ratio
Five Major Stakeholders affect Dividends-per-share ratio
Price-earnings ratio
pricing decisions:
Consumers Reasons for paying dividends
Governments Paying cash dividends is customary
Suppliers Dividends represent a sales point for
Distributors investment bankers
Competitors Shareholders often demand
Distribution includes warehousing, distribution dividends
A myth exists that paying dividends
channels, distribution coverage, retail site
will result in a higher stock price
locations, sales territories, inventory levels
and location, transportation carriers, Financial ratios
wholesaling, and retailing The most widely used method for determining an
Marketing Research is the systematic organizations strengths and weaknesses in the
gathering, recording, and analyzing of data investment, financing, and dividend areas.
about problems relating to the marketing of Types of Financial Ratios
goods and services. 1) Liquidity ratios
Opportunity Analysis involves assessing the a) Current ratio
costs, benefits, and risks associated with Current assets
marketing decisions Current liabilities
b) Quick ratio
Three Steps are required to perform
a cost/benefit analysis:
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
3) Activity ratios Consists of all those activities that transform
a) Inventory turnover
inputs into goods and services.
goods Deals with inputs, transformations, and
b) Fixed assets turnover outputs that vary across industries and
Sales markets.
c) Total assets turnover Transforms or converts inputs such as raw
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
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
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 1) Financing as many project proposals as
Managing the skilled, unskilled, clerical, and possible;
managerial employees by caring for job 2) Using a percentage-of-sales method;
design, work measurement, job enrichment, 3) Budgeting about the same amount that
work standards, and motivation techniques. competitors spend for R&D; or
E. QUALITY 4) Deciding how many successful new
Ensuring that high-quality goods and products are needed and working backward
services are produced by caring for quality to estimate the required R&D investment.
control, sampling, testing, quality TWO BASIC FORMS
assurance, and cost control. 1) Internal R&D
2) Contract R&D
Represent the largest part of an DEVELOPMENT OF NEW PRODUCTS MORE
organizations human and capital assets. DIFFICULT AND RISKY
CROSS-TRAINING OF EMPLOYEES 1. A shortage of ideas for new products
Can increase efficiency, quality, productivity 2. Increased global competition
and job satisfaction. 3. Increased market segmentation
RESEARCH AND DEVELOPMENT 4. Strong special-interest groups
The correlation between R&D 5. Increased government regulations
expenditures and successful product
launches is not high.
Fifth major area of internal operations that MANAGEMENT INFORMATION SYSTEM
should be examined for specific strength INFORMATION
and weaknesses 1. Ties all business functions together
Directed at: 2. Provides the basis for all managerial
a.) developing new products before decisions
competitors; 3. Data become information only when they
b.) improving product quality; and are evaluated, filtered, condensed,
c.) improving manufacturing processes to analyzed, and organized for a specific
reduce costs. purpose, problem, individual, or time.
Strategic and operational partnership Purpose: To improve the performance of an
between R&D and the other vital business enterprise by improving the quality of
functions is a requirement for an effective managerial decisions.
management of the R&D function
1.) Supporting existing businesses;
2.) Helping launch new businesses;
3.) Developing new products;
4.) Improving product quality;
5.) Improving manufacturing efficiency;
6.) Deepening or broadening the
companys technological VALUE CHAIN ANALYSIS
capabilities. VALUE CHAIN
INTERNAL AND EXTERNAL R&D The business of a firm in which total revenues
FOUR APPROACHES 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:
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.
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
3. The analyst converts the cost data into
information by looking for competitive
cost strengths and weaknesses that may
yield competitive advantage or
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.
An analytical tool used to determine
whether a firms VCA are competitive
compared to rivals and thus conducive to
winning in the marketplace.


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.