MODULE #3 ● Compared to external audits, this provides

STRAT 100 - INTERNAL STRATEGIC more opportunity for participants to

MANAGEMENT understand how their jobs, departments, and
divisions fit into the whole organization —
perform better when they understand how
their work affects other areas and activities of
the firm.

”Communication may be the most word in

management”

Process of Gaining Competitive Advantage in a

Firm
Weaknesses → Strengths → Distinctive
Competencies → Competitive Advantage
Internal Assessment Financial ratio analysis exemplifies the
“Great spirits have always encountered violent complexity of relationships among the
opposition from mediocre minds.” – Albert functional areas of business.
Einstein
Resourced-Based View (RBV)
“Weak leadership can wreck the soundest ● Internal resources are more important for a
strategy.” – Sun Tzu firm than external factors in achieving and
sustaining competitive advantage.
Internal Audit ● Organizational performance will primarily be
● Identify strengths and weaknesses in determined by internal resources that can be
○ Management grouped into three categories:
○ Marketing
○ Finance and accounting 1. Physical resources: plant and equipment,
○ Production and operations location, technology, raw materials, and
○ Research and development machines
○ Management information systems 2. Human resources: employees, training,
experience, intelligence, knowledge, skills,
Nature of an Internal Audit and abilities
Basis for Objectives & Strategies 3. Organizational resources: firm structure,
● Internal strengths/weaknesses planning processes, information systems,
● External opportunities/threats patents, trademarks, copyrights, databases,
● Clear statement of mission and so on.

Key Internal Forces ● Resources are what actually helps a firm

Distinctive Competencies: exploit opportunities and neutralize threats.
● Firm’s strengths that cannot be easily ● A firm's internal resources (mix, type, amount,
matched or imitated by competitors and nature) should be prioritized in devising
● Building competitive advantage involves strategies for
taking advantage of distinctive competencies sustainable competitive advantage.
● Involves developing and exploiting a firm's
Parallels process of external audit unique resources and capabilities, and
● Information gathered from: continually maintaining and strengthening those
○ Management resources.
○ Marketing ● Advantageous for a firm to pursue a strategy
○ Finance/accounting that is not currently being implemented by any
○ Production/operations competing firm.
○ Research & development ● Sustainable competitive advantage is
○ Management information systems achieved when other firms cannot duplicate a
particular strategy.
Empirical indicators ● The relationship between culture and strategy
● For a resource to be valuable, it must be: is crucial to success, and understanding the firm
○ Rare: Rare resources give firms a as a sociocultural system helps strategists align
competitive advantage, while common strategies with cultural strengths and address
resources aid economic prosperity but do not challenges.
sustain an advantage.
○ Hard to imitate: Difficult-to-imitate Management
resources provide stronger competitive Functions of management
advantages than those easily copied. 1. Planning
○ Not easily substitutable: Resources a. essential bridge between the present and the
without viable substitutes help firms maintain future that increases the likelihood of achieving
their competitive advantage, though substitutes desired results.
can create new advantages for competitors. b. process by which one determines whether to
attempt a task, works out the most effective
● These characteristics enable a firm to way of reaching desired objectives, and
implement prepares to overcome unexpected difficulties
strategies that improve its efficiency and with adequate resources.
effectiveness and lead to a sustainable 2. Organizing
competitive advantage. a. achieve coordinated effort by defining task
● Emphasizes that neither internal nor external and authority relationships.
factors alone are consistently more important b. determining who does what and who reports
for competitive advantage; understanding the to whom.
interaction between the two is key. 3. Motivating
● Since both internal and external factors a. process of influencing people to accomplish
constantly change, strategists must adapt by specific objectives.
identifying positive shifts and mitigating b. Motivation explains why some people work
negative ones to maintain competitive hard and others do not.
advantage. Strategic management's core c. leadership, group dynamics, communication,
challenge is ensuring a firm's survival amidst and organizational change
these changes. 4. Staffing
a. also called personnel management or
Integrating Strategy and Culture human resource management
Organizational culture b. includes activities such as recruiting,
● "a pattern of behavior that has been interviewing, testing, selecting, orienting,
developed by anorganization as it learns to cope training, developing, caring for, evaluating,
with its problem ofexternal adaptation and rewarding, disciplining, promoting,
internal integration, and thathas worked well transferring, demoting, and dismissing
enough to be considered valid and to be taught employees, as well as managing union
to new members as the correct way to perceive, relations.
think, and feel." 5. Controlling
○ importance of matching external with internal a. includes all of those activities undertaken to
factors in making strategic decisions. ensure that actual operations conform to
planned operations.
● Cultural products: values, beliefs, rites, rituals, b. Controlling consists of four basic steps:
ceremonies, myths, stories, legends, sagas, i. Establishing performance standards
language, metaphors, symbols, heroes, and ii. Measuring individual and
heroines. Levers that strategists can use to organizational performance
influence and direct strategy formulation, iii. Comparing actual performance to
implementation, and evaluation activities. planned performance standards
● Culture affects strengths and weaknesses, and iv. Taking corrective actions
aligning it with strategy is essential for success
in strategic management.
● A supportive culture aids strategy
implementation, while misaligned culture
creates confusion and challenges.
Management Audit Checklist considered the single best measure of a firm's
● Does the firm use strategic management competitive position and overall attractiveness
concepts? to investors
● Are objectives/goals measurable? Well 1. Investment decision (Capital budgeting)
communicated? 2. Financing decision
● Do managers at all levels plan effectively? 3. Dividend decision
● Do managers delegate well? Finance/Accounting Audit Checklist
● Is the organization’s structure appropriate? 1. Where is the firm financially strong/weak as
● Are job descriptions clear? indicated
● Are job specifications clear? by financial ratio analysis?
● Is employee morale high? 2. Can the firm raise needed short-term capital?
● Is employee absenteeism low? 3. Can the firm raise needed long-term capital
● Is employee turnover low? through
● Are the reward mechanisms effective? debt and/or equity?
● Are the organization’s control mechanisms 4. Does the firm have sufficient working capital?
effective? 5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
Marketing 7. Does the firm have good relations with its
process of defining, anticipating, creating, and investors and stockholders?
fulfilling customers’ needs and wants for 8. Are the firm’s financial managers experienced
products and services. and well trained?
9. Is the firm’s debt situation excellent?
Marketing Functions
1. Customer analysis Basic Types of Financial Ratios:
2. Selling products/services 1. Liquidity Ratios
3. Product & service planning 2. Leverage Ratios
4. Pricing 3. Activity Ratio
5. Distribution 4. Profitability Ratios
6. Marketing research 5. Growth Ratios
7. Opportunity analysis
Production/Operations
Marketing Audit consists of all those activities that transform
1. Are markets segmented effectively? inputs into goods and services
2. Is the organization positioned well among Production/Operations Functions
competitors? ● Process
3. Has the firm’s market share been increasing? ● Capacity
4. Are the distribution channels reliable & cost ● Inventory
effective? ● Workforce
5. Is the sales force effective? ● Quality
6. Does the firm conduct market research?
7. Are product quality & customer service good? Production/Operations Audit Checklist
8. Are the firm’s products and services priced ● Are suppliers of materials, parts, etc. reliable
appropriately? and reasonable?
9. Does the firm have effective promotion, ● Are facilities, equipment, machinery, and
advertising, offices in good condition?
and publicity strategies? ● Are inventory-control policies and procedures
10. Are the marketing, planning, and budgeting effective?
effective? ● Are quality-control policies & procedures
11. Do the firm’s marketing managers have effective?
adequate experience and training? ● Are facilities, resources, and markets
12. Is the firm’s Internet presence excellent as strategically located?
compared to rivals? ● Does the firm have technological
competencies?
Finance/Accounting
Research & Development
directed at developing new products before and participation is essential for effective
competitors do, at improving product quality, or strategy
at improving manufacturing processes to reduce implementation.
costs.
Management Information Systems Audit
Four approaches to determining R&D budget ● Do all managers use the information system
allocations commonly are used: to make
1. financing as many project proposals as decisions?
possible ● Is there a CIO or Director of Information
2. using a percentage-of-sales method Systems
3. budgeting about the same amount that position in the firm?
competitors spend for R&D ● Are data updated regularly?
4. deciding how many successful new products ● Do managers from all functional areas
are needed and working backward to estimate contribute
the required R&D investment. input to the information system?
● Are there effective passwords for entry into
R&D in organizations can take two basic forms: the firm’s
1. internal R&D, in which an organization information system?
operates its ● Are strategists of the firm familiar with the
own R&D department information
2. contract R&D, in which a firm hires systems of rival firms?
independent ● Is the information system user-friendly?
researchers or independent agencies to develop ● Do all users understand the competitive
specific products. advantages
Research & Development Functions that information can provide?
● Development of new products before ● Are computer training workshops provided
competitors for users?
● Improving product quality ● Is the firm’s system being improved?
● Improving manufacturing processes to reduce
costs Value Chain Analysis (VCA)
● These functions can be done internally or ● Value chain – business of a firm, in which
externally total revenues minus total costs of all activities
undertaken to develop and market a product or
Research & Development Audit service yields value.
● Are the R&D facilities adequate? ● Value chain analysis (VCA)
● If R&D is outsourced, is it cost-effective? ○ process whereby a firm determines
● Are the R&D personnel well qualified? the costs associated with organizational
● Are R&D resources allocated effectively? activities from purchasing raw materials to
● Are MIS and computer systems adequate? manufacturing product(s) to marketing those
● Is communication between R&D and other products.
organizational units effective? ○ identify where low-cost advantages
● Are present products technologically or disadvantages exist anywhere along the
competitive? value chain
○ better identify its own strengths and
Management Information Systems weaknesses, especially compared to
Purpose competitors
● Improve performance of an enterprise by ● Core competence – value chain activity that a
improving firm
the quality of managerial decisions performs especially well
● Distinctive competence – when a core
Strategic-Planning Software competence
● Must be simple and unsophisticated evolves into a major competitive advantage
● Simplicity allows wide participation among
managers Benchmarking
● analytical tool used to determine whether a
firm's value chain activities are competitive to
rivals and thus conducive to winning in the
marketplace

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

Conclusion
● Management, marketing, finance/accounting,
research and development, and management
information systems
○ represents the core operations of most
businesses
● A strategic-management audit of a firm's
internal
operations is vital to organizational health.
● Strategists must identify and evaluate internal
strengths and weaknesses in order to effectively
formulate and choose among alternative
strategies
● The process of performing an internal audit
represents an opportunity for managers and
employees throughout the organization to
participate in determining the future of the firm.
Involvement in the process can energize and
mobilize managers and employees.