STRATEGIC MANAGEMENT

LECTURE-FOUR

INTERNAL AUDIT
COMPILES AND DEVELOPED B 1
Y SIR IMRAN ZAIDI
 INTERNAL AUDIT
All organizations have strengths
and weaknesses in the functional
areas of business. No enterprise is
equally strong or weak in all areas.
Internal strengths / weaknesses,
coupled with external
opportunities / threats and a clear
statement of mission provide the
basis for establishing objectives
and strategies.
COMPILES AND DEVELOPED B 2
Y SIR IMRAN ZAIDI
KEY INTERNAL FORCES
Marketing, finance, accounting, management,
management information system, and production /
operations; there are many sub areas within these
functions, such as customer service, warranties,
advertising, packaging, and pricing under
marketing.
For different types of organizations, such as hospitals,
universities, and government agencies, the functional
business areas, of curse, differ. In a hospital, for
example, functional areas may include nursing,
maintenance, physician support, and receivables.
Functional areas of a university can include
athletic programs, placement services, housing,
fundraising, academic research, and counselling.
Within large organizations, each division has certain
strengths and weaknesses.
COMPILES AND DEVELOPED B 3
Y SIR IMRAN ZAIDI
 THE RESOURCE-BASED VIEW (RBV)

Organizational performance will primarily be determined by

internal resources which can be groped into three all
encompassing categories:

 Physical resources include all plant and equipment,

location, technology, raw materials, machines;
 human resources include all employees, training,
experience, intelligence, knowledge, skills, abilities;
 and organizational resources include firm structure,
planning processes, information systems, patents (readily
seen or sensed), trademarks (a name, symbol or other
device identifying the product), copyrights, databases, and
so on.

The theory asserts that it is advantageous for a firm to

pursue a strategy that is not currently being implemented
by any competing firm.

COMPILES AND DEVELOPED B 4

Y SIR IMRAN ZAIDI
 CULTURAL PITFALLS THAT YOU NEED TO KNOW

 Waving is a serious insult in Greece and Nigeria, particularly if

the hand is near someone’s face.
 Making a “good-bye” wave in Europe can mean “no,” but it
means “come here” in Peru.
 Latin Americans, are on average twenty minutes late to
business appointments.
 Direct eye contact is impolite in Japan.
 Don’t cross your legs in Arab or many Asian countries-it rude
to show the sole of your shoe.
 In Brazil, touching your thumb and first finger-an American
“OK” sign-is the equivalent of raising your middle finger.
 Nodding or tossing your head back in southern Italy, Malta,
Greece, and Tunisia means “no”. In India, this means “yes”.
 In China leave some food on your plate to show that your host
was so generous that you couldn’t finish.
 Do not eat with your left hand when dining with clients from
Malaysia or India.
 One form of communication works the same worldwide. It’s the
smile-so take that along wherever you go.
COMPILES AND DEVELOPED B 5
Y SIR IMRAN ZAIDI
 BASIC FUNTIION OF MANAGEMENT
FUNCTION DESCRIPTION STRATEGIC –
MANAGEMENT
PROCESS

PLANING Consists of all those managerial activities related to preparing for the future. Strategy
Specific tasks include forecasting, establishing objectives, devising strategies, formulation
developing policies, and setting goals.

organizing Organizing includes all those managerial activities that result in a structure of task Strategy
and authority relationships. Specific areas includes organizational design, job implementation
specification, job description, job specialization, span of control, unity of
command, coordination, job design, and job analysis.
motivating Motivating involves efforts directed towards shaping human behavior. Specific Strategy
topics include leadership, communication, work groups, behavior modification, implementation
delegation of authority, job enrichment, job satisfaction, needs fulfillment,
organizational change, employee morale, and managerial morale.
staffing Staffing activities are centered on personnel or human resource management. Strategy
Included all wage and salary administration, employee benefits, interviewing, implementation
hiring, firing, training, management development, employee safety affirmative
action, equal employment opportunity, union relations, career development,
personnel research discipline policies, grievance procedures, and public relations.
controlling Controlling refers to all those managerial activities directed towards ensuring that Strategy
actual results are consistent with planned results. Key areas of concern include evaluation
quality control, financial control, sales control, inventory control, expense control,
analysis of variances, rewards, and sanctions.

COMPILES AND DEVELOPED B 6

Y SIR IMRAN ZAIDI
 MANAGEMENT AUDIT CHECKLIST OF QUESTIONS

An answer of no to any question could indicate a potential

weakness, and or yes answers to the checklist questions
suggest potential areas of strength.

1. Does the firm use strategic management concepts?

2. Are company objectives and goals measurable and well
communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms
effective?

COMPILES AND DEVELOPED B 7

Y SIR IMRAN ZAIDI
 MARKETING
Marketing can be described as the process of defining, anticipating, creating, and fulfilling
customers’ needs and wants for products and services. There are seven basic
function of marketing:

1. Customer analysis (customer need, desire, and wants).

2. Selling products/services (advertising, sales promotion, publicity, personal selling,
sales force management, customer relations, and dealer relations).
3. Product/service planning (test marketing, product and brand positioning, devising (to
form or plan) warranties, packaging, determining product options, product features,
product style, and product quality, deleting old products, and providing for customer
services).
4. Pricing (five major stakeholders affect pricing decisions: customers, government,
suppliers, distributors, and competitors. Constraints by govt: on price fixing, price
discrimination, minimum prices, unit pricing, price advertising, and price control).
5. Distribution (warehouse, distribution channels, distribution coverage, retail site
location, sales territories, inventory levels and location, transportation carriers,
wholesaling, and retailing).
6. Marketing research (systematic gathering, recording, and analyzing of data about
problems relating to the marketing of goods and services).
7. Opportunity analysis (assessing the costs, benefits, and risks associated with
marketing decision).

Understanding these functions helps strategists identity and evaluate marketing

strengths and weaknesses.

COMPILES AND DEVELOPED B 8

Y SIR IMRAN ZAIDI
 MARKETING AUDIT CHECKLIST OF QUESTIONS

1. Are markets segmented effectively?

2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and cost-
effective?
5. Does the firm have an effective sales organization?
6. Does the firm conduct market research?
7. Are product quality and customer service good?
8. Are the firm’s products and services priced appropriately?
9. Does the firm have an effective promotion, advertising, and
publicity strategy?
10. Are marketing, planning, and budgeting effective?
11. Do the firm’s marketing managers have adequate experience
and training?

COMPILES AND DEVELOPED B 9

Y SIR IMRAN ZAIDI
 FINANCE/ACCOUNTING
According to James Van Horne, the functions of finance/accounting
comprising three decisions:
• Investment decision or capital budgeting; is the allocation and
relocation of capital and resources to projects, products,
assets, and division 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 (for example, by issuing stock, increasing debt
selling assets, or using a combination of these approaches).
• Dividend decision; concern issues such as the percentage of
earnings paid to stockholders, the stability of dividends paid over
time, and the repurchase or issuance of stock. Dividend decisions,
determine the amount of funds that are retained in a firm compared
to the amount paid out to stockholders. Three financial ratios that
are helpful in evaluating a firm’s dividend decisions are the
earnings-per-share ratio, the dividends-per-share ratio, and the
price-earnings ratio.
Financial ratio analysis is the most widely used method for
determining and organization’s strengths and weaknesses in
the investment, financing. And dividend areas.
COMPILES AND DEVELOPED B 10
Y SIR IMRAN ZAIDI
SUMMARY OF KEY FINANCIAL RATIOS

LIQUIDITY RATIOS:

RATIO HOW WHAT IT

CALCULATED MEASURES

COMPILES AND DEVELOPED B 11

Y SIR IMRAN ZAIDI
 FINANCE / ACCOUNTING AUDIT CHECKLIST OF QUESTIONS

1. Where is the firm financially strong and weak as

indicated by financial ratio analyses?
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?
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?

COMPILES AND DEVELOPED B 12

Y SIR IMRAN ZAIDI
 BASIC FUNTION OF PRODUCTION MANAGEMENT

FUNCTION DESCRIPTION
PROCESS Process decisions concern the design of the physical production
system. Specific decisions include choice of technology, facility
layout process flow analysis, facility location, line balancing,
process control, and transportation analysis.
CAPACITY Capacity decisions concern determination of optimal output levels
for the organization-not too much and not too little. Specific
decisions include forecasting, facilities planning, aggregate
planning, scheduling, capacity planning, and queuing analysis.
INVENTORY Inventory decisions involve managing the level of raw materials,
work-in-process, and finished goods. Specific decisions include
what to order, when to order, how much to order, and materials.
WORK Workforce decisions are concerned with managing the skilled,
FORCE unskilled, clerical, and managerial employees. Specific decisions
include job design, work measurement, job enrichment, work
standards, and motivation techniques.
QUALITY Quality decisions are aimed at ensuring that high-quality goods
and services are produced. Specific decisions include quality
control, sampling, testing, quality assurance, and cost control.
COMPILES AND DEVELOPED B 13
Y SIR IMRAN ZAIDI
IMPACT OF STRATEGY ELEMENTS ON PRODUCTION MANAGEMENT

ELEMENTS OF CONDITIONS THAT MAY AFFECT THE OPERATIONS /

STRATEGY FUNCTION AND ADVANTAGES AND DISADVANTAGES

1. Compete as low-cost Discourages competition,

provider of goods or Broadens market,
services Requires longer production runs and fewer product changes,
Requires special-purpose equipment and facilities.

2. Compete as high-quality Often possible to obtain more total profit from a smaller volume of
provider sales,
Requires more quality-assurance effort and higher operating cost,
Requires more precise equipment, which is more expensive,
Requires high skilled workers, necessitating higher wages and
greater training efforts.

3. Stress customer service Requires broader development if service people and service parts
and equipment,
Required rapid response to customer needs or changes in customer
tastes, rapid and accurate information system, careful coordination,
Requires a high inventory investment (any thing need for any time
for customer).
COMPILES AND DEVELOPED B 14
Y SIR IMRAN ZAIDI
 IMPACT OF STRATEGY ELEMENTS ON PRODUCTION MANAGEMENT

ELEMENTS OF CONDITIONS THAT MAY AFFECT THE OPERATIONS

STRATEGY /FUNCTION AND ADVANTAGES AND DISADVANTAGES
(continued)
4. Provide rapid Requires versatile equipment and people,
and frequent Has higher research and development costs,
introduction of Has high retraining costs and high tooling and changeover in
new products
manufacturing,
Provides lower volumes of each product and fewer
opportunities for improvements due to the learning curve.
5. Strive for Requires accepting some projects or products with lower
absolute growth marginal value, which reduces ROI (return on investment),
Diverts talents to areas of weakness instead of concentrating
on strengths.
6. Seek vertical Enables company to control more of the process,
integration May not have economies of scale at some stages of process,
May require high capital investment as well as technology
and skills beyond those currently available within the
organization.
COMPILES AND DEVELOPED B 15
Y SIR IMRAN ZAIDI
 IMPACT OF STRATEGY ELEMENTS ON PRODUCTION MANAGEMENT

ELEMENTS OF CONDITIONS THAT MAY AFFECT THE OPERATIONS/

STRATEGY FUNCTION AND ADVANTAGES AND DISADVANTAGES
(continued)
7. Maintain reserve Provides ability to meet peak demands and quickly implement some
capacity for flexibility contingency plans if forecasts are too low,
Requires capital investment in idle capacity,
Provides capability to grow during the lead time normally required for
expansion.
8. Consolidate Can results in economies of scale,
processing Can locate near one major customer or supplier,
(centralize) Vulnerability (powerless, weak): one strike, fire, or flood can halt the entire
operation.
9. Disperse Can be near several market territories,
processing of service Requires more complex coordination network: perhaps expensive data
(decentralize) transmission and duplication of some personnel and equipment at each
location,
If each location produces one product in the line, then other products still
must be transported to be available at all locations,
If each location specifies in a type of component for all products, the
company is vulnerable (powerless) to strike, fire, flood, etc.
If each location provides total product line, then economies of scale may
not be realized.
COMPILES AND DEVELOPED B 16
Y SIR IMRAN ZAIDI
 IMPACT OF STRATEGY ELEMENTS ON PRODUCTION MANAGEMENT

ELEMENTS OF CONCOMITANT CONDITIONS THAT MAY AFFECT

STRATEGY THE OPERATIONS FUNCTION AND ADVANTAGES
AND DISADVANTAGES
10. Stress the use Requires high capital investment,
of Reduces flexibility,
mechanization, May affect labor relations,
automation, robots
Makes maintenance more crucial.

11. Stress stability Stress the security needs of employees and may
of employment develop employee loyalty,
Helps to attract and retain high skilled employees,
May require revisions of make-or-buy decisions,
use of idle time, inventory, and subcontractors as
demand fluctuates.

COMPILES AND DEVELOPED B 17

Y SIR IMRAN ZAIDI
PRODUCTION / OPERATIONS AUDIT CHECKLIST OF QUESTIONS

1. Are suppliers of raw materials, parts, and

subassemblies reliable and reasonable?
2. Are facilities, equipment, machinery, and
offices in good condition?
3. Are inventory-control policies and procedures
effective?
4. Are quality-control policies and procedures
effective?
5. Are facilities, resources, and markets
strategically located?
6. Does the firm have technological
competencies?
COMPILES AND DEVELOPED B 18
Y SIR IMRAN ZAIDI
 RESEARCH AND DEVELOPMENT AUDIT CHECKLIST OF QUESTIONS

1. Does the firm have R&D facilities? Are they

adequate?
2. If outside R&D firms are used, are they cost-
effective?
3. Are the organization’s R&D personnel well
qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer
systems adequate?
6. Is communication between R&D and other
organizational units effective?
7. Are present products technologically
competitive?
COMPILES AND DEVELOPED B 19
Y SIR IMRAN ZAIDI
 MANAGEMENT INFORMATION SYSTEM AUDIT CHECKLIST OF QUESTIONS

1. Do all managers in the firm use the information system to

make decisions?
2. Is there a chief information officer or director of information
system position in the firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm contribute
input to the information system?
5. Ate there effective passwords for entry into the firm’s
information system?
6. Are strategists of the firm familiar with the information
system of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand the
competitive advantages that information can provide firms?
9. Are computer training workshops provided for users of the
information system?
10. Is the firm’s information system continually being improved
in content and user-friendliness?

COMPILES AND DEVELOPED B 20

Y SIR IMRAN ZAIDI
THE INTERNAL FACTOR EVALUATION (IFE) MATRIX

This strategy formulation tool

summarizes and evaluates the major
strengths and weaknesses in the
functional areas of a business, and it
also provides a basis for identifying and
evaluating relationships among those
areas. Intuitive judgments are required in
developing an IFE Matrix, so the
appearance of a scientific approach
should not be interpreted to mean this is
an all powerful technique.
An IFE Matrix can be developed in five
steps:
COMPILES AND DEVELOPED B 21
Y SIR IMRAN ZAIDI
 THE INTERNAL FACTOR EVALUATION (IFE) MATRIX

1. List key internal factors as identified in the internal audit process.

Use a total of from ten to twenty internal factors, including both
strengths and weaknesses. List strengths first and then
weaknesses.
2. Assign a weight that ranges form 0.0 (not important) to 1.0 (all-
important) to each factor. The weight assigned to a given factor
indicates the relative importance of the factor to being successful in
the firm’s industry. Regardless of whether a key factor is an internal
strength or weaknesses, factors considered to have the greatest
effect on organizational performance should be assigned the
highest weights. The sum of all weights must equal 1.0.
3. Assign a 1-to-4 rating to each factor to indicate whether that factor
represents a major weakness (rating = 1), a minor weakness (rating
= 2), a minor strength (rating = 3), or a major strength (rating = 4).
Note that strengths must receive a 4 or 3 rating and weaknesses
must receive a 1 or 2 rating. Ratings are thus company based,
whereas the weights in Step 2 are industry based.
4. Multiply each factor’s weight by its rating to determine a weighted
score for each variable.
5. Sum the weighted scores for each variable to determine the total
weighted score for the organization.

COMPILES AND DEVELOPED B 22

Y SIR IMRAN ZAIDI
THE INTERNAL FACTOR EVALUATION (IFE) MATRIX

Regardless of how many factors are

included in an IFE Matrix, the total weighted
score can range form a low of 1.0 to a high
of 4.0, with the average score being 2.5.
Total weighted scores well below 2.5
characterize organizations that are weak
internally, whereas scores significantly
above 2.5 indicate a strong internal
position. Like the EFE Matrix, an IFE Matrix
should include form 10 to 20 key factors.
The number of factors has no effect upon
the range of total weighted scores because
the weights always sum to 1.0.

COMPILES AND DEVELOPED B 23

Y SIR IMRAN ZAIDI
 EXAMPLE OF INTERNAL FACTOR EVALUATION
FOR GATEWAY CHINA COMPUTER

KEY INTERNAL FACTOR WEIGHT RATING WEIGHTED

SCORE
STRENGTHS

1. Several new senior executives with world class 0.10 4 0.40

skills and leadership experience

2. Continuous decline in operating costs and cost 0.05 3 0.15

of goods sold

3. Well-known brand name 0.05 3 0.15

4. Consumer Reports (September 2009) 0.10 4 0.40
recommended Gateway as # 1

5. As a direct seller, Gateway holds high brand 0.05 3 0.15

recognition

6. Gateway is diversifying into non-PC products 0.10 3 0.30

7. Good relationship with its suppliers 0.05 4 0.20
8. Economies of scale, the 6th largest PC maker in 0.05 4 0.20
the world

9. Gateway retail stores excellent 0.05 3 0.15

COMPILES AND DEVELOPED B 24
Y SIR IMRAN ZAIDI
 EXAMPLE OF INTERNAL FACTOR ECALUATION
FOR GATEWAY CHINA COMPUTER

KEY INTERNAL FACTOR WEIGHT RATING WEIGHTED

SCORE
WEAKNESSES
1. High operating expense 0.05 1 0.05
2. Almost no budget for R&D. 0.10 1 0.10
3. Low return on assets ratio 0.025 2 0.05
4. No niche market (area of interest) 0.025 2 0.05
5. Shortage of cash due to 0.10 2 0.20
successive losses
6. Limited number Gateway stores 0.05 2 0.10
7. Weak performance in overseas 0.10 2 0.20
market
TOTAL 1.00 2.85
The total weighted score of Gateway computer is 2.85 which is above the average value of 2.50.

COMPILES AND DEVELOPED B 25

Y SIR IMRAN ZAIDI
 EXERCISE-1

Join with two other

individuals in class,
and jointly prepare an
IFE Matrix for your
university.

COMPILES AND DEVELOPED B 26

Y SIR IMRAN ZAIDI
 EXERCISE-2
Developing an IFE Matrix for KKD.
• Step-1 join with two other students in
class and prepare IFE Matrix for KKD.
Identify the strength and weaknesses to
KKD.
• Step-2 All three persons teams should
record the IFE total weighted score.
• Step-3 Submit the report to your teacher.

COMPILES AND DEVELOPED B 27

Y SIR IMRAN ZAIDI
 THANK YOU
FOR YOUR
CONCENTRATION

COMPILES AND DEVELOPED B 28

Y SIR IMRAN ZAIDI