stg mgm lec-04 internal audit

8/2/2019 Stg Mgm Lec-04 Internal Audit

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COMPILES AND DEVELOPEDBY SIR IMRAN ZAIDI

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LECTURE-FOUR

INTERNAL AUDIT

STRATEGIC MANAGEMENT


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INTERNAL AUDIT

All organizations have strengths andweaknesses in the functional areas ofbusiness.

No enterprise is equally strong or weakin all areas.

Internal strengths / weaknesses,coupled with external opportunities /

threats and a clear statement of missionprovide the basis for establishingobjectives and strategies.


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Marketing, finance, accounting, management,management information system, and production /operations.

there are many sub areas within these functions, suchas customer service, warranties, advertising,packaging, and pricing under marketing.

For different types of organizations, such as hospitals,universities, and government agencies, the functionalbusiness areas, of course, differ.

In a hospital, for example, functional areas mayinclude nursing, maintenance, physician support, andreceivables.

Functional areas of a university can include athleticprograms, placement services, housing, fundraising,academic research, and counselling. Within largeorganizations, each division has certain strengths andweaknesses.

KEY INTERNAL FORCES


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Organizational performance will primarily be

determined by internal resources which can begroped 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,trademarks, copyrights, databases, and so on.

The theory asserts that it is advantageous for a firmto pursue a strategy that is not currently beingimplemented by any competing firm.

THE RESOURCE-BASED VIEW (RBV)


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CULTURAL PITFALLS THAT YOU NEED TO KNOW

Waving is a serious insult in Greece and Nigeria, particularly ifthe hand is near someones face.

Making a good-bye wave in Europe can mean no, but itmeans come here in Peru.

Latin Americans, are on average twenty minutes late tobusiness appointments.

Direct eye contact is impolite in Japan. Dont 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. In China leave some food on your plate to show that your host

was so generous that you couldnt finish. Do not eat with your left hand when dining with clients from

Malaysia or India. One form of communication works the same worldwide. Its the

smile-so take that along wherever you go.


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An answer of no to any question could indicate a potentialweakness, and or yes answers to the checklist questionssuggest potential areas of strength.

1. Does the firm use strategic management concepts?

2. Are company objectives and goals measurable and wellcommunicated?

3. Do managers at all hierarchical levels plan effectively?4. Do managers delegate authority well?5. Is the organizations 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?

MANAGEMENT AUDIT CHECKLIST OF QUESTIONS


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1. Are markets segmented effectively?2. Is the organization positioned well among competitors?3. Has the firms 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 firms 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 firms marketing managers have adequate experience

and training?

MARKETING AUDIT CHECKLIST OF QUESTIONS


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1. Where is the firm financially strong and weak asindicated 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 firms financial managers experienced and

well trained?

FINANCE / ACCOUNTING AUDIT CHECKLIST OF QUESTIONS


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1. Are suppliers of raw materials, parts, andsubassemblies 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?

PRODUCTION / OPERATIONS AUDIT CHECKLIST OF QUESTIONS


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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 organizations 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 otherorganizational units effective?

7. Are present products technologicallycompetitive?

RESEARCH AND DEVELOPMENT AUDIT CHECKLIST OF QUESTIONS


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MANAGEMENT INFORMATION SYSTEM AUDIT CHECKLIST OF QUESTIONS

1. Do all managers in the firm use the information system tomake decisions?

2. Is there a chief information officer or director of informationsystem 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 firms

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 firms information system continually being improved

in content and user-friendliness?


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THE INTERNAL FACTOR EVALUATION (IFE) MATRIX

This strategy formulation tool

summarizes and evaluates the majorstrengths and weaknesses in thefunctional areas of a business, and italso provides a basis for identifying and

evaluating relationships among thoseareas. Intuitive judgments are required indeveloping an IFE Matrix, so theappearance of a scientific approach

should not be interpreted to mean this isan all powerful technique.An IFE Matrix can be developed in fivesteps:


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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 thenweaknesses.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 factorindicates the relative importance of the factor to being successful inthe firms industry. Regardless of whether a key factor is an internalstrength or weaknesses, factors considered to have the greatest

effect on organizational performance should be assigned thehighest 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 weaknessesmust receive a 1 or 2 rating. Ratings are thus company based,

whereas the weights in Step 2 are industry based.4. Multiply each factors weight by its rating to determine a weightedscore for each variable.

5. Sum the weighted scores for each variable to determine the totalweighted score for the organization.


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Regardless of how many factors areincluded in an IFE Matrix, the total weightedscore can range form a low of 1.0 to a highof 4.0, with the average score being 2.5.Total weighted scores well below 2.5

characterize organizations that are weakinternally, whereas scores significantlyabove 2.5 indicate a strong internalposition. Like the EFE Matrix, an IFE Matrixshould include form 10 to 20 key factors.

The number of factors has no effect uponthe range of total weighted scores becausethe weights always sum to 1.0.


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EXAMPLE OF INTERNAL FACTOR ECALUATIONFOR GATEWAY CHINA COMPUTER

KEY INTERNAL FACTOR WEIGHT RATING WEIGHTEDSCORE

STRENGTHS

1. Several new senior executives with world classskills and leadership experience

0.10 4 0.40

2. Continuous decline in operating costs and costof goods sold

0.05 3 0.15

3. Well-known brand name 0.05 3 0.154. Consumer Reports (September 2007)

recommended Gateway as # 10.10 4 0.40

5. As a direct seller, Gateway holds high brandrecognition

0.05 3 0.15

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 inthe world

0.05 4 0.20

9. Gateway retail stores excellent 0.05 3 0.15


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EXAMPLE OF INTERNAL FACTOR ECALUATIONFOR GATEWAY CHINA COMPUTER

KEY INTERNAL FACTOR WEIGHT RATING WEIGHTEDSCORE

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 (profitable market) 0.025 2 0.05

5. Shortage of cash due tosuccessive losses

0.10 2 0.20

6. Limited number Gateway stores 0.05 2 0.10

7. Weak performance in overseasmarket

0.10 2 0.20

TOTAL 1.00 2.85

The total weighted score of Gateway computer is 2.85 which is above the average value of 2.50.


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EXERCISE-1

Join with two otherindividuals in class,

and jointly prepare anIFE Matrix for your

university.


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EXERCISE-2

Developing an IFE Matrix for KKD. Step-1 join with two other students in

class and prepare EFE Matrix for KKD.

Identify the opportunities and threats toKKD.

Step-2 All three persons teams should

record the IFE total weighted score. Step-3 Submit the report to your teacher.


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THANK YOU

FOR YOURCONCENTRATION

stg mgm lec-04 internal audit

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