Internal Assessment in Strategic Management

Strategic management relies heavily on understanding an organization's internal landscape. An internal assessment in strategic management involves a deep dive into a company's strengths and weaknesses across all its functional areas. This crucial process lays the groundwork for formulating effective strategies, ensuring a firm can capitalize on its advantages and address its limitations. Just as with an external audit, a comprehensive internal audit involves a broad range of managers and employees, fostering a shared understanding of how different departments contribute to the whole. This collaborative approach enhances communication and decision-making within the organization.

The Nature and Role of an Internal Audit in Strategic Management

An internal audit systematically evaluates a firm's internal capabilities, revealing its most important strengths and most severe weaknesses. It's a vital component of the strategic-management process, directly influencing the establishment of objectives and strategies. The goal is to build upon internal strengths and diligently work to overcome weaknesses.

The process parallels that of an external audit, requiring the involvement of representative managers and employees from across the firm. This engagement is beneficial, as participants gain a clearer picture of how their roles, departments, and divisions integrate into the overall organizational structure. Such understanding improves performance and cross-functional appreciation, as seen when marketing and manufacturing managers discuss joint issues.

Identifying Critical Success Factors

Performing an internal audit involves gathering, assimilating, and evaluating information across key operational areas like management, marketing, finance/accounting, production/operations, research and development (R&D), and management information systems. Experts suggest that a task force of managers should determine the 20 most critical strengths and weaknesses that will influence the organization's future. This selection process requires significant analysis and negotiation, as it involves diverse organizational interests and viewpoints.

This interactive process necessitates effective coordination among all functional managers, enabling them to understand the impact of decisions across different business areas. Knowledge of these interrelationships is essential for establishing sound objectives and strategies.

Core Internal Forces: A Functional Area Breakdown

To perform a thorough internal assessment, a firm must meticulously examine its performance in six key functional areas. Each area presents unique strengths and weaknesses that can significantly impact strategic success.

Management Functions and Their Strategic Relevance

The fundamental activities of management—planning, organizing, motivating, staffing, and controlling—are integral to strategic planning. Organizations must continuously leverage their strengths and improve weaknesses in these areas to maintain a competitive edge.

• Planning: Preparing for the future through forecasting, objective setting, strategy devising, policy development, and goal setting. This is crucial during Strategy Formulation.
• Organizing: Establishing task and authority relationships, including organizational design, job specialization, and coordination. This falls under Strategy Implementation.
• Motivating: Shaping human behavior through leadership, communication, work groups, and employee morale initiatives. Essential for Strategy Implementation.
• Staffing: Human resource activities like wage administration, hiring, training, and employee safety. Also key for Strategy Implementation.
• Controlling: Ensuring actual results align with planned results, involving quality control, financial control, sales control, and expense analysis. This is part of Strategy Evaluation.

Management Audit Checklist Questions: Firms should ask:

1. Does the firm utilize strategic-management concepts effectively?
2. Are company objectives and goals clear and measurable?
3. Do managers at all levels plan effectively and delegate authority well?
4. Is the organizational structure appropriate and are job descriptions clear?
5. Is employee morale high, with low turnover and absenteeism?
6. Are reward and control mechanisms effective?

Marketing: Understanding Customer Needs and Market Position

Marketing encompasses defining, anticipating, creating, and fulfilling customer needs and wants. A robust understanding of its seven basic functions helps strategists evaluate marketing strengths and weaknesses.

1. Customer Analysis: Examining consumer needs and desires through surveys, market positioning, and segmentation strategies. Critical for mission statement development.
2. Selling Products and Services: Activities like advertising, sales promotion, personal selling, and customer relations. Especially important for market penetration strategies.
3. Product and Service Planning: Test marketing, product positioning, devising warranties, packaging, and determining product features. Vital for product development and diversification.
4. Pricing: Decisions influenced by consumers, governments, suppliers, distributors, and competitors. Must consider short-run and long-run perspectives.
5. Distribution: Managing warehousing, distribution channels, retail locations, inventory, and transportation. Crucial for market development or forward integration strategies.
6. Marketing Research: Systematic gathering and analysis of data about marketing problems. Uncovers critical strengths and weaknesses, supporting all business functions.
7. Cost/Benefit Analysis: Assessing costs, benefits, and risks of marketing decisions. Involves computing total costs, estimating total benefits, and comparing them.

Marketing Audit Checklist of Questions: Firms should consider:

• Are markets segmented effectively, and is the organization well-positioned?
• Has market share been increasing, and are distribution channels reliable?
• Does the firm have an effective sales organization and conduct market research?
• Are product quality and customer service good, and are products priced appropriately?
• Is the promotion, advertising, and publicity strategy effective?
• Are marketing planning and budgeting effective, and are managers well-trained?
• Is the firm's internet presence excellent compared to rivals?

Finance and Accounting: Assessing Financial Health

Financial condition is often considered the best measure of a firm's competitive position. Analyzing financial strengths and weaknesses is essential for strategy formulation. Key financial factors include liquidity, leverage, working capital, profitability, asset utilization, cash flow, and equity.

Finance/Accounting Functions involve three critical decisions:

1. Investment Decision (Capital Budgeting): Allocating capital to projects, products, assets, and divisions. Necessary for implementing formulated strategies.
2. Financing Decision: Determining the best capital structure and methods for raising capital.
3. Dividend Decision: Concerns the percentage of earnings paid to stockholders, dividend stability, and stock repurchase/issuance.

Financial Ratio Analysis is the most widely used method to assess strengths and weaknesses. It involves comparing ratios over time, to industry norms, and to key competitors. Ratios are classified into five types: liquidity, leverage, activity, profitability, and growth.

Breakeven Analysis helps understand how price and cost changes impact profitability. The breakeven point (BE Quantity = TFC / (price - VC)) indicates the units a firm must sell for total revenues to equal total costs. Lowering prices or increasing fixed/variable costs dramatically raises the breakeven quantity, posing significant risks.

Finance/Accounting Audit Checklist: Key questions include:

• Where is the firm financially strong/weak based on ratio analyses?
• Can the firm raise needed short-term and long-term capital?
• Does the firm have sufficient working capital and effective capital budgeting procedures?
• Are dividend payout policies reasonable, and does the firm have good investor relations?
• Are financial managers experienced, and is the debt situation excellent?

Production/Operations: Transforming Inputs into Value

The production/operations function involves all activities that transform inputs into goods and services. It often represents the largest portion of an organization's human and capital assets, offering a significant competitive weapon.

Roger Schroeder identified five functions or decision areas within production/operations management:

1. Process: Decisions on technology choice, facility layout, process flow, and location.
2. Capacity: Decisions on forecasting, facilities planning, scheduling, and capacity utilization (a key strategic variable).
3. Inventory: Managing raw materials, work-in-process, and finished goods levels.
4. Workforce: Managing skilled and unskilled employees through job design, work measurement, and motivation techniques.
5. Quality: Ensuring high-quality goods and services through control, sampling, testing, and cost control.

Production/Operations Audit Checklist: Important questions include:

• Are raw material supplies reliable and reasonable?
• Are facilities, equipment, and offices in good condition?
• Are inventory-control and quality-control policies effective?
• Are facilities, resources, and markets strategically located?
• Does the firm possess technological competencies?

Research and Development (R&D): Driving Innovation

R&D is critical for many firms' survival, especially those pursuing product development strategies. Firms face the decision of whether to be a