THE NATURE OF AN 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. The internal-audit part of the
strategic-management process is illustrated in Figure 4-1.
A. Key Internal Forces
1.A firm's strengths that cannot be easily matched or imitated
by competitors are called
distinctive competencies. Building competitive advantages
involves taking advantage of
distinctive competencies.
2. Strategies are designed in part to improve on a firm's
weaknesses, turning them into strengths, and maybe even into distinctive
competencies. Figure 4-2 illustrates this process.
B. The Process of Performing an Internal Audit
1. The process of performing an internal audit closely parallels
the process of performing an external audit. Representative managers and
employees from throughout the firm need to be involved in determining a firm's
strengths and weaknesses.
2. Performing an internal audit requires gathering,
assimilating, and evaluating information about the firm's operations. Key
factors should be prioritized so that the firm's most important strengths and
weaknesses can be determined collectively.
3. Compared to the external audit, the process of performing an
internal audit provides more opportunity for participants to understand how
their jobs, departments, and divisions fit into the whole organization.
4. Performing an internal audit is an excellent vehicle or forum
for improving the process of communication in the organization.
5. In performing an external audit, critical success factors,
consisting of both strengths and weaknesses, can be identified and prioritized.
6. Financial ratio analysis exemplifies the complexity of
relationships among the functional areas of business.
The video link below provides some perspective on the challenges
that UPS had this Christmas season in meeting the demand for delivery by
Christmas Day. This challenge has caused public relations concerns from
consumers, and has strained business relationships with major retailers.
-à Learning Activity #1
If you were the CEO of UPS, describe the Internal Assessment
approach you would undertake to understand why this situation occurred and what
corrective actions would have to be put in place to avoid these challenges in
2014.
Relate your response to considerations that have been introduced
in the readings for this week.
http://www.bloomberg.com/video/how-did-ups-miss-so-many-christmas-shipments-
EiozJnLSRQKGZrvl~6x4EQ.html
THE INTERNAL FACTOR EVALUATION (IFE) MATRIX
A. The IFE Matrix
1. A summary step in conducting an internal strategic-management
audit is to construct an 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 these areas.
2. 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.
B. An IFE Matrix is developed in five steps:
1. List key internal factors as identified in the internal-audit
process. Use a total of from 10 to 20 internal factors including both strengths
and weaknesses.
2. Assign a weight ranging from 0 (not important) to 1.0 (very
important) to each factor. The sum of all the weights must equal 1.0.
3. Assign a 1-4 rating to each factor to indicate whether that
factor represents a major weakness
(1), minor weakness (2), minor strength (3), or major strength
(4).
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.
C. Additional IFE Matrix Information
1. The total weighted score can range from a low of 1.0 to a
high of 4.0, with the average score being 2.5. Scores well below 2.5
characterize organizations that are weak internally, whereas scores
significantly above 2.5 indicate a strong internal position.
2. When a key internal factor is both a strength and weakness,
the factor should be listed twice in the IFE Matrix, and a weight and rating
should be assigned to each statement.
3. An example of an IFE Matrix is provided in Table 4-9 for a
retail computer store.
4. In multidivisional firms, each autonomous division or
strategic business unit should construct an IFE Matrix. Divisional matrices can
then be integrated to develop an overall corporate IFE Matrix.
-à Learning Activity #2 - Assurance of
Learning Exercise 4B – Develop Divisional Disney IFEM's
Complete Steps 1 through 4. Be very explicit in your analysis.
Your objective is to prepare this analysis in a manner that is meaningful for
company executives to act upon.
è Assurance of Learning Exercise 4B
Develop Divisional Disney IFEMs
Purpose Walt Disney has five major
divisions as follows: 1) Media Networks, 2) Parks & Resorts, 3) Studio
Entertainment, 4) Consumer Products, and 5) Interactive media. The company
faces fierce but different competitors in each segment. The internal strengths
and weaknesses that Disney faces are different in each segment, so each
division prepares its own list of critical internal success factors. This
exercise gives you practice developing key internal factors for different
divisions of a company, so that a firm’s overall strategic plan can be developed.
Instructions
Step 1 Go to
http://corporate.disney.go.com/ and review Disney’s five major divisions.
Step 2 Review Disney’s most recent Annual
Report at http://corporate.disney.go.com/investors/
annual_reports.html. Determine what you
believe are the four major weaknesses and the
four major strengths critical to
strategic planning within Disney’s five business segments.
Step 3 Armed with the information from
Step 2, develop divisional IFEMs for Disney.
Step 4 Prioritize the 20 weaknesses and
the 20 strengths developed in the prior step so Disney’s top executives can
develop an IFEM for the overall company.
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