5/7/2022

INTRODUCTION OF
INTERNAL ASSESSMENT

MAIN CONTENT
About Internal Assessment

Introduction
1  Nature of Internal Audit
 Resource-Based View (RBV)
 Strategy and Org Culture

Basic functions of Org

2  Management
 Marketing
 Finance/ Accounting
 Production/ Operation
 R&D
 Information System Management

Improve Org
3  Value Chain Analysis (VCA)
 Internal Factor Evaluation (IFE) Matrix

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PART 1
The Nature of an Internal Audit

1. Definition
Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization’s operations.
It helps an organization accomplish its objectives
by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control,
and governance processes.

Source: International Professional Practices Framework (IPPF),

The Institute of Internal Auditors Research Foundation. Florida, USA, January 2017

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1. Definition
Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization’s operations.
It helps an organization accomplish its OBJECTIVES
by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control,
and governance processes.

Source: International Professional Practices Framework (IPPF),

The Institute of Internal Auditors Research Foundation. Florida, USA, January 2017

Henry Ford and the Auto Assembly Line

1908, Ford introduced Model T - simple, sturdy and

relatively inexpensive–but NOT inexpensive enough
 Made his production become more efficiently

Solution:
 Broke the Model T’s assembly into 84 discrete steps
 Trained each of his workers to do just one step
 Installed moving lines for bits and pieces of the
manufacturing process

Results:
 Reduced production time for a car
from > 12 hours to one hour and 33 minutes.

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1. Definition
 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 + External opportunities/threats + Clear mission statement
 Basis for establishing objectives and strategies

Distinctive competencies: A firm’s strengths

that CAN’T be easily matched or imitated by competitors
Building competitive advantages involves taking advantage of distinctive competencies

Distinctive Competitive
Weaknesses Strengths
Competencies Advantage
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Starbuck in Japan

Entered the Japanese market through a joint venture with

Japanese clothing and furniture retailer Sazaby Inc
Competed with many competitors

Solution:
“Respect for the culture of the local community”
 a special seasonal menu with local taste (i.e matcha)
 Skip asking customer’s name (respect privacy)
 Marketing through LINE – biggest digital platform in Japan

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2. The process of Performing an Internal Audit

closely parallels the process of performing an External audit

2. The process of Performing an Internal Audit

Closely parallels the process of performing an External audit

Gather, assimilate and evaluate information about the firm’s operation

 determine the firm’s most important strengths and weaknesses

Have the involvement of representative managers and employees from throughout the firm
 provides more opportunity for participants to understand how their work affects other areas and activities
 help them perform better
A key to organizational success is effective coordination and understanding among managers
from all functional business areas

Performing an internal audit is an excellent vehicle or forum for

improving communication in the organization.
Communication may be the most important word in management.

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2. The process of Performing an Internal Audit (cont.)

Financial ratio analysis:

exemplifies the complexity of relationships among the
functional areas of business

A declining return on investment or profit margin ratio

could be the result of:
 Ineffective marketing
 Poor management policies
 Research and development errors
 OR a weak management information system

The Resource-Based View

(RBV) Approach

Internal resources are more important than external factors

in achieving and sustaining competitive advantage 01

Organizational performance will primarily be determined by

internal resources, divided into 3 categories: physical 02
resources, human resources, and organizational resources

Resources are actually what helps a firm exploit

opportunities and neutralize threats. 03

Managing strategically involves

(1) develop + exploit a firm’s unique resources/ capabilities, 04
and (2) continually maintain + strengthen those resources

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3 Categories of Physical Resources

 All plant and equipment
Organizational Resources 

Location
Technology
 Raw materials
 Machines

Human Resources
 All employees
 Training
 Experience
 Intelligence
 Knowledge
 Skills
 Abilities

Organizational Resources
 Firm structure
 Planning processes
 Information systems,
 Patents
 Trademarks
 Copyrights
 Databases
 …

Valuable Resources
A resource is valuable when it is either
(1) rare, (2) hard to imitate, or (3) not easily substitutable.

These 3 characteristics are called empirical indicators.

They enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a
sustainable competitive advantage. The more a resource(s) is rare, nonimitable, and nonsubstitutable,
the stronger a firm’s competitive advantage will be and the longer it will last.

RARE RESOURCES DIFFICULT TO IMITATE NOT EASILY SUBSTITUTABLE

Resources that other competing If firms cannot easily gain the Even if a competing firm cannot
firms do not possess resources, then those resources will perfectly imitate a firm’s resource, it
lead to a competitive advantage more can still obtain a sustainable competitive
P/S: Common resources are, but so than resources easily imitable advantage of its own by obtaining
it is more advantageous if the resource substitutes.
resource(s) is also rare.

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Integrating Strategy and Culture

Relationships among a firm’s functional business activities perhaps can be exemplified
BEST by focusing on organizational culture

Organizational culture: “a pattern of behavior that has been developed by an organization as it learns
to cope with its problem of external adaptation and internal integration, and that has worked well enough
to be considered valid and to be taught to new members as the correct way to perceive, think, and feel”
Cultural products include values, beliefs, rites, rituals, ceremonies, myths, stories, legends, sagas,
language, metaphors, symbols, heroes, and heroines

 Dimensions of organizational culture permeate all the functional areas of business.

 It uncovers the basic values and beliefs that are deeply buried in an organization’s
rich collection of stories, language, heroes, and rituals, but cultural products can
represent both important strengths and weaknesses
 Culture is an aspect of an organization. Culture and strategy must work together.

Organizational  Organizational culture must be evaluated during an internal strategic-management

audit.
 Executives are emotionally committed to the firm’s culture
Culture  Culture can inhibit strategic management in two basic ways.
(1) Managers are blinded by strongly held beliefs
frequently miss the significance of changing external conditions
(2) Managers stick with the previous effective culture in the future, even during
times of major strategic change.
 An organization’s culture must support the collective commitment of its people
to a common purpose. It must foster competence and enthusiasm among managers and
employees
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PART 2
Basic functions of Organization
(1) Management, (2) Marketing
(3) Finance/ Accounting, (4) Production/ Operation
(5) R&D, (6) Information Management System

First Function
MANAGEMENT

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Basic Functions of Management

Planning
 The essential bridge between the present and the future that increases the likelihood of achieving desired results
 Determine whether to attempt a task, works out the most effective way of reaching desired objectives, and prepares to

1 overcome unexpected difficulties with adequate resources

 Enable one to avoid the trap of working extremely hard but achieving little.
 Allows an organization to identify and take advantage of external opportunities as well as minimize the impact of external
threats  adapt to changing markets and thus to shape its own destiny

Organizing
 determining who does what and who reports to whom
2  achieve coordinated effort by defining task and authority relationships
 Resources are allocated more effectively and used more efficiently
 Consist 3 sequential activities: (1) work specialization (breaking down tasks into jobs), (2) departmentalization (combining
jobs to form departments) and (3) authority delegation
 The most common forms of departmentalization are functional, divisional, strategic business unit, and matrix

Motivating
3 

The process of influencing people to accomplish specific objective
Explains why some people work hard and others do not
 Includes at least 4 major components: (1) leadership, (2) group dynamics, (3) communication, and (4) organizational change.
 Democratic behavior on the part of leaders results in more positive attitudes toward change and higher productivity than does
autocratic behavior
 Communication is a major component in motivation. An organization’s system of communication determines whether
strategies can be implemented successfully

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Staffing
 Include activities such as recruiting, interviewing, testing, selecting, orienting,
training, developing, caring for, evaluating, rewarding, disciplining, promoting, transferring, demoting, and dismissing

4 employees, as well as managing union relations

 Play a major role in strategy-implementation efforts
 Human resource managers are becoming more actively involved in the strategic management process
 Human Resources Department:
 Coordinate staffing decisions in the firm so that an organization as a whole meets legal requirements.
 Provide needed consistency in administering company rules, wages, policies, and employee benefits as well as collective
bargaining with unions.
 Particularly challenging for international companies

Controlling
 Include all of those activities undertaken to ensure that actual operations conform to planned operations particularly
5 important for effective strategy evaluation.
 Consist of four basic steps:
1. Establishing performance standards
2. Measuring individual and organizational performance
3. Comparing actual performance to planned performance standards
4. Taking corrective actions

Management Audit Checklist of Questions

determine specific strengths and weaknesses in the functional area of business

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Second Function
MARKETING

MARKETING
7 Basic Functions PRICING
CUSTOMER ANALYSIS
 Pursue a forward integration strategy
examination and evaluation of consumer
primarily to gain better control over prices
needs, desires, and wants  monitor present
charged to consumers
+ potential customers’ buying patterns
 Competing organizations must be careful
on pricing.

SELLING PRODUCTS/ SERVICES DISTRIBUTION

MARKETING  Especially important when a firm
includes many marketing activities, such as
implement a market development or
advertising, sales promotion, publicity, personal
forward integration strategy
selling, sales force management, customer
 Companies identify and evaluate many
relations, and dealer relation
ways to reach market (i.e from direct
selling to use wholesalers/ retailers)

PRODUCTS/ SERVICE PLANNING

MARKETING RESEARCH
 Particularly important when a company is  Systematic gathering, recording, and
pursuing product development or analyzing of data about problems relating
diversification. to the marketing of goods and services
 One of the most effective product and service COST/ BENEFIT ANALYSIS  Support all of the major business functions
planning techniques is test marketing  Assess the costs, benefits, and risks associated with of an organization.
 allow organization to test alternative marketing marketing decisions.
plans and to forecast future sales of new product  3 steps to perform a cost/benefit analysis: (1) compute
the total costs associated with a decision, (2) estimate
the total benefits from the decision, and (3) compare
the total costs with the total benefits
 One key factor to be considered is risk

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Marketing Audit Checklist

Third Function
Finance &
Accounting

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 Is the single best measure of a firm’s competitive position + attractiveness to investors

essential to formulate strategies, alter existing strategies and change implementation plans
 Comprise 3 decisions: (1) the investment decision, (2) the financing decision, (3) the dividend
decision
 Financial ratio analysis: the most widely used method for determining an organization’s strengths
Finance and weaknesses in the investment, financing, and dividend areas
 Financial ratios are equally applicable in for-profit and nonprofit organizations
 Investment decision (capital budgeting): the allocation and reallocation of capital and resources
& Accounting to projects, products, assets, and divisions of an organization
 Financing decision: the best capital structure for the firm and includes examining various
methods to raise capital, must consider both short-term and long-term needs. Two key financial
ratios: (1) debt-to-equity ratio and (2) the debt-to-total-assets ratio.
 Dividend decisions: determine the amount of funds that are retained in a firm compared to the
amount paid out to stockholders. 3 main financial ratios are (1) the earnings-per-share ratio, (2)
the dividends-per-share ratio, and (3) the price-earnings ratio.

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Basic types

of

Finance

Ratios

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3 main questions to ask:

1. How has each ratio changed over time?
Provides a means of evaluating historical trends.
Basic types 2. How does each ratio compare to industry norms?
Comparison of a firm’s ratios within its particular industry can be essential in
determining strength/weakness.
of 3. How does each ratio compare with key competitors?
Competition is more intense btw several competitors in a given industry/ location

Finance Note:
A firm’s financial condition depends not only on functions of finance, but also on many other factors:

Ratios 1. Management, marketing, management production/operations, research and development,

and management information systems decisions;
2. Actions by competitors, suppliers, distributors, creditors, customers, and shareholders
3. Economic, social, cultural, demographic, environmental, political,
governmental, legal, and technological trends.

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Finance/ Accounting Audit Checklist

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?
9. Is the firm’s debt situation excellent?

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Forth Function
Production &
Operations

Production/ Operations
 Consist of all those activities that transform inputs into goods and services.
 Production/operations management deals with inputs, transformations, and outputs
that vary across industries and markets
 comprises five functions or decision areas: process, capacity, inventory, workforce, and quality.

Decision Areas Example Decisions

1. Process These decisions include choice of technology, facility layout, process flow analysis, facility location, line
balancing, process control, and transportation analysis. Distances from raw materials to production sites to
customers are a major consideration.
2. Capacity These decisions include forecasting, facilities planning, aggregate planning, scheduling, capacity planning,
and queuing analysis. Capacity utilization is a major consideration.
3. Inventory involve managing the level of raw materials, work-in-process, and finished goods, especially
considering what to order, when to order, how much to order, and materials handling.
4. Workforce involve managing the skilled, unskilled, clerical, and managerial employees by caring for job
design, work measurement, job enrichment, work standards, and motivation techniques.
5. Quality involve managing the skilled, unskilled, clerical, and managerial employees by caring for job
design, work measurement, job enrichment, work standards, and motivation techniques.

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Production/ Operations

Production/ Operation Audit Checklist

1. Are supplies 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?

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Fifth Function
Research &
Development

Research & Development Audit Checklist

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?

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Sixth Function
Management
Info Systems

Research & Development Audit Checklist

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 systems 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. Are there effective passwords for entry into the firm’s information system?
6. Are strategists of the firm familiar with the information systems 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?

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PART 3
Value Chain Analysis (VCA) &
Internal Factor Evaluation
(IFE) Matrix

Value Chain
Analysis (VCA)

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 Value chain = Total Revenues - Total Costs

(of all activities to develop and market aproduct or service)
 Value chain analysis (VCA) :
 Process a firm determines the costs associated with organizational activities from
purchasing raw materials to manufacturing product(s) to marketing those products.
Value Chain  Aims to identify where low-cost advantages or disadvantages exist anywhere along
the value chain from raw material to customer service activities.

Analysis  Enable a firm to better identify its own strengths and weaknesses,
especially as compared to competitors’ value chain analyses and their own data
examined over time.
(VCA)  Substantial judgment may be required in performing a VCA because different items
along the value chain may impact other items positively or negatively, so there exist
complex interrelationships.
 Firms should determine where cost advantages and disadvantages in their value chain
occur relative to the value chain of rival firms.
 A core competence is a value chain activity that a firm performs especially well.
 A distinctive competence: a core competence evolves into a major competitive advantage
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 An analytical tool used to determine whether a firm’s value chain

activities are competitive compared to rivals and thus conducive to winning in the
marketplace.
 Entail measuring costs of value chain activities across an industry to determine “best
practices” among competing firms for the purpose of duplicating or improving upon
those best practices.
 Enable a firm to take action to improve its competitiveness by identifying (and
improving upon) value chain activities where rival firms have comparative advantages in
Benchmarking cost, service, reputation, or operation.
 The hardest part of benchmarking can be gaining access to other firms’ value chain
activities with associated costs.

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Internal Factor
Evaluation
(IFE) Matrix

 Summarizes and evaluates the major strengths and weaknesses in the functional
areas of a business
 Provide a basis to identify and evaluate relationships among those areas.

Internal  Can be developed in 5 steps:

1. List key internal factors as identified in the internal-audit process. Use a total

Factor of from 10 to 20 internal factors, including both strengths and weaknesses

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to
Evaluation each factor, showing the relative importance of the factor to being successful in
the firm’s industry. The sum of all weights must equal 1.0.
(IFE) Matrix 3. Assign a 1-to-4 rating to each factor.
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.

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SUMMARY
All things about Internal Assessment

Introduction
1  Nature of Internal Audit?
 Resource-Based View (RBV)
 Strategy and Org Culture

Basic functions of Org

2  Management
 Marketing
 Finance/ Accounting
 Production/ Operation
 R&D
 Information Management System

Improve Org
3  Value Chain Analysis (VCA)
 Internal Factor Evaluation (IFE) Matrix

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Any questions?

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