MODULE 4

At the end of the session,

the students must have:

• Described the nature and role of an

internal assessment in formulating
strategies
• Identified the basic functions (activities)
that make up management and marketing
and their relevance in formulating
strategies.
• Discussed the nature and role of finance/
accounting, production/ operations,
research and development, and
management information system in
formulating strategies.
• Explained value chain analysis and its
relevance in formulating strategies.
• Developed an Internal Factor Evaluation
(IFE) Matrix.

1. Worksheet 1 – Identification
of Internal Factors
2. Worksheet 2 – Developing
an IFE Matrix

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 1

Nature of an Internal Audit
The strengths/weaknesses (internal factors), coupled with opportunities/threats
(external factors) provide the basis for establishing objectives and strategies for the attainment
of company’s success.
The process of performing an internal audit closely parallels the process of performing
an external audit.
The internal audit requires gathering and assimilating information about the firm’s:
✓ Management,
✓ Marketing,
✓ Finance/Accounting,
✓ Production/Operations,
✓ Research and Development (R&D), and
✓ Management Information System (MIS).

In order to get ahead of your competitor, a firm must have its own distinctive
competencies - organization’s strength that cannot be easily matched or imitated by
competitors.

The Process of Gaining Competitive Advantage in a Firm

Distinctive Competitive
Weaknesses Strengths Competencies Advantage

Figure 1. The Process of Gaining Competitive Advantage in a Firm

All firms should continually strive to improve on their weaknesses, turning them into
strengths, and ultimately develop distinctive competencies that can provide the firm with
competitive advantages over rival firms as indicated in Figure 1.

Management

The functions of management consist of five basic activities: planning, organizing,

motivating, staffing, and controlling. An overview of these activities is provided in Table 1.
An organization can develop synergy through planning. Synergy exists when everyone pulls
together as a team that knows what it wants to achieve; synergy is the 2 + 2 = 5 effect.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 2

 The Basic Functions of Management

Function Description Stage of Strategic-

Management Process When
Most Important

Planning Planning consists of all those Strategy Formulation

managerial activities related to
preparing for the future.

Organizing Organizing includes all those Strategy Implementation

managerial activities that result in a
structure of task and authority
relationships.

Motivating Motivating involves efforts directed Strategy Implementation

toward shaping human behavior.
Staffing Staffing activities are centered on Strategy Implementation
personnel or human resource
management.
Controlling Controlling refers to all those Strategy Evaluation
managerial activities directed toward
ensuring that actual results are
consistent with planned results.
Table 1. Description of the Basic Functions of Management

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 functions of
marketing: (1) customer analysis, (2) selling products and services, (3) product and service
planning, (4) pricing, (5) distribution, (6) marketing research, and (7) cost/benefit analysis.

Table 2 shows the description of the basic functions of marketing

The Basic Functions of Marketing

Function Description

Customer Analysis The examination and evaluation of consumer needs, desires,

and wants-involved administering customer surveys, analyzing
consumer information, evaluating market positioning
strategies, developing customer profiles, and determining
optimal market segmentation strategies.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 3

 Selling Selling includes many marketing activities, such as
Products/Services advertising, sales promotion, publicity, personal selling, sales
force management, customer relations, and dealer relations.

Product and Service Product and service planning includes activities such as test
Planning marketing; product and brand positioning; devising warranties;
packaging; determining product options, features, style, and
quality; deleting old products; and providing for customer
service.
Pricing The market price is the current price at which an asset or
service can be bought or sold.

Distribution Distribution includes warehousing, distribution channels,

distribution coverage, retail site location, sales territories,
inventory levels and location, transportation carriers,
wholesaling, and retailing.
Marketing Research Marketing research is the systematic gathering, recording, and
analyzing of data about problems relating to the marketing of
goods and services.
Opportunity Analysis It involves assessing the costs, benefits, and risks associated
with marketing decisions.
Table 2. Description of the Basic Functions of Marketing

Finance/Accounting
Determining an organization’s financial strengths and weaknesses is essential to
effectively formulating strategies. A firm’s liquidity, leverage, working capital, profitability,
asset utilization, ash flow, and equity can eliminate some strategies as being feasible
alternatives.
Financial ratio analysis is the most widely used method for determining an
organization’s strengths and weaknesses in the investment, financing, and dividend areas.
Because the functional areas of business are so closely related, financial ratios can signal
strengths or weaknesses in management, marketing, production, research and development,
and management information systems activities. As indicated in Table 3, key financial ratios
can be classified into the following five types: liquidity, leverage, activity, profitability, and
growth.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 4

 Ratio How Calculated What It Measures
Liquidity Ratios
Current Current assets The extent to which a
Ratio Current liabilities firm can meet its short-
term obligations
Quick Ratio Current assets minus inventory The extent to which a
Current liabilities firm can meet its short-
term obligations without
relying upon the sale of
its inventories
Leverage Ratios
Debt-to-Total- Total debt The percentage of total
Assets Ratio Total assets funds that are provided by
creditors
Debt-to-Equity Total debt The percentage of total
Ratio Total stockholder ′ s equity funds provided by creditors
versus by owners
Long-Term- Long − term debt The balance between debt
Debt-to-Equity Total stockholder ′ s equity and equity in a firm’s long-
Ratio term capital structure
Times-Interest- Profit𝑠 before interest and taxes The extent to which
Earned Ratio Total interest charges earnings can decline without
the firm becoming unable to
meet its annual interest costs
Activity Ratios

Inventory Sales Whether a firm holds

Turnover Inventory of finished goods excessive stocks of
inventories and whether a
firm is slowly selling its
inventories compared to the
industry average
Fixed Assets Sales Sales productivity and plant
Turnover Fixed Assets and equipment utilization
Total Assets Sales Whether a firm is generating
Turnover Total Assets a sufficient volume of
business for the size of its
asset investment

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 5

 Accounts Annual credit sales The average length of time it
Receivable Accounts receivable takes a firm to collect credit
Turnover sales (in percentage terms)
Average Accounts receivable The average length of time it
Collection Total credit sales⁄365 𝑑𝑎𝑦𝑠 takes a firm to collect on
Period credit sales (in days)
Profitability Ratios
Gross Profit Sales minus cost of goods sold The total margin available to
Margin Sales cover operating expenses
and yield a profit
Operating Earnings before interest Profitability without
Profit Margin and taxes (EBIT) concern for taxes and
Sales interest
Net Profit Net income After-tax profits per dollar
Margin Sales of sales
Return on Total Net income After-tax profits per dollar
Assets (ROA) Total assets of assets; this ratio is also
called return on investment
(ROI)
Return on Net income After-tax profits per dollar
Stockholders’ Total stockholers ′ equity of stockholders’ investment
Equity (ROE) in the firm
Earnings Per Net income Earnings available to the
Share (EPS) Number of shares of common stock owners of common stock
outstanding
Net-Earnings Market price per share Attractiveness of firm on
Ratio Sales equity markets
Growth Ratios

Sales Annual percentage gorwth in total sales Firm’s growth rate in sales

Net Income Annual percentage gorwth in profits Firm’s growth rate in profits

Earnings Per Annual percentage gorwth in EPS Firm’s growth rate in EPS
Share
Dividends Per Annual percentage gorwth in dividends Firm’s growth rate in
Share per share dividends per share
Table 3. A Summary of Key Financial Ratios

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 6

Production/Operations
The production/operations function of a business consists 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. Table 4 shows the basic
functions within Production/Operation.

Decision
Example Decisions
Areas
1. Process These decisions include choice of technology, facility lay-out, process flow
analysis, facility location, line balancing, process control, and transportation
analysis.

2. Capacity These decisions include forecasting, facilities planning, aggregate planning,

scheduling, capacity planning, and queuing analysis.

3. Inventory These decisions 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 These decisions 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 These decisions are aimed at ensuring that high-quality goods and services
are produced by caring for quality control, sampling, testing, quality
assurance, and cost control.
Table 4. The Basic Functions within Production/Operation

Research and Development

Organizations invest in R&D because they believe that such an investment will lead to
a superior product or service and will give them competitive advantages.
Research and development expenditures are directed at developing new products before
competitors do, at improving product quality, or at improving manufacturing processes to
reduce costs.

Management Information System (MIS)

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 7

 Information ties all business functions together and provides the basis for all managerial
decisions. A management information system’s purpose is to improve the performance of an
enterprise by improving the quality of managerial decisions.

An effective information system thus collects, codes, stores, synthesizes, and presents
information in such a manner that it answers important operating and strategic questions. The
heart of an information system is a database containing the kinds of records and data important
to managers.

Value Chain Analysis

Value chain analysis (VCA) refers to the process whereby a firm determines the costs
associated with organizational activities from purchasing raw materials to manufacturing
products(s) to marketing those products. VCA aims to identify where low-cost advantages or
disadvantages exist anywhere along the value chain from raw material to customer service
activities.

Benchmarking
Benchmarking is 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.
Benchmarking entails 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.

The Internal Factor Evaluation (IFE) Matrix

A summary step in conducting an internal strategic management audit is to construct

an Internal Factor Evaluation (IFE) Matrix. The internal and external (which was discussed in
the previous module) factor evaluation matrices are both tools used to summarize the
information gained from company’s external and internal environment analyses. Table 5
presents an example of IFE Matrix for a retail computer store. These tools can be used further
to build SWOT analysis.

IFE Matrix can be developed in five steps:

1. List key internal factors as identified in the internal-audit process. Use a total of 20 internal
factors, including both strengths and weaknesses. List strengths first and then
weaknesses.
2. Assign a weight that ranges from 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 weakness, 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.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 8

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 3 or 4 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.
Note: Regardless of how many factors are included in an IFE Matrix, 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. Total weighted
scores well below 2.5 characterize organizations that are weak internally, whereas scores
significantly above 2.5 indicate a strong internal position.

Table 5. A Sample Internal Factor Evaluation Matrix for a Retail Computer Store

Source: Based on Fred R. David and Forest R. David, Strategic Management: A Competitive Advantage Approach, Concepts
and Cases 16th Edition (© Pearson education Limited 2017), p205.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 9

Summary of Key Points
Management, marketing, finance/accounting, production/operations, R&D, and
MIS represent the core operations of most businesses and the source of competitive
advantages. Many companies still prefer to be judged solely on their bottom-line performance.
However, it is essential that strategists identify and evaluate internal strengths and weaknesses
to effectively formulate and choose among alternative strategies.

The Internal Factor Evaluation Matrix, coupled with the Competitive Profile Matrix,
the External Factor Evaluation Matrix, and clear statements of vision and mission provide the
basic information needed to successfully formulate competitive strategies. The process of
performing an internal audit represents an opportunity for managers and employees throughout
the organization to participate in determining the future of the firm. Involvement in the process
can energize and mobilize managers and employees.

Understanding both external and internal factors and relationships among them is the
key to effective strategy formulation. Because both external and internal factors continually
change, strategists seek to identify and take advantage of positive changes and buffer against
negative changes in a continuing effort to gain and sustain a firm’s competitive advantage.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 10

Exercises and Evaluation
Module 4: Worksheet 1
Identification of Internal Factors

Name: Course, Year, & Section

Instruction: Determine the following internal factors if it is a “STRENGTH” or a

“WEAKNESS” for a particular organization. Write your answer on the space provided.

____________ 1. All startup funds will come from loans

____________ 2. “We do not compromise with our quality”
____________ 3. Strategic locations of properties
____________ 4. Ongoing expenses on properties such as repairs and maintenance
____________ 5. High employee turnover rate
____________6. “We have assembled a team that embraces different disciplines with expertise
in all areas of the business”
____________ 7. High start-up costs
____________ 8. Low priced products compared to competitors
____________ 9. Low market share compared to other competitors
____________ 10. High foot traffic location
____________ 11. Limited market reach
____________ 12. Indebtedness from different financial sources
____________ 13. Robust innovation focusing on research and development
____________ 14. Establishing a reputation on the internet will be challenging
____________ 15. Production level below capacity

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 11

 Module 4: Worksheet 2
Developing an IFE Matrix

Name: Course, Year, & Section

Direction: On the matrix below are the internal factors present in a certain fast food
restaurant that is operating in the local market. You are to assess how important each of these
factors to the firm in becoming successful in the industry by giving a weight and rating. Then,
compute for the weighted score of each factor. Lastly, discuss briefly the result after you
derived the total weighted score in the space provided below the matrix.

Key Internal Factors Weight Rating Wtd.

Score
STRENGTHS
1. Industry leader with secure brand value of Filipino culture,
tasty food at low prices
2. Creative marketing programs driven by a deep
understanding of Filipino consumers
3. Wide-spread local store locations

4. Systematic food preparations

5. Excellent customer service

6. Strong financial capacity to expand

7. Food safety guidelines are strictly adhered

8. Has a strong brand loyalty from customers

9. Efficient manufacturing and logistic facilities

10. Networks and support systems from investors

WEAKNESSES

1. Lack of menu innovation could be a disadvantage as

competition ramp up
2. Weak expertise in coffee business

3. The investment on returns from acquisitions may not be

attractive.
4. High training cost due to rapid employee turnover

5. Unhealthy food offerings

6. Long queues during busy period

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 12

 7. Need for technological improvement

8. Lack of international positioning

9. Price competition with the competitors

10. Quality issues on franchise network

TOTAL

Discussion:

___________________________________________________________________________

___________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 13

 Evaluation
Time!

Name: Course, Year, & Section ___

Before the implementation of the recommended strategy intended for a particular business, it is
important to know its internal factors that can make or break the company. Thus this exercise will
measure your comprehensive understanding about the topics discussed in this module, specifically in
the Internal Factor Evaluation Matrix. Moreover, this activity is one of the first steps in training you on
how to be a strategist later on.

Direction: Choose at least one (1) business entity, found on the table below the Note, which you want
to evaluate using the IFE Matrix. Should you be familiar with the business you are going to choose so
the analysis of data will be easy for you. Then, list at least 20 internal factors (10 strengths and 10
weaknesses) that are present in the functional areas of business you have chosen.

Note: The business that you will be assessing using the IFE Matrix will also be the business that you
will evaluate afterwards when we are going to discuss the remaining tools used to identify, evaluate,
and select strategies. This is to let you to come up with a consistent strategic analysis specific
for the business.

Ayala Land Mister Donuts DanCorr Auto San Antonio Resort

Repair Shop
Starbucks Panulce Pacifica Agrivet 7-Eleven
Supplies Convenience Store
Card Bank, Inc. Active Fitness Gym Addictea Mercury Drug
CapSU Aquabest Water Unitop Bank of the
Refilling Station Philippine Islands
Modish NAILS & J&T Express Shopee Mitsubishi Motors
HAIR Spa

Key Internal Factors Weight Rating Wtd.

Score
STRENGTHS
1.

2.

3.

4.

5.

6.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 14

7.

8.

9.

10.

WEAKNESSES
1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

TOTAL

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 15

Additional Readings and References
Additional Readings:
https://www.investopedia.com/terms/m/market-price.asp
https://www.investopedia.com/terms/r/randd.asp
https://strategicmanagementinsight.com/tools/value-chain-analysis.html
https://www.youtube.com/watch?v=g8p2H7EvoGM
https://www.youtube.com/watch?v=1YTwuDXy77Y

References
Strategic Management: A Competitive Advantage Approach, Concepts and Cases 16th
Edition by Fred R. David and Forest R. David

Strategic Management: Concepts and Cases 13th Edition by Fred R. David

Image Sources:
Source: Based on Fred R. David and Forest R. David, Strategic Management: A Competitive
Advantage Approach, Concepts and Cases 16th Edition (© Pearson education Limited 2017),
p205.

CBMEC 111- STRATEGIC MANAGEMENT – Module 4 16