David and David (2017) report that developing vision and mission statements along with both internal and external audit provide the basis for strategy formulation. These strategies help a company to capitalize on its strengths while overcoming weaknesses (p. 90). Internal assessments work best when representatives from across the company come together to identify the 20 most important internal strengths and weaknesses of the organization (p. 92), which should include an evaluation of the core elements of the company:
- Company culture – essential to an internal audit since employee’s strongly held beliefs and tendency to adhere to methods of past successes can be major inhibitors to strategic management (p. 95).
- Management functions – including planning, organizing, motivating, staffing and controlling.
- Marketing functions – including identification of strengths and weaknesses associated with its ability to analyze customers, plan for, sell, price and distribute its products and services along with the ability to conduct market research and cost/benefit analysis (p. 100).
- Finance and accounting –considered a strong measure of a company’s competitive position and ability to attract investors, these factors can also alter implementation plans and existing strategies, and include a firm’s: leverage, profitability, liquidity, working capital, cash flow, asset utilization and equity (p. 103).
- Production/operations – generally representing the bulk of a company’s capital and human assets and include quality, workforce, inventory, capacity and process (p. 109).
- Research and development – may represents an organization’s ability to gain or retain competitive advantage, improve product quality and manufacturing processes or reduce costs. An internal audit of R&D should analyze factors which may include: budget and resource allocation, R&D facilities, effectiveness of outsourcing, communication with other units, etc. (p. 111-112).
- Management information systems – information which provides the basis for company decision making and should include data availability, usage, management, security, etc. (p. 112).
- Value chain – evaluation of the efficiency and effectiveness of a company’s end-to-end operations (p. 113).
For each of these areas of evaluation, audit checklists can be used to examine each factor with a set of questions designed to uncover the set of strengths and weaknesses. Once these areas have been evaluated and the 20 top strengths and weaknesses identified, they can be summarized and evaluated using an internal evaluation (IFE) matrix. Similar to the EFE and CPM, the IFE uses importance weightings and ratings to determine the weighted score for each variable and provides an overall score for the organization when summed. The IFE is valuable because the weighted factors can help organizations know where to focus when formulating their strategies (David & David, 2017, p. 116-117).
David, F. R., & David, F. R. (2017). Strategic management: Concepts and cases: A competitive advantage approach (Sixteenth edition). Harlow: Pearson Education Limited.
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