Objectives:
This Lecture focuses on identifying and evaluating a firm's strengths and weaknesses in the functional areas
of business, including management, marketing, finance/accounting, production/operations, research and
development, and computer information systems. Relationships among these areas of business are
examined. Strategic implications of important functional area concepts are examined. The process of
performing an internal audit is described in these lectures.
. The Nature of an Internal Audit
. Integrating Strategy and Culture
. Management
. Marketing
. Finance/Accounting
. Production/Operations
. Research and Development
. Management Information Systems
. The Internal Factor Evaluation Matrix (IFE)

The Internal Factor Evaluation (IFE) Matrix
Great spirits have always encountered violent opposition from mediocre minds.
-- Albert Einstein
A summary step in conducting an internal strategic-management audit is to construct an Internal Factor
Evaluation (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 those areas. 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. A
thorough understanding of the factors included is more important than the actual numbers. Similar to the
EFE Matrix and Competitive Profile Matrix, an IFE Matrix can be developed in five steps:
1. List key internal factors as identified in the internal-audit process. Use total of from ten to twenty
internal factors, including both strengths and weaknesses. List strengths first and then weaknesses.
Be as specific as possible, using percentages, ratios, and comparative numbers.
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.
3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a major weakness
(rating 5 1), a minor weakness (rating 5 2), a minor strength (rating 5 3), or a major strength (rating
5 4). Note that strengths must receive a 4 or 3 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.
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. Like the EFE Matrix, an IFE Matrix should include from 10 to 20 key factors. The
number of factors has no effect upon the range of total weighted scores because the weights always sum to
1.0.
When a key internal factor is both strength and weakness, the factor should be included twice in the IFE
Matrix, and a weight and rating should be assigned to each statement. For example, the Playboy logo both
helps and hurts Playboy Enterprises; the logo attracts customers to the Playboy magazine, but it keeps the
Playboy cable channel out of many markets.
An example of an IFE Matrix for Circus Circus Enterprises is provided in Table. Note that the firm's major
strengths are its size, occupancy rates, property, and long-range planning as indicated by the rating of 4. The

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major weaknesses are locations and recent joint venture. The total weighted score of 2.75 indicates that the
firm is above average in its overall internal strength.

A Sample Internal Factor Evaluation Matrix for Circus Circus Enterprises
Key Internal Factors Weight Rating
Weighted
Score
Internal Strengths
1. Largest casino company in the United States .05 4 .20
2. Room occupancy rates over 95% in Las Vegas .10 4 .40
3. Increasing free cash flows .05 3 .15
4. Owns one mile on Las Vegas Strip .15 4 .60
5. Strong management team .05 3 .15
6. Buffets at most facilities .05 3 .15
7. Minimal comps provided .05 3 .15
8. Long-range planning .05 4 .20
9. Reputation as family-friendly .05 3 .15
10. Financial ratios .05 3 .15

Internal Weaknesses
1. Most properties are located in Las Vegas .05 1 .05
2. Little diversification .05 2 .10
3. Family reputation, not high rollers .05 2 .10
4. Laughlin properties .10 1 .10
5. Recent loss of joint ventures .10 1 .10
TOTAL 1.00 2.75

In multidivisional firms, each autonomous division or strategic business unit should construct an IFE
Matrix. Divisional matrices then can be integrated to develop an overall corporate IFE Matrix.

The Nature of an Internal Audit
Basis for objectives & strategies:
. Internal strengths/weaknesses
. External opportunities/threats
. Clear statement of mission
Functional business areas:
. Vary by organization
. Divisions have differing strengths and weaknesses
Distinctive Competencies:
. A firm’s strengths that cannot be easily matched or imitated by competitors
. Building competitive advantage involves taking advantage of distinctive competencies
. Strategies designed in part to improve on a firm’s weaknesses and turn to strengths

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Internal Audit is Parallels process of external audit. It gathers & assimilates information from:
o Management
o Marketing
o Finance/accounting
o Production/operations
o Research & development
o Management information systems
Involvement in performing an internal strategic-management audit provides vehicle for understanding nature and effect of
decisions in other functional business areas of the firm.
All organizations have strengths and weaknesses in the functional areas of business. No enterprise is equally
strong or weak in all areas. Maytag, for example, is known for excellent production and product design,
whereas Procter & Gamble is known for superb marketing. Internal strengths/weaknesses, coupled with
external opportunities/threats and a clear statement of mission, provide the basis for establishing objectives
and strategies. Objectives and strategies are established with the intention of capitalizing upon internal
strengths and overcoming weaknesses. The internal-audit part of the strategic-management process is
illustrated in Figure below.

A Comprehensive Strategic-Management Model
Key to organizational success: Internal audit creates an environment of Coordination and understanding
among managers from all functional areas.

Key Internal Forces
It is not possible in a business policy text to review in depth all the material presented in courses such as
marketing, finance, accounting, management, computer information systems, and production/operations;
there are many sub areas within these functions, such as customer service, warranties, advertising,
packaging, and pricing under marketing.
For different types of organizations, such as hospitals, universities, and government agencies, the functional
business areas, of course, differ. In a hospital, for example, functional areas may include cardiology,
hematology, nursing, maintenance, physician support, and receivables. Functional areas of a university can
include athletic programs, placement services, housing, fund raising, research, counseling, and

50
intramural programs. Within large organizations, each division has certain strengths and weaknesses. For
example, AT&T is strong in communications and weak in computers.
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. For example, 3M
exploits its distinctive competence in research and development by producing a wide range of innovative
products. Strategies are designed in part to improve on a firm's weaknesses, turning them into strengths,
and maybe even into distinctive competencies.
Some researchers emphasize the importance of the internal audit part of the strategic-management process
by comparing it to the external audit.

The Process of Performing an Internal Audit
Functional relationships refer to the Number and complexity increases relative to organization size.
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. The internal audit requires gathering and assimilating information about
the firm's management, marketing, finance/accounting, production/operations, research and development
(R&D), and computer information systems operations.

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. This is
a great benefit because managers and employees perform better when they understand how their work
affects other areas and activities of the firm. For example, when marketing and manufacturing managers
jointly discuss issues related to internal strengths and weaknesses, they gain a better appreciation of issues,
problems, concerns, and needs in all the functional areas. In organizations that do not use strategic
management, marketing, finance, and manufacturing managers often do not interact with each other in
significant ways. Performing an internal audit, thus, is an excellent vehicle or forum for improving the
process of communication in the organization. Communication may be the most important word in
management.
Performing an internal audit requires gathering, assimilating, and evaluating information about the firm's
operations. Critical success factors, consisting of both strengths and weaknesses, can be identified and
prioritized in the manner discussed later chapters.
The development of conclusions on the 10 to 20 most important organizational strengths and weaknesses
can be, as any experienced manager knows, a difficult task, when it involves managers representing various
organizational interests and points of view. Developing a 20-page list of strengths and weaknesses could be
accomplished relatively easily, but a list of the 10 to 15 most important ones involves significant analysis and
negotiation. This is true because of the judgments that are required and the impact which such a list will
inevitably have as it is used in the formulation, implementation, and evaluation of strategies.
Strategic management is a highly interactive process that requires effective coordination among
management, marketing, finance/accounting, production/operations, R&D, and computer information
systems managers. Although the strategic-management process is overseen by strategists, success requires
that managers and employees from all functional areas work together to provide ideas and information.
Financial managers, for example, may need to restrict the number of feasible options available to operations
managers, or R&D managers may develop such good products that marketing managers need to set higher
objectives. A key to organizational success is effective coordination and understanding among managers
from all functional business areas. Through involvement in performing an internal strategic-management
audit, managers from different departments and divisions of the firm come to understand the nature and
effect of decisions in other functional business areas in their firm. Knowledge of these relationships is
critical for effectively establishing objectives and strategies.
A failure to recognize and understand relationships among the functional areas of business can be
detrimental to strategic management, and the number of those relationships that must be managed increases
dramatically with a firm's size, diversity, geographic dispersion, and the number of products or services
offered. Governmental and nonprofit enterprises traditionally have not placed sufficient emphasis on
relationships among the business functions. For example, some state governments, utilities, universities, and
hospitals only recently have begun to establish marketing objectives and policies that are consistent with
their financial capabilities and limitations. Some firms place too great an emphasis on one function at the
expense of others.

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Financial Ratio Analysis:
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 computer information system. The
effectiveness of strategy formulation, implementation, and evaluation activities hinges upon a clear
understanding of how major business functions affect one another. For strategies to succeed, a coordinated
effort among all the functional areas of business is needed.

Integrating Strategy and Culture
Organizational Culture
Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal
integration…is considered valid and taught to new members
. Resistant to change
. May represent a strength or weakness of the firm
Relationships among a firm's functional business activities perhaps can be exemplified best by focusing on
organizational culture, an internal phenomenon that permeates all departments and divisions of an
organization. Organizational culture can be defined as "a pattern of behavior developed by an
organization as it learns to cope with its problem of external adaptation and internal integration
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." This definition emphasizes the importance of matching
external with internal factors in making strategic decisions.
Organizational culture captures the subtle, elusive, and largely unconscious forces that shape a workplace.
Remarkably resistant to change, culture can represent a major strength or weakness for the firm. It can be
an underlying reason for strengths or weaknesses in any of the major business functions.
Defined in Table below cultural products include values, beliefs, rites, rituals, ceremonies, myths, stories,
legends, sagas, language, metaphors, symbols, heroes, and heroines. These products or dimensions are
levers that strategists can use to influence and direct strategy formulation, implementation, and evaluation
activities. An organization's culture compares to an individual's personality in the sense that no organization
has the same culture and no individual has the same personality. Both culture and personality are fairly
enduring and can be warm, aggressive, friendly, open, innovative, conservative, liberal, harsh, or likable.

Cultural Products and Associated Definitions
Rites Relatively elaborate, dramatic, planned sets of activities that
consolidate various forms of cultural expressions into one event,
carried out through social interactions, usually for the benefit of
an audience
Ceremonial A system of several rites connected with a single occasion or event
Ritual A standardized, detailed set of techniques and behaviors that
manage anxieties, but seldom produce intended, technical
consequences of practical importance
Myth A dramatic narrative of imagined events usually used to explain
origins or transformations of something. Also, an unquestioned
belief about the practical benefits of certain techniques and
behaviors that is not supported by facts
Saga An historical narrative describing the unique accomplishments of
a group and its leaders, usually in heroic terms
Legend A handed-down narrative of some wonderful event that is based
on history but has been embellished with fictional details
Story A narrative based on true events, sometimes a combination of
truth and fiction

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Folktale A completely fictional narrative
Symbol Any object, act, event, quality, or relation that serves as a vehicle
for conveying meaning, usually by representing another thing
Language A particular form or manner in which members of a group use
sounds and written signs to convey meanings to each other
Metaphors Shorthand words used to capture a vision or to reinforce old or
new values
Values Life-directing attitudes that serve as behavioral guidelines
Belief An understanding of a particular phenomenon
Heroes/Heroines Individuals whom the organization has legitimized to model
behavior for others
Source: Adapted from H.M. Trice and J.M. Beyer, "Studying Organizational Cultures through
Rites and Ceremonials," Academy of Management Review 9, no. 4 (October 1984): 655.
Dimensions of organizational culture permeate all the functional areas of business. It is something of an
art to uncover the basic values and beliefs that are buried deeply in an organization's rich collection of
stories, language, heroes, and rituals, but cultural products can represent important strengths and
weaknesses. Culture is an aspect of organizations that no longer can be taken for granted in performing an
internal strategic-management audit because culture and strategy must work together.
Culture can inhibit strategic management:
. Miss changes in external environment because they are blinded by strongly held beliefs
. When a culture has been effective in the past, natural tendency to stick with it in future, even
during times of major strategic change
The strategic-management process takes place largely within a particular organization's culture. 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.
Organizational culture significantly affects business decisions and, thus, must be evaluated during an
internal strategic-management audit. If strategies can capitalize on cultural strengths, such as a strong work
ethic or highly ethical beliefs, then management often can implement changes swiftly and easily. However, if
the firm's culture is not supportive, strategic changes may be ineffective or even counterproductive. A firm's
culture can become antagonistic to new strategies, with the result being confusion and disorientation. An
organization's culture should infuse individuals with enthusiasm for implementing strategies.
Internal strengths and weaknesses associated with a firm's culture sometimes are overlooked because of the
inter functional nature of this phenomenon. It is important, therefore, for strategists to understand their
firm as a socio cultural system. Success is often determined by linkages between a firm's culture and
strategies. The challenge of strategic management today is to bring about the changes in organizational
culture and individual mind-sets necessary to support the formulation, implementation, and evaluation of
strategies.

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.

The Basic Functions of Management
Function Description
Stage of Strategic-
Management
Process When Most
Important

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Planning Planning consists of all those managerial activities
related to preparing for the future. Specific tasks
include forecasting, establishing objectives, devising
strategies, developing policies, and setting goals.
Strategy Formulation
Organizing Organizing includes all those managerial activities that
result in a structure of task and authority relationships.
Specific areas include organizational design, job
specialization, job descriptions, job specifications,
span of the control, unity of command, coordination,
job design, and job analysis.
Strategy
Implementation
Motivating Motivating involves efforts directed toward shaping
human behavior. Specific topics include leadership,
communication, work groups, behavior modification,
delegation of authority, job enrichment, job
satisfaction, needs fulfillment, organizational change,
employee morale, and managerial morale.
Strategy
Implementation
Staffing Staffing activities are centered on personnel or human
resource management. Included are wage and salary
administration, employee benefits, interviewing,
hiring, firing, training, management development,
employee safety, affirmative action, equal employment
opportunity, union relations, career development,
personnel research, discipline policies, grievance
procedures, and public relations.
Strategy
Implementation
Controlling Controlling refers to all those managerial activities
directed toward ensuring that actual results are
consistent with planned results. Key areas of concern
include quality control, financial control, sales control,
inventory control, and expense control, analysis of
variances, rewards, and sanctions.
Strategy Evaluation