IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit

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Strategic Management MGT603

Lesson 12

IFE MATRIX

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

Strategic Management MGT603

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

Weighted

Key Internal Factors

Weight Rating

Score

Internal Strengths

1. Largest casino company in the United States

.05

.20

2. Room occupancy rates over 95% in Las Vegas

.10

.40

3. Increasing free cash flows

.05

.15

4. Owns one mile on Las Vegas Strip

.15

.60

5. Strong management team

.05

.15

6. Buffets at most facilities

.05

.15

7. Minimal comps provided

.05

.15

8. Long-range planning

.05

.20

9. Reputation as family-friendly

.05

.15

10. Financial ratios

.05

.15

Internal Weaknesses

1. Most properties are located in Las Vegas

.05

2. Little diversification

.05

.10

3. Family reputation, not high rollers

.05

.10

4. Laughlin properties

.10

5. Recent loss of joint ventures

.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

Strategic Management MGT603

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, academic research, counseling, and

Strategic Management MGT603

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.

Strategic Management MGT603

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

Strategic Management MGT603

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

Stage of Strategic-

Management

Process When Most

Function

Description

Important

Strategic Management MGT603

Planning

Planning consists of all those managerial activities Strategy Formulation

related to preparing for the future. Specific tasks

include forecasting, establishing objectives, devising

strategies, developing policies, and setting goals.

Organizing

Organizing includes all those managerial activities that Strategy

result in a structure of task and authority relationships. Implementation

Specific areas include organizational design, job

specialization, job descriptions, job specifications,

span of the control, unity of command, coordination,

job design, and job analysis.

Motivating

Motivating involves efforts directed toward shaping Strategy

human behavior. Specific topics include leadership, Implementation

communication, work groups, behavior modification,

delegation of authority, job enrichment, job

satisfaction, needs fulfillment, organizational change,

employee morale, and managerial morale.

Staffing

Staffing activities are centered on personnel or human Strategy

resource management. Included are wage and salary Implementation

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.

Controlling

Controlling refers to all those managerial activities Strategy Evaluation

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.

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