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CHAPTER 4 • THE INTERNAL ASSESSMENT 93

the state of Washington, where it has offices and ware- cash-strapped states across the country. Amazon con-
houses. In mid-2009, Amazon ended business relation- tends that it is unconstitutional to require sellers with no
ships with marketing affiliates in North Carolina, Rhode physical presence in a state to collect sales tax on sales
Island, and Hawaii to avoid collecting sales tax in the to buyers in that state.
state. A marketing affiliate can be defined as a business
that gets a sales commission by featuring links to out- Source: Based on Geoffrey Fowler, “Amazon’s Sales Surge, Bucking
Retail Slump,” Wall Street Journal (January 30, 2009): B1; Yukari
side e-commerce sites on their own Web site. There
Iwatani Kane and Dan Gallagher, “Amazon Gets in Used-Game
are mounting tensions between online retailers and Business,” Wall Street Journal (March 6, 2009): B5.

The Nature of an Internal Audit
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 4-1.

Key Internal Forces
It is not possible in a strategic-management text to review in depth all the material
presented in courses such as marketing, finance, accounting, management, management
information systems, and production/operations; there are many subareas 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, func-
tional 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 intramural programs.
Within large organizations, each division has certain strengths and weaknesses.
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.
Figure 4-2 illustrates that all firms should continually strive to improve on their weak-
nesses, turning them into strengths, and ultimately developing distinctive competencies
that can provide the firm with competitive advantages over rival firms.

The Process of Performing an Internal Audit
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 man-
agement information systems operations. Key factors should be prioritized as described in
Chapter 3 so that the firm’s most important strengths and weaknesses can be determined
collectively.
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