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 operation of management information system (MIS). The process of internal audit provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization. This is of a great benefit because managers and employees perform better when they understand how their work affects other areas and activities of the firm.

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 prioritised.

Strategic management is a highly interactive process that requires effective coordination among management, managers of marketing, finance/accounting, production/operation, R&D, and MIS. 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. A key to organisational 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 on other functional business areas in the firm. Financial ratio analysis provides a good example of the complexity of relationships among the functional areas of the business. A declining return on investment or profit margin ratio could be the result of an ineffective marketing, poor management policies, research and development errors, or a weak management information system. The effectiveness of strategy formulation, implementation, and evaluation activities hinges upon a clear understanding of how major business functions affect one another.

The internal factors are generally regarded as controllable factors because the company, generally, has control over these factors; it can alter or modify such factors as it’s personal, physical facilities, organization and functional means, such as the marketing mix, to suit the environment.

Within a given industry, why do some companies do better than others? Porter proposed the view that success depends on the competitive advantage. Competitive advantage comes from:

• Efficiency
• Quality of products and services
• Customer responsiveness
• Innovations