What is involved when performing audits in the strategic management process?

In the strategic management process, audits are a fundamental component that helps organizations assess their current standing in relation to their goals and objectives. The correct choice emphasizes the importance of studying both the firm's environment and its internal capabilities, which is crucial for several reasons.

First, understanding a firm's external environment involves analyzing market trends, competitive dynamics, economic factors, and regulatory conditions that can impact the organization. This external audit helps identify opportunities and threats that may influence strategic decision-making.

Second, examining internal capabilities includes assessing resources, competencies, weaknesses, and strengths within the organization. This internal analysis ensures that the firm is aware of what it can leverage and what areas require improvement, thereby guiding future strategies toward better alignment with organizational capabilities.

By integrating insights from both external and internal analyses, a firm can develop a well-rounded strategy that capitalizes on strengths, mitigates weaknesses, seizes opportunities, and addresses threats. This holistic approach is central to effective strategic management.

The other options, while relevant in different contexts, do not capture the comprehensive nature of an audit within strategic management. For instance, examining competitors’ strategies is important but focuses narrowly on competitive analysis rather than the broader strategic landscape. Reviewing employee compliance with policies is typically related to operational audits rather than the strategic focus.