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Internal Analysis

Chapter Six

Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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Financial Performance – Sales and Profitability

• Sales and Market Share

• Profitability

• Measuring Performance: Shareholder Value

Analysis

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Shareholder Value Analysis

• Cost of equity—weighted average of cost of capital and cost of debt– e.g. Capital $1 billion (12%); Debt $3 billion (4%) then

the cost of capital is 6%

• Each business aims at ROA to exceed cost of equity so shareholder can improve stock investment

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Shareholder Value Risks

• ROA estimate requires knowing the cash flow of any investment and the assets employed—could encourage short term results

• Reducing assets employed by outsourcing could result in loss of control of business

• Reducing investment could affect offering• Increasing debt to reduce cost of equity could be

risky

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Performance Measures ReflectingLong-Term Profitability

Customer Satisfaction/Brand Loyalty

Customer Satisfaction/Brand Loyalty

Relative CostRelative Cost

Brand/Firm AssociationsBrand/Firm Associations

Product/Service QualityProduct/Service Quality

New Product ActivityNew Product Activity

Manager/Employee Capability and Performance

Manager/Employee Capability and Performance

LongTerm Profits

CurrentPerformance

Figure 6.1

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Relative Cost vs. Relative Performance - Strategic Implications

More ExpensiveMore Expensive

Less ExpensiveLess Expensive

InferiorInferior SuperiorSuperior

Change• Design• Manufacturing/SystemsIgnore

Value Analysis• Raise prices• Promote Cost Reduction

Value Analysis• De-emphasize• Upgrade

Value Analysis• Emphasize/promote• Leave it alone

Figure 6.2

Our Component is

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Strengths and Weaknesses

• Strategies leverage strengths and neutralize weaknesses

• Point of advantage vs. points of parity vs. liability

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Threats & Opportunities

• Key output of external analysis• Evaluate as to

– Immediacy– Impact

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Structuring Strategic Decisions

Strategy Decisions• Strategic Investment• Value Proposition• Assets and Competencies• Functional Strategies and Programs

Strategy Decisions• Strategic Investment• Value Proposition• Assets and Competencies• Functional Strategies and Programs

Figure 6.3

OrganizationalStrengths and Weaknesses

Competitor Strengthsand Weaknesses

Competitor Strengthsand Weaknesses

Market Needs,Attractiveness, and

Key Success Factors

Market Needs,Attractiveness, and

Key Success Factors

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Key Learnings

• Sales and profitability analysis provide an evaluation of past strategies and an indication of the current market viability of a product line.

• Shareholder value holds that the flow of profits emanating from an investment should exceed the cost of capital (which is the weighted average of the cost of equity and cost of debt). Routes to achieving shareholder value – such as downsizing, reducing assets employed, and outsourcing – can be risky when they undercut assets and competencies.

• Performance assessment should go beyond financials to include such dimensions as customer satisfaction/brand loyalty, product/service quality, brand/firms associations, relative cost, new product activity, and manager/employee capability and performance.

• Assets and competences can represent a point of advantage, a point of parity, or a liability. Threats and opportunities that are both imminent and important should trigger strategic imperatives, programs with high priority.

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Ancillary Slides

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“We have met the enemy and he is us.”

- Pogo

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“Self-conceit may lead to self-destruction.”-Aesop,

“The Frog and the Ox”

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“The fish is the last to know if it swims in water.”

-Chinese proverb

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“The successful man is the one who finds out what is the matter with his

business before his competitors do.”

- Roy L. Smith

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Six Rules for Success1. Face reality as it is, not as it was or as you wish it

were.2. Be candid with everyone.3. Don’t manage, lead.4. Change before you have to.5. If you don’t have a competitive advantage, don’t

compete.6. Control your own destiny, or someone else will.

- Jack Welchformer Chairman, General Electric

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“It’s not companies that fail, it’s their leaders who fail.”

- Warren Bennis