strategy ch.5

8/12/2019 Strategy Ch.5

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Strategy: A View From the TopChapter 5

Analyzing an Organizations

Strategic Resource BaseChase Mueller Tanner Gilreath

Ashley Hoptay Olivia Erwin

Brandon Laviage Anna RendonPaige Stone


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Introduction

When determining what strategies a companycan pursue successfully they have to look attheir strategic resources and capabilities.

Organizational strategic resources: Physical assets

Relative financial position

Market position, brands and the capabilities of itspeople

Specific knowledge, competencies, processes, skillsand cultural aspects of the organization


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Principles of a Companys InternalStrategic Environment

1. Cataloging and valuing current resourcesand core competencies that can be used

to create a competitive advantage2. Identifying internal pressures for change

and forces of resistance


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Analyzing a Companys FinancialResources

Corporate Level

Balance Sheet

Income Statement Cash Flow Statement

Retained Earnings

To determine how the company isfunctioning?

Financial Ratio Analysis


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Ratio Analysis

Financial Ratio Analysis Can provide a quick overview of a companys or business units

current or past profitability, liquidity, leverage, and activity

Profitability Ratios Measures how well a companys is allocating its resources

Liquidity Ratios Focus on cash flow generation and a companys ability to meet its

financial obligations

Leverage Ratios May suggest potential improvements in the financing of operations

Activity Ratios Measure productivity and efficiency


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Profitability Ratios Gross Profit Margin = (Sales-COGS) / Sales

Total margin available to cover operating expenses and yield a profit

Net Profit Margin = Profits After Taxes / Sales

Return on Sales

Return on Assets = EBIT / Total Assets Return on the total investment from both stockholders and creditors

Return on Equity =Profits After Taxes / Total Equity Rate of return on stockholders investment in the firm


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Liquidity Ratios

Current Ratio = Current Assets / Current Liabilities

The extent to which the claims of short-term creditors arecovered by short-term assets

Quick Ratio = (Current AssetsInventory) / CurrentLiabilities

Acid-Test Ratio; the firms ability to pay off short-termobligations without having to sell its inventory

Inventory to Net Working Capital = Inventory / (CurrentAssetsCurrent Liabilities)

The extent to which the firms working capital is tied up in

inventory


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Leverage Ratios

Debt-to-Asset = Total Debt / Total Assets

The extent to which borrowed funds are used tofinance the firms operations

Debt-to-Equity = Total Debt / Total Equity

Ratio of funds from creditors to funds fromstockholders

Long-Term Debt-to Equity = Long-Term Debt / Total

Equity

The balance between debt and equity


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Activity Ratios

Inventory Turnover = Sales / Inventory

The amount of inventory used by the company togenerate its sales

Fixed-Asset Turnover = Sales / Fixed Assets

Sales productivity and plant use

Average Collection = Accounts Receivable / AverageDaily Sales

The average length of time required to receivepayment


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Analyzing Ratios

Ratios can be used to assess:

1. The businesss position in the industry

2. The degree to which certain strategicobjectives are being achieved

3. The businesss vulnerability to revenue and

cost swings

4. The level of financial risk associated with thecurrent or proposed strategy


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Du Pont Formula

COGS

OperatingExpenses

Inventories

AccountsReceivables

Cash

PrepaidExpenses

Costs

Sales

Current Assets

Fixed Assets

EBIT

Sales

Sales

Total Assets

Earnings as% of Sales

Asset Turnover

Returnon

Assets

+

+

+

+

-

+

/

/

X


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Du Pont Explanation

How do we know that are assets are beingused effectively to produce income?

Return on Assets

How do we know that our strategy is being

executed with effectiveness? Asset Turnover


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Financial Questions?

Does the current strategic plan createshareholder value?

How does the business units performancecompare with the performance of others inthe corporation?

Would an alternative strategy increaseshareholder value more than the currentstrategy?


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Value Based Measures

Traditional Measures

Return on Equity (ROE)

Return on Assets (ROA)

Broader Measures

Economic Value Added (EVA) Market Value Added (MVA)


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Economic Value Added (EVA)

Is a value-based financial performancemeasure that focuses on economic value

creation.

Capital Focus:

Cost of Debt Cost of Equity


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EVA

EVA = Profit[(Cost of Capital)(Total Capital)] ProfitAfter tax operating profit

Cost of Capitalweighted cost of debt and equity

Total Capitalbook value plus interest-bearing debt

Positive EVA Cost of Capital less than profits generated

Negative EVA Cost of Capital more than profits generated


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EVA Benefits

1. It can help align employee and ownerinterests through employee compensationplans

2. It can be the basis for a single competitiveperformance measure called market valueadded (MVA)

Examples

Capital Budgeting, Employee PerformanceEvaluation, and Operational Assessment


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Cost Analysis

Deals with the identification of strategiccost driversthose cost factors in the

value chain that determine long-termcompetitiveness in the industry

Variables: Product Design, Factor Costs,Scale, Scope of Operations, and CapacityUse


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Cost Benchmarking

Useful in assessing a firms costs relative to those

of competing firms, or for comparing a companys

performance against best-in-class competitors

5 Steps1. Selecting areas or operations to benchmark

2. Identifying key performance measures and practices

3. Identifying best-in-class companies or key competitors

4. Collecting cost and performance data

5. Analyzing and interpreting the results


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Human Capital: A Companys MostValuable Strategic Resource

Relates that companies are run by and for people Understanding their concerns, aspirations, and capabilities is,

therefore, keyto determining a companys strategic position andoptions

A survey by Chief Executive demonstrates that more andmore focus is being put in attracting, developing, andretaining human capital Of the CEOs surveyed 43% believe that finding and retaining good

people is their greatest challenge and 84% believe that people issuesare far more important than before

A study conducted by the American Society for Training and

Development examined 500 U.S.-based publicly traded firms. Bylooking at annual training expenditures and stockholder returns, itconcluded that the top half of firms in terms of spending on training hadhigher stockholder returns than did the bottom half


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Continuous employee development, through on-the-job training and otherprograms, is critical to the growth of human capital

Examples:

Fed Ex developed a system of continuous learning. 3% of its total

expenses goes toward training programs. All line and staff managersattend 11 weeks of mandatory training in their first year. More that10,000 employees have been to the Leadership Institute and have

attended weeklong courses on the companys culture and operations

Motorola executives report that their company receives $33 for every$1 invested in employee education

On February 27, 2008 Starbucks closed every store in America for 3hours in effort to retrain employees which was known as a MandatoryTraining Day

Human Capital: Training


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Organizational Strategic Resources

Knowledge andintellectual capital are major drivers ofcompetitive advantage

How is competitive advantage created and sustained?When a company continues to mobilize new knowledgefaster and more efficiently than its competitorsEx: I-phone

Recognizing the importance of knowledge as a strategicasset, Skandia, NASDAQ, Chevron, and Dow Chemicalhave established director level positions in charge ofintellectual capital


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Organizational Strategic Resources-Continued

A companys market capitalization increasinglyreflects the value of such resources and theeffectiveness with which they are managed

Example: Netscape had a $4 billion market capitalization based

on its stock price, even though the companys saleswere only a few million dollars per year. Investors

based the high stock price on their assessment onthe companys intangibles- its knowledge base andquality of management


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Organizational Strategic Resources-Knowledge is Power

Patents- Is a limited legal monopoly granted toan individual or firm to make, use, and sell itsinvention, and to exclude others from doing so

-Microsoft Patents Patents have doubled each year in the U.S.

due to its great strategic value, thus a greatadvantage

Strategic Patentingusing patent applicationsto colonize the entire new areas of technologyeven before tangible products are created


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Organizational Strategic Resources-Intellectual Capital Base

HOWEVER THE LARGEST PART OF A COMPANY IS NOT PATENTABLE Intellectual capital base- collective knowledge (whether or not documented) of

the individuals, groups, and units within an organization. This knowledge canbe used to produce wealth, multiply output of physical assets, gain competitiveadvantage, and/or to enhance value of other types of capital past experiences, values, education, and insights Better decisions = improved performance and enhanced learning

Explicit Knowledge- is formal and objective and can be codified and stored inbooks, archives, and databases

Implicit or tacit knowledge- is informal and subjective. It is gained throughexperience and transferred through person interaction and collaboration

Ex: Xerox Collaboration- Technicians at break would talk about work and sharetheir ideas Encourage informal communication Institute open door policies Use intranets


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The Importance of Brands

The physical distance between customers,distributors, and manufacturers has created

the need for brands They provide a guarantee of reliability and

quality

They build trust and reinforce value


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Brands

Strategic assets that assist companies inbuilding and retaining customer loyalty

Must constantly be nourished, sustainedand protected

Failure to support a brand can be

catastrophic


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Coke

Coke changed their formula in order to competewith Pepsi who had taken 36% of their marketshare

Coke's change was immediately greeted byangry protest. For three straight months, Coca-Cola headquarters received some 1,500 phonecalls daily, as well as a barrage of angry letters.

Wrote one correspondent: "Changing Coke islike God making the grass purple or putting toeson our ears or teeth on our knees."


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Coke

"We did not understand the deep emotionsof so many of our customers for Coca-

Cola," said President Donald R. Keough. "Itis not only a function of culture orupbringing or inherited brand loyalty. It is awonderful American mystery. A lovely

American enigma.


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Brand Value

Calculated at the net present value of theearnings that the brand is expected togenerate and secure in the future

Business Week does a ranking of the 100best global brands by dollar value theselect on 2 criteria1. Brands have to be global, generating significant

earnings in the main global markets2. Must be sufficient marketing and financial data

publicly available for valuation


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3 Strong Recommendations

Companies that succeed in growing theirbrands while pursuing their missions exhibit

certain qualities DO NOT FEAR PUBLIC FLOPS

FACE YOUR WEAKNESSES

PROTECT YOUR CULTURE


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http://www.youtube.com/watch?v=6xuzY4VFlkA
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Core Competencies are

World class capabilities that enable acompany to build a competitive advantage

Key element in building a long-termstrategic advantage

Set of skills or systems that create a

uniquely high value for customers at best-in-class levels.


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Core Competencies

Contribute to perceived customer benefits

Are difficult for competitors to imitate

Allow for leverage across markets


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Core Competencies

Test for identifying core competencies:

Core competencies should provide access to abroad array of markets

Core competencies should help differentiate coreproducts and services

Core competencies should be hard to imitate

because they represent multiple skills,technologies, and organizational elements.


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Core Competencies

Development should focus on:

Long-term platforms capable of adapting to newmarket circumstances

Unique sources of leverage in the value chainwhere firms think they can dominate

Elements that are important to customers in the

long run Key skills and knowledge, not on products


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Core Competencies

Examples from the book:

3M-coatings

Canon-optics, imaging, and microprocessorcontrols

Honda-small engine technology

Other examples

NEC-semiconductors

Nokia-adapted from rubber boots to cell phones


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Core Competencies Black and Decker

broad array of markets the home workshop market:small electric motors are

used to produce drills, circular saws, sanders, routers,rotary tools, polishers, and drivers

the home cleaning and maintenance market:smallelectric motors are used to produce dust busters, etc.

the kitchen appliance market:small electric motorsare used to produce can openers, food processors,blenders, bread makers, and fans


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Core Competencies

Dellhard to imitate Online customization for each

computer built

Minimization of working capital inthe production process

High manufacturing anddistribution quality- reliableproducts at competitive prices
http://www.dell.com/content/products/RBIredirect.aspx?rbi=GKiitGAbBa2SB+6V9bxpRyvwm4g6Tn36wTwLVrus+1Yk1iSYlI8tpShc0L6a76U+H4DeA4Wf6vBScS6RPvM29pMs5HCS3v1+Os/1x/pfxJAfNjiD2WDTlIr5+IsXTHvPI6S5cBm50iVlOvZPjnWVX9rMd6oC1rezfpkOjce3KNU=http://www.dell.com/content/products/RBIredirect.aspx?rbi=GKiitGAbBa2SB+6V9bxpRyvwm4g6Tn36wTwLVrus+1Yk1iSYlI8tpShc0L6a76U+H4DeA4Wf6vBScS6RPvM29pMs5HCS3v1+Os/1x/pfxJAfNjiD2WDTlIr5+IsXTHvPI6S5cBm50iVlOvZPjnWVX9rMd6oC1rezfpkOjce3KNU=


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Forces for Change

As discussed in an earlier lecture, there are12 global trends that emanate from acompanys external environment that cause

strategic change.

Internal forces within the organization orfrom immediate stakeholders also causestrategic change, and the life cycle of acompany causes change.


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Internal Drivers That Cause Change

A few examples:

Disappointing financial performance

New owners or executives Limitations on growth with current strategies

Scarcity of critical resources

Internal cultural changes

Gentle Creek Golf Club


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Organizational Resistance to Change

1. Structural, organizational rigidities

2. Closed mind-sets reflecting support forobsolete business beliefs and strategies

3. Entrenched cultures reflecting values,behaviors and skills that are not conducive tochange (GCGC Example)

4. Counterproductive change momentum that isnot in tune with current strategicrequirements


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Company Life Cycle Forces forChange

Company Life Cycle: The Beginning

When a founder or founding team starts a company.Hard to separate the identity of the founder with the

identity of the company. Maturing

When companies transform from informality to a moreformal organization. Described as entrepreneurial-managerial transition. Dilemma: how does a company

maintain an entrepreneurial spirit while moving towardan organizational structure increasingly focused oncontrol.


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Pressures of Growth

Development Issues: Loss of focus Lack of authority and leadership

Communication becomes harder Skill development falls behind Stress becomes evident

The pressure to grow faster can skew strategicthinking Unwise acquisitions or market expansions,

implementation of unproven technologies, anddeviations from developing core skills


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Ability to Change

The ability to deal with change is imperativefor a companys success

Internal factors can reduce a companysability to change:

Structural rigidities

A lack of adequate resources

Adherence to dysfunctional processes

Company culture


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7-S Model

Developed at McKinsey & Company

Key Idea One: organizational effectiveness

stems from the interaction of a number offactors, of which strategy is just one.

Seven Variables included in the model:strategy, structure, systems, shared values,skills, staff and style


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7-S Model Continued

Depicts a situation where it is not clear which factoris the driving force for change or the biggestobstacle to change.

The seven variables are interconnected, SOprogress in one area must be accompanied byprogress in another area to create meaningfulchange.

Key Idea Two: To orchestrate effective change, oneneeds to understand the impact of each factor andchange each according to the desired direction


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McDonalds Example: Ray Kroc created one of the most compelling brands of all time.

Problem: Barely turning a profit. Feeling the pressure for growth.

Strategy: Bought a lot of land to rent to franchisees. When that slowed,he took the business abroad.

Key Success Factors: McDonalds success is more than Krocsstrategy of expanding the business. Throughout the company'sspectacular growth, Kroc maintained a delicate balancing act, imposingrigorous system-wide standards as well as developing andimplementing a sophisticated operating and delivery system whileencouraging an entrepreneurial spirit that welcomed ideas from alllevels.

He overcame structural rigidities, developed the resources he neededto grow, and focused on his employees as well as the companys

cultural spirit.


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Stakeholders Analysis

It is important to identify key stakeholders insideand outside the organization, the roles they play infulfilling the organizations mission, and the valuesthey bring to the process.

External Stakeholders:Key customersSuppliersAlliance PartnersRegulatory agencies

Internal Stakeholders:OwnersBoard of DirectorsCEOExecutivesManagersEmployees


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Stakeholder Analysis Continued

In determining the companys objectives andstrategies, executives must recognize the legitimaterights of the firms stakeholders

With this each firm gets thousands of demands

from its stakeholders such as job security, productquality, community service, high ROI etc.

Due to the wide variety of stakeholders as well asrequests companies must assign priority to eachstakeholder which correlates with the relativeemphasis that the firm will give their demands Southwest Airlines and SAS Business Intelligence

Software focus on employees


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Main Points

Use financial ratio analysis to determine how the company isfunctioning.

Human Capital is a companys most valuable strategic resource.

Organizational Strategic Resources and Core Competencies are

key to a companys competitive advantage.

Brands are extremely important in building and retaining customerloyalty

Forces for change can come from within the company. Strategy isjust one of the seven factors that make up organizationaleffectiveness; remember the 7-S Model.

strategy ch.5

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