Chapter 4: Internal Situation Analysis PDF

# Chapter 4: Internal Situation Analysis ## Evaluating a Company's Resources, Cost Position, and competitive Strength ### Key Questions in Situation Analysis - How well is the company's strategy working? - What are the company's competitively important resources and capabilities? - Are the compa...

# Chapter 4: Internal Situation Analysis ## Evaluating a Company's Resources, Cost Position, and competitive Strength ### Key Questions in Situation Analysis - How well is the company's strategy working? - What are the company's competitively important resources and capabilities? - Are the company's prices and costs competitive? - Is the company competitively stronger or weaker than key rivals? - What strategic issues and problems merit front-burner managerial attention? ### Situation Analysis Question 1: How Well is the Company's Strategy Working? - Is the company achieving its financial and strategic objectives? - Is the company an above-average industry performer? #### Performance Indicators - Trends in sales and earnings growth - Trends in the company's stock price - The company's overall financial strength - The rate at which new customers are acquired - Image and reputation with customers - Evidence of improvement in internal processes such as defect rate, order fulfillment, and days of inventory #### Table 4.1: Key Financial Ratios | Profitability Ratios | How Calculated | | :----------------------------------------- | :---------------------------------------------------------------------------------------- | | 1. Gross profit margin | Revenues - Cost of goods sold / Revenues | | 2. Operating profit margin (or return on sales) | Revenues - Operating expenses / Revenues | | | Or Operating income / Revenues | | 3. Net profit margin (or net return on sales) | Profits after taxes / Revenues | | 4. Return on total assets | Profits after taxes + Interest / Total assets | | 5. Return on stockholder's equity | Profits after taxes / Total stockholders’ equity | | 6. Return on invested capital | Profits after taxes / Long-term debt + total equity | | 7. Earnings per share | Profits after taxes / Number of shares of common stock outstanding | #### Table 4.1: Key Financial Ratios (cont'd) | Liquidity Ratios | How Calculated | | :-------------------------------------- | :---------------------------------------------------------------------------------------- | | 1. Current ratio | Current assets / Current liabilities | | 2. Working Capital | Current assets - Current liabilities | | Leverage Ratios | | | 1. Debt-to-assets ratio | Total debt / Total assets | | 2. Long-term debt-to-capital ratio | Long-term debt / Total stockholders’ equity | | 3. Debt-to-equity ratio | Total debt/ Total stockholders’ equity | | 4. Long-term debt-to-equity ratio | Long-term debt/ Total stockholders’ equity | | 5. Times-interest-earned (or coverage) ratio | Operating income / Interest expenses | #### Table 4.1: Key Financial Ratios (cont'd) | Activity Ratios | How Calculated | | :---------------------------------- | :----------------------------------------------------------------------------------------- | | 1. Days of inventory | Inventory / Cost of goods sold ÷ 365 | | 2. Inventory turnover | Cost of goods sold / Inventory | | 3. Average collection period | Accounts receivable / Total sales ÷ 365 | | | Or Accounts receivable / Average daily sales | #### Other Important Measures of Financial Performance | | How Calculated | | :-------------------------------- | :---------------------------------------------------------------------------------- | | 1. Dividend yield on common stock | Annual dividends per share / Current market price per share | ### Situation Analysis Question 2: The Company's Competitively Important Resources And Capabilities - A company's strategy and business model: - Must be well-matched to its collection of resources and capabilities - Is strengthen when exploiting resources that are competitively valuable, rare, hard to copy, and not easily trumped to rivals’ equivalent substitute resources #### Resource-Based Strategies - Resource-based strategies attempt to exploit a company's valuable and rare resources and competitive capabilities to deliver value to customers in ways rivals find it difficult to match. #### Identifying Competitively Important Resources and Capabilities - Common types of valuable resources and competitive capabilities include: - Skills or specialized expertise in a competitively important capability - Valuable physical assets - Valuable human assets or intellectual capital - Valuable organizational assets - Valuable intangible assets - Competitively valuable alliances or cooperative ventures #### Determining the Competitive Power of a Company Resource - Is the resource really competitively valuable? - Is the resource rare and something rivals lack? - Is the resource hard to copy or imitate? - Can the resources be trumped by the substitute resource strengths and competitive capabilities of rivals? #### Strategies for Addressing Resource Deficiencies - Companies that lack a competitively powerful stand-alone resource may be able to support its strategy with a _bundle of resources_. - Companies may be able to neutralize the power of rivals’ resources and capabilities developing _substitute resources_ to accomplish the same purpose. #### Resources and Capabilities as the Foundation of Competitive Advantage - A _competence_ represents real proficiency in performing an internal activity. - A _core competence_ is a well-performed internal activity central to a company's competitiveness and profitability. - A _distinctive competence_ is a competitively valuable activity a company performs better than its rivals. #### Taking Inventory of a Company's Strengths, Weaknesses, Opportunities, and Threats - SWOT represents the first letter in: - Strengths - Weaknesses - Opportunities - Threats - For a company's strategy to be well-conceived, it must be: - Matched to its resource strengths and weaknesses - Aimed at capturing its best market opportunities and defending against external threats to its well-being #### Identifying Resource Weaknesses and Competitive Deficiencies - A _weakness_ is something a firm lacks, does poorly, or a condition placing it at a disadvantage in the marketplace. - Resource weaknesses relate to: - Inferior or unproven skills, expertise, or intellectual capital - Deficiencies in competitively important physical, organizational, or intangible assets - Missing or competitive inferior capabilities in key areas #### Identifying a Company's Market Opportunities - Opportunities most relevant to a company are those offering: - A good match with its financial organizational resource capabilities - Best prospects for growth and profitability - Most potential for competitive advantage #### Identifying External Threats to Profitability and Competitiveness - Entry of lower-cost foreign competitors - Burdensome regulations - Rise in interest rates - Potential of a hostile takeover - Unfavorable demographic shifts - Adverse shifts in foreign exchange rates #### Overall Value of a SWOT Analysis - Ability to draw conclusions about the company's overall situation. - Ability to translate into strategic actions: - Better match the company's strategy to its resource strengths and market opportunities - Correcting problematic weaknesses - Defending against worrisome external threats ### Situation Analysis Question 3: How competitive Are The Company's Prices and Costs? - Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis #### Key Analytical Tools - Value chain analysis - Benchmarking #### Company Value Chain | Primary Activities and Costs | Support Activities and Costs | | :------------------------------ | :---------------------------------------------------------------------------------- | | Supply chain management | Product R&D; Technology, and Systems Development | | Operations | Human Resources Management | | Distribution | General Administration | | Sales and Marketing | | | Service | | | Profit Margin | | - **Primary activities:** - Supply Chain Management: Activities, costs, and assets associated with purchasing raw materials, parts, and components, merchandise, and consumable items from vendors; receiving, storing, and disseminating inputs from suppliers; inspection; and inventory management. - Operations: Activities, costs, and assets associated with converting inputs into final product form (production, assembly, packaging, equipment maintenance, facilities, operations, quality assurance, environmental protection). - Distribution: Activities, costs, and assets dealing with physically distributing the product to buyers (finished goods warehousing, order processing, order picking and packing, shipping, delivery vehicle operations, establishing and maintaining a network of dealers and distributors). - Sales and Marketing: Activities, costs, and assets related to sales force efforts, advertising and promotion, market research and planning, and dealer/distributor support. - Service: Activities, costs, and assets associated with providing assistance to buyers, such as installation, spare parts delivery, maintenance and repair, technical assistance, buyer inquiries, and complaints. - **Support activities:** - Product R&D, Technology, and Systems Development: Activities, costs, and assets relating to product R&D, process R&D, process design improvement, equipment design, computer software development, telecommunications systems, computer-assisted design and engineering, database capabilities, and development of computerized support systems. - Human Resources Management: Activities, costs, and assets associated with the recruitment, hiring, training, development, and compensation of all types of personnel; labor relations activities; and development of knowledge-based skills and core competencies. - General Administration: Activities, costs, and assets relating to general management, accounting and finance, legal and regulatory affairs, safety and security, management information systems, forming strategic alliances and collaborating with strategic partners, and other "overhead" functions. #### Benchmarking Costs of Key Value Chain Activities - Focuses on _cross-company comparisons_ of how certain activities are performed and _costs_ associated with these activities - Purchase of materials - Payment of suppliers - Getting new products to market - Performance of quality control - Filling and shipping of customer orders #### Industry Value Chain | Value Chains | | | :--------------------------------------------- | :----------------------------------------------------------------------- | | Supplier-Related Value Chains | A Company's Own Value Chain | | Forward Channel Value Chains | | | Activities; Costs, and Margins of Suppliers | Internally performed activities, costs, and margins | | Activities, costs, and margins of forward channel | Buyer or End-user Value chains | | allies and strategic partners | | ### Strategic Options for Remedying a Cost Disadvantage - There are three main areas of a company's overall value chain where cost differences occur: - Activities performed by suppliers - A company's own internal activities - Activities performed by forward channel allies ### Correcting Internal Cost Disadvantages - Implement _best practices_ throughout the company - Try to eliminate some _cost-producing activities_ altogether by revamping value chain - Relocate _high-cost activities_ to lower-cost geographic areas - See if _high-cost activities_ can be _outsourced_ - Invest in productivity enhancing, _cost-saving technology_ - Find ways to _detour around activities or items_ where _costs are high_ - Redesign the product or its components to reduce manufacturing costs - Make up difference by achieving savings in backward or forward portions value-chain system ### Correcting Supplier-Related Cost Disadvantages - Pressure suppliers for lower prices - Switch to lower-priced substitutes - Collaborate closely with suppliers to identify mutual cost-saving opportunities - Integrate backward into the business of high-cost suppliers ### Correcting Cost Disadvantages Associated With Forward Channel Allies - Pressure dealer-distributors to reduce their costs - Work closely with forward channel allies to identify win-win opportunities to reduce costs - Change to a more economical distribution strategy: - Switch to cheaper distribution channels - Integrate forward into company-owned retail outlets ### Situation Analysis Question 4: what Is the Company's Competitive Strength? - Overall _competitive position_ involves answering two questions: - How does a company rank relative to competitors on each industry key success factor? - Does a company have a net _competitive advantage_ or _disadvantage_ vis-à-vis major competitor? #### *Table 4.2: Illustration of a Competitive Strength Assessment* | Key Success Factor/Strength Measure | Importance Weight | Strength Rating | Score | Strength Rating | Score | Strength Rating | Score | Strength Rating | Score | Strength Rating | Score | | :----------------------------------------------- | :----------------- | :--------------- | :---- | :--------------- | :---- | :--------------- | :---- | :--------------- | :---- | :--------------- | :---- | | Quality/product performance | 0.10 | 8 | 0.80 | 5 | 0.50 | 10 | 1.00 | 1 | 0.10 | 6 | 0.60 | | Reputation/image | 0.10 | 8 | 0.80 | 7 | 0.70 | 10 | 1.00 | 1 | 0.10 | 6 | 0.60 | | Manufacturing capability | 0.10 | 2 | 0.20 | 10 | 1.00 | 4 | 0.40 | 5 | 0.50 | 1 | 0.10 | | Technological skills | 0.05 | 10 | 0.50 | 1 | 0.05 | 7 | 0.35 | 3 | 0.15 | 8 | 0.40 | | Dealer network/distribution capability | 0.05 | 9 | 0.45 | 4 | 0.20 | 10 | 0.50 | 5 | 0.25 | 1 | 0.05 | | New product innovation capability | 0.05 | 9 | 0.45 | 4 | 0.20 | 10 | 0.50 | 5 | 0.25 | 1 | 0.05 | | Financial resources | 0.10 | 5 | 0.50 | 10 | 1.00 | 7 | 0.70 | 3 | 0.30 | 1 | 0.10 | | Relative cost position | 0.30 | 5 | 1.50 | 10 | 3.00 | 3 | 0.95 | 1 | 0.30 | 4 | 1.20 | | Customer service capabilities | 0.15 | 5 | 0.75 | 7 | 1.05 | 10 | 1.50 | 1 | 0.15 | 4 | 0.60 | *Sum of importance weights* 1.00 *Weighted overall strength rating* 5.95 7.70 6.85 2.10 3.70 #### Interpreting the Competitive Strength Assessments - Shows how firm stacks up against rivals, _measure-by-measure_ - Indicates whether firm is at a competitive advantage or disadvantage against each rival - Identifies possible offensive strategies that can be waged against rivals' weaknesses - Identifies the need for defensive actions to correct competitive weaknesses. ### Situation Analysis Question 5: What Strategic Issues Must Be Addressed by Management? - Final and most important analytical step in assessing "Where are we now" - Based on results of both industry and _competitive analysis_ - Pinpointing the precise things that should be on management's _worry list_? *Table 4.2: Illustration of a Competitive Strength Assessment* | Key Success Factor/Strength Measure | Importance Weight | Strength Rating | Score | Strength Rating | Score | Strength Rating | Score | Strength Rating | Score | Strength Rating | Score | | :----------------------------------------------- | :----------------- | :--------------- | :---- | :--------------- | :---- | :--------------- | :---- | :--------------- | :---- | :--------------- | :---- | | Quality/product performance | 0.10 | 8 | 0.80 | 5 | 0.50 | 10 | 1.00 | 1 | 0.10 | 6 | 0.60 | | Reputation/image | 0.10 | 8 | 0.80 | 7 | 0.70 | 10 | 1.00 | 1 | 0.10 | 6 | 0.60 | | Manufacturing capability | 0.10 | 2 | 0.20 | 10 | 1.00 | 4 | 0.40 | 5 | 0.50 | 1 | 0.10 | | Technological skills | 0.05 | 10 | 0.50 | 1 | 0.05 | 7 | 0.35 | 3 | 0.15 | 8 | 0.40 | | Dealer network/distribution capability | 0.05 | 9 | 0.45 | 4 | 0.20 | 10 | 0.50 | 5 | 0.25 | 1 | 0.05 | | New product innovation capability | 0.05 | 9 | 0.45 | 4 | 0.20 | 10 | 0.50 | 5 | 0.25 | 1 | 0.05 | | Financial resources | 0.10 | 5 | 0.50 | 10 | 1.00 | 7 | 0.70 | 3 | 0.30 | 1 | 0.10 | | Relative cost position | 0.30 | 5 | 1.50 | 10 | 3.00 | 3 | 0.95 | 1 | 0.30 | 4 | 1.20 | | Customer service capabilities | 0.15 | 5 | 0.75 | 7 | 1.05 | 10 | 1.50 | 1 | 0.15 | 4 | 0.60 | *Sum of importance weights* 1.00 *Weighted overall strength rating* 5.95 7.70 6.85 2.10 3.70