Strategy: A View From the Top Chapter 5 Analyzing an Organization

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Strategy A View From the TopChapter 5Analyzing
an Organizations Strategic Resource Base

• Chase Mueller Tanner Gilreath
• Ashley Hoptay Olivia Erwin
• Brandon Laviage Anna Rendon
• Paige Stone

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Introduction

• When determining what strategies a company can
  pursue successfully they have to look at their
  strategic resources and capabilities.
• Organizational strategic resources
• Physical assets
• Relative financial position
• Market position, brands and the capabilities of
  its people
• Specific knowledge, competencies, processes,
  skills and cultural aspects of the organization

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Principles of a Companys Internal Strategic
Environment

1. Cataloging and valuing current resources and core
   competencies that can be used to create a
   competitive advantage
2. Identifying internal pressures for change and
   forces of resistance

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Analyzing a Companys Financial Resources

• Corporate Level
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Retained Earnings
• To determine how the company is functioning?
• 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 are covered by short-term assets
• Quick Ratio (Current Assets Inventory) /
  Current Liabilities
• Acid-Test Ratio the firms ability to pay off
  short-term obligations without having to sell its
  inventory
• Inventory to Net Working Capital Inventory /
  (Current Assets Current 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 to
  finance the firms operations
• Debt-to-Equity Total Debt / Total Equity
• Ratio of funds from creditors to funds from
  stockholders
• 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 to
  generate its sales
• Fixed-Asset Turnover Sales / Fixed Assets
• Sales productivity and plant use
• Average Collection Accounts Receivable /
  Average Daily Sales
• The average length of time required to receive
  payment

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Analyzing Ratios

• Ratios can be used to assess
• The businesss position in the industry
• The degree to which certain strategic objectives
  are being achieved
• The businesss vulnerability to revenue and cost
  swings
• The level of financial risk associated with the
  current or proposed strategy

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Du Pont Formula
Sales
COGS
-
EBIT

Costs
Earnings as of Sales
/
Operating Expenses
Sales
Return on Assets
X
Inventories

Accounts Receivables
Sales
/
Current Assets
Asset Turnover

Cash
Total Assets

Fixed Assets

Prepaid Expenses
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Du Pont Explanation

• How do we know that are assets are being used
  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 create
  shareholder value?
• How does the business units performance compare
  with the performance of others in the
  corporation?
• Would an alternative strategy increase
  shareholder value more than the current strategy?

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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 performance measure
  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)
• Profit After tax operating profit
• Cost of Capital weighted cost of debt and
  equity
• Total Capital book 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

• It can help align employee and owner interests
  through employee compensation plans
• It can be the basis for a single competitive
  performance measure called market value added
  (MVA)
• Examples
• Capital Budgeting, Employee Performance
  Evaluation, and Operational Assessment

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Cost Analysis

• Deals with the identification of strategic cost
  drivers those cost factors in the value chain
  that determine long-term competitiveness in the
  industry
• Variables Product Design, Factor Costs, Scale,
  Scope of Operations, and Capacity Use

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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 Steps
• Selecting areas or operations to benchmark
• Identifying key performance measures and
  practices
• Identifying best-in-class companies or key
  competitors
• Collecting cost and performance data
• Analyzing and interpreting the results

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Human Capital A Companys Most Valuable
Strategic Resource

• Relates that companies are run by and for people
• Understanding their concerns, aspirations, and
  capabilities is, therefore, key to determining a
  companys strategic position and options
• A survey by Chief Executive demonstrates that
  more and more focus is being put in attracting,
  developing, and retaining human capital
• Of the CEOs surveyed 43 believe that finding
  and retaining good people is their greatest
  challenge and 84 believe that people issues
  are far more important than before
• A study conducted by the American Society for
  Training and Development examined 500 U.S.-based
  publicly traded firms. By looking at annual
  training expenditures and stockholder returns, it
  concluded that the top half of firms in terms of
  spending on training had higher stockholder
  returns than did the bottom half

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Human Capital Training

• Continuous employee development, through
  on-the-job training and other programs, 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 managers attend 11
  weeks of mandatory training in their first year.
  More that 10,000 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 3 hours in effort to retrain
  employees which was known as a Mandatory Training
  Day

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Organizational Strategic Resources

• Knowledge and intellectual capital are major
  drivers of competitive advantage
• How is competitive advantage created and
  sustained?
• When a company continues to mobilize new
  knowledge faster and more efficiently than its
  competitors
• Ex I-phone
• Recognizing the importance of knowledge as a
  strategic asset, Skandia, NASDAQ, Chevron, and
  Dow Chemical have established director level
  positions in charge of intellectual capital

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Organizational Strategic Resources-Continued

• A companys market capitalization increasingly
  reflects the value of such resources and the
  effectiveness with which they are managed
• Example
• Netscape had a 4 billion market capitalization
  based on its stock price, even though the
  companys sales were only a few million dollars
  per year. Investors based the high stock price on
  their assessment on the companys intangibles-
  its knowledge base and quality of management

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Organizational Strategic Resources-Knowledge is
Power

• Patents- Is a limited legal monopoly granted to
  an individual or firm to make, use, and sell its
  invention, 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 great advantage
  
• Strategic Patenting using patent applications
  to colonize the entire new areas of technology
  even 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 can be used to produce wealth, multiply
  output of physical assets, gain competitive
  advantage, 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 in books, archives,
  and databases
• Implicit or tacit knowledge- is informal and
  subjective. It is gained through experience and
  transferred through person interaction and
  collaboration
• Ex Xerox Collaboration- Technicians at break
  would talk about work and share their 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 in
  building and retaining customer loyalty
• Must constantly be nourished, sustained and
  protected
• Failure to support a brand can be catastrophic

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Coke

• Coke changed their formula in order to compete
  with Pepsi who had taken 36 of their market
  share
• Coke's change was immediately greeted by angry
  protest. For three straight months, Coca-Cola
  headquarters received some 1,500 phone calls
  daily, as well as a barrage of angry letters.
  Wrote one correspondent "Changing Coke is like
  God making the grass purple or putting toes on
  our ears or teeth on our knees."

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Coke

• "We did not understand the deep emotions of so
  many of our customers for Coca-Cola," said
  President Donald R. Keough. "It is not only a
  function of culture or upbringing or inherited
  brand loyalty. It is a wonderful American
  mystery. A lovely American enigma.

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Brand Value

• Calculated at the net present value of the
  earnings that the brand is expected to generate
  and secure in the future
• Business Week does a ranking of the 100 best
  global brands by dollar value the select on 2
  criteria
• Brands have to be global, generating significant
  earnings in the main global markets
• Must be sufficient marketing and financial data
  publicly available for valuation

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3 Strong Recommendations

• Companies that succeed in growing their brands
  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?v6xuzY4VFlkA

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Core Competencies are

• World class capabilities that enable a company to
  build a competitive advantage
• Key element in building a long-term strategic
  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 a
  broad array of markets
• Core competencies should help differentiate core
  products 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 new
  market circumstances
• Unique sources of leverage in the value chain
  where 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 microprocessor
  controls
• 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 small
  electric motors are used to produce dust busters,
  etc.
• the kitchen appliance market small electric
  motors are used to produce can openers, food
  processors, blenders, bread makers, and fans

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Core Competencies

• Dell hard to imitate
• Online customization for each computer built
• Minimization of working capital in the production
  process
• High manufacturing and distribution quality-
  reliable products at competitive prices

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Forces for Change

• As discussed in an earlier lecture, there are 12
  global trends that emanate from a companys
  external environment that cause strategic change.
• Internal forces within the organization or from
  immediate stakeholders also cause strategic
  change, and the life cycle of a company 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 for obsolete
   business beliefs and strategies
3. Entrenched cultures reflecting values, behaviors
   and skills that are not conducive to change (GCGC
   Example)
4. Counterproductive change momentum that is not in
   tune with current strategic requirements

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Company Life Cycle Forces for Change

• 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
  more formal organization. Described as
  entrepreneurial-managerial transition. Dilemma
  how does a company maintain an entrepreneurial
  spirit while moving toward an organizational
  structure increasingly focused on control.

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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 strategic
  thinking
• Unwise acquisitions or market expansions,
  implementation of unproven technologies, and
  deviations from developing core skills

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Ability to Change

• The ability to deal with change is imperative for
  a companys success
• Internal factors can reduce a companys ability
  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 of factors, 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
  factor is the driving force for change or the
  biggest obstacle to change.
• The seven variables are interconnected, SO
  progress in one area must be accompanied by
  progress in another area to create meaningful
  change.
• Key Idea Two To orchestrate effective change,
  one needs to understand the impact of each factor
  and change 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 Krocs strategy of expanding the business.
  Throughout the company's spectacular growth, Kroc
  maintained a delicate balancing act, imposing
  rigorous system-wide standards as well as
  developing and implementing a sophisticated
  operating and delivery system while encouraging
  an entrepreneurial spirit that welcomed ideas
  from all levels.
• He overcame structural rigidities, developed the
  resources he needed to 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
  inside and outside the organization, the roles
  they play in fulfilling the organizations
  mission, and the values they bring to the
  process.

• Internal Stakeholders
• Owners
• Board of Directors
• CEO
• Executives
• Managers
• Employees

• External Stakeholders
• Key customers
• Suppliers
• Alliance Partners
• Regulatory agencies

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Stakeholder Analysis Continued

• In determining the companys objectives and
  strategies, executives must recognize the
  legitimate rights of the firms stakeholders
• With this each firm gets thousands of demands
  from its stakeholders such as job security,
  product quality, community service, high ROI etc.
• Due to the wide variety of stakeholders as well
  as requests companies must assign priority to
  each stakeholder which correlates with the
  relative emphasis 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 is functioning.
• 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 customer loyalty
• Forces for change can come from within the
  company. Strategy is just one of the seven
  factors that make up organizational
  effectiveness remember the 7-S Model.