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  • 1. 1 INTERNAL ANALYSIS: Organizational Appraisals Dr.L.Prakash Sai  Financial Analysis - Ratio Analysis, EVA, ABC  Value Chain Analysis  Business Process Analysis  VRIO framework (Resource Based View)  Organizational Capability Analysis Organizational Appraisal: Methods & Techniques Used
  • 2. 2 Financial Capability (a) Sources of funds (b) Usage of funds (c) Management of funds Marketing Capability (a) Product related (b) Price related (c) Promotion related (d) Integrative & Systematic Information Management (a) Acquisition & retention of info (b) Processing & synthesis of info (c) Retrieval& usage of info (d) Transmission & dissemination (e) Integrative, systemic & supportive Operations Capability (a) Production system (b) Operation & Control system (c) R&D system Personnel Capability (a) Personnel system (b) Organization/employee characteristics (c) Industrial Relations General Management (a) General Management Systems (b) External Relations (c) Organization climate Organizational Capability Profile (OCP) Capability Factor Values: Weakness(-5), Normal (0), Strength (+5) Strategic Advantage Profile (SAP) Capability Factor Competitive Strength/Weakness Finance  High cost of capital, reserves & surplus unsatisfactory Marketing  Fierce competition, company position secure at present Operations  Plant & m/c; captive sources of parts & components Personnel  Management & staff on par with competition General  Highly experienced top management - proactive stance Management [Example of a Bicycle Company]
  • 3. 3 Strategy: the plan devised to maintain and build competitive advantage over the competition. Structure: the way the organization is structured and who reports to whom. Systems: the daily activities and procedures that staff members engage in to get the job done. McKinsey’s 7S Framework Style: the style of leadership adopted. Staff: the employees and their general capabilities. Skills: the actual skills and competencies of the employees working for the company. Shared Values: (called "superordinate goals“) the core values evidenced in the corporate culture and the general work ethic. McKinsey’s 7S Framework Structure Shared Values Strategy Skills System Style Staff To diagnose causes of organizational problems & formulate programs
  • 4. 4 Generating Alternative Strategies From SWOT  SWOT analysis is a tool for helping assess the current situation for the firm.  However, we need to be able to combine the information in the SWOT analysis in a meaningful way to generate alternative strategies that we might pursue.  The TOWS matrix is a tool designed to match external opportunities and threats with our internal strengths and weaknesses SWOT Analysis Opportunities 1. 2. 3. Strengths 1. 2. 3. Threats 1. 2. 3. Weaknesses 1. 2. 3. Internal Environment External Environment
  • 5. 5 Strengths Advantages of proposition? Capabilities? Competitive advantages? USP's (unique selling points)? Resources, Assets, People? Experience, knowledge, data? Financial reserves, likely returns? Marketing – reach/distribution/awareness? Innovative aspects? Location and geographical? Price, value, quality? Accreditations, qualifications, certifications? Processes, systems, IT, communications? Cultural, attitudinal, behavioural? Management cover, succession? Philosophy and values?  Disadvantages of proposition?  Gaps in capabilities?  Lack of competitive strength?  Reputation, presence and reach?  Financials?  Own known vulnerabilities?  Timescales, deadlines and pressures?  Cashflow, start-up cash-drain?  Continuity, supply chain robustness?  Effects on core activities, distraction?  Reliability of data, plan predictability?  Morale, commitment, leadership?  Accreditations, etc.?  Processes and systems, etc?  Management cover, succession? Weaknesses Opportunities  Market developments?  Competitors' vulnerabilities?  Industry or lifestyle trends?  Technology development & innovation?  Global influences?  New markets, vertical, horizontal?  Niche target markets?  Geographical, export, import?  New USP's?  Tactics: e.g., surprise, major contracts?  Business and product development?  Information and research?  Partnerships, agencies, distribution?  Volumes, production, economies?  Seasonal, weather, fashion influences? Political effects? Legislative effects? Environmental effects? IT developments? Competitor intentions - various? Market demand? New technologies, services, ideas? Vital contracts and partners? Sustaining internal capabilities? Obstacles faced? Insurmountable weaknesses? Loss of key staff? Sustainable financial backing? Economy - home, abroad? Seasonality, weather effects? Threats
  • 6. 6 TOWS Matrix  Technique used in strategy formulation for combining – External analysis • Opportunities • Threats – Internal analysis • Strengths • Weaknesses TOWS Matrix Threats: 1. 2. 3. Opportunities: 1. 2. 3. ST Strategies Take advantage of Strengths to avoid Threats SO Strategies Use Strengths to take advantage of Opportunities Strengths: 1. 2. 3. WT Strategies Defensive strategies to minimize weaknesses and avoid threats WO Strategies Use Opportunities to overcome Weaknesses Weaknesses: 1. 2. 3. From External Analysis From Internal Analysis
  • 7. 7 StrategicAnalysis: TOWSMatrix TOWSmatrix:Volkswagen (1973-75)
  • 8. 8 SPACE Matrix [Strategic Position & Action Evaluation Matrix] Aggressive Conservative Defensive Competitive Two Internal Dimensions Financial Strength (FS) Competitive Advantage (CA) Two External Dimensions Environmental Stability (ES) Industry Strength (IS) Strategic Posture  Dimension  Aggressive Competitive Conservative Defensive ENVIRONMENT Stable Unstable Stable Unstable INDUSTRY Attractive Attractive Unattractive Unattractive COMPETITIVENESS Strong Strong Weak Weak FINANCIAL STRENGTH High Weak High Weak APPROPRIATE STRATEGIES •Growth- possibly by acquisition •Capitalize on opportunities •Innovative to sustain comp. adv. • Cost reduction; Productivity improvement; Raising more capital to follow opportunities and strengthen competiveness • Possible merge with a less competitive but cash-rich organization. • Cost reduction and product/service rationalization •Invest in search for new products, services and competitive opportunities •Rationalization •Divestment as appropriate Strategic Postures
  • 9. 9 Internal Strategic Position External Strategic Position Internal Strategic Position External Strategic Position Financial Strength (FS) Environmental Stability (ES) Competitive Advantage (CA) Industry Strength (IS)  Return on investment  Leverage  Liquidity  Working capital  Cash flow  Technological changes  Rate of inflation  Demand variability  Price range of competing products  Barriers to entry  Competitive pressure  Price elasticity of demand  Ease of exit from market  Risk involved in business  Market share  Product quality  Product life cycle  Customer loyalty  Competition’s capacity utilization  Technological know-how  Control over suppliers & distributors  Growth potential  Profit potential  Financial stability  Technological know-how  Resource utilization  Ease of entry into market  Productivity, capacity utilization SPACE Factors Steps to Developing a SPACE Matrix 1. Select a set of variables to define FS, CA, ES, & IS 2. Assign a numerical value:  From +1 to +6 to each FS & IS dimension  From -1 to -6 to each ES & CA dimension 3. Compute an average score for each FS, CA, ES, & IS 4. Plot the average score on the appropriate axis 5. Add the two scores on the x-axis and plot the point. Add the two scores on the y-axis and plot the point. Plot the intersection of the new xy point 6. Draw a directional vector from the origin through the new intersection point.
  • 10. 10 SPACE Matrix: Example SPACE Matrix: Example
  • 11. 11 Corporate Strategy Business Portfolio Analysis Market Growth rate of the industry: Expressed in % increase in sales Relative market share of a firm: Market share in industry / market share of the largest other competitor Assumptions:  Other things being equal - growing market is attractive  Market leader influences the average costs BCG (Boston Consulting Group) Matrix
  • 12. 12 High Low High Low Market Growth Rate Relative Market Share BCG (Boston Consulting Group) Matrix [10%] < 1> 1 > 1 indicates market leader BCG Matrix: Question Marks (Problem Children: Low Market Share / High Market Growth)  Investment:  heavy initial capacity expenditures and high R&D costs  Earnings: negative to low  Cash-flow: negative (net cash user)  Strategy Implications:  if possible to dominate segment, go after share.  If not, redefine the business or withdraw.
  • 13. 13 BCG Matrix: Stars (High Market Share / High Market Growth)  Investment:  continue to invest for capacity expansion  Earnings: low to high earnings  Cash-flow: negative (net cash user)  Strategy Implications:  continue to increase market share - even at the expense of short-term earnings Petrochemicals Telecom BCG Matrix: Cash Cows (High Market Share / Low Market Growth)  Investment  capacity maintenance  Earnings: high  Cash-flow: positive (net cash contributor)  Strategy Implications:  maintain market share and cost leadership until further investment becomes marginal
  • 14. 14 BCG Matrix: Dogs (Low Market Share / Low Market Growth)  Investment:  gradually reduce capacity  Earnings: high to low  Cash-flow:  positive (net cash contributor) if deliberately reducing capacity  Strategy Implications:  plan an orderly withdrawal to maximize cash flow Indian Cotton Textiles Anchoring Systems Powder Actuated Tools Cable Tray Systems Electric Power Tools Concrete Lifting Systems Low High Low Market Growth Rate Relative Market Share BCG Matrix: Example of a Fastener Supplier Note that the Anchoring System SBU is forecasted to move to a new position High
  • 15. 15 GE Portfolio Matrix  Originally developed by GE’s planners drawing on McKinsey’s approaches  Market attractiveness is based on as many relevant factors as are appropriate in a given context  Business-position assessment also made on a many factors SBU needs to be rated on each factor Industry Attractiveness: Market size & growth rate, industry profit margin, competitive intensity, pricing practices, opportunities / threats [Scale 1 – 5: “Very unattractive” to “Very attractive”] Company’s Business Strengths or Competitive Position: Market share, technological position, profitability, size, strengths & weakness, management calibre [Scale 1-5: “Very weak” to “Very strong”] Industry Attractiveness High High Medium Medium Low Low Invest / Grow Select / Earn Harvest / Divest Protect Position Invest to Build Build selectively Build selectively Selectively manage for earnings Limited expansion or harvest Protect & refocus Divest Manage for earnings GE Portfolio Matrix
  • 16. 16 Industry Attractiveness High High Medium Medium Low Low GE Portfolio Matrix Invest / Grow Select / Earn Harvest / Divest Quadrant IV 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Quadrant III 1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Liquidation Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation RAPID MARKET GROWTH SLOW MARKET GROWTH WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION Grand Strategy Matrix
  • 17. 17 Quadrant IV 1. Strong competitive position 2. Slow-growth industry 3. Diversification to more promising growth areas Quadrant III 1. Compete in slow-growth industries 2. Weak competitive position 3. Drastic changes quickly 4. Cost & asset reduction (retrenchment) Quadrant I 1. Excellent strategic position 2. Concentration on current markets/products 3. Take risks aggressively when necessary Quadrant II 1. Evaluate present approach 2. How to improve competitiveness 3. Rapid market growth requires intensive strategy RAPID MARKET GROWTH SLOW MARKET GROWTH WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION Grand Strategy Matrix Key Internal Factors  Management  Marketing  Finance/Accounting  Production/Operations  Research and Development  Computer Information Systems Strategy 3Strategy 2Strategy 1WeightKey External Factors  Economy  Political/Legal/Governmental  Social/Cultural/Demographic/ Environmental  Technological  Competitive Strategic Alternatives Quantitative Strategic Planning Matrix (QSPM)
  • 18. 18 PIMS Program (Profit Impact of Market Strategy) PIMS holds 6 areas of info on each biz: 1. characteristics of the biz environment 2. competitive position of the business 3. structure of the production process 4. how the budget is allocated 5. strategic movement 6. operating results.  The PIMS project was started by Sidney Schoeffler with GE in the 1960s  Administered by the Strategic Planning Institute since 1975  Uses multi dimensional cross- sectional regression studies of profitability of over 3000 businesses.  Provides industry characteristics, average profitability, and compares it with performance of the company concerned. The key strategic factors influencing business performance Market Environment Marketing/Sales Customer Concentration Customer Purchase Amount Industry Concentration Capital and Operating Structure Investment / Sales Investment / Value Added Gross Book Value of P&E / Total Investment Operating Effectiveness Receivables / Investment Capacity Utilization Value Added / Sales Stage of Lifecycle New Products/Sales R & D/Sales Real Market Growth Competitive Position Market Share Relative Market Share Relative Quality Relative Price
  • 19. 19 PIMS: Strategic Benchmarks The experience of PIMS businesses, situationally comparable to a business under study, is used to establish strategy and performance benchmarks. www.pimsonline.com includes:  Profitability (Return on Sales, and ROI)  Change in market share  Marketing budget (Sales force, Advertising, Promotion and Other Marketing Expenses)  Market attractiveness / competitive strength PIMSONLINE.COM
  • 20. 20 Corporate Governance Issues 1. No more than 2 directors current or former company executives 2. No directors do business with the company 3. Audit, compensation, and nominating committees made up of outside directors 4. Each director attends at least 75% of all meetings 5. Audit committee meets at least four times a year 6. CEO is not also the Chairperson of the Board 7. Shareholders have considerable power and information to choose & replace directors 8. Stock options are considered a corporate expense 9. No interlocking directorships Business Week’s “principles of good governance”