Business Strategy – Internal Analysis of the Company

Prepeared By Debashish Bramha. Please Click Debashish Bramha’s Blog: http://debashishbramha.blogspot.com

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What do we mean by strategy? Strategy refers to the plans made and action taken to enable an organization to fulfill its indented objectives Strategy is management’s game plan for strengthening the organization’s position, pleasing customers, and achieving performance targets. http:// debashishbramha.blogspot.com

Strategy refers to the plans made and action taken to enable an organization to fulfill its indented objectives

Strategy is management’s game plan for strengthening the organization’s position, pleasing customers, and achieving performance targets.

http:// debashishbramha.blogspot.com

Without a strategy, managers have: No thought-out course to follow No roadmap to manage by No action program to produce the intended result http:// debashishbramha.blogspot.com

Good strategy and good strategy execution are the most trustworthy signs of good management. http:// debashishbramha.blogspot.com

Components of Strategic Management Process Vision Company Mission Company Profile Recognizing and evaluating external and internal environment. Strategic Analysis and Choice Strategy Formulation Strategy Implementation Evaluation of performance http:// debashishbramha.blogspot.com

Vision

Company Mission

Company Profile

Recognizing and evaluating external and internal environment.

Strategic Analysis and Choice

Strategy Formulation

Strategy Implementation

Evaluation of performance

which are required for firms to achieve: Above-Average Returns Strategic Competitiveness Sustained Competitive Advantage The Strategic Management Process Involves the full set of: http:// debashishbramha.blogspot.com Actions Commitments Decisions

Sustained Competitive Advantage Above-Average Returns Returns in excess of what an investor expects to earn from other investments with similar risk Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate Strategic Competitiveness Achieved when a firm successfully formulates and implements a value-creating strategy http:// debashishbramha.blogspot.com

What does a company’s strategy consist of? How to satisfy customers Broad or narrow product line? Amount of customer service provided? How to grow the business Concentrate on a single business strategy? Diversify into related or unrelated industries? Expand globally? Company strategies concern: http:// debashishbramha.blogspot.com

How to satisfy customers

Broad or narrow product line?

Amount of customer service provided?

How to grow the business

Concentrate on a single business strategy?

Diversify into related or unrelated industries?

Expand globally?

How to respond to changing industry and market conditions How best to capitalize on new opportunities How to manage each functional piece of the business How to achieve strategic and financial objectives What does a company’s strategy consist of? http:// debashishbramha.blogspot.com

How to respond to changing industry and market conditions

How best to capitalize on new opportunities

How to manage each functional piece of the business

How to achieve strategic and financial objectives

What is an Internal Analysis? Internal Analysis Identifies and evaluates resources, capabilities, and core competencies Looks at the organization’s Current vision Mission Strategic objectives Strategies

Internal Analysis

Identifies and evaluates resources, capabilities, and core competencies

Looks at the organization’s

Current vision

Mission

Strategic objectives

Strategies

Why Do an Internal Analysis? It is the only way to identify an organization’s strengths and weaknesses It’s needed for making good strategic decisions http:// debashishbramha.blogspot.com

It is the only way to identify an organization’s strengths and weaknesses

It’s needed for making good strategic decisions

Value Chain Analysis The premise behind value chain analysis is that customers demand value from goods and services they obtain Customer value Product is unique and different Product is low priced Quick response to specific or distinctive customer needs A value chain is a systematic way of examining organization’s functional activities http:// debashishbramha.blogspot.com

The premise behind value chain analysis is that customers demand value from goods and services they obtain

Customer value

Product is unique and different

Product is low priced

Quick response to specific or distinctive customer needs

A value chain is a systematic way of examining organization’s functional activities

http:// debashishbramha.blogspot.com General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service The Value Chain

Value Chain Analysis Inbound Logistics • • • Materials control system Inventory control system Raw material handling and warehousing Operations • • • • Equipment comparison to competitors Plant layout Production control system Level of automation in production processes http:// debashishbramha.blogspot.com

Value Chain Analysis Outbound Logistics • • Timeliness and efficiency of finished products delivery Warehousing of finished products Marketing and Sales • • • • • • • • Marketing research Sales promotions and advertising Alternative distribution channels Competency and motivation of sales force Organization’s image of quality Organization’s reputation Brand loyalty of customers Domination of various market segments http:// debashishbramha.blogspot.com

Value Chain Analysis Customer Service • • • • • Customer input for product improvements Handling of customer complaints Warranty and guarantee policies Employee training in customer education & service issues Replacement parts and services http:// debashishbramha.blogspot.com

Value Chain Analysis Procurement • • • • • Alternate sources for obtaining needed resources Timeliness of resources procurement Procurement of large capital expenditure resources Lease-versus-purchase decisions Long-term relationships with reliable suppliers Technological Development • • • • • • R&D activities in product and process innovations Relationship between R&D and other departments Meeting deadlines in technological development activities Quality of labs and other research facilities Qualifications of lab technicians and scientists Creativity and innovation in organizational culture http:// debashishbramha.blogspot.com

Value Chain Analysis Human Resource Management • • • • • • • Recruiting, selecting, orienting, and training employees Employee promotion policies Reward systems to motivate and challenge employees Absenteeism and turnover Union-organization relations Employee participation in professional organizations Employee motivation, job commitment, and satisfaction http:// debashishbramha.blogspot.com

Value Chain Analysis Firm Infrastructure • • • • • • • Identification of external opportunities and threats Accomplishing goals with strategic planning system Coordination and integration of value chain activities Low-cost capital expenditures & working capital funds IS support for strategic and operational decisions Relationships with stakeholders Public image as a responsible corporate citizen http:// debashishbramha.blogspot.com

The Analysis Process Within the organization's strategic context specify the decisions to be made, Select, gather and analysis the most relevant data about the organization, its environment, operations and people. Based on these data, formulate conclusions about the organization its environment, operations and people. Determine and appraise feasible alternatives, weighing risks and opportunities. Select the most appropriate alternative. Implement the selected alternative and monitor results. http:// debashishbramha.blogspot.com

Within the organization's strategic context specify the decisions to be made,

Select, gather and analysis the most relevant data about the organization, its environment, operations and people.

Based on these data, formulate conclusions about the organization its environment, operations and people.

Determine and appraise feasible alternatives, weighing risks and opportunities.

Select the most appropriate alternative.

Implement the selected alternative and monitor results.

Interrelationships among Value-Chain Activities within and across Organizations Interrelationships among activities within the firm Relationships among activities within the firm and with other organizations (e.g., customers and suppliers)

Interrelationships among activities within the firm

Relationships among activities within the firm and with other organizations (e.g., customers and suppliers)

INTERRELATIONSHIPS AMONG FUNCTIONAL AREAS ENVIRONMENT ENVIRONMENTAL INPUTS ENVIRONMENTAL OUTPUT ENVIRONMENT HR M MIS R and MD P/O F

STRATEGIC INTERNAL FACTORS

Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Tangible Resources

Relatively easy to identify, and include physical and financial assets used to create value for customers

Financial resources

Firm’s cash accounts

Firm’s capacity to raise equity

Firm’s borrowing capacity

Physical resources

Modern plant and facilities

Favorable manufacturing locations

State-of-the-art machinery and equipment

Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems Tangible Resources

Technological resources

Trade secrets

Innovative production processes

Patents, copyrights, trademarks

Organizational resources

Effective strategic planning processes

Excellent evaluation and control systems

Innovation and creativity Technical and scientific skills Innovation capacities Reputation Effective strategic planning processes Excellent evaluation and control systems Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time Intangible Resources

Innovation and creativity

Technical and scientific skills

Innovation capacities

Reputation

Effective strategic planning processes

Excellent evaluation and control systems

Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Intangible Resources

Human

Experience and capabilities of employees

Trust

Managerial skills

Firm-specific practices and procedures

Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Organizational Capabilities

Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end

Outstanding customer service

Excellent product development capabilities

Innovativeness of products and services

Ability to hire, motivate, and retain human capital

For a strategic capability to be a Core Competency, it must be: Core Competencies What a firm Does ... that is Strategically Valuable Valuable Rare Costly to Imitate No substitutable

Is the Resource Valuable? Organizational resources can be a source of competitive advantage only when they are valuable Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

Organizational resources can be a source of competitive advantage only when they are valuable

Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

Is the Resource Rare? Organizational resources also possessed by competitors are not sources of competitive advantage Common strategies based on similar resources give no one firm an advantage Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors

Organizational resources also possessed by competitors are not sources of competitive advantage

Common strategies based on similar resources give no one firm an advantage

Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors

Can the Resource be Imitated? Difficulty in imitating resources is key to value creation because it constrains competition Profits generated from inimitable resources are more likely to be sustainable Physical uniqueness Path dependency Causal ambiguity Social complexity

Difficulty in imitating resources is key to value creation because it constrains competition

Profits generated from inimitable resources are more likely to be sustainable

Physical uniqueness

Path dependency

Causal ambiguity

Social complexity

Are Substitutes Readily Available? There must be no strategically equivalent valuable resources that are themselves not rare or inimitable Substitutability may take at least two forms Competitor may be able to substitute a similar resource that enables it to develop and implement the same strategy Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

There must be no strategically equivalent valuable resources that are themselves not rare or inimitable

Substitutability may take at least two forms

Competitor may be able to substitute a similar resource that enables it to develop and implement the same strategy

Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

Criteria for Sustainable Competitive Advantage and Strategic Implications Valuable Rare Difficult Without Implications to Imitate Substitutes for Competitiveness No No No No Competitive disadvantage Yes No No No Competitive parity Yes Yes No No Temporary competitive advantage Yes Yes Yes Yes Sustainable competitive advantage Is a resource or capability… Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99-120.

Challenge of Internal Analysis How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?

How do we effectively manage current core competencies while simultaneously developing new ones?

How do we assemble bundles of resources, capabilities and core competencies to create value for customers?

How do we learn to change rapidly?

What a firm Does ... Capabilities Represent: The firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage . Capabilities

Human Resource Development Initiations Measures :- Employee Motivation For Strategic Effectiveness Developed in-built appraisal system like– (a) Productivity Honorarium Scheme (b) Quarterly Incentive Scheme (c ) Group Incentives for cohesive team working & (d) Reward and Reconviction Scheme.

Measures :- Employee Motivation For Strategic Effectiveness

Developed in-built appraisal system like–

(a) Productivity Honorarium Scheme

(b) Quarterly Incentive Scheme

(c ) Group Incentives for cohesive team working &

(d) Reward and Reconviction Scheme.

Coverage and Evaluation of Ratios The different types of financial ratios in Financial Strategic Management includes: Liquidity Activity Debt Profitability

The different types of financial ratios in Financial Strategic Management includes:

Liquidity

Activity

Debt

Profitability

Liquidity Ratio Analysis Liquidity ratios measure a firm’s ability to meet its current financial obligations. Liquidity Ratios include: Net working capital Current Ratio Quick Ratio

Liquidity ratios measure a firm’s ability to meet its current financial obligations.

Liquidity Ratios include:

Net working capital

Current Ratio

Quick Ratio

Net Working Capital While not technically a ratio, Net Working Capital (NWC) is a key element for internal control. The higher this number the better. NWC is found by subtracting current liabilities from current assets. This is a sign of growing assets while keeping their liabilities stable.

While not technically a ratio, Net Working Capital (NWC) is a key element for internal control.

The higher this number the better.

NWC is found by subtracting current liabilities from current assets.

This is a sign of growing assets while keeping their liabilities stable.

Current Ratio The Current Ratio is a direct evaluation of a company’s liquidity. The higher this value, the more liquid a firm’s resources are. Current Ratio is found by dividing current assets by current liabilities. This could be improved by lowering the reliance on debt financing.

The Current Ratio is a direct evaluation of a company’s liquidity.

The higher this value, the more liquid a firm’s resources are.

Current Ratio is found by dividing current assets by current liabilities.

This could be improved by lowering the reliance on debt financing.

Quick Ratio The Quick Ratio is comparable to the Current Ratio except that it takes inventory levels into consideration. This is found by subtracting inventories from current assets and then dividing by current assets.

The Quick Ratio is comparable to the Current Ratio except that it takes inventory levels into consideration.

This is found by subtracting inventories from current assets and then dividing by current assets.

Activity Ratio Analysis Activity Ratios are used to measure the speed with which accounts are converted into cash. Activity Ratios include: Inventory Turnover Average Collection Period Total Asset Turnover

Activity Ratios are used to measure the speed with which accounts are converted into cash.

Activity Ratios include:

Inventory Turnover

Average Collection Period

Total Asset Turnover

Inventory Turnover Inventory Turnover is measurement of a firm’s inventory liquidity. This is found by cost of goods sold(COGS) by inventory. Generally a lower number is better.

Inventory Turnover is measurement of a firm’s inventory liquidity.

This is found by cost of goods sold(COGS) by inventory.

Generally a lower number is better.

Total Asset Turnover Total Asset Turnover illustrates the firm’s ability and proficiency in using its assets to generated sales. It is found by dividing sales by total assets, and is measured in times per year When using cross-sectional analysis, a company must take special care in comparing Total Asset Turnover because new assets tend to have lower turnover.

Total Asset Turnover illustrates the firm’s ability and proficiency in using its assets to generated sales.

It is found by dividing sales by total assets, and is measured in times per year

When using cross-sectional analysis, a company must take special care in comparing Total Asset Turnover because new assets tend to have lower turnover.

Debt Ratio Analysis A company’s debt position is a measure of how much of the firm’s profits are generated using money borrowed from other companies or individuals. Debt Ratios include: Financial Leverage Multiplier Debt Ratio Interest Coverage Ratio

A company’s debt position is a measure of how much of the firm’s profits are generated using money borrowed from other companies or individuals.

Debt Ratios include:

Financial Leverage Multiplier

Debt Ratio

Interest Coverage Ratio

Financial Leverage Multiplier The Financial Leverage Multiplier (FLM) is used to convert the company’s Return On Assets to its Return on Equity. This reflects the impact of leverage, or use of debt, on owners’ return. It is the ratio of total assets to stockholders’ equity.

The Financial Leverage Multiplier (FLM) is used to convert the company’s Return On Assets to its Return on Equity. This reflects the impact of leverage, or use of debt, on owners’ return.

It is the ratio of total assets to stockholders’ equity.

Profitability Ratio Analysis Profitability Ratios evaluate a company’s earnings with respect to sales, assets, owner’s investments and share values. Profitability Ratios include Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets Return on Equity

Profitability Ratios evaluate a company’s earnings with respect to sales, assets, owner’s investments and share values.

Profitability Ratios include

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Return on Total Assets

Return on Equity

Gross Profit Margin The Gross Profit Margin(GPR) is the percentage of each sales dollar that remains after the firm has paid for the goods sold. It is found by subtracting COGS from sales and dividing by sales.

The Gross Profit Margin(GPR) is the percentage of each sales dollar that remains after the firm has paid for the goods sold.

It is found by subtracting COGS from sales and dividing by sales.

Net Profit Margin Net Profit Margin(NPR), one of the most popular indicators of company health, measures the percentage of sales revenue remaining after ALL expenses are paid. NPR is found by dividing net profits by sales

Net Profit Margin(NPR), one of the most popular indicators of company health, measures the percentage of sales revenue remaining after ALL expenses are paid.

NPR is found by dividing net profits by sales

Return on Total Assets Return of Total Assets(ROA), also known as return on investment, measures a firm’s effectiveness at generating profits with its assets. ROA is found by dividing the net profits after taxes by total assets.

Return of Total Assets(ROA), also known as return on investment, measures a firm’s effectiveness at generating profits with its assets.

ROA is found by dividing the net profits after taxes by total assets.

Return on Equity The Return on Equity(ROE) is extremely important to potential investors. ROE is found by dividing net profit by owner’s equity.

The Return on Equity(ROE) is extremely important to potential investors.

ROE is found by dividing net profit by owner’s equity.