strategy ch.5
TRANSCRIPT
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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
http://www.youtube.com/watch?v=6xuzY4VFlkAhttp://www.youtube.com/watch?v=6xuzY4VFlkAhttp://www.youtube.com/watch?v=6xuzY4VFlkAhttp://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.