1. Internal Analysis

2. Lecture Topics Purpose of Internal Analysis
Competitive Advantage and Core Competence
Value Chain
Financial Analysis
Combining Internal and External Analyses

3. Purpose of Internal Analysis
An organization’s future success depends on its own internal conditions as well as external conditions
Managers need to be able to identify
Strengths that the company can relay on in order to compete
Weaknesses that need to be corrected or minimized as competitive factors

4. Competitive Advantage
The collection of factors that sets a company apart from its competitors and gives it a unique position in the market
Means to add value for stakeholders
Focus especially on adding value for customers

5. Core Competence
A unique set of lasting capabilities that a company relies on to achieve competitive advantage and add value
Innovation
Efficiency
Customer Responsiveness
Quality
Special Expertise

6. Value Chain

7. Value Chain Interpretation
Represents a company or any organization
Simplified illustration of all activities that an organization must perform
Framework for analyzing a company’s strengths and weaknesses
Margin represents profit- expand margin by
Being able to charge a higher price
Operating at a lower cost within the Value Chain

8. Primary Activities in the Value Chain
Activities directly involved in producing, selling, distributing, and servicing product for buyer.
Inbound logistics: receiving, storing, and distributing inputs for production
Operations: all activities involved in transforming inputs into final products
Outbound logistics: collecting, storing, distributing product to final buyer
Marketing and Sales: activities used to get customers to buy company products
Service: installation, repair, support, training for using a product

9. Support Activities in the Value Chain
Activities that enable the performance of primary activities
Firm infrastructure: companywide support of entire value chain; includes quality of management, financial performance, strategy, organizational culture
Human resource management: recruiting, hiring, training, reward systems for employees
Research and development: design of products and processes that enhance company performance; not limited to equipment
Procurement: purchasing and managing inputs used in operations; developing and managing supplier relations

10. Applying Value Chain Analysis
Framework for identifying company’s strengths and weaknesses
Means to focus on where the company’s core competencies exist and can be used to achieve competitive advantage and add value
Comparison with competitors reveals opportunities for improving company’s competitive position

11. Financial Analysis
Uses company’s financial results to assess company’s performance
Requires comparisons of results over multiple years and against industry standards
Important tool to identify company’s strengths and weaknesses and potential problem areas.

12. Income Statement Sales Cost of Goods Sold Gross Profit
Operating Expenses
Wages and Salaries
Rent
Advertising
Insurance
Research and Development
Depreciation
Total Operating Expenses
Operating Income (Earnings Before Interest and Taxes – EBIT)
Interest
Income Before Taxes
Taxes
Net Income

13. Balance Sheet Assets Current Assets Cash Marketable Securities
Accounts Receivable
Inventory
Total Current Assets
Fixed Assets
Property, Plant, Eqt.
Less: Accumulated
Depreciation
Net Fixed Assets
Other Assets
Patents, Trademarks
Goodwill
Total Other Assets
Total Assets
Liabilities and Owners’ Equity
Liabilities
Current Liabilities
Accounts Payable
Wages Payable
Notes Payable
Taxes Payable
Total Current Liabilities
Long Term Liabilities
Loans
Mortgages
Total Long Term Liabilities
Owners’ Equity
Stock
Retained Earnings
Total Owners’ Equity
Total Liabilities and Owners’ Equity

14. Types of Ratios Profitability Activity – Efficiency Liquidity
Debt - Leverage
Growth

15. Profitability Ratios Gross Profit Margin = Gross Profit Sales
Net Profit Margin = Net Income
Operating Profit = Operating Income
Margin Sales
Return on Equity = Net Income___
Owner’s Equity

16. Profitability Ratios Du Pont Formula
Return on = Net Income__
Assets Total Assets
= Net Income X __Sales___
Sales Total Assets
= Net Profit X Total Asset
Margin Turnover
= Profitability X Efficiency

17. Activity – Efficiency Ratios
Inventory = Cost of Goods Sold
Turnover Inventory
Average = _________365 days____
Collection (Sales/Accounts Receivable)
Period
Fixed Asset = _________Sales________
Turnover Net Fixed Assets
Total Asset = _________Sales________
Turnover Total Assets

18. Liquidity Ratios Current = __Current Assets___ Current Liabilities
Quick = Current Assets – Inventories

19. Debt –Leverage Ratios Debt = Current + Long Term Liabilities
Total Assets
Debt = Current + Long Term Liabilities
Total Owners’ Equity
Times = Operating Income (EBIT)
Interest Interest
Earned

20. Growth Sales = SalesYear 2 - SalesYear 1
Growth ___________________ X 100
SalesYear 1
Profit = Profit Year 2 - Profit Year 1
Profit Year 1

21. Combining Internal and External Analyses
Internal and External Analyses commonly referred to as SWOT:
Strengths
Weaknesses
Opportunities
Threats
Strengths and Weaknesses identified from Internal Analysis
Opportunities and Threats identified from External Analyses

22. Internal Analysis
Strengths and Weaknesses identified through the use of tools such as:
Core Competencies
Stakeholder Analysis
Value Chain
Financial Analysis

23. External Analysis
Opportunities and Threats identified through the use of tools such as:
General Environment Assessment
Five Force Analysis
Key Success Factors in Industry
Competitive Changes during Industry Evolution
Strategic Groups
National Competitive Advantage

24. Results of Internal and External Analysis
Requires creative interpretation
Understanding of company’s competitive position in its industry
Identification of strategic issues the company faces
Strategic issues
Represent dangers to the company’s long-term survival
Suggest areas where the company should concentrate its efforts in order to grow

25. Strategic Alternatives Strategy
Internal Analysis
Strengths
Weaknesses
External Analysis
Opportunities
Threats
Tools
Tools
Strategic Issues
Strategic Alternatives
Strategy