Internal Analysis

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

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

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

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

Value Chain

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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