Strategy: A View From the Top Chapter 5 Analyzing an Organization’s Strategic Resource Base

1. Strategy: A View From the TopChapter 5Analyzing an Organization’s Strategic Resource Base Chase Mueller Tanner Gilreath Ashley Hoptay Olivia Erwin Brandon Laviage Anna Rendon Paige Stone

2. Introduction • When determining what strategies a company can pursue successfully they have to look at their strategic resources and capabilities. • Organizational strategic resources: • Physical assets • Relative financial position • Market position, brands and the capabilities of its people • Specific knowledge, competencies, processes, skills and cultural aspects of the organization

3. Principles of a Company’s Internal Strategic Environment • Cataloging and valuing current resources and core competencies that can be used to create a competitive advantage • Identifying internal pressures for change and forces of resistance

4. Analyzing a Company’s Financial Resources • Corporate Level • Balance Sheet • Income Statement • Cash Flow Statement • Retained Earnings • To determine how the company is functioning? • Financial Ratio Analysis

5. Ratio Analysis • Financial Ratio Analysis • Can provide a quick overview of a company’s or business unit’s current or past profitability, liquidity, leverage, and activity • Profitability Ratios • Measures how well a company’s is allocating its resources • Liquidity Ratios • Focus on cash flow generation and a company’s ability to meet its financial obligations • Leverage Ratios • May suggest potential improvements in the financing of operations • Activity Ratios • Measure productivity and efficiency

6. 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

7. Liquidity Ratios • Current Ratio = Current Assets / Current Liabilities • The extent to which the claims of short-term creditors are covered by short-term assets • Quick Ratio = (Current Assets – Inventory) / Current Liabilities • Acid-Test Ratio; the firm’s ability to pay off short-term obligations without having to sell its inventory • Inventory to Net Working Capital = Inventory / (Current Assets – Current Liabilities) • The extent to which the firm’s working capital is tied up in inventory

8. Leverage Ratios • Debt-to-Asset = Total Debt / Total Assets • The extent to which borrowed funds are used to finance the firm’s operations • Debt-to-Equity = Total Debt / Total Equity • Ratio of funds from creditors to funds from stockholders • Long-Term Debt-to Equity = Long-Term Debt / Total Equity • The balance between debt and equity

9. Activity Ratios • Inventory Turnover = Sales / Inventory • The amount of inventory used by the company to generate its sales • Fixed-Asset Turnover = Sales / Fixed Assets • Sales productivity and plant use • Average Collection = Accounts Receivable / Average Daily Sales • The average length of time required to receive payment

10. Analyzing Ratios • Ratios can be used to assess: • The business’s position in the industry • The degree to which certain strategic objectives are being achieved • The business’s vulnerability to revenue and cost swings • The level of financial risk associated with the current or proposed strategy

11. Du Pont Formula Sales COGS - EBIT + Costs Earnings as % of Sales / Operating Expenses Sales Return on Assets X Inventories + Accounts Receivables Sales / Current Assets Asset Turnover + Cash + Total Assets + Fixed Assets Prepaid Expenses

12. Du Pont Explanation • How do we know that are assets are being used effectively to produce income? • Return on Assets • How do we know that our strategy is being executed with effectiveness? • Asset Turnover

13. Financial Questions? • Does the current strategic plan create shareholder value? • How does the business unit’s performance compare with the performance of others in the corporation? • Would an alternative strategy increase shareholder value more than the current strategy?

14. Value Based Measures • Traditional Measures • Return on Equity (ROE) • Return on Assets (ROA) • Broader Measures • Economic Value Added (EVA) • Market Value Added (MVA)

15. Economic Value Added (EVA) • Is a value-based financial performance measure that focuses on economic value creation. • Capital Focus: • Cost of Debt • Cost of Equity

16. EVA • EVA = Profit – [(Cost of Capital)(Total Capital)] • Profit – After tax operating profit • Cost of Capital – weighted cost of debt and equity • Total Capital – book value plus interest-bearing debt • Positive EVA • Cost of Capital less than profits generated • Negative EVA • Cost of Capital more than profits generated

17. EVA Benefits • It can help align employee and owner interests through employee compensation plans • It can be the basis for a single competitive performance measure called market value added (MVA) • Examples • Capital Budgeting, Employee Performance Evaluation, and Operational Assessment

18. Cost Analysis • Deals with the identification of strategic cost drivers – those cost factors in the value chain that determine long-term competitiveness in the industry • Variables: Product Design, Factor Costs, Scale, Scope of Operations, and Capacity Use

19. Cost Benchmarking • Useful in assessing a firm’s costs relative to those of competing firms, or for comparing a company’s performance against best-in-class competitors • 5 Steps • Selecting areas or operations to benchmark • Identifying key performance measures and practices • Identifying best-in-class companies or key competitors • Collecting cost and performance data • Analyzing and interpreting the results

20. Human Capital: A Company’s Most Valuable Strategic Resource • Relates that companies are run by and for people • Understanding their concerns, aspirations, and capabilities is, therefore, key to determining a company’s strategic position and options • A survey by Chief Executive demonstrates that more and more focus is being put in attracting, developing, and retaining human capital • Of the CEO’s surveyed 43% believe that finding and retaining good people is their greatest challenge and 84% believe that “people issues” are far more important than before • A study conducted by the American Society for Training and Development examined 500 U.S.-based publicly traded firms. By looking at annual training expenditures and stockholder returns, it concluded that the top half of firms in terms of spending on training had higher stockholder returns than did the bottom half

21. Human Capital: Training • Continuous employee development, through on-the-job training and other programs, 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 managers attend 11 weeks of mandatory training in their first year. More that 10,000 employees have been to the “Leadership Institute” and have attended weeklong courses on the company’s 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 3 hours in effort to retrain employees which was known as a Mandatory Training Day

22. Organizational Strategic Resources • Knowledge and intellectual capital are major drivers of competitive advantage • How is competitive advantage created and sustained? When a company continues to mobilize new knowledge faster and more efficiently than its competitors Ex: I-phone • Recognizing the importance of knowledge as a strategic asset, Skandia, NASDAQ, Chevron, and Dow Chemical have established director level positions in charge of intellectual capital

23. Organizational Strategic Resources-Continued… • A company’s market capitalization increasingly reflects the value of such resources and the effectiveness with which they are managed Example: • Netscape had a $4 billion market capitalization based on its stock price, even though the company’s sales were only a few million dollars per year. Investors based the high stock price on their assessment on the company’s intangibles- its knowledge base and quality of management

24. Organizational Strategic Resources-Knowledge is Power • Patents- Is a limited legal monopoly granted to an individual or firm to make, use, and sell its invention, 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 great advantage • Strategic Patenting – using patent applications to colonize the entire new areas of technology even before tangible products are created

25. 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 can be used to produce wealth, multiply output of physical assets, gain competitive advantage, 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 in books, archives, and databases • Implicit or tacit knowledge- is informal and subjective. It is gained through experience and transferred through person interaction and collaboration • Ex: Xerox Collaboration- Technician’s at break would talk about work and share their ideas • Encourage informal communication • Institute open door policies • Use intranets

26. 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

27. Brands • Strategic assets that assist companies in building and retaining customer loyalty • Must constantly be nourished, sustained and protected • Failure to support a brand can be catastrophic

28. Coke • Coke changed their formula in order to compete with Pepsi who had taken 36% of their market share • Coke's change was immediately greeted by angry protest. For three straight months, Coca-Cola headquarters received some 1,500 phone calls daily, as well as a barrage of angry letters. Wrote one correspondent: "Changing Coke is like God making the grass purple or putting toes on our ears or teeth on our knees."

29. Coke • "We did not understand the deep emotions of so many of our customers for Coca-Cola," said President Donald R. Keough. "It is not only a function of culture or upbringing or inherited brand loyalty. It is a wonderful American mystery. A lovely American enigma.

30. Brand Value • Calculated at the net present value of the earnings that the brand is expected to generate and secure in the future • Business Week does a ranking of the 100 best global brands by dollar value the select on 2 criteria • Brands have to be global, generating significant earnings in the main global markets • Must be sufficient marketing and financial data publicly available for valuation

31. 3 Strong Recommendations • Companies that succeed in growing their brands while pursuing their missions exhibit certain qualities • DO NOT FEAR PUBLIC FLOPS • FACE YOUR WEAKNESSES • PROTECT YOUR CULTURE

32. http://www.youtube.com/watch?v=6xuzY4VFlkA

33. Core Competencies are… • World class capabilities that enable a company to build a competitive advantage • Key element in building a long-term strategic advantage • Set of skills or systems that create a uniquely high value for customers at best-in-class levels.

34. Core Competencies • Contribute to perceived customer benefits • Are difficult for competitors to imitate • Allow for leverage across markets

35. Core Competencies • Test for identifying core competencies: • Core competencies should provide access to a broad array of markets • Core competencies should help differentiate core products and services • Core competencies should be hard to imitate because they represent multiple skills, technologies, and organizational elements.

36. Core Competencies • Development should focus on: • Long-term platforms capable of adapting to new market circumstances • Unique sources of leverage in the value chain where firms think they can dominate • Elements that are important to customers in the long run • Key skills and knowledge, not on products

37. Core Competencies • Examples from the book: • 3M-coatings • Canon-optics, imaging, and microprocessor controls • Honda-small engine technology • Other examples • NEC-semiconductors • Nokia-adapted from rubber boots to cell phones

38. 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: small electric motors are used to produce dust busters, etc. • the kitchen appliance market: small electric motors are used to produce can openers, food processors, blenders, bread makers, and fans

39. Core Competencies • Dell – hard to imitate • Online customization for each computer built • Minimization of working capital in the production process • High manufacturing and distribution quality- reliable products at competitive prices

40. Forces for Change • As discussed in an earlier lecture, there are 12 global trends that emanate from a company’s external environment that cause strategic change. • Internal forces within the organization or from immediate stakeholders also cause strategic change, and the life cycle of a company causes change.

41. 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

42. Organizational Resistance to Change • Structural, organizational rigidities • Closed mind-sets reflecting support for obsolete business beliefs and strategies • Entrenched cultures reflecting values, behaviors and skills that are not conducive to change (GCGC Example) • Counterproductive change momentum that is not in tune with current strategic requirements

43. Company Life Cycle Forces for Change • 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 more formal organization. Described as “entrepreneurial-managerial” transition. Dilemma: how does a company maintain an entrepreneurial spirit while moving toward an organizational structure increasingly focused on control.

44. 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 strategic thinking • Unwise acquisitions or market expansions, implementation of unproven technologies, and deviations from developing core skills

45. Ability to Change • The ability to deal with change is imperative for a company’s success • Internal factors can reduce a company’s ability to change: • Structural rigidities • A lack of adequate resources • Adherence to dysfunctional processes • Company culture

46. 7-S Model • Developed at McKinsey & Company • Key Idea One: organizational effectiveness stems from the interaction of a number of factors, of which strategy is just one. • Seven Variables included in the model: strategy, structure, systems, shared values, skills, staff and style

47. 7-S Model Continued • Depicts a situation where it is not clear which factor is the driving force for change or the biggest obstacle to change. • The seven variables are interconnected, SO progress in one area must be accompanied by progress in another area to create meaningful change. • Key Idea Two: To orchestrate effective change, one needs to understand the impact of each factor and change each according to the desired direction

48. McDonald’s 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: McDonald’s success is more than Kroc’s strategy of expanding the business. Throughout the company's spectacular growth, Kroc maintained a delicate balancing act, imposing rigorous system-wide standards as well as developing and implementing a sophisticated operating and delivery system while encouraging an entrepreneurial spirit that welcomed ideas from all levels. • He overcame structural rigidities, developed the resources he needed to grow, and focused on his employees as well as the company’s cultural spirit.

49. Stakeholder’s Analysis • It is important to identify key stakeholders inside and outside the organization, the roles they play in fulfilling the organization’s mission, and the values they bring to the process. • Internal Stakeholders: • Owners • Board of Directors • CEO • Executives • Managers • Employees • External Stakeholders: • Key customers • Suppliers • Alliance Partners • Regulatory agencies

50. Stakeholder Analysis Continued • In determining the company’s objectives and strategies, executives must recognize the legitimate rights of the firm’s stakeholders • With this each firm gets thousands of demands from its stakeholders such as job security, product quality, community service, high ROI etc. • Due to the wide variety of stakeholders as well as requests companies must assign priority to each stakeholder which correlates with the relative emphasis that the firm will give their demands • Southwest Airlines and SAS Business Intelligence Software focus on employees