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Internal Analysis

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Lecture Topics

• Purpose of Internal Analysis

• Competitive Advantage and Core Competence

• Value Chain

• Financial Analysis

• Combining Internal and External Analyses

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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

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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

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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

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Value Chain

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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

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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

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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

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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

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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.

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Income StatementSalesCost of Goods SoldGross ProfitOperating Expenses

Wages and SalariesRentAdvertisingInsuranceResearch and DevelopmentDepreciation

Total Operating ExpensesOperating Income (Earnings Before Interest and Taxes – EBIT)InterestIncome Before TaxesTaxesNet Income

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Balance SheetAssets

Current AssetsCashMarketable SecuritiesAccounts ReceivableInventory

Total Current AssetsFixed Assets

Property, Plant, Eqt.Less: Accumulated Depreciation

Net Fixed AssetsOther Assets

Patents, TrademarksGoodwill

Total Other AssetsTotal Assets

Liabilities and Owners’ EquityLiabilities

Current LiabilitiesAccounts PayableWages PayableNotes PayableTaxes Payable

Total Current LiabilitiesLong Term Liabilities

LoansMortgages

Total Long Term LiabilitiesOwners’ Equity

StockRetained Earnings

Total Owners’ EquityTotal Liabilities and Owners’ Equity

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Types of Ratios

• Profitability

• Activity – Efficiency

• Liquidity

• Debt - Leverage

• Growth

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Profitability Ratios

• Gross Profit Margin = Gross Profit

Sales• Net Profit Margin = Net Income

Sales• Operating Profit = Operating Income

Margin Sales• Return on Equity = Net Income___

Owner’s Equity

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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

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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

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Liquidity Ratios

• Current = __Current Assets___

Current Liabilities

• Quick = Current Assets – Inventories

Current Liabilities

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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

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Growth• Sales = SalesYear 2 - SalesYear 1

Growth ___________________ X 100

SalesYear 1

• Profit = Profit Year 2 - Profit Year 1

Growth ___________________ X 100

Profit Year 1

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Combining Internal and External Analyses

• Internal and External Analyses commonly referred to as SWOT:StrengthsWeaknessesOpportunitiesThreats

• Strengths and Weaknesses identified from Internal Analysis

• Opportunities and Threats identified from External Analyses

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Internal Analysis

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

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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

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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

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Internal Analysis

•Strengths

•Weaknesses

External Analysis

•Opportunities

•Threats

Strategic Issues

Strategic Alternatives

Strategy

Tools Tools