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  1. 1. CHAPTER FOUR INTERNAL ANALYSIS  Financial performance-sales and profitability  Performance Measurement-Beyond Profitability  Determinations of strategic options
  2. 2.  A business self-analysis is similar to a competitor analysis, but it has a greater focus on performance assessment and is much richer and deeper.  The analysis is based on detailed, current information on sales, profits, costs, organizational structure, management style, and other factors.  self-analysis can be conducted at each of the three strategic formation levels..  The common goal is to identify organizational strengths, weaknesses, constraints, and, ultimately, responsive strategies, either exploiting strengths or correcting or compensating for weaknesses.
  3. 3.  Self-analysis often starts with an analysis of current financial measures of sales and profitability.  Furthermore, they provide and indicator of the success of past strategies and thus can often help in evaluating whether strategic changes are needed.  In addition, sales and profitability at least appear to be specific and easily measured. As a result, it is not surprising that they are so widely used as performance evaluation tools.
  4. 4.  Increased sales can mean that the customer base has grown. An enlarged customer base, if we assume that new customers will develop loyalty, will mean future sales and profits.  Increased share can provide the potential to gain SCAs in the form of economies of scale and experience curve effects. a problem with using sales as a measure??
  5. 5.  They provide the basis for the internally or externally generated capital needed to pursue growth strategies, to replace obsolete plants and equipment, and to absorb market risk.  One basic profitability measure is return on assets, which is calculated by dividing the profits by the assets involved:  ROA=Profit Assets  What is Good Performance?  What should the target projected ROA be for existing businesses? Each business should earn an ROA that meets or exceeds the cost of capital, the weighted
  6. 6.  It is somewhat analogous to preferring $6 million to $4 million.  The real question involves determining which strategic alternative will generate $6 million and which will generate $4 million.  Thus, it is necessary to develop performance measures that will reflect long-term viability and health.  The focus should be on the assets and skills that underlie the current and future strategies and their SCAs
  7. 7. Current long term Performance Profits Customer satisfaction/ Brand Loyalty Product/service Quality Brand/Firm Associations Relative Cost New Product Activity Manager/Employee Capability & Performance
  8. 8.  Customer satisfaction /Brand Loyalty  Measures of customer satisfaction and brand loyalty are much more sensitive and provide diagnostic value as well.  Guidelines for Measuring Satisfaction and Loyalty  First, problems & cause of satisfaction that may motivate customers to change brands or firms should be identified.  Second, often the most sensitive and insightful information comes from those who have decided to leave a brand or firm(exit interviews ).  Third, there is a big difference between a brand or firm being liked and the absence of dissatisfaction..
  9. 9.  Product and Service Quality  A product (or service) and its components should be critically and objectively compared both with the competition and with customer expectations and needs.  How good a value is it?  Can it really deliver superior performance? How does it compare with competitor offerings?  How will it compare with competitor offerings in the future given competitive innovations?  Product quality: counseling service, hospital, furniture, computers, cars, fruits and vegetables, films, bottled water ??- - what marketing strategies(dimensions) are applicable in each case?
  10. 10.  Brand/Firm Associations  Is a brand or firm regarded as expert in a product or technology area (such as designing and making sailboats)? Innovative? Expensive? For the country club set? Is it associated with a country, a user type, or an application area (like racing)? Such associations can be key strategic assets for a brand or firm.  Think over the following different competing companies and analyze their respective association: Insurance, hospitals, shoe manufacturers, TV, Mobile hand sets, NGO’S, computers, Restaurants, leather products.
  11. 11.  Relative Cost Less expensive More Expensive Change Value analysis . Design . Raise Prices . Manufacturing/systemignores . Promote . Cost reduction Inferior Our ComponentIs.... Superior Value analysis value analysis . De-emphasis . Emphasize/promote . Upgrade . Leave it alone
  12. 12.  New Product Activity  Does the R&D operation generate a stream of new product concepts?  Is the process form product concept to new product introduction well managed?  It there a track record of successful new products that have affected the product performance profile and market position?
  13. 13.  Manager/Employee Capability and Performance  Capability represents the firm’s capacity or ability to integrate individual firm (tangible and intangible )resources to achieve a desired objective.  Are the human resources in place to support current and future strategies? Do those who are added to the organization match its needs in terms of types and quality?  Or are there gaps that are not being filled?
  14. 14.  Involves :  What characteristics of a business make some options infeasible without a major organizational change?  What characteristic will be pivotal in making a choice between strtegic options?  the answers to these questions will depend on the situation(five areas warrant close scrutiny)
  15. 15. STRATEGIC CHOICE Past and current strategies Strategic problems Organizational capabilities/constraints Financial capabilities/constraints Strengths/weaknesses
  16. 16.  Past strength( innovation? manufacturing ? scale economies?  Strategic problems  A strategic problem differs from a weakness or liability, which is the absence of an asset (e.g., good location) or skill (e.g., new product introduction skills).  A business copes over time with a weakness or liability by adjusting strategies. Strategic problems, in contrast, need to be addressed and corrected even if the fix is difficult and expensive.  Assume that you are financially capable, but you couldn’t get a high traffic area which is highly
  17. 17.  Organizational Capabilities /Constraints  The internal organization of a company-is structure, systems, people, and culture-can be an important source of both strengths and weaknesses  Longer structure vs shorter:  Organizational culture(value)  People(value/background similarities)
  18. 18.  Financial Resources and Constraints  Should a firm increase its net investment or decrease it by holding liquid assets or returning cash to shareholders or debt holders?  funds may be obtained either by debt or equity financing  A division or subsidiary may need to consider how much support and involvement it can expect form a parent organization
  19. 19.  Organizational Strengths and Weaknesses  A key step in self-analysis is to identify the strengths and weaknesses of an organization that are based on its assets and skills.  In fact, much of self-analysis is motivated by the need to detect strengths and weaknesses
  20. 20.  A business portfolio : is the collection of Strategic Business Units that make up a corporation..  Portfolio matrix models can be useful in re- examining a company's present portfolio.  The purpose is to help a company understand and consider changes in its portfolio of businesses, and also to think about allocation of resources among the different business elements.
  21. 21.  The two primary models (planning tools) are the BCG Growth-Share Matrix and the GE Business Screen.  These models consider and display on a two-dimensional graph each major SBU in terms of some measure of its industry attractiveness and its relative competitive strength  The BCG Growth-Share Matrix  The BCG growth-share matrix, being both simple and easily quantifiable is often a useful first step in portfolio analysis  It suggests that the desirability of the market can best be expressed by the market growth rate, and that the best summary indication of a firm’s strength in a market is its relative market share.
  22. 22.  dimensions:  Industry growth rate  Relative market share position of the businesses  SBUs plotted as circles with area proportional to their contribution to overall corporate sales
  23. 23. Dogs Cash Cows Question Marks Stars Relative Market Share Position High 1.0 Medium .50 Low 0.0 Industry Sales Growth Rate High +20 Low -20 Medium 10
  24. 24. The Growth Dimensions: Of all the characteristics of a market, why select growth as the single indicator of its desirability? The reasons include the following: • Growth is perhaps the best measure of the product life cycle, a key strategic consideration. • Market share is assumed to be more easily gained in a growth context when new users with no developed loyalties are attracted to the product class. • Furthermore, competitors may react less aggressively to the loss of new customers than to the loss of their base of existing customers. • Share gain is important, in part, because of its link to the experience curve.
  25. 25. The Growth Dimensions: • A market position in a growth market will be worth more in the future as the market grows, if we assume the position can be retained. It is normally easier to retain market share than to gain it. • In a growth market, demand often exceeds supply; excess demand will support premium prices and profit levels. • By aggressively entering in to a growth market and establishing a sustainable competitive advantage, a firm can discourage competitors from entering the market
  26. 26.  The Market-Share Dimension Relative market share is selected as the single indicator of a firm’s position for several reasons:  The largest-share firm will very likely enjoy advantages of size such as economies of scale, high brand recognition, channel dominance, and the strongest bargaining position with customers and suppliers.  The market leader is the best position to exploit the experience curve because it will accumulate experience faster than competitors. The experience curve suggests that cumulative production experience will result in lower unit costs because of learning effects, technological improvements in production /operations, and product redesign.  Empirical evidence indicates that market share is related to profitability
  27. 27. The matrix and its cast of characters 1. Stars: contains the high-share SBUs operating in high-growth markets.  Because they are in growth contexts, the model predicts that they will have a heavy need for cash to support that growth.  they will be both users and providers of large cash flows 2. Cash cows: are high-share SBUs operating in a low- growth market. Because of their market position, their cash generation should be high.  Because the market is mature, the cash investment needs should be small and these businesses should therefore be a source of substantial amount of cash that can be channeled to other areas
  28. 28. 3. Dogs:  because growth is low, expansion of share is assumed to be very costly  Dogs are often cash users and possibly even “cash trap”---products that perpetuate absorb cash, in part because of the investment required to maintain position. 4. Problem children: also called question marks or wildcats  are assumed to have cash needs because, although they need to fund growth, they generate little cash because they are not far down the experience curve
  29. 29.  The general strategy is to take cash from the cash cows to fund R&D, the source of future SBUs, and those problem children that have the potential to gain share to achieve star status.  The cash cows should receive a maintenance investment level, but any tendency to automatically reinvest the cash they are generating should be recoded. Stars, on the other hand, should be of lesser concern.
  30. 30.  Given that the stars are adequately financed, a limited number of the most promising problem children can be selected for investment to try to improve their shares.  The other problem children neither should nor receive investment. They should be held, abandoned, or molded for whatever cash they can produce.  The dogs, usually the most prevalent category, present a challenge, several alternatives are available.  First, a dog can sometimes become very profitable through the pursuit of a “focus”
  31. 31.  In effect, it would then be the star or cash cow of the redefined market. Second, investment can be sold or simply liquidated.  Managers should be wary of “turn-around” plans for dogs, particularly when there is no fundamental change in the market or environment.
  32. 32. Assumption and limitations  The BCG growth-share matrix is usually easy to develop, because measures on the two dimensions are often readily available and the baseline conclusions are usually clear.  The fact that the model is so simple also means that its assumptions are both evident and vulnerable in many contexts.  The assumption that market share affects cost. The motivation for using relative share to describe competitive position is based on the assumption that market share will affect costs because of economies of scale and experience curve effects.
  33. 33. Busines s position 1. Invest/grow 2. Selective investment 3. Harvest/divest Market Attractiveness Hi gh Me di u m Low 1 1 2 1 2 3 2 2 3 High Medium Low
  34. 34. Application  The industry attractiveness-business position matrix is much richer than the growth-share matrix. As a result, it is not limited to “volume” industries, but can be applied in other competitive settings as well.  Furthermore, its structure can be adapted more easily to higher-level investment-allocation decisions such as those across divisions.  A business-Position and a market-attractiveness rating may both represent averages of several component businesses.
  35. 35.  Thus, the growth-share-matrix logic is unlikely to apply when a business consists operating on its own experience curve. Thus, it is rarely helpful in allocating investment over divisions or groups of SBUs.  Furthermore, an experience-curve-based, low-cost strategy is only of several ways to complete. Relative market share will not be as likely to be relevant to differentiate or focus strategies, for example
  36. 36. Evaluating the Ability to compete Evaluating Market Attractiveness Size, growth Share by segment, Customer loyalty, Margins , Distribution, technology skills, Patents Marketing, Flexibility Organization Size, Growth Customer Satisfaction Levels, Competition; quantity, types, effectiveness, Commitment Price levels Profitability Technology Governmental regulations Sensitivity to economic trends
  37. 37. Limitations  more subjective an ambiguous, especially across business units.  The selection and weighting of factors and the subsequent development of both a firm’s position and market attractiveness are highly subjective processes  They can be unduly influenced by historical perspectives and performance and by individual biases and backgrounds.  The final evaluating are bound to be somewhat unreliable in that different people will obtain different evaluations.  Furthermore, different business units will undoubtedly