Intro To Case Analysis

Case Method Provides the opportunity to move from a narrow, specialized view that emphasizes functional techniques to a broader, less precise analysis of the overall organization (one caveat- functional cases) Cases present actual business situations and enable you to examine both successful and unsuccessful organizations

Case Method You critically analyze a situation in which a manager had to make a decision of long-term corporate importance This approach gives you a feel for what it is like to be faced with making and implementing strategic decisions

Case Method Students benefit from: Understanding the role individuals play in guiding their organization to success Developing analytical skills in assessing firm resources/capabilities as well as industry/competitive scenarios Practicing to identify key strategic issues, options to address them and formulating workable action plans Enhanced sense of business judgment and exposure to a range of industries and companies

Case Method Knowing facts, theories and concepts permits you to make good recommendations by providing you with an analytic toolbox In a case, there is rarely one “right” answer and a number of “wrong” ones In the “real world,” people routinely have to make decisions without knowing if their decisions are “right.” They make their decisions based on a range of factual knowledge, experience/skill and intuition

Case Method Your objective in case analysis is to prepare a well-justified course of action to improve firm performance A specific recommendation must be made, and it must be supported by systematic analysis and clear thinking

Case Preparation Read the case- maybe twice Examine the content of exhibits Identify strategic issues and factors Analyze the situation described in the case Don’t treat the facts in the case as gospel Use strong rationale Prepare a detailed action plan/contingencies

ROLE You need to take a ROLE- strategic decision maker, Board member, outside consultant(most of the time) Talk “to the client” Never, ever talk about “in the case” Stay within the context of the case Assumptions Case Competition Guide

Process Structured Decision-Making Process example

Problem(s) or Issue(s) Some cases have more than one problem/issue Articulate the problem/issue- writing down a problem/issue statement gives you a reference point when you proceed through the case analysis Some problems/issues are not apparent until after you do the analysis

Strategic Analyses Determine strategic issues involved Use strategic tools to conduct the analysis- 5 Forces, SWOT, TOWS, etc. Test your own assumptions about the case

Alternatives Develop a list of options first without judging them- Do nothing can be an alternative

Criteria Establish criteria (see handout)

Evaluate alternatives Can the company afford it? Is the solution likely to evoke a competitive response? Will employees accept the change? How will it affect other stakeholders? How does it fit with the vision, mission, objectives, culture or values of the company?

Recommendations Make a set of recommendations that your analysis supports Describe exactly what needs to be done and why this course of action will solve the problem Have a detailed implementation (see handout) and budget/contingency plan

Presenting The Case Answer Introduction of the Team Outline of presentation (Agenda vs. Table of Contents) Analysis of the situation / Problem/issue Identification Alternatives Establish Criteria Evaluate Alternatives Recommendation Implementation Plan (handout) and discussion of contingencies Wrap-Up

Slides Themselves Points – not detailed sentences Agenda highlighted on them Using items/figures as analogies

Possible Help Know the judging criteria!!!

Financial Analysis Ratios are usually used in one of two ways: To identify financial trends over time for an organization or one of its divisions To make comparisons across companies at a given point in time. Financial ratios in isolation are rarely particularly revealing Having some basis of comparison allows for analysts to make comparisons that point to improving or deteriorating financial position

Financial Ratio Analysis — Liquidity How Formula Expressed Meaning 1. Liquidity Ratios Current ratio Quick (acid test) ratio Inventory to net working capital Cash ratio Current assets ————————— Current liabilities Decimal A short-term indicator of the company’s ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. Measures the company’s ability to pay off its short-term obligations from current assets, excluding inventories. A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory. Measures the extent to which the company’s capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets. Current assets – Inventory ———————————— Current liabilities Inventory ——————————————— Current assets – Current liabilities Cash + Cash equivalents ——————————— Current liabilities

Financial Ratio Analysis — Profitability How Formula Expressed Meaning 2. Profitability Ratios Net profit margin Gross profit margin Return on investment (ROI) Return on equity (ROE) Earnings per share (EPS) Net profit after taxes ————————— Net sales Percentage Dollars per share Shows how much after-tax profits are generated by each dollar of sales. Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. Measures the rate of return on the total assets utilized in the company; a measure of management’s efficiency, it shows the return on all the assets under its control regardless of source of financing. Measures the rate of return on the book value of shareholders’ total investment in the company. Shows the after-tax earnings generated for each share of common stock. Sales – Cost of goods sold ————————————— Net sales Net profit after taxes ————————— Total assets Net profit after taxes Shareholders’ equity ————————— Net profit after taxes – preferred stock dividends ———————————— Average number of common shares

Financial Ratio Analysis — Activity How Formula Expressed Meaning 3. Activity Ratios Inventory turnover Days of inventory Net working capital turnover Asset turnover Fixed asset turnover Average collection period Accounts receivable turnover Accounts payable period Days of cash Net sales ——————— Inventory Decimal Days Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the number of one day’s worth of inventory that a company has on hand at any given time. Measures how effectively the net working capital is used to generate sales. Measures the utilization of all the company’s assets; measures how many sales are generated by each dollar of assets. Measures the utilization of the company’s fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets. Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers. Indicates the number of times that accounts receivable are cycled during the period (usually a year). Indicates the average length of time in days that the company takes to pay its credit purchases. Indicates the number of days of cash on hand, at present sales levels. Inventory ——————————— Cost of goods sold ÷ 365 Net sales ————————— Net working capital Sales ————————— Total assets Sales ——————— Fixed assets Accounts receivable ————————— Sales for year ÷ 365 Annual credit sales ————————— Accounts receivable Accounts payable ———————————— Purchases for year ÷ 365 Cash ——————————— Net sales for year ÷ 365

Financial Ratio Analysis — Leverage How Formula Expressed Meaning 4. Leverage Ratios Debt to asset ratio Debt to equity ratio Long-term debt to capital structure Times interest earned Coverage of fixed charges Current liabilities to equity Total debt ——————— Total assets Percentage Decimal Measures the extent to which borrowed funds have been used to finance the company’s assets. Measures the funds provided by creditors versus the funds provided by owners. Measures the long-term component of capital structure. Indicates the ability of the company to meet its annual interest costs. A measure of the company’s ability to meet all of its fixed-charge obligations. Measures the short-term financing portion versus that provided by owners. Total debt ————————— Shareholders’ equity Long-term debt ————————— Shareholders’ equity Profit before taxes + Interest charges ———————————————— Interest charges Profit before taxes + Interest charges + Lease charges ———————————————— Interest charges + Lease obligations Current liabilities Shareholders’ equity —————————

Financial Ratio Analysis — Other How Formula Expressed Meaning 5. Other Ratios Price/earning ratio Dividend payout ratio Dividend yield on common stock Market price per share ————————— Earnings per share Decimal Percentage Shows the current market’s evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings. Indicates the percentage of profit that is paid out as dividends. Indicates the dividend rate of return to common shareholders at the current market price. Annual dividends per share ———————————— Annual earnings per share Annual dividends per share ——————————————— Current market price per share

Case Analysis Analyzing Financial Statements: Scrutinize historical statements Compare historical statements over time Calculate changes in categories from year to year Determine the change as a percentage Adjust for inflation

Case Analysis Common Size Statements: Income statements and balance sheets in which the dollar figures have been converted into percentages.

Case Analysis Economic Measures: Constant dollars Prime interest rate Dollars adjusted for inflation to make them comparable over various years. Consumer Price Index (CPI) Prime interest rate Rate of interest banks charge on their lowest risk loans. Gross Domestic Product (GDP) Total output of goods and services within a country’s borders.

Strategic Audit Worksheet: Part 1

Strategic Audit Worksheet: Part 2