Internal Analysis Chapter Six Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Chapter 6 - Internal Analysis

Financial Performance – Sales and Profitability Sales and Market Share Profitability Measuring Performance: Shareholder Value Analysis Chapter 6 - Internal Analysis

Shareholder Value Analysis Cost of equity—weighted average of cost of capital and cost of debt e.g. Capital $1 billion (12%); Debt $3 billion (4%) then the cost of capital is 6% Each business aims at ROA to exceed cost of equity so shareholder can improve stock investment Chapter 6 - Internal Analysis

Shareholder Value Risks ROA estimate requires knowing the cash flow of any investment and the assets employed—could encourage short term results Reducing assets employed by outsourcing could result in loss of control of business Reducing investment could affect offering Increasing debt to reduce cost of equity could be risky Chapter 6 - Internal Analysis

Performance Measures Reflecting Long-Term Profitability Customer Satisfaction/ Brand Loyalty Long Term Profits Current Performance Product/Service Quality Brand/Firm Associations Relative Cost New Product Activity Manager/Employee Capability and Performance Chapter 6 - Internal Analysis Figure 6.1

Relative Cost vs. Relative Performance - Strategic Implications More Expensive Less Expensive Inferior Superior Change Design Manufacturing/Systems Ignore Value Analysis Raise prices Promote Cost Reduction Our Component is Value Analysis De-emphasize Upgrade Value Analysis Emphasize/promote Leave it alone Chapter 6 - Internal Analysis Figure 6.2

Strengths and Weaknesses Strategies leverage strengths and neutralize weaknesses Point of advantage vs. points of parity vs. liability Chapter 6 - Internal Analysis

Threats & Opportunities Key output of external analysis Evaluate as to Immediacy Impact Chapter 6 - Internal Analysis

Structuring Strategic Decisions Organizational Strengths and Weaknesses Competitor Strengths and Weaknesses Strategy Decisions Strategic Investment Value Proposition Assets and Competencies Functional Strategies and Programs Market Needs, Attractiveness, and Key Success Factors Chapter 6 - Internal Analysis Figure 6.3

Key Learnings Sales and profitability analysis provide an evaluation of past strategies and an indication of the current market viability of a product line. Shareholder value holds that the flow of profits emanating from an investment should exceed the cost of capital (which is the weighted average of the cost of equity and cost of debt). Routes to achieving shareholder value – such as downsizing, reducing assets employed, and outsourcing – can be risky when they undercut assets and competencies. Performance assessment should go beyond financials to include such dimensions as customer satisfaction/brand loyalty, product/service quality, brand/firms associations, relative cost, new product activity, and manager/employee capability and performance. Assets and competences can represent a point of advantage, a point of parity, or a liability. Threats and opportunities that are both imminent and important should trigger strategic imperatives, programs with high priority. Chapter 6 - Internal Analysis

Ancillary Slides Chapter 6 - Internal Analysis

“We have met the enemy and he is us.” - Pogo Chapter 6 - Internal Analysis

“Self-conceit may lead to self-destruction.” Aesop, “The Frog and the Ox” Chapter 6 - Internal Analysis

“The fish is the last to know if it swims in water.” Chinese proverb Chapter 6 - Internal Analysis

“The successful man is the one who finds out what is the matter with his business before his competitors do.” - Roy L. Smith Chapter 6 - Internal Analysis

Six Rules for Success 1. Face reality as it is, not as it was or as you wish it were. 2. Be candid with everyone. 3. Don’t manage, lead. 4. Change before you have to. 5. If you don’t have a competitive advantage, don’t compete. 6. Control your own destiny, or someone else will. - Jack Welch former Chairman, General Electric Chapter 6 - Internal Analysis

“It’s not companies that fail, it’s their leaders who fail.” - Warren Bennis Chapter 6 - Internal Analysis