Copyright 2005 Prentice Hall Bus 411 Day 7 Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall Agenda Question? Assignment 2 posted Due Feb 13 (changed from the 9th) EFE and CPM for McDonald's Assignment 3 Posted IFE and Ratio analysis Due Feb 27 @ 12:30 PM Bus 411 assignment three.pdf Finish Discussion on The Internal Assessment Copyright 2005 Prentice Hall

Chapter 4 The Internal Assessment Strategic Management: Concepts & Cases 13th Edition Fred David Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Investment decision (Capital budgeting) Financing decision Finance/Accounting Investment decision (Capital budgeting) Financing decision Dividend decision Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2005 Prentice Hall Financial ratios Objective indicators Two uses Trending over time Comparison to industry norms and Competitors Websites with definitions and examples http://www.netmba.com/finance/financial/ratios/ http://cpaclass.com/fsa/ratio-01a.htm http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html Industry norms are available through UMFK electronic resources Business and Company Resource Center Business Source Premier Valueline Ratios.xlt Copyright 2005 Prentice Hall

Basic Financial Ratios Firm’s ability to meet its short-term obligations Ratios Current ratio CA/CL Quick (or acid test) ratio (CA-Inv)/CL Liquidity Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Extent of debt financing Ratios Debt-to-total assets Debt-to-equity Long-term debt-to-equity Times-interest-earned Leverage Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Effective use of firm’s resources Ratios Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period Activity Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Effectiveness shown by returns on sales and investment Basic Financial Ratios Effectiveness shown by returns on sales and investment Ratios Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Profitability Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Basic Financial Ratios Effectiveness shown by returns on sales & investment Ratios Return on stockholders’ equity (ROE) Earnings per share Price-earnings ratio Profitability Ratios (cont’d) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Firm’s ability to maintain economic position Basic Financial Ratios Firm’s ability to maintain economic position Ratios Sales Net Income Earnings per share Dividends per share Growth Ratios Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Growth Ratios Ratio Sales Net Income Earnings per share Dividends per share Annual percentage growth in Total sales Profits EPS Dividends per share Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Figure 4-3 page 109 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

BE Chart.xlsx Copyright © 2011 Pearson Education, Inc. Breakeven point = quantity of units that a firm must sell in order for total revenues to equal total costs Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Finance/Accounting Audit Where is the firm financially strong/weak as indicated by financial ratio analysis? Can the firm raise needed short-term capital? Can the firm raise needed long-term capital through debt and/or equity? Does the firm have sufficient working capital? Are capital budgeting procedures effective? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Finance/Accounting Audit Are dividend payout policies reasonable? Does the firm have good relations with its investors and stockholders? Are the firm’s financial managers experienced and well trained? Is the firm’s debt situation excellent? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Production/Operations Functions Process Capacity Inventory Workforce Quality Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Audit Are suppliers of materials, parts, etc. reliable and reasonable? Are facilities, equipment, machinery, and offices in good condition? Are inventory-control policies and procedures effective? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Production/Operations Audit Are quality-control policies & procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Research & Development Functions Development of new products before competitors Improving product quality Improving manufacturing processes to reduce costs These functions can be done internally or externally Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Financing as many projects as possible Use percent-of-sales method Budgeting relative to competitors How many successful new products are needed R&D Budgets Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Audit Are the R&D facilities adequate? If R&D is outsourced, is it cost-effective? Are the R&D personnel well qualified? Are R&D resources allocated effectively? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Research & Development Audit Are MIS and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems Purpose Improve performance of an enterprise by improving the quality of managerial decisions Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems Audit Do all managers use the information system to make decisions? Is there a CIO or Director of Information Systems position in the firm? Are data updated regularly? Do managers from all functional areas contribute input to the information system? Are there effective passwords for entry into the firm’s information system? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Management Information Systems Audit Are strategists of the firm familiar with the information systems of rival firms? Is the information system user-friendly? Do all users understand the competitive advantages that information can provide? Are computer training workshops provided for users? Is the firm’s system being improved? Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Value Chain Analysis The process whereby a firm determines the costs associated with: Purchasing raw materials Manufacturing products Marketing products And compares them to the value chain of rival firms Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Value Chain Analysis Core competencies Distinctive competencies Benchmarking Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Transforming Value Chain Activities into Sustained Competitive Advantage Value Chain Activities Are Identified and Assessed Core Competencies Arise in Some Activities Some Core Competencies Evolve into Distinctive Competencies Some Distinctive Competencies Yield Sustained Competitive Advantages Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

VCA http://www.mindtools.com/pages/article/newTMC_10.htm Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2005 Prentice Hall The IFE Matrix A summary step in conducting an internal strategic-management audit is to construct an IFE Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among these areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique. Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall 5 Steps to an IFE List key internal factors as identified in the internal-audit process. Use a total from ten to twenty internal factors including both strengths and weaknesses. Assign a weight ranging from 0 (not important) to 1.0 (very important). The weight indicates the relative importance of the factor to being successful in the firm’s industry. The sum of all the weights must equal 1.0. Assign a 1-4 rating to each factor to indicate whether that factor represents a major weakness (1), minor weakness (2), minor strength (3), or major strength (4). Multiply each factor’s weight by its rating to determine a weighted score for each variable. Sum the weighted scores for each variable to determine the total weighted score for the organization. Total weighted scores of below 2.5 indicate an internally weak organization. IFE matrix.xlt Copyright 2005 Prentice Hall

IFE– Gateway Computers (2003) Key Internal Factors Weight Rating Wtd Score Strengths 1. Several new senior executive with world-class skills and leadership experience 0.05 4 0.40 2. Continuous decline in operating costs and cost of goods sold 3 0.15 3. Well-known brand name 4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1 0.10 5. As a direct seller, Gateway holds high brand recognition Copyright 2005 Prentice Hall

IFE– Gateway Computers (2003) Key Internal Factors Weight Rating Wtd Score Strengths (cont’d) 6. Gateway is diversifying into non-PC products 0.10 3 0.30 7. Good relationship with its suppliers. 0.05 4 0.20 8. Economies of scale, the 6th largest PC maker I the world 9. Gateway retails stores excellent 0.15 Copyright 2005 Prentice Hall

IFE– Gateway Computers (2003) Key Internal Factors Weight Rating Wtd Score Weaknesses 1. High operating expense (22% of revenue vs. 10% for Dell) 0.05 2 0.10 2. Almost no budget for R&D vs. Dell’s 18% of revenue 1 3. Low return on assets ratio 0.025 4. No niche market Copyright 2005 Prentice Hall

IFE– Gateway Computers (2003) Key Internal Factors Weight Rating Wtd Score Weaknesses (cont’d) 5. Shortage of cash due to successive losses 0.10 2 0.20 6. Limited number Gateway stores 0.05 7. Weak performance in overseas market TOTAL 1.00 2.80 Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall