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ORGANIZATIONAL ANALYSIS OF STRENGTHS AND WEAKNESSES

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  1. ORGANIZATIONAL ANALYSISOF STRENGTHS AND WEAKNESSES • HAS OUR ORGANIZATION BEEN FINANCIALLY COMPETITIVE? • SCRUTINIZE FINANCIAL STATEMENTS • WERE OUR STRATEGIC MARKETING OBJECTIVES ACHIEVED? • STRATEGIC CORPORATE OBJECTIVES • ARE OUR PRICES AND COSTS COMPETITIVE? • VALUE CHAIN ANALYSIS • WHAT ARE OUR DISTINCTIVE COMPETENCIES & RESOURCES? • PERSONNEL, STRUCTURE, PHYSICAL RESOURCES, DEPARTMENTS • HOW STRONG IS OUR COMPETITIVE POSITION? • COMPETITIVE ASSESSMENT WITH KEY SUCCESS FACTORS • HOW WELL ARE OUR PRESENT STRATEGIES WORKING? • COMPETITIVE, CORPORATE, FUNCTIONAL IN SUMMARY, WHAT ARE THE TOP STRENGTHS AND THE GREATEST WEAKNESSES THIS ORGANIZATION POSSESSES?

  2. ORGANIZATIONAL AUDITS FINANCIAL & MARKET PERFORMANCE (Strengths/Weaknesses) FINANCIAL INDICATORS • RATIOS, FINANCIAL COMPARISONS, TRENDS STRATEGIC MARKET INDICATORS • MARKET SHARE, PENETRATION, TRENDS INTERNAL ORGANIZATION (Distinctive Competencies/Weaknesses) PERSONNEL -- Top Management, Professional Expertise STRUCTURE -- Authority, Accountability, Communication, Decision-Making CORPORATE CULTURE -- Norms, Historic ways of doing things PHYSICAL RESOURCES -- Equipment, Buildings, Locations COMPETENCE OF KEY DEPARTMENTS -- Mktg, R&D, Operations, IS OBJECTIVES & STRATEGIES (Successes/Failures) CLARITY AND FOCUS OF MISSION/VISION PRECISION AND LOGIC OF STRATEGIC CORPORATE OBJECTIVES “FIT” & SUCCESS OF COMPETITIVE (Business-level) STRATEGIES “FIT” & SUCCESS WITH CORPORATE (Investment-level) STRATEGIES SUCCESS WITH IMPLEMENTING DEPARTMENTAL STRATEGIES SUMMARY OF ORGANIZATIONAL CONDITION Summarize the distinctive competencies and strengths and the glaring organizational weaknesses and failures you’ve detected at this firm.

  3. OBVIOUS INDICATORS OF STRATEGIC AND FINANCIAL PERFORMANCE MARKET SHARE AND RANKING PROFIT MARGINS INCREASING? COMPARISONS WITH RIVALS? TRENDS IN NET PROFITS (NP) & RETURN ON TOTAL ASSETS (ROA) COMPARISONS WITH RIVALS? …WITH THE INDUSTRY? CREDIT RATING SALES GROWING? FASTER OR SLOWER THAN THE INDUSTRY? REPUTATION WITH CUSTOMERS? IMAGE? IS THIS COMPANY A LEADER IN ANYTHING? INNOVATION, TECHNOLOGY, QUALITY, CUSTOMER SERVICE, ETC?

  4. FINANCIAL STATEMENT ANALYSIS SCRUTINIZE THESE STATEMENTS… BALANCE SHEET INCOME STATEMENT CASH FLOW (POSITION) STATEMENT IF A SERIES OF ANNUAL STATEMENTS IS AVAILABLE, SELECTIVELY COMPARE RESULTS TO SEE ORGANIZATIONAL TRENDS. (GRAPH RESULTS?) NOTE THE PERCENTAGE CHANGES THAT OCCUR IN INDIVIDUAL CATEGORIES FROM YEAR TO YEAR. CREATE COMMON SIZE BALANCE SHEETS AND INCOME STATEMENTS TO MORE EASILY SEE CATEGORICAL SHIFTS AND CHANGES. (MAKE TOTAL ASSETS = 100% AND NET SALES = 100%) IF INFLATION HAS BEEN SIGNIFICANT, MAKE APPROPRIATE ADJUSTMENTS TO UNMASK THE TRUE OR “REAL” CHANGES & TRENDS IN THE ORGANIZATION.

  5. ASSESSING ORGANIZATIONAL PERFORMANCE ORGANIZATIONAL TRENDS HISTORIC PERFORMANCE COMPARISONS OVER TIME ARE THESE TRENDS LIKELY TO CONTINUE INTO THE FUTURE? ARE ADJUSTMENTS NEEDED FOR INFLATION? COMPARISONS WITH SIMILAR FIRMS A--INDUSTRIAL AVERAGES (SIC Codes) CAN WE DETERMINE THE CORRECT CODE FOR OUR INDUSTRY? B--COMPARISONS WITH KEY COMPETITORS WHO ARE OUR TOP THREE COMPETITORS? CAN WE GET GOOD DATA ON THEIR RECENT PERFORMANCE? ORGANIZATIONAL OBJECTIVES STRATEGIC OBJECTIVES (Stockholder’s Reports & Meetings) WERE ANY OBJECTIVES SET? ARE THE OBJECTIVES PRECISE ENOUGH TO BE EVALUATED? HAVE WE MET OR EXCEEDED OUR OBJECTIVES?

  6. RATIO ANALYSIS - 1 LIQUIDITY RATIOS ABILITY TO MEET SHORT-TERM FINANCIAL OBLIGATIONS CURRENT RATIO How much of our current assets are available to cover short-term obligations? (Current Assets/Current Liabilities) CA/CL QUICK (Acid-Test) RATIO Ability to pay short-term obligations without liquidating inventories (Current Assets - Inventories)/Current Liabilities (CA-Invent)/CL CASH RATIO How much of the current obligations can be paid with cash? (Cash + Cash Equivalents)/Current Liabilities (Cash + Equiv)/CL

  7. RATIO ANALYSIS - 2 LEVERAGE RATIOS AMOUNT OF BORROWING AND INDEBTEDNESS DEBT TO ASSETS RATIO How much of the company assets are basically financed by all forms of borrowing and indebtedness? Total Liabilities/Total Assets TL/TA DEBT TO EQUITY RATIO Measures the funds provided by all forms of borrowing vs the funds provided by owners Total Liabilities/Total Equity TL/TE CURRENT LIABILITIES TO EQUITY RATIO Measures the extent of short-term financing provided by owners Current Liabilities/Total Equity CL/TE

  8. RATIO ANALYSIS - 3 ACTIVITY RATIOS EFFECTIVE MANAGEMENT OF CORPORATE RESOURCES INVENTORY TURNOVER The number of times that finished goods inventory was sold or cleared out in a year Cost of Goods Sold/Avg Finished Goods Inventory COGS/FGI AVERAGE COLLECTION PERIOD Indicates the average amount of time (in days) it takes to collect on a credit sale (Accounts Receivable x 365)/Annual Sales (net) (ARx365)/Tot Sales NET WORKING CAPITAL TURNOVER Measures how effectively working capital is used to generate sales Net Sales/(Current Assets – Current Liabilities) Tot Sales/(CA-CL) ASSET TURNOVER Measures utilization of total assets. How many sales are generated by each dollar of assets? Net Sales/Total Assets Tot Sales/TA

  9. RATIO ANALYSIS - 4 PROFITABILITY RATIOS DEGREE OF SUCCESS IN ACHIEVING DESIRED PROFIT LEVELS NET PROFIT MARGIN (NP) How much after-tax profit is generated by each dollar of sales? Net Profit (after taxes)/Net Sales NP/Tot Sales RETURN ON ASSETS (ROA) A measure of management efficiency. The rate of return on total assets before interest and taxes. Operating Income (before int + tax)/Total Assets Oper Inc/TA RETURN ON EQUITY (ROE) Measures the rate of return on the total book value of equity in the company Net Profit (after taxes)/Total Equity NP/TE

  10. RATIO ANALYSIS - 5 OTHER RATIOS EARNINGS PER SHARE (EPS) Shows after tax earnings generated for each share of common stock (Net Profit – Preferred Dividends)/Avg # Shares (NP-Pref Div)/# Shares PRICE/EARNINGS RATIO How much the investor is willing to pay for each dollar of earnings? Share Market Price/Earnings Per Share Stock Price/EPS DIVIDEND PAYOUT RATIO The percentage of profit that is paid out in dividends Dividends (per share)/Earnings Per Share Div (per share)/EPS DIVIDEND YIELD The dividend rate of return to common stockholders at the current market price Dividends (per share)/Share Market Price Dividend/Stock Price

  11. ALTMAN’S Z (Bankruptcy Ratio)Altman, Journal of Business Strategy. Fall, 1983. Z = 1.2(A) + 1.4(B) + 3.3(C) + .6(D) + 1.0(E) ORIGINAL Z = FOR PUBLIC MANUFACTURERS A = WORKING CAPITAL/TOTAL ASSETS B = RETAINED EARNINGS/TOTAL ASSETS C = (EARNINGS BEFORE INTEREST + TAXES)/TOTAL ASSETS D = MARKET VALUE OF EQUITY/TOTAL LIABILITIES E = SALES REVENUES/TOTAL ASSETS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - IF Z > 3.0 THE FIRM ISFINANCIALLY STRONG IF Z < 1.8 THE FIRM IS IN SERIOUS TROUBLE

  12. ALTMAN’S Z (Bankruptcy Ratio)FOR PRIVATE FIRMS (MODELS A and B) Z = .717(A) + .847(B) + 3.107(C) + .42(D) + .998(E) MODEL A = PRIVATE MFRS…..MODEL B = PRIVATE - GENERAL MANAGEMENT A = WORKING CAPITAL/TOTAL ASSETS B = RETAINED EARNINGS/TOTAL ASSETS C = (EARNINGS BEFORE INTEREST + TAXES)/TOTAL ASSETS D = MARKET VALUE OF EQUITY/TOTAL LIABILITIES E = SALES REVENUES/TOTAL ASSETS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - MODEL A VALUESMODEL B VALUES IF Z > 2.90 THE FIRM ISFINANCIALLY STRONG IF Z > 2.60 IF Z < 1.23 THE FIRM IS IN SERIOUS TROUBLEIF Z < 1.10

  13. INDEX OF SUSTAINABLE GROWTHBangs, Managing by the Numbers, Upstart Publ, 1992, pp 106-107 How much sales growth can be sustained by internally-generated funds? G* =_P (1 – D) (1 + L)___ T – P (1 – D) (1 + L) P = (NET PROFIT BEFORE TAXES / NET SALES) x 100 D = TARGET DIVIDENDS / PROFIT AFTER TAXES L = TOTAL LIABILITIES / NET WORTH T = (TOTAL ASSETS / NET SALES) x 100 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - IF PLANNED GROWTH RATE > G* EXTERNAL CAPITAL WILL BE NEEDED TO FUND GROWTH

  14. CONSUMER PRICE INDEX (for all items)US Bureau of Labor Statistics, Monthly Labor Review YEAR = CPI (1967=100)____YEAR = CPI (1982/84 = 100) 1967 100.0 1980 246.8 1993 144.5 1968 104.2 1981 272.4 1994 148.2 1969 109.8 1982 289.1 1982 96.2 1995 152.4 1970 116.3 1983 298.4 1983 99.6 1996 156.9 1971 121.3 1984 311.1 1984 103.9 1997 160.5 1972 125.3 1985 322.2 1985 107.6 1998 163.0 1973 133.1 1986 328.4 1986 109.6 1999 166.6 1974 147.7 1987 340.4 1987 113.6 2000 172.2 1975 161.2 1988 354.3 1988 118.3 2001 177.1 1976 170.5 1989 371.3 1989 124.0 2002 179.9 1977 181.5 1990 391.4 1990 130.7 2003 184.0 1978 195.4 1991 408.0 1991 136.2 2004 188.9 1979 217.4 1992 420.3 1992 140.3 2005

  15. ILLUSTRATED INFLATION ADJUSTMENT OREGON CONFERENCE TITHES ”THE LORD HAS GREATLY BLESSED…TITHES HAVE GROWN 18.2% DURING THE PAST TWO YEARS.” 1979 $35 Million 1980 $38 Million 1981 $41.4 Million CPI INDICES 1979 217.4 1980 246.8 1981 272.4 TITHES CONVERTED TO CONSTANT 1979 DOLLARS 1979 $35 Million 1980 $33.47 Million 1981 $33.04 Million WHEN ADJUSTED FOR INFLATION, TITHES HAVE DECLINED BY 5.6% DURING THE PAST TWO YEARS.

  16. ASSESSING THE ORGANIZATION—A REMINDER ORGANIZATIONAL TRENDS HISTORIC PERFORMANCE COMPARISONS OVER TIME ARE THESE TRENDS LIKELY TO CONTINUE INTO THE FUTURE? ARE ADJUSTMENTS NEEDED FOR INFLATION? COMPARISONS WITH SIMILAR FIRMS A--INDUSTRIAL AVERAGES (SIC Codes) CAN WE DETERMINE THE CORRECT CODE FOR OUR INDUSTRY? B--COMPARISONS WITH KEY COMPETITORS WHO ARE OUR TOP THREE COMPETITORS? CAN WE GET GOOD DATA ON THEIR RECENT PERFORMANCE? ORGANIZATIONAL OBJECTIVES STRATEGIC OBJECTIVES (Stockholder’s Reports & Meetings) WERE ANY OBJECTIVES SET? ARE THE OBJECTIVES PRECISE ENOUGH TO BE EVALUATED? HAVE WE MET OR EXCEEDED OUR OBJECTIVES?

  17. HOW WELL IS THE PRESENT STRATEGY WORKING? WHAT IS THE CURRENT STRATEGY? COST-LEADERSHIP DIFFERENTIATION FOCUS HOW MANY STAGES IN THE CHAIN DO WE OPERATE IN? AMOUNT OF VERTICAL INTEGRATION SIZE & DIVERSITY OF GEOGRAPHIC MARKETS COVERED? FUNCTIONAL STRATEGIES? MARKETING OPERATIONS & PRODUCTION FINANCE HUMAN RESOURCES EVIDENCE OF SUCCESS? RECENT STRATEGIC MOVES?

  18. USING ORGANIZATIONAL RESOURCES TO GAIN COMPETITIVE ADVANTAGE RESOURCES = What are our organizational assets? CAPABILITY = We are able to function/perform adequately COMPETENCY = Something we do exceedingly well A CORE COMPETENCY = We do it well, all across the organization A DISTINCTIVE COMPETENCY = We do it better than our competitors Distinctive competencies may erode over time to become the minimum to compete in the industry, because competitors will try to copy or imitate successful firms.

  19. EVALUATING COMPETENCIESBARNEY 2003 VRIO ANALYSIS FRAMEWORK VALUE DOES IT PROVIDE OBVIOUS CUSTOMER VALUE AND COMPETITIVE ADVANTAGE? RARENESS DO OUR COMPETITORS WISH THEY HAD THIS RESOURCE, BUT THEY DON’T? IMITABILITY IS IT EXTREMELY DIFFICULT TO COPY OR IMITATE? ORGANIZATION IS OUR FIRM ABLE TO TAKE FULL ADVANTAGE OF (EXPLOIT) THIS RESOURCE? IF THE ANSWER IS “YES” ON ALL OF THE ABOVE, WE HAVE FOUND A DISTINCTIVE COMPETENCE FOR OUR FIRM (A Clear Organizational Strength)

  20. HOW WE ACQUIRE DISTINCTIVE COMPETENCIESVERDIN & WILLIAMSON 94 WE INHERITED IT—IT’S ALWAYS BEEN A COMPANY ASSET SOMETHING WE OBTAINED FROM THE FOUNDER…OWNERSHIP OF A UNIQUE LOCATION, PATENT, PRODUCT OR PROCESS. WE ACQUIRED IT FROM SOMEONE ELSE SOMEONE ELSE DEVELOPED IT, BUT WE BOUGHT IT WE SHARE IT WITH SOMEONE ELSE DEVELOPED BY SOMEONE ELSE…A JOINT VENTURE OR ALLIANCE ALLOWS US ACCESS WE BUILT IT OURSELVES WE PAINSTAKINGLY DEVELOPED THIS RESOURCE “FROM SCRATCH.” THE DISTINCTIVENESS OF THIS COMPETENCY HAS EVOLVED OVER TIME.

  21. SUSTAINABILITY OF A COMPETITIVE ADVANTAGE JUST BECAUSE YOU HAVE A DISTINCTIVE COMPETENCE OR COMPETITIVE ADVANTAGE DOESN’T MEAN YOU WILL BE ABLE TO KEEP IT. HOW QUICKLY WILL YOUR ADVANTAGE ERODE? HOW EASILY CAN COMPETITORS COPY YOUR ADVANTAGES? IS THE KEY TO YOUR ADVANTAGE TRANSPARENT? IS IT BASED ON EXPLICIT OR TACIT KNOWLEDGE? IS IT TRANSFERRABLE? …REPLICABLE? “OTHERS UNDERSTAND WHAT WE DO, BUT THEY CAN’T DO IT.” M Dell A CONTINUUM OF SUSTAINABILITY SLOW CYCLE – strongly shielded (patents, brand names) STANDARD CYCLE – production processes are a bit complicated FAST CYCLE – easily duplicated and idea-driven Can’t sustain advantages unless you’re always first from the lab to the market

  22. WHERE DOES YOUR FIRM MAKE ITS MONEY? WHAT IS YOUR BUSINESS MODEL? WHERE DOES MOST OF YOUR PROFIT COME FROM? FROM THE PRODUCT? FROM UPGRADES? FROM SERVICES? FROM ADVERTISING? A FEW EXAMPLES OF BUSINESS MODELS BLOCKBUSTER JUST A FEW KEY PRODUCTS THAT WE A HOLD A PATENT ON (NEAR-MONOPOLY) PROFIT PYRAMID COMPANY OFFERS A COMPLETE LINE OF PRODUCTS. HIGHER PRICED (Luxury) MODELS ARE WHERE MOST OF THE PROFIT IS MADE MULTI-COMPONENT SYSTEM SELL COMPUTERS VIRTUALLY AT COST, MAKE MONEY ON PRINTERS & INK ADVERTISING MEDIA PRODUCT IS BASICALLY FREE TO THE PUBLIC (TV, RADIO, INTERNET) ADVERTISERS PAY FOR EXPOSURE OF THEIR ADS THROUGH THIS “FREE” VENUE

  23. A REMINDER OF WHAT TO CONSIDER FINANCIAL & MARKET PERFORMANCE (Strengths/Weaknesses) FINANCIAL INDICATORS • RATIOS, FINANCIAL COMPARISONS, TRENDS STRATEGIC MARKET INDICATORS • MARKET SHARE, PENETRATION, TRENDS INTERNAL ORGANIZATION (Distinctive Competencies/Weaknesses) PERSONNEL -- Top Management, Professional Expertise STRUCTURE -- Authority, Accountability, Communication, Decision-Making CORPORATE CULTURE -- Norms, Historic ways of doing things PHYSICAL RESOURCES -- Equipment, Buildings, Locations COMPETENCE OF KEY DEPARTMENTS -- Mktg, R&D, Operations, IS OBJECTIVES & STRATEGIES (Successes/Failures) CLARITY AND FOCUS OF MISSION/VISION PRECISION AND LOGIC OF STRATEGIC CORPORATE OBJECTIVES “FIT” & SUCCESS OF COMPETITIVE (Business-level) STRATEGIES “FIT” & SUCCESS WITH CORPORATE (Investment-level) STRATEGIES SUCCESS WITH IMPLEMENTING DEPARTMENTAL STRATEGIES SUMMARY OF ORGANIZATIONAL CONDITION Summarize the distinctive competencies and strengths and the glaring organizational weaknesses and failures you’ve detected at this firm.

  24. ORGANIZATIONAL ANALYSISOF STRENGTHS AND WEAKNESSES • HAS OUR ORGANIZATION BEEN FINANCIALLY COMPETITIVE? • SCRUTINIZE FINANCIAL STATEMENTS • WERE OUR STRATEGIC MARKETING OBJECTIVES ACHIEVED? • STRATEGIC CORPORATE OBJECTIVES • ARE OUR PRICES AND COSTS COMPETITIVE? • VALUE CHAIN ANALYSIS • WHAT ARE OUR DISTINCTIVE COMPETENCIES & RESOURCES? • PERSONNEL, STRUCTURE, PHYSICAL RESOURCES, DEPARTMENTS • HOW STRONG IS OUR COMPETITIVE POSITION? • COMPETITIVE ASSESSMENT WITH KEY SUCCESS FACTORS • HOW WELL ARE OUR PRESENT STRATEGIES WORKING? • COMPETITIVE, CORPORATE, FUNCTIONAL IN SUMMARY, WHAT ARE THE TOP STRENGTHS AND THE GREATEST WEAKNESSES THIS ORGANIZATION POSSESSES?