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MBA Program

Strategic Management Course

A Case Study

Strategic Audit
of
( XYZ Company Inc. )
CONTENTS
 Background

1. Current Situation
A. current Performance
B. Strategic Posture
2. Corporate Governance
A. board of Directors
B. Top Management
3. External Environment ( Opportunities and Threats )
A. Societal Environment
B. Task Environment ( Industry )
C. Summary of external Factors
4. Internal Environment ( Strengths & Weaknesses )
A. Corporate Structure
B. Corporate Culture
C. Corporate Resources
1) Marketing
2) Finance
3) Research and development
4) Human Resource Management
5) Information System
D. summary of Internal Factors
5. Analysis of Strategic Factors
A. Situational Analysis
B. Review of Mission and Objectives

6 . Determination of Strategy, using Strategic Factors

7. Determination of Strategy using SPACE Matrix

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 Background
XYZ Company was founded in 1687. It started by producing Baking Soda Packages with the
brand name (Arm & Hammer ).
For 150 years XYZ Company kept developing and adding more consumer products to its
product line, until the products carrying the brand name (Arm & Hammer) could be seen on
about 95 % of all U.S households .
The company has full coverage of the market in the U.S and Canada, but less than 5% of its
sales are outside the U.S, therefore it is working hard now to expand its international
operations . International operations will face two problems :
1-Lack of recognition of the brand name Arms & Hammer outside the U.S .
Overcoming this problem will require huge and expensive marketing efforts
2-The Transportation Cost from the US to target markets in Europe / Asia is high
This problem will deprive the company from one of its main competitive
advantages, which is low prices .
To strengthen its position in the European Market, The company acquired De Witt
International Corporation . This acquisition provided XYZ with the following advantages :
1- Increased international Exposure
2- Ownership of Production facilities and technology of tooth paste .

 Products
XYZ Company remained focused on its main product ( Baking Soda ) for a long time, but in
the 1970 The company started to apply a strategy of increasing the number of its consumer
products.
It implemented this strategy by Developing new products in-house and Buying well known
consumer brands, such as : Brillo, Parsons, Ammonia ,,,
The largest selling consumer product is Laundry Detergent ( 4 % of the market ) .
Its main competitive advantage is low price.(15-20% lower than market leader, Proctor &
Gamble ), but this product line faces 2 difficulties :
1- The growing environmental concerns over chemical detergents .
2- The competition of the new entrants

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Ι-Current Situation
a. Current Performance
1-Market Share

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2-Financial Performance
The Main Financial Ratios of XYZ Company
1-Liquidity Ratios
a-Current Ratio = Current Assets / Current Liabilities .
b- Quick ( ACID Test ) Ratio = ( Current Assets – Inventory )
Current Liabilities
a-Current Ratio = Current Assets / Current Liabilities .
Item Date 1 Date 2
Total Current Assets
Total Current Liabilitis
Current Ratio = Current Assets / Current Liabilities
b- Quick ( ACID Test ) Ratio = ( Current Assets – Inventory )

Current Liabilities
Item Date 1 Date 2
Total Current Assets
Inventory
Total Current Asset – Inventory
Total Current Liabilitis
Acid Test Ratio = (Current Assets – Inventory ) / (Current Liabilities )

Summary of Liquidity Ratios


S
Ratio Calculation of the ratio Values
1 Current Ratio Current Assets / Current Liabilities
2 Quick (ACID Test) Ratio
( Current Assets – Inventory )
Current Liabilities

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2-Asset Management Ratios
A-Inventory Turnover Ratio = Sales / Inventory
B- Days Sales Outstanding Ratio = Receivables / Average daily sales.
C- Fixed Assets Turnover Ratio = Sales / Net Fixed Assets
D- Total Assets Turnover Ratio = Sales / Total Assets

A-Inventory Turnover Ratio = Sales / Inventory


Item Accounting Period
Duration1 ( Days ) Duration2 ( Days )
Sales 734.691.105 763.075.784
Inventory, Net (On 31 Dec 2000) 174.925.197 -

Inventory Turnover Ratio = Sales / Inventory 4.2


`
Conclusion & Comments
1- The Sales: Inventory Ratio of Olympic Group is very good. It has turned over its
Inventory 4.2 times in 9 Months only.
B- Days Sales Outstanding Ratio = Receivables / Average daily sales.
Accounting Period
Item Duration1 Duration2
( Days ) ( Days )
Accounts & Notes Receivables, Net 108.178.473
Sales 734.691.105 763.075.784

2.721.078 2.119.655
Average Daily Sales (270 Days) (360 Days)

DSO Days Sales Outstanding Ratio = Receivables / Average Daily Sales 39.76 -

Conclusion & Comments


1-The Days Sales Outstanding (DSO) Ratio of Olympic Group is very good. For a company
that sells basically on Credit terms, 40 days is very acceptable.
2- The Average daily sales has improved. It increased from about 2.11 Million / Day at
The beginning of the year 2000 to about 2.72 million / day at the end of year.

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c- Fixed Assets Turnover Ratio = Sales / Net Fixed Assets

Sales ( 1 April -31st Dec. 2000 ) ,( 9 Months = 270 Days ) 734.691.105


Fixed Assets, Net ( On 31st Dec. 2000 ) 266.979.701

Fixed Assets Turnover Ratio = Sales / Net Fixed Assets 2.75

c- Total Assets Turnover Ratio = Sales / Total Assets

Sales ( From 1st April 2000 To 31st Dec. 2000 ) 734.691.105


( 9 Months = 270 Days )

Total Long Term Assets ( On 31st Dec. 2000 ) 785.533.410

Total Current Assets ( On 31st Dec. 2000 ) 537.989.886

Total Assets 1.323.523.296


Total Assets Turnover Ratio = Sales / Total Assets 0.555

Conclusion & Comments


1-The Sales : Fixed Assets Ratio of Olympic Group is = 2.75, which is very good .
2-The Sales : Total Assets Ratio of Olympic Group is also very good .
3-The relative percentage between Fixed Assets and Current Assets are 59 % : 41 %
,which indicates a balance between the two types of Assets .

Summary of Asset Management Ratios


S
Ratio Calculation of the ratio Values
1 Inventory Turnover Ratio Sales / Inventory
2 Days Sales Outstanding Ratio Receivables / Average daily
sales.
3 Fixed Assets Turnover Ratio Sales / Net Fixed Assets
4 Total Assets Turnover Ratio Sales / Total Assets

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3- Debt Management Ratios
a-Total Debt to Total Assets ratio.
b- Times Interest Earned ( TIE ) Ratio
c- Fixed Charge Coverage Ratio

a-Total Debt to Total Assets ratio.


Item Value Remarks
Total Assets 1.323.523.296
Current Liabilities 750.080.480 6 % of the total Debt
Long Term Liabilities 50.408.533 94 % of the total Debt
Total Liabilities ( Total Debt ) 800.489.013 100%
Total Debt to Total Assets ratio. 60 %
Conclusion & Comments
1- Total Debt to Total Assets ratio of Olympic Group is not good . It means that 60 %
of the Total Assets are supplied by Creditors.
2- The ratio between Current Liabilities and Long term liabilities is 94 % TO 6 %
b-Times Imterest Earned ( TIE ) Ratio :
Earning before interest & Taxes ( EBIT ) / Interest Charges

Item Value Remarks


Earning before Taxes & Interest 189.331.557
Interest Charges ( Financing Expenses ) 66.047.770
Earning before Taxes & Interest /
2.86
Interest Charges ( Financing Expenses )

Summary of Debt Management Ratios


S
Ratio Calculation of the ratio Values

1 Total Debt to Total Assets Ratio. Total Debt / Total Assets

Times Interest Earned Earning before interest &


( TIE ) Ratio Taxes ( EBIT )
2
Interest Charges

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4- Profitability Ratios
a-Profit Margin 0n Sales Ratio.
b- Basic Earning Power ( BEP ) Ratio
c-Return on Total Assets ( ROA ) Ratio
d-Return on Common Equity( ROE ) Ratio

a-Profit Margin 0n Sales Ratio.


a-Profit Margin 0n Sales Ratio.= Net Income / Sales

Item Value Remarks


Net Income 79.999.404
Sales 734.691.105
Profit Margin / Sales Ratio.= Net Income / Sales 10.9 %
b- Basic Earning Power ( BEP ) Ratio
Earning before Interest & Taxes ( EBIT )
=
Total Assets

Item Value Remarks


Earning before interest & Taxes ( EBIT ) 189.331.557
Total Assets 1.323.523.296
Earning before interest & Taxes ( EBIT ) / Total Assets 14.3 %

c-Return on Total Assets ( ROA ) Ratio


Return on Total Assets ( ROA ) Ratio = Net Income
Total Assets
Item Value Remarks
Net Income 79.999.404
Total Assets 1.323.523.296
Net Income / Total Assets 6%

d-Return on Common Equity( ROE ) Ratio


Return on Common Equity( ROE ) Ratio = Net Income

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Common Equity

Item Value Remarks


Net Income 79.999.404
Total Shareholders Equity 459.746.410
Return on Common Equity( ROE ) Ratio 17.4%

Summary of Profitability Ratios


S
Ratio Calculation of the ratio Values
1
Profit Margin 0n Sales Profit Margin (Net Income) / Sales
Ratio.
Earning before Interest &
2 Basic Earning Power
Taxes ( EBIT )
( BEP ) Ratio

Total Assets
3 Return on Total Assets Net Income / Total Assets
( ROA ) Ratio
4 Return on Common Net Income / Common Equity
Equity( ROE ) Ratio

Summary of The Financial Ratios of XYZ Company


Liquidity Ratios
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Values
Ratio Definition Year 1 Year 2 Year 3
Current Ratio Current Assets / Current Liabilities

( Current Assets – Inventory )


Quick Ratio
Current Liabilities
Asset Management Ratios
Inventory Turnover Sales / Inventory
Ratio
Days Sales Receivables / Average daily
Outstanding Ratio sales.
Fixed Assets Turnover Sales / Net Fixed Assets
Ratio
Total Assets Turnover Sales / Total Assets
Ratio

Debt Management Ratios


Total Debt to Total Total Debt / Total Assets
Assets Ratio.

Times Interest Earned Earning before interest & Taxes (


( TIE ) Ratio EBIT ) / Interest Charges
Profitability Ratios
Profit Margin 0n Profit Margin (Net Income) /
Sales Ratio. Sales

Basic Earning Power Earning before Interest &


( BEP ) Ratio Taxes ( EBIT ) / Total Assets
Return on Total Assets
Net Income / Total Assets
( ROA ) Ratio
Return on Common
Net Income / Common Equity
Equity ( ROE ) Ratio

3-Position in the International Market

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A.Strategic Posture
1.Mission

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2-Objectives

3- Strategies

4- Policies

2.Corporate Governance
A. Board of Directors

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B. Top Management

3.External Environment ( Opportunities and Threats )

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A. Societal Environment
1-Political Environment

2- Economical Environment

3- Socio cultural Environment

4- Technological Environment

B. Task ( Industry ) Environment, using Porter Model


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1-Competition among existing rivals

2-Threat of new entrants

3-Negotiating power of suppliers

4- Negotiating power of buyers

5- Special Interest Groups

a. Summary of external Factors


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External Factors Analysis Summary ( EFAS )
Weighted
External Strategic Factors Weight Rating Comments
Score
Opportunity

Threat

4.Internal Environment ( Strengths & Weaknesses )


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1-Corporate Structure

2-Corporate Culture

3-Corporate Resources
a-Marketing

b-Finance

c-R& D

d-HRM

e-Management Information System

C.Summary of Internal Factors


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Internal Factors Analysis Summary ( IFAS )
Weighted
Internal Strategic Factors Weight Rating Comments
Score
Strengths
A strong, respected and trusted brand
name in the Consumer Products
market
Reduced Prices ( about 20% Lower
than the Market Leaders )
Controlling the primary raw material
of its products.
Increased international exposure in
the market of Tooth Paste.
Having great Marketing experience
with Top management officials .
Innovation and continuously
developing new
consumer products
Weaknesses

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SWOT analysis
( Strengths, Weaknesses ,Opportunities and Threats )

Strength Weaknesses

 A strong brand name, that is respected  Lack of recognition of the


& trusted for a long time in the market brand name ( Arm & Hammer )
 Reduced Prices ( Lower than the in Europe .
market leader )  The high Transportation Cost,
 The company controls the primary of products from U.S to Europe
raw material of its products. will increase the selling price
 Increased international exposure in .
the market of Tooth Paste.
 Member of The top management have
great Marketing experience.

Opportunities Threats

 More and more uses are found for  Competition of existing local
the products of the Company. producers of detergents.
 The products of the Company are  Competition of new entrants in
environmentally friendly. the Tooth Paste market.
 The increasing demand on Dental 
Hygiene products as a result of
continuous growth of oral
 Use of the main product of the
company ( Sodium Bicarbonate ) in
the treatment of drinking water .

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5.Analysis of Strategic Factors
A. Situational Analysis ( SFAS)
Strategic Factors Analysis Summary ( SFAS )
Weighted
Strategic Factors Weight Rating Comments
Score

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Part 2

Strategy Formulation
for
XYZ Company

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To formulate Strategy, we use the TOWS matrix

Internal
Factors Strengths ( S) Weaknesses ( W )
* Low labor cost * Low productivity due to
* Enjoying the popular under-utilization of
image of IDEAL capacity
Products in the market * Low market share
* Reduced Expenses * Lack of management
External * Providing warranty & skills in middle
Factors after sale service to managers .
consumers .
Opportunities (O) SO Strategies WO Strategies
* The increasing demand 1-Increase productivity 1-Running management
on gas cookers. to meet the increasing Training courses to Middle
* The potential export to demand. Managers .
Arabic & African 2- Focusing of marketing 2- Analyze production
countries activities on opening processes to identify
* Low prices, relative to new external markets causes of low
its medium quality level for export , utilizing the utilization.& take actions
* The good & Popular I advantage of low prices to remedy them
image of the product 3-Emphasizing in the
line (IDEAL ) marketing plan on the
old & popular name of
IDEAL .
ST Strategies WT Strategies
* Benchmarking CMEI 1- Focusing in advertising
cooker to products of on the issue of providing
Threat ( T )
competitors to identify after sale service to the
*Competition of locally
strengths & weaknesses . product, an advantage that is
built gas cookers
not available for imported
*Competition of imported
products .
Gas Cookers
2- Analyze production cost
*Approaching the date of
and take actions to reduce it
full Implementation of
to reduce selling price, to
GATT,
keep the low price
competitive advantage when
the GATT is implemented.

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Formulation Of Strategies
Using TWOS Matrix
Based upon the TWOS Analysis, CMEI should follow the following strategies :

1 Increase productivity to meet the increasing demand


.

2 Focusing of marketing activities on opening new external markets to export to


Arabic and neighbor African Countries, utilizing the advantage of low prices

3 Emphasizing in the marketing plan on the old & popular name of IDEAL .

4 Running management Training courses to Middle Managers .

5 Analyze production processes to identify causes of low utilization.& take actions


to remedy them

Benchmarking CMEI cooker to products of competitors to identify strong features


6 & Specifications and modify the design accordingly .

Focusing in advertising on the issue of providing after sale service to the product,
7 an advantage that is not available for imported products .

8 Analyzing production cost and take actions to reduce it, to reduce selling price, in
order to keep the low price competitive advantage when the GATT is
implemented

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The Strategic Position and Action Evaluation ( SPACE ) Matrix
Of
XYZ Company

Internal Strategic Position


Financial Strength ( FS ) Rating

Return on assets in the year 2000 = 10.7% . This ratio is low compared
+3
to the running bank interest , which is about 10 % .

Profit before taxes in the year 2000 = 4.576.000 E.P , which is about
four times the year 99 +5

Stock Turnover which is 2.2, is low compared to the turnover in 1999, +2


which was 2.6
Total value of FS Factors +10

Average value of FS +3.5

Competitive Advantage ( CA) Rating

Low production cost -2

Good positioning of the product in the market ( CMEI is a member of


Olympic Group , the largest house hold Manufacturer in Egypt , and it -1
enjoys the good reputation of the Group )

Providing distinctive warranty and after sale service to consumers -3

Total value of CA Factors -6

Average value of CA -2

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External Strategic Position
Environmental Stability ( ES )
Rating
The increase of the exchange rate of the U.S $ against the Egyptian
Pound increase the value of imported parts in the end product, which -1
increases the production cost, and the selling price

Fluctuation of the prices of sheet metal affects the production cost, and
-2
consequently the selling price of the end product to consumers .

Competitors are improving their product Quality to compete with XYZ -2

The threat of imported Cookers, with lower price & higher quality -1

Total value of ES Factors -6


Average value of ES -1.5

Industry Strength ( IS ) Rating


The industry of Gas Cookers is growing. The government is encouraging it
to boost using of natural gas as a source of energy, to protect the +5
environment and reduce pollution .

Total value of IS Factors +5

Average value of IS +5

RESULTS

External Strategic Position Factors Internal Strategic Position Factors


 Environmental Stability ( ES ) = -1.5
 Financial Strength ( FS ) = +3.5
 Industry strength ( IS ) = +5 Competitive Advantage ( CA ) = - 2

Directional Vector Coordinates of X axis = ( IS ) + ( CA ) = ( +5 ) + ( -2 ) =+3


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Directional Vector Coordinates of Y axis = ( FS ) + ( ES ) = (+3.5 ) + ( -1.5 ) = + 2
Determination of Strategy
using Graphical Presentation of Results
of
The Strategic Position and ACtion Evaluation ( SPACE ) Matrix

Conservative FS Aggressive
+6
+5
+4
+3
+2
+1
CA -6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6 IS
-2
-3
-4
-5
-6
Defensive ES Competitive

CONCLUSION
The Graphical representation of results indicate that CMEI is in a strong
financial position, and operates in a growing industry , therefore CMEI
should adopt an Aggressive Strategy

A. Review of Mission and Objectives

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