Internal Analysis

Lecture Topics
Purpose of Internal Analysis Competitive Advantage and Core Competence Value Chain Financial Analysis Combining Internal and External Analyses
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Purpose of Internal Analysis

An organizations future success depends on its own internal conditions as well as external conditions Managers need to be able to identify
Strengths that the company can relay on in order to compete Weaknesses that need to be corrected or minimized as competitive factors

Competitive Advantage
The collection of factors that sets a company apart from its competitors and gives it a unique position in the market Means to add value for stakeholders Focus especially on adding value for customers
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Core Competence
A unique set of lasting capabilities that a company relies on to achieve competitive advantage and add value Innovation Efficiency Customer Responsiveness Quality Special Expertise
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Value Chain

Value Chain Interpretation

Represents a company or any organization Simplified illustration of all activities that an organization must perform Framework for analyzing a companys strengths and weaknesses Margin represents profit- expand margin by
Being able to charge a higher price Operating at a lower cost within the Value Chain

Primary Activities in the Value Chain

Activities directly involved in producing, selling, distributing, and servicing product for buyer.
Inbound logistics: receiving, storing, and distributing inputs for production Operations: all activities involved in transforming inputs into final products Outbound logistics: collecting, storing, distributing product to final buyer Marketing and Sales: activities used to get customers to buy company products Service: installation, repair, support, training for using a product 8

Support Activities in the Value Chain

Activities that enable the performance of primary activities
Firm infrastructure: companywide support of entire value chain; includes quality of management, financial performance, strategy, organizational culture Human resource management: recruiting, hiring, training, reward systems for employees Research and development: design of products and processes that enhance company performance; not limited to equipment Procurement: purchasing and managing inputs used in operations; developing and managing supplier relations
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Applying Value Chain Analysis

Framework for identifying companys strengths and weaknesses Means to focus on where the companys core competencies exist and can be used to achieve competitive advantage and add value Comparison with competitors reveals opportunities for improving companys competitive position
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Financial Analysis
Uses companys financial results to assess companys performance Requires comparisons of results over multiple years and against industry standards Important tool to identify companys strengths and weaknesses and potential problem areas.

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Income Statement
Sales Cost of Goods Sold Gross Profit Operating Expenses Wages and Salaries Rent Advertising Insurance Research and Development Depreciation Total Operating Expenses Operating Income (Earnings Before Interest and Taxes EBIT) Interest Income Before Taxes Taxes Net Income

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Balance Sheet
Assets Current Assets Cash Marketable Securities Accounts Receivable Inventory Total Current Assets Fixed Assets Property, Plant, Eqt. Less: Accumulated Depreciation Net Fixed Assets Other Assets Patents, Trademarks Goodwill Total Other Assets Total Assets Liabilities and Owners Equity Liabilities Current Liabilities Accounts Payable Wages Payable Notes Payable Taxes Payable Total Current Liabilities Long Term Liabilities Loans Mortgages Total Long Term Liabilities Owners Equity Stock Retained Earnings Total Owners Equity Total Liabilities and Owners Equity
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Types of Ratios
Profitability Activity Efficiency Liquidity Debt - Leverage Growth

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Profitability Ratios
Gross Profit Margin = Gross Profit Sales Net Profit Margin = Net Income Sales Operating Profit = Operating Income Margin Sales Return on Equity = Net Income___ Owners Equity
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Profitability Ratios Du Pont Formula

Return on = Net Income__ Assets Total Assets = Net Income X __Sales___ Sales Total Assets = Net Profit Margin X Total Asset Turnover

= Profitability X Efficiency
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Activity Efficiency Ratios

Inventory Turnover Average Collection Period Fixed Asset Turnover Total Asset Turnover = Cost of Goods Sold Inventory = _________365 days____ (Sales/Accounts Receivable) = _________Sales________ Net Fixed Assets = _________Sales________ Total Assets
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Liquidity Ratios
Current = Quick __Current Assets___ Current Liabilities = Current Assets Inventories Current Liabilities

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Debt Leverage Ratios

Debt = Current + Long Term Liabilities Total Assets Debt = Current + Long Term Liabilities Total Owners Equity Times = Operating Income (EBIT) Interest Interest Earned

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Growth
Sales = SalesYear 2 - SalesYear 1 Growth ___________________ X 100 SalesYear 1

Profit = Profit Year 2 - Profit Year 1 Growth ___________________ X 100 Profit Year 1

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Combining Internal and External Analyses

Internal and External Analyses commonly referred to as SWOT:
Strengths Weaknesses Opportunities Threats

Strengths and Weaknesses identified from Internal Analysis Opportunities and Threats identified from External Analyses
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Internal Analysis
Strengths and Weaknesses identified through the use of tools such as:
Core Competencies Stakeholder Analysis Value Chain Financial Analysis

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External Analysis
Opportunities and Threats identified through the use of tools such as:
General Environment Assessment Five Force Analysis Key Success Factors in Industry Competitive Changes during Industry Evolution Strategic Groups National Competitive Advantage

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Results of Internal and External Analysis

Requires creative interpretation Understanding of companys competitive position in its industry Identification of strategic issues the company faces Strategic issues
Represent dangers to the companys long-term survival Suggest areas where the company should concentrate its efforts in order to grow
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Internal Analysis
Strengths Weaknesses

External Analysis
Opportunities Threats Tools

Tools

Strategic Issues

Strategic Alternatives

Strategy
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