INTERNAL
DlAGNosls
OBJECTIVES diagnosts
of internalanalysisand
To dcscribethe process illustratehow they affcct
i"tto" u'.'dtt'
To introduceinternal "'uttltt
used lbr
becn dovclopedand
lT.:'"i]::t:::e tcchniqueswhich havc
internalanalYsts internal strengthsand
affcct thc diagnosisof
To considerfactorsthat
weaknesscs
I N T R O D U C T I O[N
1]
n i t o n a n a l to
T h i s c h a p t c r c o m p l e t e s t h e t h r e e - c h a p;tt e r u;;"ironment i s a n d d i a which
l ' s determine gnosis.ChaptcrsJ
unury'i'";;; ;i;""'*
and 4 focuseo on "f i" 'rt" nt- in the future' Chapter 5
ut lignificant
oppoftunitiesuna 'r""ui''t""iJ
descriuestheparallelp,".*,-*'.ninr,olvesdeterminingthestrengthsandweaknesses in order to develop
at present develop' Th;; ;;; d"iagnosed limtt
the firm has
"'"ti'ni or ionsider how they wrll
competitive advantages'"Jnil:'ilt;;*"utn"'*''
'"1""?f
;ffi::i'"fi!i""T"1-"li,lillli,IT,f
H:'j"'il:J:':'#TitJ.ii;#;
ina' itsrunc-
strong
isequa'v
;**:U:ilHl-T::n:iT';'lil,"il"rii: ","
t i o n s . P r o c t o r & G a m b l e w a s k n o w o"*ign'
n r c ' i t " "l-*tican
p " t U t t t t *Telephone k n o w n f ois
g i sTelegraph
i n j ' ' l t a y t aand r
p'ooutliJn una p'oau't of these firms ts
its outstanding potiti"s' Yet each
'"'uit" und p""onn"i
known for its outstanOing 155
C H A P T E R5
Saramanca'
the 10,000linesinstalledin
in 1gg5to to theunited one quarterof
introduce successful lonversion of
ITT spent$105 million spain, or. *o*inr., The
a prevailing
Statcsits system 12, a sophisticated.telephone^switch stiengthsintt' uouoniog"s was ttr1,1l;<1^by
fiIanc" or marketingareasbutin the
whichhasbeenroutrngcallsanddataabroadrint"'tgai' *"ut'i"*"
rTT,s #;;;i; vehiclefor .r*ki;;;; TTt* organization and managemeni
Sysrem12 is pr.riuct .evelopmentand
,nurt"i-ion inut"o uv a.T&i'ano in the Unitedstatesand
telecommunication,
analystsand cuslomers areas.Three*"** *"tr set'up
^"d'l;;;^; :11"ry
while
NorthernTelecomLtd.
12i';;;vinnouutin' t".^Y;L:n:,:tlht1::lii:-!;*'!:ii
thesvstem
that
agree oiganiza'lion
'lhe
T5ill:l:;l'!;Iu*;':";;;pr"* uno lt was
iffi';,;i;t; l*.:*i:tJ'"i'iS;'lx,:,iTli""?+
12,;;;;; is so complexthat without focusedmanagement
ttran$t uiilion d""*ni"* Srrr.,n
spentmore Thisfaultin thestrategtc
ha'dto dtugn^amajorsystem'"
;;;tt"
tneopinionthatit should.be deliverydelays
from someanalysts the nume^rous
Xi in the Unitedro*r, u-iou"^rt^i""",'0
add 25 centsa planningstageresurted-in
ieading-toot""uJ cuslonrer*ifrd:::t' ln addition'
ti Systeml;;;*;
il. #;;ft;;,,,,.*ev t,lffi*: m$:tHjlfm:f#:,,4,i;;4t**
shareto eamings.u"in.;rir.r'*nd,
tochairm.an
cruciar
!!.
ttl+x**:J!ll;l:riiil1,",ry::::#:'iJi:i l:ff','#r:*#:**x*i:Jil:f",T":;'"
BI
i{ii
tl{[I
terecoJnmunications
the TTJllhlTfiyl'}ill *{il;;;*."of
strategv,ryi:i":,iilT::11
ll:,1il1l.$"i,i"i.il;'il;.'i;"9.;;'**ri-9:t" .,ecommun.
^":i:i*"frT,:ffi?';'JJiii;11;ffi*
st
-*c
&i,
{;.
Hr*k*J:*;;
li;;pfrtrg*hi5i:ffiftgg j:l -'
*t, more.llobrem'
ffi il:?i,ffi'r;;,1; ;;;;;;{
ru;rffi#'ffi
.r*' t^.^'1,
1
:",1*f.lt3,;.,J"';{'"ll;i;**:fu
'S::i
gr:
.i
.,'g!
ff?i"i,f
,,t';:*:,,fi
, 'gi
it:
tf
*
,,ii .!-
AND DIAGNOSIS 157
ANALYSIS
INTERNAL
S t r a r e g i cm a n a g e m e n t
e l e m e n t s( C h a p t e r2 )
To determine
missiong , oals
a n d v a l u e so f
the firm and Enterprise l \ 4 i s s i o na n d
key decision objectives
makers
The
general
environment
T o s e a r c ht h e
e n v i r o n m e n at n d
d r a g n o s teh e
rmpaclor tnreats
and opporlUnittes
To eramine
anc dragnose
thc i rm s
s l r c n q t h sa n d
WCAK IESSCS
The
s I r a l e g cr
T o c o n s i d e vr a r r o u s m an a g e m e n t
a l t e r n a t l v easn d process
a s s u r et n a t t h e
6pcroprialestrategy
s chosen
T o m a t c hp l a n s ,
p o l r c i e s ,r e s o u r c e s ,
stru61g19,3n6
a d m i n i s t r a l i v set y l e
wrth the StrategY
lI
l
>r
To ensure
Evalualion
implementation and
will meet control
objectives
AND DISTRIBUTION
INTEBNALFACTORS:MARKETING
5'3
EXHIBIT
struclY::andmarketshare:To whalex 8 Ef.ficient and effqctive packaging of products (or the
-tompetifive
;t;r*'ilt firm establisleou,,:lflt marketsharein the equivalentfor services.l.
9 Effcctiue pricing strategyfor productsand sen'ices'
I
iltin*il*rt::*#
#ilffrT':|
?,'i:il* l0 Efficient and efl'ectivesalesforce: close ties-withkey
I i;i.tl;.
,tritui.tt'
t*"ct-service
Ffi4 pfo-du.t-Eervlce
llne.
mix: quality of products
- - ^ ^ ^ r .product-service
completeness of ^ - ^ r . . ^ +^ ^
coverage,including internalefforts'
/'
identifi,ingthemarket,developingproduct,testingcustomerreaction'workingout
and deciding
productioi and costs,determiningdistributionand servicerequirements,
on advcrtisingand promotion approachet'
in the 1970s
As sirnpleas this sounds,marrycotporationsall but forgot suchbasics
high. But vast economic and social changes have madc
The
when inflation kept revenue
imporlant for most firm6. Thc recession in thc early 1980s
srralegrc marketing strengthsmore
shifts created problems for those who pursued mass
managemenl
process
and demographicand iife_style
as the kcys to marketing SucceSS. Likewise, lntense
marketing and brand loyalty
have created
internationalcompetition,rapid technologicalchange,and dcregulation
in typical marketing approaches. The changing nature of competition,
new weaknesses
at marketing strengths and weaknesses in order to build
then. requiresa close look
fragmented narkets. Exhibit 5.3 is a list of the
competitivcadvantagein increasingly
The strategist is looking to see if the firm is sub-
marketing and distriburionfactors.
stantiallystrongerin marketing and distribution than its competltors'
from a variety of
As ytu looi at the factors,you will seethat strengthcan come
questions of segrnentation, positioning, and
upprou.h"r. The operationalmarketing
distribution) are quite important to the firn,s abiltty
mix (pr<lduct,prlce' promotion.
firms compete on any and all of these factors.
to compete effectively. ol cclurse,
l o w p r i c e s l
. o w e r q u a l i i y . m o r e p r o motion.
S o m ef i r m s p r e f c ra p p r o a c h ei ns v o l v i n g
prefer orientations toward higher prices, higher quality,
and wide distriburion;others
and customdcsign.
An assessment of the weaknesses in relationto marketpotentialalso suggestsareas
where improvementscan be made. For instance,if there appearsto be a gap in the
to fill out the
product line, new-productdevelopmentor acquisitionis called for
gap in distribution might lead to efforts to build
existing line or createnew ones.A
gaps exist, price or promotion can lead to
intensity, exposure,or coverage.lf usage
uses or users (customers) can be found for
increasedfrequencyof purchase,or new
products.
160 5
CHAPTER
edge.
i:,(
ir :
Finally, the importanceof marketingto the overallsuccess of the companyneeds i_
l."'
evaluation.In somefirrrs. suchas thosewhich supplyto a few customerswho specify
tlicir prcciseneeds(e.g.. defensecontractors), the markctingfunction neednot bl
particularlysil'ong.In otherindustries. lhc greatest shareof internalresourceallocation
ntay go to rnarketing units (e.g., consumer products producers). As compctitiveneedg
relative strenglh of n'rarketing and the way it is ntanagedin relation Ri
are assessed, the
to major contpetitors ntav lead 1o indications ol strength or weakness. Exhibit 5.4
providcs an example of hou' malkcting has bccot'ne a wcakness at Proctor& Gamble
ducto thc w a y i t i s n a n a g e di n a c h a n g i n g
e n v i r o n m e n t
E X H I B I T5 , 4 BYTHENUMBERS
MARKETING
Like all packageci-goods marketers,Proctor & Gamble often get freedom to try ideas without interferencefrorn,
'
operatesin a tougherrvorld than the past, when it had the the top, P&G remains bureaucraticand centrally con-
midas touch. Thc firm has sturnbledlately. It no ionger trolled. The president wants to "know whal the factslr
has commandingleadson brandedproductssuch as Crest are." Irle is a no-nonsenseanalystwho gets involvedin
and Pampers.And its competltorsare smarter. nitty-gritty matters, with a fetish fot memorandaand a
P&G's traditional strengths-a massivecommitment burdensomesystemof comnrunication.This slow-moving
to product reseatchand exhaustivetest marketing-have perfectionist style worked to P&G's advantageduring
not been as potent as in the last. lts ntarkctsare lnoture, less-competitivetimes. But now this approachis hurting
and "the old mdssaudiencedeliveredby massmedia for somekey markel:.
the massnarketsisn't working anynore," saysoneP&G Recently, PresidentSmale has been showing greater
alumnus. flexibility. P&G js working more closely with retailers;it
P&G's earlier successes often camefrom a strategyof has cut down on its memos and livened up its ads. For-
acquiring brand names (e.g., Charmin, Duncan Hines, going its usual thoroughness,P&G rolled out half a dozen
Folger's); and using rnarketing expertise, it put those products since 1984 with no test marketing. However,
narrcs or'lone product after anotherto doninate its field. unless its weaknessesresulting from insularity and ad-
Bu1 the firm has yet to tum recent acquisitionsinto big hercncetb centralizationare reduced,Proctor'spastmar-
profit producers.Proctor has done little more than refor- keting gloriesmay not providethe strengthsto accornplish
mulate sonre new products while competitorshave cap- its goal of doubling unit volume each decade.
tured substantialnew businessby segmentingmarketsand As Exhibit 5.tl points out, P&G still faces problems
products. Insiders suggestthat the problemsat P&G rc- from cornpetitorswho are beatingthem to the punch,but
flect a corporateculture which is stifling. Decisionsare this "det'ensive" posturelits thc style of its currentman-
"rnade by the numbers." In an agewhen creativethinkers agementpractices.
Source: Adaptedfrom Z. Schiiler and A. Dunkin: "P&G's Rusty Marketing Machine," Bu,sinessWeek, Oct.2l, 1985, pp'
I l 1-r12.
.-
\
L N A L Y S I SA N D D I A G N O S I S 1 6 1
I N T E R N AA
*rntj\*'m]i:?'*il"':r"YJ::lilr
ln Chapter3 we notedthat majortcihnologicalchanges
ofteu occurredor-rtsidethe
can provide significant
mntecliateindustr.y.Hven so, r"searchanci development
ferencefrom strength1orthe ongoing husiness'
lntrally con- TheR&Dprocesstscomm<-rnlyviewedasproceedingthroughthestagesofbasic
rat the facts research,appliedresearch,developnrenlalresearch,andctlmmercialization.Exhibit
or
r involvedin
5.6 graphicallyrepresents the tinle savingsin producinga new product' process'
rranda and a one aris showsthc
re.search. time lapse frOrr
servicewith accelerated dcvelopnrental
;low-moving to conmercializ.ation and the othcr shows the R&I)
a basic rosearchbreakthrough
rtage during conditions'
states.The actualrmprovement in time will vary, but unclerunaccelerated
:h is hurting anclcomrnercializ'ation about 25
is
the normal gap betweena researchbreakthrough
wing greater years-Thefigu,.*u,developedbylookingbackfromconlmercializationtobaslc
applications of basicor developr.nental
h retailers;it research.Accurateiorecastsof the comrl]ercial
individualfirm assessingits own
its acis-For- researchat'erareand dlfficultto produce.But for the
half a dozen R&Dcapabilities,thekeyistoexaminetheabilitytoproduceproductorprocess
:. Hogever, improvementsandthetimirigande{l.cclivenessofitsfutureef|orts.
t0 R&D or pursue defensive
ritrr end ad-
A firm can chooseto puisue an offensivc approach
' ' s p a s tm a r -
Exhibit 5.? describesthe kinds of differ-
,,fast seconcl"or "imitaior" approaches.
, accornplish
encesyou would expectin theseapproaches to R&D. Thc offensiveapproachwould
acceleratetheappliedanddevelopmentalresearclrefforts(BlirrExhibit5.6).The
:s problems .,fast seconcl"approachwould emphasize accelerated research(Bt in
cleveloprnental
: punch.but ..imitator,'wouldwait for commercialdevelopments and follow up
ulTentman- Exhibit 5.6). The
withn'rinorchangesorimprovements(B.inExhibit5.6).Exhibit5.8suggestswhen
to use'
thesevarious approachesmight be more suitable
1 , 1 9 8 5p
, p. and 6efensive R&D work. For exan'rple,TDK cor-
Some firms io Uotftoffeniive
its work as positive negativetechnology,
techncllogy,
poration (japan) characterizes
.-rL-
162 5
CHAPTEF
Commercializalion ofi
<a-
i'io
Developmenta{ iin
Tesearcn
F.ti
lv
!::.
?b
io
:a
Applied if
r e s e ar c h
it
ir
l'!
Basic i,
research { l
ir
D1 D 2 D.r D4
Tlme
E X H I B I T5 . 6 Lookingbackfromsuccessful commercialization:transforming
basicresearchintoviable
products.
(BasedonR.Gold,"Technological
Diflusion
in lndustry:
Fesearch
NeedsandShancomings."
TheJournal
of Industrial
Economics,
val.39lMarch pp.247-269.)
1981),
E X H l B l r5 . 7 A coMpARtsoN oF OFFENStvA
E t \ D D E F E N S I VR
E& D A p p R o A C H E S
Otfensive Defensive
SN D D I A G N O S I S 1 6 3
L N A L Y S TA
I N T E R N AA
i fi;;t"t took thc number one market-share rnarket in the recent past' by.lacking in
re- p"t#t-" in the
,l].,.uit.".ontouredfitting diapers'P&G's comeback the imltator
ofi.nr.--o, innovativeleads' lt has assun.red
:#;;; a $-s00 million revamp of diaper-rrtaking and the pump toothpaste' evsll-
equlpment position in both diapers
l.r*.t, Krmberly is presentlychangingrts market shirre Where techr.rologics
iually making up lost
t J a * . a n e t l u i v a l e nPt r o d r r c l '
'"'i;;;;i"t'to of are relativellisimple'the imitatorposition
may be qtrite
P&G, it is using a provon strategv
nrore lasting and rnuch
take suitable. Changesare slower but
consumcrbencfit' howcver slight' to spol rnore attractivc'
a.rr""Ut"itU prcxlucG less rnodiliable.maklng the imitator
i".r"ttrl., ,itare Other examples of P&C's technology is more complex' the
ateas, where
inclurJcthe addit:ionof tartar con- In other
iiii.r.ntiotiun strategy innovalor or fast-second position is usually more dcstra-
and the introductionol Liquid Tide' a laundry and
o"ii" Ct.t, howeuei, are usually smaller finls
with sttperior cleanil1gpower' Howcver' com- ble. Innovatot's,
a.nrg*, industry
dispenset oi'tenconre from outsidetlie
continuc to innovate (e'g ' the pump
;;;ffi ' Br'isirlcs'r
Wcck' Fcb' 24' 1986'
rrch into viable ''l'rocter
ancl Gamble llanks On a Nerv Baby: Ultra Pampers,
Soarcr: Adaptetl fron
pp.3G37'
rs." TheJournal
he purposeof l.orsonethanforothels.Iiorinslance,con.lputerorplrarnaceuticalfirnlsrcncrally
ncgatlvetech- h a v e m u c h l a r g e r R & I ) b u d g c t s ( 5 o r 6 p e r c e n t o | s a l c s ) t h a r i d o r n a n yinnovate
othcrindustries
cvct] thcrc' s:lmc O-il"S^,:tl:tl:-to
ent a threatto lwhich are rn thc 1 pt"tnirange)Yc1
new applicationsor minor improvcmcnts
the possibility wilh new products,r.vhrleothcri dcvclop
wav to iurpiou"procluctivity in rnanulacturing'
substitutions, 0fequal imporlance,R&D is sccnasa dccadcs of neglect
automatiotr alter two
:ould provide Increasecl iL&l) has lcd to incrcasingiactory
inclustries are recognizingthe need to boost
regativetech- rn the Unitctl States.Irven tho service
investtncntin technologyper workcr avcr-
oped. proclucrivity.In thc UfritcilStatcs.capital
much higher agccllcssthan$450pcrworkerinthelg60sthroughrnid]970s'Bythemid-1980s,
(in constantdolLars)'
this figurejunped to ovcr $i1000per worker
firms havc bcen lagging in long-tcrm
It might bc noted 0rat u,hilc nran1,U.S.
witrr unlinown time andpayofflags' 'lapancsc
commitmentto rnvestnentin riskytab
Now n.ranyof the imitators arebccomingthe tnventors'
.o-funr", havesurgedaheacl.
l]utovcnhere,diflerentlrrtlspursuediflcrentapproachcs.Sonyisanlnnovat0r;
electLotlics arena'
x r s l r n go n e s Matsushitals a copycattn thc consutler
hasis
Productionand OperationsManagementFactors[4]
Exhibit5.gliststheiactorsforanalyzingprodr-rctionandopcrationsmanagement'
D to needs
l f w e w e r e t o i d e n t i l y o n e l . u n c t i o n a l a r c a w h e r e N o r t h A m e r i c a n f iThe
r m s United
havebecome
to overseas conrpetitors, it wouldbe operations
lesscompetitivein r-elation
164 CHAPTER
5
l*ctto'uLE S**'*o'*9:ttoN:]
s''o TnE
,rr1af
-ffiI*onof
;calesis
plantsizeto moremanaee^1ble the producta year lale.
it is eusiet to keep tabs on what is happening at the
A newoffic-cfurniturc
ai Westinghouse
ffi;;;t lts general furniture factory. When Nagel took over' he realized
,nlibruni Rapidsemploys600 people new
least
almost itntnediatelythat it was throwing away at
:JI1il:
;:;:',:,'"','.,;i
#h * il:i'*.il:i $100,000,y.u, ui woocl
"f.futaftaat an enormousdilferencebetwecnman- set up a rask lbrce of
s c
managers
r r p .
and
W i t h
union
i n a f c w w
workers
c c
to
k s 'h c
deal
with:tbe problenr.Within a few monthsthey reducedthe
' his"andsmall Plants
ig'H,bjj;il.::;i ;; flarrt.wcsringhousc wastrving scrap to bfOOOu year. "The bottom-lineefTectqf,bcing
mant'facture an energy-efficientlow-cost able to idcntify goals and comtrunicatethem quickly in
n,futifW a'ncl is clramatic," says Nagel' "Ten
recalls'"For six or eightmonths.we a smaller environment
i*rtnit. Nagel me whether by going to smaller
guvsfronrmarketing ^l'd.*^"f11: years dgo, if you askecl
;Tffi;:;;., the-tev what we were ptuns, gave up a lot of efliciencies,I would have
to talk about lou
t:"r iti. the sameroom 'ves.' Now, I can't think of anY "
givcntirne,manywere outof town said
ltri, * " At any
I*?*t"t on otherprojects introduced
Westinghouse
lvzek, ocl 22, lc)84' pp l52-l5tr
:"ol:,,.,." 'A4antedfrom "Small Is Beautiful Now in Manufacturing," Blr,tir'?'ts
JPU|LE'
CorporateResourcesand PersonnelFactors[5]
andpersonnel factorswhich can provide
Exhibit 5.11 listsa serof corporateresources
competitivearlvantages for a {rrm. Each of the factorscan add lo the ability of a firm
factors.GeneralElec-
,u u.ti"u" its objectives.Somefirms are well known for these
tric.forexample,hasacivantageswithrcgardtomostofthem.
>_--
166 C H A P T E5R
E X H I B I T5 , 1 1 L A C T O R SC: O B P O R A T R
I N T E R N AF F E S O U R C EASN D P E R S O N N E L
Sonrc firms have artractedand held high quality, highly productive,and loyal
entployecsand managers.IBM, Texaslnstrunlents,and other firms arc knownf.r
this. Stncethcsepeoplc nrakethc dccisions1'orall l'unctions,this can be a crucial
advantase.Many {irms havepurchased otherfirntsjust to get thcir top-qualityman-
agcrial, professional,and othcr crrployees.By the same token, an organization's
structurc,clinratc,and culturecan bc a kcy advantage. Disneyis well known for an
overridingcrnphasison a fcu, core principleswhich guide dccisions,enrployee be-
havior, and the operalionsof its busincss.
Beingunionizcdcanbc a con'rpclitive disadvan{age becausco1'thelossof flexibility
or bccauseof thc higherdirectcostsof labor.Somefirns arc unioniz.ed but havehad
good relalionswith efficientand efiectiveunions,leadingttt potentialadvantage.
Many of thesefactorsbecomcparticularlvimportantwhcn managcrstry to deter-
nrine whethera str.atcgv can be irnplenrentcd. Weaknesses in theseareascould lead
1o a dcc:isiorrtl1'not attcmptinga given stratcgybccauseo1'the inabilityto carryit out
clfcclivcly. For exarnplc.an accluisition candidatewhoseorganizationstructureis
incor.npatiblc with thc strllclrrre ol your firrn could be a poor choice.Or a strategy t0
ckrsca plant could be af1'ected by union contracts.
Thus,lactors8 to l2 dealwith the so calledpeopleissues.And managers(whether
labclcclpcrsonnel,industrialrclations.or humanresources rnanagers) who dealwith
thesc issucsarc recognizedat somc leadingcomplnies rs a s()urceof cornpetitive
strcnglh.More of thesemrnaccrsarcreportinsto the CEO andare involvedin making
slrategidc e c i s i o n sI f. c o r l r p a n i easr cc o n s t a n t layc q u i l i n gr. n c r r i n g ,s p i n n i n go f f n e w
divisions,entcringnew businesses, or gettingout ol old oncs, managementmust
consiclerthe hurnanresourceques{ions involved-matchingskills with jobs, keeping
kcy personnelaftcra merger,solvinghumanproblcmsthatarisewith new technology
or the closingof a plant, and so on. Accordingto onc of the new breedof human
resourcemanagers,"Chicf cxecutivcshave finalllr colre 1tt realize that people are
what give you a competitivecdgc,andwe'rc tellingthemhorv1oget the right people."
Finally, with thc adventof management informationsyslemsrieveloprnent. and
usagc,many firms are findingthat they can turn dala and informationpower into a
potent strategicweapon.Exhibit 5.12 suggestsa numberof ways that firms can
l;,
.F--
L N A L Y S I SA N D D I A G N O S I S 1 6 7
I N T E R N AA
TECHNOLOGY
TEN WAYSTO USE INFORMATION
5'12
ExHtBtT
ber for'consumerquestionsand complaints.you get ideas
**.*'o*.F I n.u.'I nun''u'.,-1.11i:i:it
:.:)::'l:T^
office'and
thetreasurer's :1"
your ::I
bauks' Ior product improvementsand neu products ln-house
nd ready to hk;!i i*i,,iiintt betu'een
1P"*' ^ ^ ^ x r o i . 6 n q n n i a l information elecironicpublishingcan help turn oul productmanuals
f a s t c r - a n d that
i n f n r r n n l i o n faster*and thal
ether as a teami1,, llrr .* obtain financial fasterforspeedier.introductions...
,:,,.. il,i;r", uoot cash
betttr
'r--Customer cashmanagement
managentenl
. i-rneunt tap intoyour 7 Sales. biuing salespeopieportablecomputersso that
tatrons policies: i tr Customer service.
service' By
BY letting
letti customers
they can get messagesfaster anclenter ordeis directly adds
-
-L:--'r^.^+^
and shipments, you Lbuild
,,^.' 'rlli
ig and dgvelop- a"atuiur.to track their orders up to quicker deliveries, bettel cash flow, and less pa-
fotuf,y"nOsmoothrelations'
excluslvcconr- perwork.
/ Compensation, r Locking iu custolners'B)' cteattng
p"utr,ao*tnunications with customers for orderentryand g Selling extra processing power. By using off-peak
servicesfor
data,youcanhelpthwart piocessingpowelto developcompletelynew
d computersys- !r.nung. of productandservice
outsiders,you can transfersone of the bigh costsof build-
competitors.
"i
titu.x.t intelligence.By assembling andmanipulal- ing your inforrnationnelwork.
cold leads by
ingdataon dernographics and competitors' -voucanspot i ielemarketing. Testing .telephone
conputer runs to feret out the best pros-
uniupp.aniches,clevelop newproducts'andavoidinven- first-using
pects-helps slash sales-forceexpensesand boost pro-
:lve, and loyal torycruncnes.
virl'.
are known for < New businesses.Information technologiesmake ducti video-
possible' Foderal Express' for one' 16 Training' Training or retrainingworkers-u.sing
ln De a crucial *iole newoperations speed-and lets you cut
trucksandfa- ditkt 1"tt them leam at their own
p-qualiry man- couldnot work withoutcomputer-equipped
i r a i n i u nc o s t s .
cilities.
organization's providing a toll-free num-
6 Product developmcnt. By
I known for an O o t .1 4 ,i 9 8 5 ,P P .1 0 8 - 1 1 6
Soarce:AdaptedtiomJ'HamiltonandC.L'Hanis,..InfornrationPowel,''BusinessWt:ek'
employeebe-
E X H I B I T5 . 1 3 INTERNALFACTORS:FINANCEAND ACCOUNTING
rSome analystsnow
suggestthe computationof a Q ratio to aid investmentdecisions.This is theratio
of the marketvalue of physicalassetsto the cost of replacingthoseassets.
I N T E R N AA AND DIAGNOSIS 169
L NALYSIS
financial
important role of the policies and proceduresestablishedfor performing
--'-----*\ role of the financial executive in providing support for planning
analysis.Thus the
ranceto minirnize can lead to a strategic advantagefor the finn. Too often, the chief financial manager
is seen as important only at budget preparationstagesor for providing "number
the
ing, workingse:, crunching" ur input for decisions.These roles are important. But frequently
financial executives are excluded from real involvement in strategicplanning because
;ystemsfor cost;
it is believed that they have short-termorientations,focus on selectivecomponents
3 procedures rather than on conrprehensive pictures,and value precisionover less tangible issues'
(These remarks often apply to executivesin other functional areas as well') As a
result, decisionprocesses can suffer frorn what has beencalled a "paralysis of anal-
ysis." It is suggestedthat the chief financial officer's tasks of forecasting capital
of the cash-flsw structurc,determiningresource allocation anclcash flows, and raising external funds
med costiy planl are critical functionsin determining the competitive advantageof the firlTr.
for them. Thus a firm at a particular time can be strong (or weak) financially, and this
rs Or weaknesses condition allows it to make (or prevents it from making) strategicchanges'Financia-
The other factors ratio and accountinganalyseshelp measure this strategic advantage.But an analysis
rrs 3 and 4) to n should also be madeof the process of flnancial management, since it too can provide
: legal and rnnn- advantagesfor the finn. Of course, as suggested in the section on corporateresources,
uation (factorg) the quality of managementin any of the functional areas can provide advantagesfor
d other external the firm.
just
ln sum, lrrms can have competitiveadvantageson a number of the factors
l as the financial discussed.Strengthsusually lead to greater "slack"-a cushion of resources which
rust be carefully allows an organizationto be flexible and adaptinternallyor externally.Slack enhances
l. Stock market the ability of a firm to choosefrom a greaternumberof alternativestrategies'Weak-
lgments may be nessesor disadvantages limit the strategicoptionsof a firm. The list of resourcesand
a
rses,which may factors also servesas a checklistof items to analyzeabout a firm (or a case)with
liculouslyout of view to improving its operationsand identilying its distinctivecompetencies. It is not
used.rlneither an exhaustivelist. But it doesprovidea usefulbeginning'
lstiture or liqui-
ddition 1o other
:aknessdepends ANDWEAKNESSES
ANALYSISO F S T R E N G T H S
(or
There are a variety of ways each areaof potentialcompetitiveadvantage disad-
versusongolng vantage)mighr be analyzed.First we will provide some for
prescriptions how analysis
p so much cash should be done. Then we will summarizesomeevidence about whether it is done that
s. On the other way and what is analYzed.
I providea con-
1g questlonsare
Techniquesof lnternalAnalysis [7]
rl management. As suggestedeariier, a number of basic referencesfor each areaof internal analysis
) content of the trauebe.n provided.It is beyondthe scopeof this book to summarizethe techniques
o be important, of analysisfor the areasmost businessschoolcurriculumscoverin detail. For instance,
5.13hint at the a partial but far from comprehensivelist of toois ls identifiedin Exhibit 5'14'
Data for analysisand diagnosisof the factors come from several sources. One
sourceis the data gatheredin the environmentalanalysisand diagnosisstageof stra-
rs.Thisis theratio
tegic management.The other sourceis the internaldata generatedin doing business
,,,;L
1-i
ttv ui-1AHttH5
E X H I B I T5 , 1 4 A F E WT O O L SF O R I N T E R N AA
LNALYSIS
li
\
MATRIX
RESOURCE.DEPLOYMENT
s't s A FUNCTIONAL-AREA
EXHIBIT
Functional
areas
le and shop-
y1, material;
'ement R&D+
plan- engineering
; valueanal.,
, 1,, % ol strategic
develoPmenl
Manu{aclunng dollars
right useto
ie of profile
I functional
Finance
nalrix (Ex-
l1' exerting
can deter-
rmpetitors'
re strategic Management
pared with
re of these
respectto
problemsin meetingany conditionsof loan agreernents with bankers?Are <lurhirrng
do current
procedures meeting the requirernents of the i]qual Opportunity Ernployment Con'r-
or internal
mission So that we can continue t() seuure government contracts? Any o1'lhesearcas
n s ue r w i l l
' e db c l o r e , couldbe Sources of weaknesses or strengtl"ts. For example, yor-rr
firm may be a favorcd
employer if its hiring practices are "bctter" than thosc of competitors.
eacharea
:- r. ,i -r . r. .r,a. .t iDn. s
Second,the analysiscan be dclneon a piccemealbasis,with each area viewed
independently of the others.However,thestrengths andweaknesses musthe comparcd
a s r g no f
in relatiottto one another. f'rade-offs will inevitably result. br"rt
it is betterto considcr
i n c e sm a y Consider
the needsand desires of each area together rather than let each suboptimiz.e.
rroduction a policy ot
Exhibit 5.17 as a case in point. Manufacturing may see strength through
n s .A h o s t policies
long, steadymass production runs of a limited product line. Finance may set
s noted in
which value a low {inished-goods inventoryand high turnoverfor cash-flowimpro're-
:pared for
nent. It may suggest capital budgeting and investmentpolicieswhich minimize the
rirements.
number of factories and warehouses, freight costs,etc. So far so good; thesepolicies
\ suggest
172 5
CHAPTER
EXHIBIT5,16 PROFILE
TYPICALFUNCTIONAL.AREA
R&D engineering
(conceive/design/develop) Manufacturing
(produce)
------a
Focuso{ financial $ for basicresearch $ rol.pfunt
deployments $ for new product $ lor equipment
development $ lor inventory
$ lor produclimprovemenls $ lor labor
$ lor processimprovements
systems
Organizational Systemto monitor Natureand sophistication
of
technological purchasing system;
developmenls productionschedulingand
Systemto control controlsystem;quality
nnnnonlrral/rlocinn/ conlrolsystem
process
developmenl
Marketing Management
'ing (produce) (distribute/sell/service) Finance (finance) (plan/organizelcontrol)
and ages of key Nos.,types,and agesof key Nos..types.and agesof ke, Nos.,types,and ages of key
onnetand sarespeopre financialand accounting managersand corporale
Marketingstaff personnel staff
key personnel Turnoverol key personnel Turnoverof key personnel Turnoverol key personnel
sophistication
of Natureand sophistication oi Type and sophisticatlon
of Natureof organizational
rg syslem; distributionsyslem; cashmanagement cuitureand values
r schedulingand servicesystem: pricrng system;financialmarkets of planning
Sophistication
'stem;quality and credit staff; market forecastingsystem; and nnntrnl c\/etame
rarlesW. Hoferand
F i n i s h e dg o o d s
i...r., b{ inventory control
nlsuc vrew ".nptu-
(,,if W a r e h o unsgi
r opttmrsticyis*
ead of allowinp
,1.2pspponunil|
tegttimate,reol
to One another,
conoltlons.The
r firm's position
egicallyrelative
:isonsbe mndg.
h degree of in_ \--}
nvestmenl_sales
rtialiy different T r a n s P or t a t Io n
Order processtng
out the mission
Flnance P a c k In g
for determinrng
lf, the company Personnel
lVlarketing
with regardto
;, for example.
comparethese EXH|BIT5'17 "Cogwheels" in a physicaldistributionsystem' 3)
Distribution:ASuitab/e
(R.Ball,,,physical LongRangePlanninglFebruaryl9S0l,p
caseforTreatment,"
ow performers
luidity of your
, to your firm's
'erent
strategic
r or with beer-
/lth leadersof
ikely to reveai
EXHIBIT5.18 A common product-servicelife cycle'
the basis for
rnt size, R&D
..,]
**Hil
Phase l , ., :. .t.
'
ren its former (Devdloomen!]
:'ti
rragesthan to
D e v e l o P m e notf
the produit and/or
ser.vice and/or
iiar phasesof p r o c e sas n d l o r
es are in the
: with a firm
ntationof the
market
characterized
. b y : l n c e P t l o n .;
m i s s i o n a lwYorK;
I l a c ko i . q u s t o m e r
lil;fin::"'',1
I decrearseq{emand,I
l'' andcoripotilqrsI I
I k n o w l e d g em ; uch
' '.",';*'''
r their overail I p e r s o n esl e l l i q g
ged down in I a n ds e r v i c o ;.
I c o r i i l n u e dp r o d u c t
y operational
or weakness
\
rt is required
176 5
CHAPTER
. :,,,':
1.
._,
,
which areas and indicatorsthese are. (We have '
for determining more to sauo.-
this in the sectionon diagnosis.)The key is to identify areasand indicators*i,^llTt
management shouldfocus on. Four key questionscan be askedas vou.*url.lllp
five areas: What does this firm do particularlywell? Do thesecompetencies ^l.lqe
and il'so, when?What doesthe firm do poorly?Does it matter?nr .o*p.ni.rl}l
' - {ru
casesare analyzed,our adviceis to not worry aboutheadcolds-if pneurnontaseetn*
to be indicated,that requiresmore seriousanalysis.(Nonetheless, if it aPPears
that
the head cold can become pneumonta, it may requtretrealment.)
be
For instance,expansionmay entail internaldiseconomiesof scale.And there may
e to say about grorvth in a particular business. Under certain circumstances, the
limits to continued
Ltorswhich 16p size of the market share itself is related to returns in a U-shapedfashion where large
u examlne the and small sharesmay be relatedto higherROI than medium market shares.
)tenciescount, For example, the do-it-yourselfretail businesshas long been dominatedby small
lompanlesand (K Mart, Home
mom-and-pophardwarestoresand lumberyards.Severallarge firms
)umoniaseems centers of America, etc.) believed they could jump in, build mammoth stores,offer
It appearsthat discountprices, and attract customers u'ith advertising. Instead of killing off the ltttle
guys, the big chains are fighting each other for market share and sites needed to break
warehouse stores. Ir{assive advertising, cost cutting, and loss leaders to
.u"n on large
cut gross margins tremendously. And the littie guys fought back by'
build traffic have
to
forming alliancesfor buying and advertisingclout and by offering personalsen'ice
tle descriptive the naive new do-it-Yourselfers.
ntageanalysis. Theseand other examplessuggestthat expansionStrategies carr)'with them seeds
ressof internal disadvantage where sheer size creates new managementprob-
of potentialcompetitive
Ihere is often lems. Hence each firm must determine whether it is better to bc a big fish in a iittle
ieir firm. Sec- pond or a litrle fish in the sea. There are advantages in both situations, and strength
energe. Each Lr w.ukn.ss can go along with a large size. Careful thought must go into the diagnosis
of whetherconditionsbeing analyzed are strengths or weaknesses'
d use compet- There are also some descriptionsabout how businesses can strengthentheir cour
-rd analysis
of petitivc position and developdistinctive competence. Ohmae suggeststhat managers
rle, distinctive and weaknesses in ways which iead to compet-
snoutause their analysisof strengths
r differentiated itive advantage.
ality, superior
vative product ccrtain areas
I The first approachis to readjustresourceallocationto strengthen
"ibution.Such resoulces exactly the same way competitors
of the business.If managementallocates
ower costs0f do. there will be no changein competitive position. So this approach suggests that
e, good trade where there are key success factors (KSF)
resourcesshould be concenlratedin areas
:ation of these so the firm can gain a stralegicadvantage.Even though a flrm may have no more
toral resourcesthan competitors,it can achievedistinctionif it focusesthoseresources
35 SeCtOrSWaS
on one crucial Point.
scrves special One typical examplehereis the useof marketsegmentation. A Japanese shipbuilder
larger size in segmentedcustomergroups into seven marketsand ship types into 12 product cate-
e strengthbY g-i.r. After identifying ke.v product market groups, it focused its resources and
owever, there attentionon thesesectorsto gain competitive advantage'
rmics of scale 2 It may be that the KSF struggleis beingwaged.but a firm may exploit diff'crences
: organization betu,eenitself and a competitor.Here the strategisteither (a) makesuse of the tech-
gresslvecom- nology, sales network. and so on. of those of its products which are not directly
's^ legislators,
competingwith the productsof competitorsor (b) makesuse of other differencesin
ia1 for misuse the iomposition of assets.Thus reiative superiorityis used to avoid head-oncompe-
advantage of
tition.
I or units find Ohmaeprovidesan exampleof a Japanesefl1m producerwho could not compcte
with Fuji on ttre basis of an image problem associatedwith its name. Advenising
A number of could not overcomethe negativeconnotations.However. it had a relative advantage
perfbrmance'
t
I
.l
'. .1
178 C H A P T E R5
{:
T h e R o l e o f S t r a t e g i s t si n A n a l y s i sa n d D i a g n o s i s
Exhibit-5.19 showshow eachof thegroupsof strategists is involvedin internalanalysis
a n dd i a g n o s t s .
the role performances
lf'yi comparcthis exhibitwirh Exhibit 3.9 you'11notethat
what the research tells us, lirms perform internalanalysis
are siritilar,exceptthat liom
which is why tl.rere are differences betweenthe
less frequetrtly ancl lcss forrnally,
and distorted'
exhibits.Given sone iin<tingstliar rnrernalanal,;sisis time-consuming
are reluctant to perform intcrnal analysis them-
we might unclerstand *hy ,iu,]oc.rs
howevcr.An investment
selves.Outsideconsulta;tsare iot 'ecessarilya panacea,
inject a bias for cmphasizing financial
firm's rcport, for instance, may ,:p:t:l,t^t-
areprobably useful with top management ciiscusston
Irrescriptively,severalapproaches
on pointsof disagreement.
o| course,in a single.SBUfirm, advantages ale analyzedand diagnosedat.the
at the SBU level and then
corporalelevel. In rnutiipt.-SnU firms, the.vare analyzed
rcevaluatedat the colporatelevel and comparedacrossSBUs'
.lil
ANDDIAGNOSIS
I N T E R N A LA N A L Y S I S 179
IN INTER*O'N
on ecolorlic T H E R O L EO F S T R A T E G I S T S
tftl1tl Analysis
1o-dislodgg.
Verbal Docu-
, rut SUCCOSS Formal Diagnosisand
searchand mentarY
to chailenee studies MIS decision making
interviews search
producrs Strategists Perlorms
;r Rarely Rarely RarelY
OccasionallY Advisesas requested
f^6 1nanaOers Rarely OccasionallY Rarely
Itave to o^ OccasionallY OccasionallYadvlses
Pt-n"tt RarelY Rarely RarelY
Cohotutt OccasionallY hired1oadvise
on'tnauJa Rarely NA OccasionallY
Rarely Rarely
_n-t.-Federal
or tunneled
)nscan lead
:-L
180 c H A p r E5R
E X H I B I T5 , 2 0 STBATEGIC
A D V A N T A GP
ER O F I L E
_ , , iL
\
181
L N A L Y S I SA N D D I A G N O S I S
INTERNAA
ontechniquesforanalysis'Forexample'asetoffinancia lratios(seetheappendix)
11isto overall SAP' Then a diagnosisof the most important
can be exhibitedu, u 'upftt-ent to the
in the fina1SAP'
Totuttgnonu on., fo. the organizationis summanzed the
ro weakngg5gg the most crucial and most difficult' In effect'
This latter stage ls probably and time sl-
-.nutaonaantrl ytu to considerthe environmental factors
comparariveanalysesfi;";
o ro assist
in multaneously.Let's clanfy this statement- with
high quick ratio for the firm compared
Supposethat your unuly'i' shows a there is a potential
ro prepare assessment could be that
a rhe ratio of 1'6ut*ujo' to*p"titor' One
to the ETOP,
cashmanagementweakness.ButSupposeyouaisoidentifiedintheETOPathreatof
n can hnygu
insufficientcapitalavat]ab]etotheindustryforneededinvestment.Nowyourpercep_
t i o n o f t h e c a s h p o s i t r o n o f t h i s f i r m m a y t u r n o u t t o i n d i c a t eweakness
s t r e n g t hcould
s . S i mbe
ilarly'a
Note that this otherwisebe viewed as a
high inventory positron which might
rnd is experi_ appearto be growing or if a strike appears
considereda strengthi1'demandconditions
narket expan-
tt*tJrr,n. threatscan be
rt a conscious
sametoken, assessments of environmentaropportunitiesand
rend on envi- the internalfactors. Let,s say that 1'ourenr'i-
iiltered dependrngon your diagnosisof of rarv materials
knessesiden_ of supplies
ronmentalanaly.sis indrcatedalhreat of the exit of sources
purchasing agent
:st in updated you' i"t"*at analysis'however'showsthat your
for your industry' is assured of a
s opportunity remaining suppliers;your firm
has developedclose contactswith the is one of
other factors the p.r.Jp,ion'or the supplier threat
steadystreamof neededinputs. Now strength
advantage;ueto your firm's particular
an opportunily to galn a competitive
rost probable
in thrs area.
tc future are
Intheseexamplesnotethatdiagnosisinvolvestheperception()fthreatsandop'
Ihen several
p o r t u n i t i e s a n d s t r e n g t h s o r * e a l i n e s s e s i n r e l a t i o n t o o n e a n o t h e r .thal Theanalysisof
But diagnosis^requ-1res. you
data and information can be done independently.
fore the final
i 55 5a
considerintegratingtherelativeinformationtodrawconclusions.onefufiherSteplS
needed,however.
n our sectlon You shouldrecognizethat eventscan
We have discussedthis as a staticprocess.
change.Thusdragnostsalsoinvolvesestimatingscenariosoflikelyfutureconditions
to reflect dYnamicrealities' threat
strengthof supply contactsoffsetsa
Considerthe examplewhereyour firm's
o f t h e e x i t o f s u p p h e r s ' H o w l o n g w i ] l t h a t S t r e n g t h e x i s t ? W i ]competitors
l t h e s u p p l ialter
erslemaln
your firm's competitors?will the
loyal or bend to pressureto suppti
t h e i r S t r a t e g y ? F o I 1 n s t a n c . , . o . n " m a , v l e a v e t h e b u s i n e s s . S o mor e m a y i n t e gto
rateback
Othersmay try new methods materials
ward to make thelr own raw materials'
suppliers'Each of thesealternat*"t-if-nl
reducetheir dependenceon the remaining
beconsideredbyyourcompetitors.They'too,arelookingtobuildacompetltlve
advantage if
n of how long a strengthwrll remain
Another issuerelatedto time is the questto
itisre]iedon"^..n,iu.tyo.ou..,"o.Forinstance,theKSFapproachprescribes
b u i l d i n g a u n i q u e S t r e n g t h b y c o n c e n t r a t l n g l e s o u r c e s i nto a s i n g l e a rball'
eaorinafew
rely on a single superstar carry the
low debl-
areas.For lnstance.u rJotuuit team may
bie stock S e v e r a l c o n d i t i o n s m a y r e s u l t o v e r t i m e ' F i r s t , c o m p e t i t o r s m a y SIft athe
r t . tstrength
o..keyon''the
or copy you' fittn's strength'
factor-they may try io attackit, steal'
happenstobetechno]"gi."r,itcanbecomeousot"t..Ifthestrengthlies,inpersonnel,
182 CHAPTER
5
..lL
\
L N A L Y S I SA N D D I A G N O S I S 1 8 3
INTERNAA
hc kind
the environmentall'actorsdescribed
r v e S lt n However.we think that this ignoressomeof
nt. im- inourearltcrchaptels.Anditishopedthatyoucanfindwaystoincreaseeitlrerthe
sizeor numberof advantages to incrcascyour options Thus, diagnosisof corl-rbining
-'s. and
wi<lelvarietyof strategyalternatives
t n t 3q e . thc ETOP andthe SAi' shouldleadto cxamininga
here, which is the subjectof Chapters6 and'7'
than is suggested
d cons
Lber of
SUMMARY
strate-
diagnosisplocessparallelingthe en-
rte ad- The chapterdescribedthe intcrnalanalysisand
3 and4. lnternalanalysisand dtag-
small, vironmentalanalyslsprocesscoveredin chapters
nosisistheprocessbywhichthestrategistsexaminethefirm'sinternalfactorsto
184 c H A p r E Rs
S i z e o f t h e c o m p e t i t i v e a d v a n l a g ew h i c h c a n b e
achieved
Small Large
l ( e y c o m p e t i t i v e f e a t u r e: Key competitivefeature:
. :
l , 4 a n yw a y s t o g a i n a n e d g e ,b u t A s p e c . a ' ; z e da D p r o a c ht o
t h e s i z eo f t h e e d g ec o u n t s f o r the h
m a r k e l s e g m e n t si r . r . . n i i . i ' l " l . n y
litrlein the marketplace, i s c r e a r i n ga n d F r o r e c l ; n j so
f,,.""q
a d v a n t a g er n s e r v i n gt h e s e
segments.
Strategyprescriptions:
. C a r u eo u t a p o s i t i o n a n d S t r a t e g yp r e s c r i p t i 6 n g
hotd ir,
lManY r E m p h a s i z ep r o f i t s n o w . r S e e ka n i c h e ,
..1
L
\
185
L N A L Y S I SA N D D I A G N O S I S
I N T E R N AA
various
described'Data and indicators of
Techniquesof internal analysiswere
SubfactorsshouldbegatheredSothalreiati|ecomparisonscanb€made.,Comparisons
arenecessaryinthefo]lowingareastogetaclearerpictureofstrengthsandweak-
n e S S e S : p a s t , p r e s e n t , a n d f u t u r e c o n d i t i o n s ; i n t e r n a l g o a l sand
a n denvironmental
externalrequilements;
to other functional areas;
the wa1,that each functronalarearelates
and the productlife cycle Two anal-vtical
factors:competitors't"itnotog-v' suppliers' key questionswere
tools were suggesred as usef; guiies for the analysis,and four
well? Dcr
competencies-Whatdoesthe firm do
suggestedto help identify distinctive it matter?
do poorly? Does
thesecompetencles count?What doesthe firm
e selected R e s e a r c h o n i n t e r n a l a n a l ) , s i s i n d i c a t e s t h a t r h i s p r o c e s s i s nindicate
otsclen tific.Butvery
that
subject.The studieswhich exist
ly to build
little researchhas been JonL on this
advantage.
ro aspire
exccutivesperceiveStrengthsandweaknessesdifferent]1'andthatfirmsseemtobe
tage. uniqueintheirparticular"patternofcompetitir,eadvanlages.Thatuniquenesscanbe
in a varietyof ways'
developedinto competltiveadvantages
in ihe inrernal analysis and diagnosis
A brief sectlon on the role of ;traregists
processsuggeststhencec]toformalizetheprocessofintemalanai-vsisforbetter
s t r a t e c in
clalla!(mcnt'
t s f o r p e r l o r m l l l gl n l e r n a ld i a g n o s i s '
lp one of the The chapterconcludeswith our suggestlol
r sw i l l s u r v i v e ; F o c u s i n g t h e d i a g n o s r s i s a f f e c t e d b y f a c t o r s o u t l i n e d i n C h a p tperformance:
erl|l.inaddition'
ary aovantage
shoulddererminethe area.s of greatestimportanceto strategic
nare of the the anal1,.st
t e c h n i c a ] c o l e u n l t s a n c l u n i t s w h i c h a r e p e r v a s i v e a(SAP)
n d c a nisr edefined
d u c e u nand
c e rits
tainty.once
advantageprofile
the diagnosisis focused,the strategic
tleveloPment is outlined'
EC
r\ e COlvnward
oi vieakfirms,
T h e s t r a t e g i c a d v a n n g e p r o f i | e i s a t o o l f o r m a k i n g a s yin
slematlceva|uationof.theenter-
l for new way5 for the company its environment'
prise'sinternal factarswntchatre significant
W h a t t h i s p r o f i l e d o e s i s g i v e a v i s u a l r e p r e s e n t a t i o n o f w henvironment'
atthecompanylSaSa
decisionsandinteractionwith its
resultof developingtrom pusl strategic
an internalanalysis'
Sugg.rtion, ut. offer"A for interpreting
Insum'thechapterl.ocusedonhn*.oarralyzetheinternalfactorsrealisticallyand
l r o w t o d i a g n o s e t h e r r s r g n i f i c a n c e . T h e n t h e e x e c u t i v e c a n d e v eorl op.licies'
panSAPandmatch
s neededs0 adjustingor changingstrategies
ir with the E'fOp to creite conditionsfor
i n h i b i t i n ga form as fbllows:
The processis summarizedin proposition
d and diag-
the role of
Proposition5.1
rkcting and Afirmwhosestrategyfitsitsenvironment,consideringltscompetitiveadvantages,wil|be
not
more effectivethan one whasestrategydoes
t. corporate
\\ as broken Proposition5.2
n a i \s i s a n d Afirmwhichdeve|opssta}kresourcesthroughdistinctivecompetencewillbemoreeffec.
lck to give tive than one which does not'
lossibie.
186 C H A P T5
EF
H::J,",:;::i;::'.#:fl jj;il:
ffi:'!;:H:i:#;*'i:111"]L';:T:11
waysin whichthe gapmay be reduced,by examiningstrategy
,'hoice of a slrategy. "tn*",iri*Tffll- qrt
Appendix:UsingFinancial
Analysis*
:",""::Hffi
lll"ilil::tl:li;"'i.":'::i'.T:T:trT:T,i,#::T
as the beginningpoint for their financialdecisionmaking. lnvestorsuse financialunutvr.*ll
makingdccisionsaboulwhetherto buy or sell stock,andcreditorsusethemin Oeciding whetne,
or nor ro lcnd. Thcy providenanagorswith a measuremenr o1'how the companyis doingii
comparisonwith its performancein past yearsand with the perlormancgof competitorsi;the
industry.
Althoughfinancialanalysisis usefulfol decisionmaking,therearc somc weaknesses
1lx1
shoulcl[rc notcd. Any picture that it providesof the companyis basedon past data. Although
trends may be noteworthy, this picture shouldnot automaticallybe assumedto be applicabie
to the future. In addition,the analvsisis only as good as thc accountingprocedures thathave
providedthc inforrlalion-When nrakingcomparisons bctweencompanies,one shouldkeepin
nrind the variabrlityof accountingproceduresfrom lirm to firm.
Therc are lbur basicgroupsof llnancialratios:licluidity,levcrage,activity, and profitability.
Depicted jn Exhibit 5.23 arc the specific ratroscalculatedlor each of the basic groups.
Licluidity and leverageratios representan assessmenL of the risk of the iirm. Activityand
profitability ratiosare mcasuresof thc returngeneratedby the assctsof the firrn. The interaction
betwcencerlarngroups of ratios is indicatedby arrows.
Typicallytwo commonfinancialstatements areusedin {inancialanalyses: thc balance sheet
and tlreincomeslatement. Exhibit-5.24is a baianceshcetandExhibit5.25 an incomestatemenl
for thc ABC Company.Thesestatements wili be usedto illustratethe financialanalyses.
Liquidity Ratios
Liquidity ratros arc used as indicatorsof a firnr's ability to meet its short-termobligations,
Theseobligationsincludeany currentliabilities,includingcurrentlymaturinglong-termdebt.
Currentassetsmove througha normal cashcyclc of inventories-sales-accounts receivable-
cash,The llrm thenuscscashto pay off or reduceits currentliabilities.The best-knownliquidity
ratio is the currcnt ratio: currenl assetsdivided by current liabilities. For the ABC Company
the cufenl ratio is calcu]ated as follows:
T N T E R N AALN A L Y S I sA N D D l A G N o s l s 187
Aclrv ty ProtrlabriltV
L q u i dr 1 y Leverage
,Tif.liSj}:$:
reatea gxp
L
;il;..'];Iffi
'rthrn
its industry
1 sf analysi5
.this
tctal analyses
in
leciding whether
ran)' rs doingin
rntpetttors in hs
,,re:rknesses
$31
. dara.Although
Irt be applicable
:duresthathave
' shouidkeep
in
nd profimbility.
e basic groups,
n. Acrivity and Relurn
measurSs I
The interaction I Net income
i sates I
re balancesheet
rcom€ StatO[l0nt
I analyses.
f--.-rta-".-*. I
I N e tw o r t h
rm obligations,
long-termdebt.
Its receivable- E X H I B I T5 . 2 3 F i n a n c i arl a t i o s .
inou n liquidity
{B(' (.ompany
i s n o t n c c e s s a r i lay
M o - q at n a l y s t s u g g c sal c u n e n lr a t i 0o 1 ' l t o 3 . A l a r g cc u i l c l l t r a t i ( )
tilat an organiz-ation iS not n-iaking. tlre most eiltcicnt usc oi assct's' Thc
gooclsign. it rnav rnean
the more volatilc industr-ies
optimum currentratio will var.vfronr industr) to inclustry."vith
r c q u i r i n gh i g h c lr a t i o s .
Sinccslow ntovtngor obsolescct.tt inventories couldoverstatca llrnl's abllity to lnect Short-
term dcnran(is.thc qurcK ratio is sonretinles prelcreci to assessa fir]n's liquiditl' The quick
ratio is currentassetsnrinusinventories. drvrdedbv curenl iiabilities.The quick ratio for the
A B C C o m p a n yi s c a l c u l a t eads f o l l o w s :
j
188 C H A P T E5F
Currentassets- inventories $ 1 . 9 5 0 . 0 0 0
Curent liabilities $ra"iat:078(1988)
s1.618.000
- O 7a rlqx'7'
$:.:1:.:50
E X H I B I T5 . 2 4 A B C C O M P A N YB A L A N C ES H E E TA S O F D E C E M B E R
31
1987
Assets
Currenlassets:
Cash $ 140,000 $ 115,000
Accountsreceivable 1,760,000 1,440,000
lnventory 2,175,000 2,000,000
Prepaidexpenses 50.000 63,000
Totalcurrenlassets $4,12s,000 $3,618,000
Fixedassets.
| ^n^-torm roeoirrahlec s1,255,000 $1,090,000
Propertyand planl $2,037,000 $2,015,000
I ess A n n rr m r r l a l F d r i p D r e c t a l t o n 862,000 860,000
Nel propertyand plant 1, 17 5 , 0 0 0 1,155,000
Otherfixedassets 550,000 530,000
TotalJixedassets $2,980,000 $2,775,000
Totalassets _q!_ar_q9g _46,99!pA
Liabilitiesand Stockholders'Equity
C u r r e nlti a b i l i t i e s :
Accountspayable 91,325,000 $1,225,000
Eank loanspayable 475,000 550,000
Accrued{ederaltaxes 675,000 425,000
Currenlmaturities (long-term
debt) 17,500 26,000
flirrirlonrlc n2v2hlo 16,250
Tolalcurrentliabilities $2,s12,500 $2,242,250
Long-termliabilities 1,350,000 1,425,000
Totalliabiiities $3,862,500 $3,667,250
Stockholders'equity:
Commonstock(104,046shares
o u t s t a n d i ni n
g 1 9 8 3 ;1 0 1 , 2 0 4
shares
o u t s t a n d i ni n
g 1982) $ 44,s00 $ 43,300
Additionaipaid-incapital 568,000 372,450
Retainedearnrngs 2,630,000 2.310,000
Totalstockholders' equity $3,242,500 $2,725,750
equity
and stockholders'
Totalliabilities 05,000
$7,'1 -qq9l9!4
I
,tL
T N T E R N AALN A L Y S I SA N D D I A G N O S I S 1 8 9
$B'250'000 $8,000,000
Net sales
$ 5 , 10 0 , 0 0 0 $5,000,000
Less:Costof goodssold
1,750,000 1,680,000
exPenses
Admrnistrative
420,000 390.000
OtherexPenses
tlhoughthere 7,270,000 7,070,000
-ld be able Total
1q $ 980'000 $ 930,000
Earningsbeloreinterestand laxes 210,000
210,000
Less;InlerestexPense
$ 770,000 $ 720,000
Earningsbetoretaxes 325,000
360,000
Less:Federalincometaxes
Earningsa{tertaxes(netincome) jg $_!99p99
cashdividends $ 9o,0oo $ B4,ooo
Common-stock $ 311,000
Additionto retainedearnings $ 320,000
$ 3940 $ 390
EarningsPercommonshare $ 083
$ 0865
s 11 5 , 0 0 0 DividendsPercommonshare
1,440,000
2,000,000
63,000
s3,618,000 LeverageRatios .I.lte
capitiil-ownersor or.]tsidc credilrlrs, |crtlt
LeveragcraLrios idenrilythe s()urceo1.:rfirrr-r,s "amplifi/l'
s1,090,000 ,,leverage"rcl'orsto the fact that using capitalwirh a fixcd intcrestchalgc will
'f
to theequityof holderso1'coltlmon
in rclzrtion stock' hc nlostcoltlmonly
eithcrprolitsor lOsses
Total dcbt includescurrcntliabiliticsand long-
usedrario is toral debt a,uiJcdny total asseis.
t e r n r l i a b i l i r i e s . T h i s r a t r o i s a m e a s u r e O f t h e p c | c e n t a g e o l t o t a l l .firns
u n d sinp stablc
rwidcdbydebt.A
rs usuallyconsidered sa1'eonly for
total dcbt-totalassetsratrohrghcrthan 0.5
s2775,000
s6.393,000 industries.
$ 43,300
372,450 L o n g - t e r md c b t _ $ 1 , 3 5 0 . 0 0 0: 0 . 4 2 ( 1 9 g g )
2,310.000 Equity $3,242'500
s2,725,750
_ S 1 . 4 2 5 . 0 0_0. ( ) 5 2 ( t q 8 7 J
q9!99!00
, 75 0
$2 . 7 2 5
190 c H A P T E5F
Activity Batios
Activitl' ratiosindicatehow cffectivelya firm is using its resources.By .o.purilg,,uan,,*
rvith the resourcesusecl1o generalethem, it is pgssibleto establishan efficiency o1
ono,^..-,!
T h c a s : r ' tl u l n u \ c l r e t i . i n i l i r a r e hs u u e f l i c i e n t l )t n a n a F e n t ei n
s rc m p k , 1i n g t o r i l u r r . L " t u j t * .
turnoveris calculatcdby divrdingsalesby total assets.For the ABC Company,urr.,i,,Jrt,t
'-'ttuVtl
is r'alrulalcdl. f,'l lou s:
. Salcs 1,8.150.000
/\S5Ct lUI ll('Vel
Tlrllrssctr $7.l{}l.O{)0
Salcs $8.250,000
Ijixed asscl lurnover -
2.11
N e t { i x c dr s s e t s $2,980.000
ri
$8,000.000
t
, .lr,u, 2 8 8 r l q k T )
.brr ,-/ r/ ;) -, u
I
.:
lnrlustryfigurcs1orassctlumovcrwrll vary u,ithcapital-intcnsive
indrrstrres,
andthose
.l
requirinr: large inl'cntories will havc ntuch sntaller ratros.
:i A t t r r l l 1 , 'i1r - t r \ t l \ r : r l i r ri r l 1 1 y g n 1 o rl u) n l { ) \ C r .t . : t i t n a l r . ,hl v d i v r d r n g s : i l c s b i
a v e l . a g ien v e n -
t o r l ' . 1 ' h c n o r t n 1 o r A n r c r i o a n i r r d u s t r i e si s 9 . b u t w h e t h c r r h c r a t i o f o r a p a r t i c u l a r -
i firm is higher
o r l o r ' v e rn o r m a l l t ' d e p e n d s u p o n t h c p r o d u c ( s o l d . S n a l l , i n e x p e n s i v o i t e n r s u s u a l l y
turnover
at a llluch highcr rate than larccr', expcnsive oncs. Sincc invcntorics arc normally
ii c a n i e da t
l1
It c o s l ' t t r ' r ' o u ] cbl e n l o t e a c c u r a i e l o u s c t h e c o s t o f g o o d s s o l d i n p l a c e o f s a l c s i n t h e
numerator
lt
ti o f t h l s r a t i o . I j s t a b l i s h c d c o m p i l e r s o 1 'r n d u s t r y r a l i o s s u c h a s D u n a n d B r a d s t r e e i ,
It
nowever,
ir u s e t h c r a t i o o l s a l c sl o i n v c n t o r y .
t1 ,'
ll
. S:rles $ 8 . t . 5 U . 0 -0 0
ln\ Cnlor) tUtI,)\Cr l- 3 . 7 4t l 9 B E t
I ltvcnt0ry v, [.rrL,o
$8.000.000
- 4 (1981)
$r{,0r1000
A N A L Y S I SA N D D I A G N O S I S 1 9 1
INTEFNAL
:
rumover : : 4.6e(1e88)
receivable
Accounls A;*#*ffiG *#ffi
parlng revenues
!). ul oper?tig1_ - $ 8 , o o o , o o=o 5 . 5 6( 1 9 8 7 )
tal assets.
Asset $ I ,440,000
,, assettumover
360
AveragecoilectionPeriod = Accounts tufilover
receivable
360 -
? 7 d a v s( 1 9 8 8 )
469
16n
556
,qulpment.
It is
Ratios
ProfitabilitY chosenby an organl-
)88) profitability is thc nct rcsult of a large number of policies and dccisions
Zation,smanagement.Profitabilityra.tioslndicatehoweffectivelythetotalfirmtsbeingman-
,87) aged.Theprofitmarginloralirmiscalculatedbydividingnelearningsb ysales.Thereiswidc
Amcrican firms is approximatcly5 percent'
variation antong industnes,but the averagcfor
N e t e a r n i n g s- $410,000 -
ies, and those 0 . 0 4 9 7( 1 9 8 8 )
Saies $8,250'000
N c t e a r n i n g s- $ 4 1 0 ' 0 0 0 - 0 . U 5 7 7( 1 9 8 8 )
T o t a la s s e t s $ 7 ' 1 0 5 ' 0 0 0
T o t a l c c s t s S ub 1r a c l e d F i x e da s s e t s C ur r e n l
$7,840,000 lrorn Plus assetS
$2,980,000
$4,r25,000
Cost of A d mi ni s t r aitv e
goods sold € xp e n s e s
$ 5 , 10 0 , 0 0 0 $1,750.000
Accounts
r e c ei v a bl e
$ 1,760,000
\
L N A L Y S I SA N D D I A G N O S I S 1 9 3
I N T E R N AA
;;,'.Tf#i*'yli:i:'li;;::,iT:,"il:'J:;'"il,i",Tlilll*:i:i::';:::
lroldeis,and rhc najor brokeragehouscs
I assets/equity different conrpaniesmust be standardizedstl
t,105,000/ To the extent possib}e,,..o,unting data {.rom
),242,50=0 t h a t C o l n p a n l e s c a n b e C o n l P a r . d n , . , o t h a r a s p e c i l i c c ( ) l l l p a n y c a n b e c o m p a r oot
dwithindustry
of financialstatements, sitlccvariousaccountinp
2.15 dara.It is irnportantt0 reaclan1"footnotes
financialpicturcoI the company ljor example'
maragcmcntpracticcscan han. an effccton thc
ftrnlsusingsa]c-leasebackmethtrdsrrrayhavclcveragepicturcsthatalcquitcdiffercntfronl
shcrt
. h a t i s s h o w nu r sd c b l st r r a \ \ c l \ o n l l t e b a l a n c c
Funds
Analysis of the Sources and Uses of
.I.hepurposcofthisanalysisistodetcrminchtlwthcconrpanyisusingitsfinancialrcsotlrccs
lrclmone yeart0 the next, one may determinc
lrolrr year tO year.By comparintbalancesheets ycar'
which thcsefundswere employcdduring thc
how fundswerc obtaincd^"a ui. way in (1) classifybalance
and
of the sou.ces uscs of lundsit ts necessaryto
To prcparea statcrrenr
cashand changesthat decrease cash,(2) classifyfrom thc lncomc
shcetchangcsthal rncrease
and (3) consolidatethis informationon a sources
statemenlfactorsthat increascor dccrcasecash,
In v e n t o r y
i2,175,000 and usesof funds statenlentlonr'
as follows'
Sourcesof funds that increasecashare
deprecrablefixed asset
P r e p iad
I A net dccreascin any assetother than a
fixed asset
expenses 2 A gros decteasein a depleciable
$50,000 3 A net increasein anYliabilitY
4 Proceedsfrom the saleof stock
and depreciationif the cornpanyis profitable)
5 The operatrono1 the company(net income.
A N D U S E SO F F U N D SS T A T E M E N T
A B C C O . ' SS O U R C E S
FOB 19BB
Sorrces
Prepaidexpenses $ 13,000
AccountsPayable 100,000
Accruedfederaltaxes 250,000
Dividendspayable 3,750
CommonstocK 1,200
Additionalpaid-incaPital 195,500
Earningsaftertaxes(netincome) 410,000
Depreciation 80.000
Toialsources $1,0s3,450
Cash $ 25,000
Accountsreceivable 320,000
Inventory 175,000
.165,000
Long{ermreceivables
Propedyand plant 100,000
Other fixed assets 20,000
Bank loanspayable 75,000
Currentmaturities debt
oi long-term 8,500
Long-termliabilities 75,000
Dividendspaid 90,000
Totaiuses $1,053,450
-
SN DD I A G N O S I S 1 9 5
I N T E R N AAL N A L Y S I A
Fatios and
workrng
capital
L i qui di t y :
C ur r e n l
0uick
the
Leverage
ins
the
( e t c .)
\ /orkIng
capitai
posilion
(.'onclusion
E r h i b i t 5 2 7 s o t h a t Y O Uc a l l c l e v c l t ) l )a
nds I t i s r . c ( ) n r n l c t l d c - ct lh a t \ ' ( ) l l p r e p e r c a c h a r l s L l c ha s
c h a r t a l l o u s a t l i s p l a Vo 1 ' l l t c r a l t U st ' r c t L i t t l t
iter u s c l r r lp o r t r a ! a l 0 l l l t c s c i r n a n c r a la n a 1 l ' s t ' sl '.l t c
'fhi: 'l "favorablc" ( 'l )' "ncutral" (-- )' ancl
ds. r e n c ic o l u n r r r c O u i t l i t l c l u d c a r r o w s t o ' l i c a t c
i n t i
. c o l u l n n c O u l d i r l c l u r l ct h c d c s t r c ' d
ual r . r n f a V 0 r a b l c(" l l l 0 f t h c r l t i o s o v c r t l n l e. h c S t e n d a l c l
-l'hc lnclrllln!tti the rattCls
rds ( O r r c t l u r r c c lrl a l i o . l n t e r p r c t a f i O cno l u t t l nc a n b c t r s t t i l o d c s e l i b ct h c
rarios a s o n c a s p e c r o
t i thc firnl's financiai
{ i r r t h i s l r r r r r .l ' h c c h a r t r . r " c s a b i , s i c t i i s p l : r v o i t l t e
condltlotl.
REFERENCES
tl I StrategicAdvantageFactors
I'he Intcnrlil Analvsis.'' Long Rdtt'Qe l ' l r t r r r i t r l , qv o l
C r o o n . l ' . . " A i d s r n D e t e r n r i r l i n !S t l a t e9 \
il. no. 4 (August.19791P ' P 65 73
unl Crntltclitttr'r (Neu'
P o r t c r ' .\ 4 . F . . . C o n t l t c t i t i t e S / r r t l t ' , q r "7 c L h t t r t l u a s . l r t tA n r i t : i t t g l n d u ' s l r i t s
Y o r k . l j r e cP r e s s .l 9 i r ( ) ) '
(Ncu YOrk:Irinlncr:LlIlxCCUtiYe-q Rcscarch
Stcincr.(1.:"!lrrrtt,!ir'l.at'lrn"sitt rgtts'i(sssll.rr:.ss
ljountlatron,1965).
' ' A R c s o u r c c - B a sV Jovt'rln1' vol
\ \ ' i r n e r l e l tR
. .. e ide u ' o l t h c I " i r t t r ' S t r r r t c g i r 'l \ l a n a g e n t c t t l
5 ( 1 9 8 ' 1 )p.p . l 7 l - l f i O
and Distribution
12) Analyzing Marketing
Mttrkt'tPlonnit?q(EnglcwoLrdcliifs' N l : Ptenltcc
Abell. t). Ir.. andJ. S. Harnnrontl:Srratc:g.ic
llall. 1979).
(EnglewoodClil'l''r'N i : PLentice-}lall'l9E0l
ting Md11{)8(it1(ttt
Kotlcr. l).: iv4arke
"N{arketing.The New I'rioriry." IJuriirc's'sll'crlt Nov ll ' 1981"pp 96-106'