Chapter Six

Internal Analysis
© 2007 John Wiley & Sons

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Chapter 6 - Internal Analysis PPT 6-1

 Financial Performance – Sales and
Profitability

• Sales and Market Share

• Profitability
• Measuring Performance: Shareholder Value
Analysis
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-2

 Shareholder Value Analysis

• Cost of equity—weighted average of cost of

capital and cost of debt
– e.g. Capital $1 billion (12%); Debt $3 billion (4%) then
the cost of capital is 6%

• Each business aims at ROA to exceed cost of

© 2007 John Wiley & Sons

equity so shareholder can improve stock

investment

Chapter 6 - Internal Analysis PPT 6-3

 Shareholder Value Risks

• ROA estimate requires knowing the cash flow of

any investment and the assets employed—could
encourage short term results
• Reducing assets employed by outsourcing could
result in loss of control of business
• Reducing investment could affect offering
• Increasing debt to reduce cost of equity could be
© 2007 John Wiley & Sons

risky

Chapter 6 - Internal Analysis PPT 6-4

 Performance Measures Reflecting
Long-Term Profitability
CustomerSatisfaction/
Customer Satisfaction/
BrandLoyalty
Brand Loyalty

Product/ServiceQuality
Product/Service Quality
Current
Brand/FirmAssociations
Brand/Firm Associations
Performance
RelativeCost
Relative Cost Long
Term
© 2007 John Wiley & Sons

NewProduct
New ProductActivity
Activity Profits
Manager/Employee
Manager/Employee
Capability/Performance
Capability/Performance

Heritageand
Heritage andValues
Values

Chapter 6 - Internal Analysis Figure 6.1 PPT 6-5

 Relative Cost vs. Relative Performance
- Strategic Implications

More
MoreExpensive
Expensive
Change Value Analysis
• Design • Raise prices
• Manufacturing/Systems • Promote
Ignore Cost Reduction

Inferior
Inferior Superior
Our Component is Superior
© 2007 John Wiley & Sons

Value Analysis Value Analysis

• De-emphasize • Emphasize/promote
• Upgrade • Leave it alone
Less
LessExpensive
Expensive

Chapter 6 - Internal Analysis Figure 6.2 PPT 6-6

 Strengths and Weaknesses

• Strategies leverage strengths and neutralize

weaknesses

• Point of advantage vs. points of parity vs. liability

© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-7

 Threats & Opportunities

• Key output of external analysis

• Evaluate as to:
– Immediacy
– Impact
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-8

 Structuring Strategic Decisions
Organizational
Competitor Strengths
Strengths and
and Weaknesses
Weaknesses

StrategyDecisions
Strategy Decisions
••Strategic
StrategicInvestment
Investment
••Value
ValueProposition
Proposition
••Assets
Assetsand
andCompetencies
Competencies
••Functional
FunctionalStrategies
Strategiesand
andPrograms
Programs
© 2007 John Wiley & Sons

Market Needs,
Attractiveness, and
Key Success Factors

Chapter 6 - Internal Analysis PPT 6-9

Figure 6.3
 Key Learnings
• Sales and profitability analysis provide an evaluation of past strategies and an
indication of the current market viability of a product line.

• Shareholder value holds that the flow of profits emanating from an investment
should exceed the cost of capital (which is the weighted average of the cost of
equity and cost of debt). Routes to achieving shareholder value – such as
downsizing, reducing assets employed, and outsourcing – can be risky when they
undercut assets and competencies.

• Performance assessment should go beyond financials to include such

© 2007 John Wiley & Sons

dimensions as customer satisfaction/brand loyalty, product/service quality,

brand/firms associations, relative cost, new product activity, and
manager/employee capability and performance.

• Assets and competences can represent a point of advantage, a point of parity, or

a liability. Threats and opportunities that are both imminent and important should
trigger strategic imperatives, programs with high priority.

Chapter 6 - Internal Analysis PPT 6-10

 Ancillary Slides
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-11

 “We have met the enemy and he is us.”
- Pogo
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-12

 “Self-conceit may lead to self-destruction.”
-Aesop,
“The Frog and the Ox”
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-13

 “The fish is the last to know if it swims
in water.”
-Chinese proverb
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-14

 “The successful man is the one who
finds out what is the matter with his
business before his competitors do.”
- Roy L. Smith
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-15

 Six Rules for Success
1. Face reality as it is, not as it was or as you wish it
were.
2. Be candid with everyone.
3. Don’t manage, lead.
4. Change before you have to.
5. If you don’t have a competitive advantage, don’t
compete.
6. Control your own destiny, or someone else will.
© 2007 John Wiley & Sons

- Jack Welch
former Chairman, General Electric

Chapter 6 - Internal Analysis PPT 6-16

 “It’s not companies that fail, it’s their
leaders who fail.”
- Warren Bennis
© 2007 John Wiley & Sons

Chapter 6 - Internal Analysis PPT 6-17