Concept of SAP[1]

INTERNAL ANALY9ISrrr r -AND DlAGNosls

OBJECTIVES

INTRODUCTION [1]

internal analYsts

To consider factors that

weaknesscs

To dcscribe the process of internal analysis and diagnosts

To introduce internal "'uttltt

i"tto" u'.'d tt' illustrate how they affcct

lT.:'"i]::t:::e tcchniques which havc becn dovcloped and used lbr

affcct thc diagnosis of internal strengths and

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 t e r u n i t o n a n a l l ' s i s a n d d i a g n o s i s . C h a p t c r s Jand 4 focuseo on unury'i'";;; ;i;""'*

"f ;t ;;"ironment to determine which

oppoftunities una 'r""ui''t""iJ ut lignificant i" 'rt" nt- in the future' Chapter 5

descriuestheparallelp,".*,-*'.ninr,olvesdeterminingthestrengthsandweaknessesthe firm has at present

"'"ti'ni develop' Th;; ;;; d"iagnosed in order to develop

competitive advantages'"Jnil:'ilt;;*"utn"'*'' or ionsider how they wrll limtt

'"1""?f ;ff i::i'"fi !i""T"1-"li,lillli,IT,f H:'j"'il:J:':'#TitJ.ii;#;;**:U:ilHl-T::n:iT';'lil,"il"rii: ","

is equa'v strong in a' its runc-

t i ons .P roc to r&Gamb lewasknownrc ' i t " "p " tU t t t t * i n j ' ' l t ay tag i sknown fo rits outstanding p'ooutliJn una p'oau't o"*ign' l-*tican Telephone and Telegraph is

known for its outstanOing '"'uit" und p""onn"i potiti"s' Yet each of these firms ts

155

CHAPTER 5

lnternalanalysls is the process by which thestr-ategists examine the tirm's matKeilng and

distribution, research una'i"i"tipûnt, production and operations, corporate resources

and personnet, "d

ti'"'"2"!iiZ"""'l'i'n i"'ors^to determine where the lirm has siq-

nilicantstrengths uno t"ukn"" s' lnternaldlagnosls ls the process by which strategists

determine how to exptoit ii"Zii"n'"i'i"'' *{ \:::.the

threats the environment ls pre-

senting by usingst'"ngti'"'l;iiepai'i'g weaknesses in order to buitd sustainabie com-

not strong ' 'across the board ''' Within t

:o*li:y' each division has varying strengths

and weaknesses Gcncral Electric was strong in jct engines and weak rn compurers a

i .ewycarsago.Soaf i rmnrustdetermincwnat i tsd is t inct ivecompetenciesare-whatr r - rakes i t un iquc to thecompc t i t i vea rena -so , tha t i t canmakedec i s i onsabou thowto use these abilitres no* oni in the future. And it l.nust determine whether weaknesses

will i imit strategtc opt'o* or identify weaknesscs which can bc overcome'

E x h i b i t 5 . l i n d i c a t e s ' t ' ' o * ' * " n g t t ' s a n d w e a k n o s s c s a t l T T r n a y i n f l u e n c e t h a tcomPany's strategy'

Xit ii l.! ! .

BIi{iit Il{[st

- * c&i,{;.

ffi'S::i

gr:

. i.,'g!, it:'gi

tf*,,ii

ITT spent $105 million in 1gg5 to introduce to the united one quarter of the 10,000 lines installed in Saramanca'

Statcs its system 12, a sophisticated.telephone^switch spain, or. *o*inr., The successful lonversion of

whichhasbeenroutrngcallsanddataabroadrint"'tgai' stiengths intt' uouoniog"s was ttr1,1l;<1^by a prevailing

Sysrem 12 is rTT,s #;;;i; vehicle for .r*ki;;;; *"ut'i"*" TTt*

fiIanc" or marketingareas but in the

telecommunication, ,nurt"i-ion inut"o uv a.T&i'ano pr.riuct .evelopment and organization and managemeni

Northern Telecom Ltd. while analysts and cuslomers areas. Three *"** *"tr set'up in the United states and

agree that the svstem 12 i';;;vinnouutin' ^"d 'l;;;^; :11"ry t".^Y;L:n:,:tlht1::lii:-!;*'!:ii

iffi';,;i;t; l*.:*i:tJ'"i'iS;'lx,:,iTli""?+ T5ill:l:;l'!;Iu*;':";;;pr"* uno 'lhe oiganiza'lionspent more ttran $t uiilion d""*ni"* Srrr.,n 12, ;;;;; is so complex that without focused management lt was

from some analysts tne opinion that it should.be ;;;tt" ha'd to dtugnâ major system'" This fault in the strategtc

in the United ro*r, u-iou"^rtî""",'0 add 25 cents a planning stage resurted-in the nume^rous delivery delays

share to eamings. u"in.;rir.r'*nd, Systeml;;;*; ieading-to ot""uJ cuslonrer *ifrd:::t' ln addition'

cruciar to chairm.an #;;ft;;,,,,.*ev t,l ffi*: m$:tHjlfm:f#:,,4,i;;4t**ttl+x**:J!ll;l:riiil1,",ry::::#:'iJi:i l:ff','#r:*#:**x*i:Jil:f",T":;'"':":the terecoJnmunications TTJllhlTfiyl'}ill *{il;;;*."of strategv,ryi:i":,iilT::11ll:,1il1l.$"i,i"i.il;'il;.'i;"9.;;'**ri-9:t" ^" :i:i*"frT,:ffi?';'JJiii;11;ffi* .,ecommun.Hr*k*J:*;; li;;pfrtrg*hi5i:ffiftgggffiffitil:?i,ffi'r;;,1; ;;;;;;{ .r*' 1 t^.^'1, *t, more.llobrem' j:l -'

,,t';:*:,,fi ff ?i"i,f :",1*f.lt3,;.,J"';{'"ll;i;**:fu ru;rffi #'ffi

.!-

s marketing and,orale I'esou/ces'he firm has slo-rhlch stralegrslg;ronment is pr1-tstainable s6m-

r'arytng strengthsk in computers n:ncres are-w[n1sions about how:ther weaknesses'con]e.

y influence that

"l'-*--rI ln Salarnanca,'conversion ofby a prevailingAreas but in thO'

nd managementnited States .andng to M. Peterrrk Systems Di-':he organizationagement lt wasin the strategic

f,elivery delayse. In addition,ts resources inwing other ad-"s future could' of this single

kog announced: telecommun-is rejected, hece, leading tosheet.

i5; "Behind the

INTERNAL ANALYSIS AND DIAGNOSIS 157

unless the executives are fully aware of their competitive advantages, they may

not choose the one opportunity of the many available at the time that is likely to lead

to the greatest success. Unless they regularly analyze their weaknesses, they will be

unable to face the environmental threats effectively. In effect, these assessments must

be combined with environmentai analysis so that decisions can be made about how

to use or add strengths and minimize weaknesses'

This chapter focuses on how to analyze the intemal factors realistically and diag-

nose their significance. lt is at this point that executives can develop a -strateg$aduantap,e.Ilofile (SAP) and match it with an environmental tllreat and opportunity

prinl" GffiF) to create optimal conditions for adjusting or changing strategies or

pol ic ies.Exhibit 5.2 reminds us of how this process fits into the total strategic management

process. And as before, we are interested in how the internal factors relate to the gap

analysis. That is, managernent performs internal analysis and diagnosis to identify

clearly the current strengths and weaknesses of the firm. Management also examlnes

the most probablefuture strenglhs and weaknesses. On the basis of these assesslnents,

expectations are developed about goal attainment given the internal and external con-

ditions. If gaps exist between desired and cxpected objectives, new strengths must be

developed or weaknesses preventing goal attainmcnt must be overcotne.

Since this chapter parallels Chapters 3 and 4, much of what was said there applies

here and wii l not be duplicated.'fhe sinri larit ies include thc definit ions of analysis

and diagnosis, the purposes ofanalysis and diagnosis, and factors affecting diagnostic

decis ions.This chapter also provides parallel information on the internal factors. This includes

. Strategic factors to be analyzed and diagnosed

. Techniques and problems of internal analysls

. The role of strategists in internal analysis and diagnosis

. Diagnosis and preparation of a summary assessment (SAP)

INTERNAL FACTORS TO BE ANALYZED

In the discussion ofinternal factors, it is not possible to consider in depth the material

presented in courses such as marketing management and personnel and laborrelations.'Some

of the leading books on the subject are listed in tbe references for each section.

All that will be attempted here is a listing of the most crucial ir]ternal factors and a

presentation of brief illustrations of the competitive advantages (and weaknesses) that

are poSsible. The order of discussion does not indicatc importance-it is iust a con-

venient ordering of line and staff factors and follows a fairly typical budgeting format'

But you should remember that each area interacts with the others'

Marketing and Distribution Factors [2]

Marketing and distribution means moving goods or services from the producer to the

customer. It starts with finding out what customers want or need and whether the

product and/or service can be sold at a profit. This requires doing market research'

158 cHAPTER 5

S t r a r e g i c m a n a g e m e n te l e m e n t s ( C h a p t e r 2 )

T o d e t e r m i n em i s s i o n , g o a l sa n d v a l u e s o ft h e f i r m a n dk e y d e c i s i o nm a k e r s

To search thee n v i r o n m e n t a n dd r a g n o s e t h ermpac l o r tn rea tsand oppor lUn i t tes

T o e r a m i n ea n c d r a g n o s et h c i r m ss l r c n q t h s a n dW C A K I E S S C S

T o c o n s i d e r v a r r o u sa l t e r n a t l v e s a n da s s u r e t n a t t h e6pcropr ia le s t ra tegys c hosen

T o m a t c h p l a n s ,po l rc ies , resources ,s t r u 6 1 g 1 9 , 3 n 6a d m i n i s t r a l i v e s t y l ewr th the St ra tegY

To ensure

i m p l e m e n t a t i o nwi l l meeto b j e c t i v e s

EXHIBIT 5.2 A model of strategic management.

ThesI ra legr cma nagementp rocess

lIl> r

E n t e r p r i s e l \4 iss ion andob jec t ives

T h e

g e n e r a l

e n v i r o n m e n t

E v a l u a l i o na n d

c o n t r o l

-tompetifive struclY:: and market share: To whal ex

;t;r*'ilt firm establisleo u,,:lflt market share in the

iltin*il*rt::*# # ilff rT':| ?,'i:il*i;i.tl;. t*"ct-service mix: quality of products and

, t r i tu i . t t ' - -^^ ^r .^-^r . .^+ ̂ ^

Ffi4 pfo-du.t-Eervlce llne. completeness of product-service

;.,rirr *o pr"9i:::::i].'':,mix; phase or lire cvcle the maini.proOu.tt and services are in'

I 'S Strong new-proouct and new-service lcatlenhip'

I O pu,.ni protection (or equivalent legal prolection for


INTEBNAL FACTORS: MARKETING AND DISTRIBUTION

EXHIBIT 5'3

I

I

8 Ef.ficient and effqctive packaging of products (or the

equivalent for services.l .

9 Effcctiue pricing strategy for products and sen'ices'

l0 Efficient and efl'ective sales force: close ties-with key

customers. How vulncrable are we in tcrms 01 concen-

traring on sales to a few custotnets?

11 Effective advertising: Hasr it established the compa-

ny's product or brancl rtnage to develop loyal customers?

ri nincient and effective marketing promotion activities

other than advertising,

13 Efficient and eff'ective service after purchase'

14 Elficient and effective channels of distribution and

geographic coverage, including internal efforts'' w W e / '

Positive feelings about the fitm and and

ices bY the ultimate consumer'

Thesr ra legrcmanagemenlprocess

i den t i f i , i ng themarke t ,deve lop ingp roduc t , t es t i ngcus tomer reac t i on 'wo rk ingou tproductioi and costs, determining distribution and service requirements, and deciding

on advcrtising and promotion approachet'

As sirnple as this sounds, marry cotporations all but forgot such basics in the 1970s

when inflation kept revenue high. But vast economic and social changes have madc

marketing strengths more imporlant for most firm6. Thc recession in thc early 1980s

and demographic and iife_style shifts created problems for those who pursued mass

marketing and brand loyalty as the kcys to marketing SucceSS. Likewise, lntense

international competition, rapid technological change, and dcregulation have created

new weaknesses in typical marketing approaches. The changing nature of competition,

then. requires a close look at marketing strengths and weaknesses in order to build

competitivc advantage in increasingly fragmented narkets. Exhibit 5.3 is a list of the

marketing and distriburion factors. The strategist is looking to see if the firm is sub-

stantially stronger in marketing and distribution than its competltors'

As ytu looi at the factors, you will see that strength can come from a variety of

upprou.h"r. The operational marketing questions of segrnentation, positioning, and

mix (pr<lduct, prlce' promotion. distribution) are quite important to the firn,s abiltty

to compete effectively. ol cclurse, firms compete on any and all of these factors.

Some f i rms prefcr approaches involv ing low pr ices. lower qual i iy . more promot ion.

and wide distriburion; others prefer orientations toward higher prices, higher quality,

and custom dcsign.An assessment of the weaknesses in relation to market potential also suggests areas

where improvements can be made. For instance, if there appears to be a gap in the

product line, new-product development or acquisition is called for to fill out the

existing line or create new ones. A gap in distribution might lead to efforts to build

intensity, exposure, or coverage. lf usage gaps exist, price or promotion can lead to

increased frequency of purchase, or new uses or users (customers) can be found for

products.

160 CHAPTER 5

Just as important as these questions are other areas which focus on how the mar.keting organization functions. For instance, the organization n.ray have the abil itvi

accumulate better knou'ledge about its rnarkets than the corrpetition has lf properi,

used, this can become a major advantage with respect to assessing the need for change*and detern-rining their t iming. Similarly, if the n'rarketing organization maintains gs.drelationships with production oI new-product engineering, the translation of marketplace necds into the tin'rcly creation of goods or services can lead to a competitive

edge.Finally, the importance of marketing to the overall success of the company needs

evaluation. In some firrrs. such as those which supply to a few customers who specify

tl icir prccise needs (e.g.. defense contractors), the markcting function need not blparticularly sil 'ong. In other industries. lhc greatest share of internal resource allocation

ntay go to rnarketing units (e .g., consumer products producers). As compctit ive needgare assessed, the relative strenglh of n'rarketing and the way it is ntanaged in relation

to major contpetitors ntav lead 1o indications ol strength or weakness. Exhibit 5.4providcs an example of hou' malkcting has bccot'ne a wcakness at Proctor & Gamble

duc to thc way i t is nanaged in a changing envi ronment

EXHI

f:,.:1: i : , 1

i. 1t,, i

f::"4li

i : , (ir :i _l. "'

Ri

EXHIBIT 5 ,4 MARKETING BY THE NUMBERS

Like all packageci-goods marketers, Proctor & Gamble

operates in a tougher rvorld than the past, when it had the

midas touch. Thc f irm has sturnbled lately. I t no ionger

has commanding leads on branded products such as Crest

and Pampers. And its competltors are smarter.

P&G's traditional strengths-a massive commitment

to product reseatch and exhaustive test marketing-have

not been as potent as in the last. lts ntarkcts are lnoture,

and "the old mdss audience delivered by mass media for

the mass narkets isn't working anynore," says one P&G

alumnus.P&G's earlier successes often came from a strategy of

acquir ing brand names (e.g., Charmin, Duncan Hines,

Folger's); and using rnarketing expertise, it put those

narrcs or'l one product after another to doninate its field.

Bu1 the firm has yet to tum recent acquisitions into big

profit producers. Proctor has done little more than refor-

mulate sonre new products while competitors have cap-

tured substantial new business by segmenting markets and

products. Insiders suggest that the problems at P&G rc-

flect a corporate culture which is stifling. Decisions are

"rnade by the numbers." In an age when creative thinkers

Source: Adapted from Z. Schiiler and A. Dunkin: "P&G's Rusty Marketing Machine," Bu,siness Week, Oct.2l, 1985, pp'

I l 1 - r 1 2 .

often get freedom to try ideas without interference frorn ,

the top, P&G remains bureaucratic and centrally con- '

trolled. The president wants to "know whal the facts lr

are." Irle is a no-nonsense analyst who gets involved in

nitty-gritty matters, with a fetish fot memoranda and aburdensome system of comnrunication. This slow-movingperfectionist style worked to P&G's advantage during

less-competitive times. But now this approach is hurting

some key markel:.Recently, President Smale has been showing greater

flexibility. P&G js working more closely with retailers; it

has cut down on its memos and livened up its ads. For-

going its usual thoroughness, P&G rolled out half a dozen

products since 1984 with no test marketing. However,

unless its weaknesses resulting from insularity and ad-

hercnce tb centralization are reduced, Proctor's past mar-

keting glories may not provide the strengths to accornplish

its goal of doubling unit volume each decade.

As Exhibit 5.tl points out, P&G still faces problems

from cornpetitors who are beating them to the punch, but

this "det'ensive" posture lits thc style of its current man-

agement practices.

. -

\


INTEBNAL FACTORS: R&D AND ENGINEERINGhorv the ry1n1_the ability 1s5 If properlyd for changesalntalns goOdrn o1'ms1(s1-I competit ive

mpany needs; *'ho specifyneed not be

-ce allocationretit ive needs:d in relation

Exhib i r 5 .4tr & Gamble

ference fromlntral ly con-rat the factsr involved inrranda and a;low-movingrtage during:h is hurting

wing greaterh retailers; iti ts acis- For-half a dozen: . Hogever ,r i t r r e n d a d -

' ' s pas t mar -, accornpl ish

:s problems: punch. butulTent man-

1 , 1985, pp .

EXHlBti ss

1 Basic research capabilities within the firm

Z i.u.fopt.nt capabilitl for product engineering

8 Weli-equipped iaboratories and testing facilities

9 Trainecl and experienced technicians and scientists

l0 Work environment suited to creativity and innovation

11 Managers who can explain goals to researchers and

research results to higher managers

12 Ability ofunit to perform effective technological fore-

castlng

i i*cellencc in Product design"l

i,*..11.n.. in proccss design and improvenrents

i lop.tiot packaging developmcnts being created.

i i.otou.t.nts in the use of old or new materials

i oiiritt to nreet dcsign goals and customer require-

ments

F&D and Engineering Factors[3]

The rescarch and developr.pcni (R&D) and er.rgineering function cati be a compctit ive

advantage lor two prlme reasons: (1) lt can lead to new or inlproved products for

marketing, and (2) rt can lead to the development of improved rnanufacturing or'ilii'ffi *rntj\*'m]i:?'*il"':r"YJ::lilr:l"*n':;

ln Chapter 3 we noted that major tcihnological changes ofteu occurred or-rtside the

mntecliate industr.y. Hven so, r"search anci development can provide significant

strength 1or the ongoing husiness'

TheR&Dprocess tscomm<- rn l yv iewedasp roceed ing th rough thes tageso fbas i cresea rch ,app l i ed resea rch ,deve lopn ren la l resea rch ,andc t lmmerc ia l i za t i on .Exh ib i t5.6 graphically represents the tinle savings in producing a new product' process' or

service with accelerated dcvelopnrental re.search. one aris shows thc time lapse frOrr

a basic rosearch breakthrough to conmercializ.ation and the othcr shows the R&I)

states. The actual rmprovement in time wil l vary, but uncler unaccelerated conditions'

the normal gap between a research breakthrough ancl comrnercializ'ation is about 25

yea rs -The f i gu , . *u ,deve lopedby look ingback f romcon lmerc ia l i za t i on tobas l cresearch. Accurate iorecasts of the comrl]ercial applications of basic or developr.nental

research at'e rare and dlff icult to produce. But for the individual f irm assessing its own

R & D c a p a b i l i t i e s , t h e k e y i s t o e x a m i n e t h e a b i l i t y t o p r o d u c e p r o d u c t o r p r o c e s simprovemen tsand the t im i r i gande { l . cc l i venesso f i t s fu tu ree f | o r t s .

A firm can choose to puisue an offensivc approach t0 R&D or pursue defensive

,,fast seconcl" or "imitaior" approaches. Exhibit 5.? describes the kinds of differ-

ences you would expect in these approaches to R&D. Thc offensive approach would

acce le ra te theapp l i edanddeve lopmen ta l resea rc l re f f o r t s (B l i r rExh ib i t 5 .6 ) .The.,fast seconcl" approach would emphasize accelerated cleveloprnental research (Bt in

Exhibit 5.6). The .. imitator, ' would wait for commercial developments and follow up

w i thn ' r i no rchangeso r improvemen ts (B . i nExh ib i t 5 .6 ) .Exh ib i t 5 .8sugges tswhenthese various approaches might be more suitable to use'

Some firms io Uotft offeniive and 6efensive R&D work. For exan'rple, TDK cor-

poration (japan) characterizes its work as positive techncllogy, negative technology,

.-rL-

162 CHAPTEF 5

C o m m e r c i a l i z a l i o n

Deve lopmenta{Tesearcn

A p p l i e dresea rch

B a s i cresearch

EXHIBIT 5 .6

D 1 D 2 D.r D4T l m e

A T Y P I C A L R & D P R O C E S S8 1 . 3 A C C E L E R A T E D D E V E L O P T I I E N T A L B E S E A B C HC A C C E L E R A T E D A P P L I E D R E S E A R T ] H, 1 a B A S T C I T E S E A R C H F l N D l | ' J G S

Looking back from successful commercialization: transforming basic research into viableproducts.(Based on R. Gold, "Technological Diflusion in lndustry: Fesearch Needs and Shancomings." The Journalof Industrial Economics, val. 39 lMarch 1981), pp. 247-269.)

or nonexistent tcchnology. Positive tcchnology involves research for the purpose 0fupgrading existing technologies and improving products. Research on negative tech-nolog)' is done on processes. naterials, or technology which could present a threat t0existing lechnology. While this entails l ime, cost, and risk. it cnhances the possibii i tyof accumulation o1'ne w technology and kecps a firrn abreast of potential substitutions.Nonexjstcnt technology research Iocuses on new developments which could providethreat or opportunity in the futurc. Without this, delays in research of negative tech-nology would be inevitablc, and new products would cease to be developed.

As with marketing, thc in'rportance o1'R&D to success in business is much higher

EXHlB l r 5 .7 A coMpARtsoN oF OFFENStvE At \D DEFENSIVE R&D AppRoACHES

Otfensive Defensive

Products or processesProduction designVo lumelmplementationTimingEnvironrnent

Dramatical ly new onesFlexible and responsiveLess emphasis on cost per uni lNew drvisions or new f irmsLonger termProacl-Use R&D to achieve

change suited to yourresearch

lmprovement of exist ing onesRigid, with eft iciency goalsHigh-volume emphasrsExist ing structureslmmediate impactReact-Adlust R&D to needs

torecasted

ofi<a-

i'ioiinF. til v!::.

? bi o: a

i f

i ti rl ' !i ,{ l

i r

\

INTERNAL ANALYSTS AND DIAGNOSIS 163

rrch into viable

rs. " The Journal

he purpose ofncgatlve tech-ent a threat tothe possibil i tysubstitutions,:ould provideregative tech-oped.much higher

xrs l rng ones

hasis

D to needs

glgtBlT 5'8 AN INNOVATOn tuRtlto 't '- ' OtO*

-:1; Procter & Gamble unveiled its newest product

: lililli;,' ;*1T.T " i.i ̂ L i,l ;:: i:"'"l#':Yxfor toothpaste). leaving P&G to fo1low in their footsteps'

N*" f,"* rhis relates io the managelnent style discussed

in Exhibit 5.4,The strategy pursued by P&G adcls light

1",":t q1::

cussion of R&D wilh regard to offcnsive and detenstve

,pp-^"ft"r. Altirough thc Uiggest firnrs ale,thougll to "

fait seco,.tdr, this seems to valy with the lcvel -ol

tech-

nology. Reporledlv, P&G iost ground to "nimbler.com-

p"t#t-" in the rnarket in the recent past' by.lacking in

ofi.nr.--o, innovative leads' lt has assun.red the imltator

position in both diapers and the pump toothpaste' evsll-

iually making up lost market shirre Where techr.rologics

are relat ivel l is imple' the imitator posit ion may be qtr i te

suitable. Changes are slower but nrore lasting and rnuch

less rnodiliable. maklng the imitator spol rnore attractivc'

In other ateas, where technology is more complex' the

innovalor or fast-second position is usually more dcstra-

ble. Innovatot's, howeuei, are usually smaller finls and

oi'ten conre from outside tlie industry

Nerv Baby: Ultra Pampers, ' Br'isirlcs'r Wcck' Fcb' 24' 1986'

innol'ilr,'",''"s Nurses Association for helping to maln-

I [:.j i*H. IT J: Tf;" T:iff "; :::'J:] ili ffi i

ibut:-:',"'*;;n it failcd to realize that consumers would

f"""H;; for bctter-quality diapers Last spring' Kimber-

i oJ,t,

fi;;t"t took thc number one market-share positiotr

, l ] . , .u i t ." .ontoured f i t t ing diapers' P&G's comeback re-

:#;;; a $-s00 million revamp of diaper-rrtaking

l.r*.t, Krmberly is presently changing rts equlpment

tJa* . an e t lu iva len t Prodr rc l '' " ' i ; ; ; ; i" t ' to P&G, i t is using a provon strategv of

a.rr""Ut"itU consumcr bencfit' howcver slight' to take

i".r"ttrl., ,itare Other examples of P&C's prcxlucG

iiii.r.ntiotiun strategy inclurJc the addit:ion of tartar con-

o"ii" Ct.t, and the introduction ol Liquid Tide' a laundry

a.nrg*, with sttperior cleanil1g power' Howcver' com-

;;;ffi continuc to innovate (e'g ' the pump dispenset

Soarcr: Adaptetl fron ''l 'rocter ancl Gamble llanks On a

pp. 3G37'

l . o r sone than fo ro the l s . I i o r i ns lance ,con . l pu te ro rp l ra rnaceu t i ca l f i r n l s r cnc ra l l yhavemuch la rge rR&I )budgc ts (5o r6pe rcen to | sa l cs ) tha r i do rnanyo thc r i ndus t r i es

lwhich are rn thc 1 pt"tnirange)Yc1 cvct] thcrc' s:lmc O-il"S^,:t l:t l :-to innovate

wilh new products, r.vhrle othcri dcvclop new applications or minor improvcmcnts

0fequal imporlance, R&D is sccn as a wav to iurpiou" procluctivity in rnanulacturing'

Increasecl iL&l) has lcd to incrcasing iactory automatiotr alter two dccadcs of neglect

rn the Unitctl States. Irven tho service inclustries are recognizing the need to boost

proclucrivity. In thc Ufritci l Statcs. capital investtncnt in technology per workcr avcr-

a g c c l l c s s t h a n $ 4 5 0 p c r w o r k e r i n t h e l g 6 0 s t h r o u g h r n i d ] 9 7 0 s ' B y t h e m i d - 1 9 8 0 s ,this figure junped to ovcr $i1000 per worker (in constant dolLars)'

It might bc noted 0rat u,hilc nran1,U.S. f irms havc bcen lagging in long-tcrm

commitment to rnvestnent in risky tab witrr unlinown time and payoff lags' ' lapancsc

.o-funr", have surged aheacl. Now n.rany of the imitators are bccoming the tnventors'

l ] u t o v c n h e r e , d i f l e r e n t l r r t l s p u r s u e d i f l c r e n t a p p r o a c h c s . S o n y i s a n l n n o v a t 0 r ;Matsushita ls a copycat tn thc consutler electLotl ics arena'

Production and Operations Management Factors [4]

Exh ib i t 5 .g l i s t s the iac to rs fo rana l yz ingp rod r - r c t i onandopc ra t i onsmanagemen t 'l fwewereto ident i lyonel .unct ionalarcawhereNorthAmer icanf i rmshavebecome

less competit ive in r-elation to overseas conrpetitors, it would be operations The United

164 CHAPTER 5

EXHlBlr 5'9 TNTERNAL FACToRS: pRoDUcroN AND oPERATTONS MANAGEMENT

I Lower total cost of operations. compared wilh com_pctirors' total costs;2 Capacity to meet market demands . .3 Efficient and effective facilities l

4 Raw nraterials arid subassenrblies costs5 Aclequale availability of raw matgrials and subassem_

bl ies"i?tri"i.n,

ancl eflective equipmenr and machinery

7 Efficient and effectiveloffices

13 Flexibility in operations

l l Elf icienr ancl effect ive nraintenance pol icies

l1 l tr : j iy. verl ical inlegrarion or supplier relat ions

States used to be cited as the rcader in this area. Now it seems that Japanese, Tai-wanesc, Korean, or European firrr-rs arc the readcrs. In pirrt icular, the Japanese ff ipushed hard on factors l, 6, a'd l0 tl irough the use of robots (five times more ip ssgthan in the united States, even though rhey wcre invented by Arncricanrl -a q".rirylcontrol circles in a national eflbrt to improve pro<Juctiviry. If we are to be able bcolnpete' we cannot continue to yicld whole businesses such as television una ,uoiomanufacturing and clothing to overseas competil. ion. Steel may be the next malorloss.Ellbrts are being made now in u.s. i 'dustry to improve quaiity. ,,D.rng

rt rightthefirst t irne" rnay provide morc bcnefit to the bottom line than any realistic boost insales volumc-and liequently f.r an inveslment that is returned in less than a year.

Consider the U.S steel f irnrs. Their facil i t ies are out of date and they haven'tbeenablc t , ra isc funJs ro nrrde 'n izc. Thel l l .e ar a ser ious cJ isadvantage.r . r r i i i ,Japancse on factors l and 2, though they are showing signs ol makinga turnaround.

with regard to factors r and 6, Eastern Airrines usecr tocompere witt Derta. Delta,scquipment was newer and less costly to operate. Delta had a cost advantage. withlhe newer equipment there are fewer brcakclowns, too, and so Delta had an advantageon factor I l .

with regard to factor 3, consider sclme of the majo'food chains. Sateway andKroger havc larger and ncwer stores than A&p. A&p has ha<i to spend large sums totry to catch up. A&P also has factor-g problcms, Many of its stoies were rocated inoldcr neighborhoods with no parking. Ancl A&p is inadequately represented in thefaster-growing areas.

consider factors 4 ancr 5. Ashrand oir does not own its own crude oil. In the1973-1914 oil crisis, only governmcnr policy allowed it to continue i" trr. g.r"ri*business. Exxon did not havc thcse problems.

Your exposure to prclduction and opcrations management provided you with toolsto help you decidc how a firm can improve with regard tL factors 9 to 12. Thedevelopment of care|ul production planning and contiol systems, productivity im-provements, supplier relations, and plant capacity and location decii ions can lead toimportant competitivc advantages for a firm. If a firm can produce at a lower cost,has the capacity to handre business when others can't, or.un g"t raw materials atfavorable prices, jt has a competit ive advantage.

Final ly . factor l3 suggcsts rhar ,pcrat ions f lcx ib i l i ty courd become a compet i t iveadvantage. Since the beginning of this century, efficiency through economies of scale

INTEFNAL ANALYSIS AND DIAGNOSIS 165

,rr1af s''o TnE l*ctto'uLE S**'*o'*9:ttoN:]

-ffiI*onof plant size to more manaee^1ble ;cales is

ffi;;;t ai Westinghouse A new offic-c furniturc

,nlibruni Rapids employs 600 people lts general

#h * il:i'*.il:i ; : ;:',:,'"','.,;i :JI1 il :"f . futaf taat an enormous di l ference betwecn man-

' his"and small Plantsig'H ,bjj ;il.::;i ;; flarrt. wcsringhousc was trving

n,futifW a'ncl mant'facture an energy-efficient low-cost

i*rtnit. Nagel recalls' "For six or eight months.we

;Tffi;:;;., the-tev guvs fronr marketing ^l'd. *^"f11:

t:"r iti. the same room to talk about what we were

ltri, * " At any givcn tirne, many were out of town

I*?*t"t on other projects Westinghouse introduced

the product a year lale.

it is eusiet to keep tabs on what is happening at the

new furniture factory. When Nagel took over' he realized

almost i tntnediately that i t was throwing away at least

$100,000, y .u , u i wooc l sc r rp . Wi th in a fcw wccks ' hc

set up a rask lbrce of managers and union workers to deal

with:tbe problenr. Within a few months they reduced the

scrap to bfOOO u year. "The bottom-line efTect qf,bcing

able to idcntify goals and comtrunicate them quickly in

a smaller environment is clramatic," says Nagel' "Ten

years dgo, if you askecl me whether by going to smaller

ptuns, lou gave up a lot of efliciencies, I would have

said 'ves. ' Now, I can't think of anY "

:"ol:,,.,." A4anted from "Small Is Beautiful Now in Manufacturing," Blr,tir'?'ts lvzek, ocl 22, lc)84' pp l52-l5trJ P U | L E ' '

has clominated thc thinking of production executives. Longer and bigger rl lns can cut

per-unit costs. But ^, *. noi"d bcforc, technologiell and econorll ic international

compctitrVe conditions are changing the ground rules Becausc of nonunion and lbr-

e l g n c o m p e r i r i o n ' i t i s i n c r e a s i n g l y d i f l i c u l t t o r u n ] a l g c p l a n t s a t c a p a c i t y . A n d a stechnologicat chalgc shortens pri,duct l i fe cycles (e.g. consurner electronics), plants

becclnre obsolete sooner than expectcd. Conrbincd with computer-aided design and

manu l .ac tu r i ng ,p roduc t i v i t ycanbe ra i sedbu t l a rgep lan tcapac i t i c sbecomcuncom-

Pc t i t i ve 'Manufacturing people arc now discussing diseconomics of scale Huge manufac-

turing compl"*., ur. teing replaced with newer, smaller plants which are beconllng

rrore automatcd, as suggested in Exhibil 5.10. While some iirms sti l l usc cconomies

of scale to saln advantage, others are finding that they have nlore flcxibii i ty to shift

pro6uction rcqurrements rn smallcr plants, achievc greater productivity, and eliminate

some bureauciacy, which ofren leads to smoothcr labor relations. ln an cra where

mass marketing gives way to a focus on needs of fragnrented population groups which

seem to change iapiclly, f lexibil i ty in operations can vefy well become a competit ivc

strength. Firms can increase p.u.Lr, f lexibil i ty and product design flexibil i ty, as well

as add flexibil i ty to the production infrastructurc (personnel, training, inventory, qual-

i tycontro l ,andplanningandschedul ing) .Thiscreatesaggregatemanufactur ingf lex-ibil irv.

Corporate Resources and Personnel Factors [5]

Exhibit 5.1 1 l ists a ser of corporate resources and personnel factors which can provide

competitive arlvantages for a {rrm. Each of the factors can add lo the ability of a firm

,u u.ti"u" its objectives. Some firms are well known for these factors. General Elec-

t r i c . f o rexamp le ,hasac i van tagesw i th rcga rd tomos to f t hem.

>_--

166 CHAPTER 5

EXHIBIT 5 ,11 INTERNAL FACTORS: COBPORATF RESOURCES AND PERSONNEL

I Corporate inrage and preslige.

2 Effective organization structure, climate, and culture.3 Cornpany size in relation to the industry (barrier to

4 Strategic rnanatL' lncnt system.5 Enterprise;s recorcl for reaching ob.jectives: How con-

sistent has it been? How weil does it do compared withsirrilar enterprises?

6 lnflucnce with regulatory and governmentai bodies.7 Ll lect ive corporrte-stalT supporl systcrns.8 l { igh-qua l i ry c rnp l ( )yccs .

9 Balanced functional experience and track record otmanagcrnent: Are replacements trained and ready to tover? Do the top managers work well together as a,10 Effective relations wilh trade uhions.ll Eflicient and effective persbnnel relationsstaff ing. appraisal and pronrol ion. training andment, and compensation and benefits.12 Lower costs of labor (as measured byturnover . and absentce isnr l .13 Effective tnanagement inlormation and computertems.

Sonrc firms have artracted and held high quality, highly productive, and loyalentployecs and managers. IBM, Texas lnstrunlents, and other firms arc known f.rthis. Stnce thcse peoplc nrake thc dccisions 1'or all l 'unctions, this can be a crucialadvantase. Many {irms have purchased other firnts just to get thcir top-quality man-agcrial, professional, and othcr crrployees. By the same token, an organization'sstructurc, clinratc, and culture can bc a kcy advantage. Disney is well known for anoverriding crnphasis on a fcu, core principles which guide dccisions, enrployee be-havior, and the operalions of its busincss.

Being unionizcd can bc a con'rpclit ive disadvan{age becausc o1'the loss of f lexibil i tyor bccause of thc higher direct costs of labor. Some firns arc unioniz.ed but have hadgood relalions with efficient and efiective unions, leading ttt potential advantage.

Many of these factors becomc particularlv important whcn managcrs try to deter-nrine whether a str.atcgv can be irnplenrentcd. Weaknesses in these areas could lead1o a dcc:isiorr t l1' not attcmpting a given stratcgy bccause o1' the inabil ity to carry it outclfcclivcly. For exarnplc. an accluisit ion candidate whose organization structure isincor.npatiblc with thc strl lclrrre ol your firrn could be a poor choice. Or a strategy t0ckrsc a plant could be af1'ected by union contracts.

Thus,lactors 8 to l2 deal with the so called people issues. And managers (whetherlabclccl pcrsonnel, industrial rclations. or human resources rnanagers) who deal withthesc issucs arc recognized at somc leading complnie s rs a s()urce of cornpetit ivestrcnglh. More of these mrnaccrs arc reportins to the CEO and are involved in makingsl rategic decis ions. I f cor l rpanies arc constant ly acqui l ing. rncrr ing, sp inning of f newdivisions, entcring new businesses, or getting out ol old oncs, management mustconsicler the hurnan resource ques{ions involved-matching skil ls with jobs, keepingkcy personnel aftcr a merger, solving human problcms that arise with new technologyor the closing of a plant, and so on. According to onc of the new breed of humanresource managers, "Chicf cxecutivcs have finalllr colre 1tt realize that people arewhat give you a competit ive cdgc, and we'rc tell ing them horv 1o get the right people."

Finally, with thc advent of management information syslems rieveloprnent. andusagc, many firms are finding that they can turn dala and information power into apotent strategic weapon. Exhibit 5.12 suggests a number of ways that f irms can

l;,

.F--

**.*'o*.Fnd ready to hk;!iether as a teami1,,

. ,:,,..tatrons policies:ig and dgvelop-

/ Compensation,

d computer sys-

: lve, and loyalare known forln De a crucialp-qualiry man-organization's

I known for anemployee be-

ss of l lexibil i tyJ but have hadadvantage.rs try to deterreas could leadto carry it out

)n structure is,r a strategy to

igers (whetherwho deal withrf competit iveved in makingnning off newrgement mustjobs, keeping:w technology:ed of humanat people areight people. "lopment, andpower into arat firms can


ExHtBtT 5'12 TEN WAYS TO USE INFORMATION TECHNOLOGY

I n.u.' I n u n''u'.,-1.11i:i:it :.:): :'l: T^ :1" ::Ii*i,,iiintt betu'een the treasurer's office'and your bauks'1P"* ' ^^ ^xroi . 6nqnnial infnrrnnl ion fastcr-and thalllrr .* obtain financial information faster*and that

il,i;r", uoot cash managementi- rneunt betttr cash managentenl

i r Customer service' BY lett i'r--Customer

service. By letting customers tap into yourt

- - L : - - ' r ^ . ^ + ^ , , ^ . ' L ' r l l i

ber for'consumer questions and complaints. you get ideas

Ior product improvements and neu products ln-house

elecironic publ ishing can help turn oul product manuals

fas ter fo rspeed ier . in t roduc t ions . . .

7 Sales. biuing salespeopie portable computers so that

they can get messages faster ancl enter ordeis directly adds

up to quicker deliveries, bettel cash flow, and less pa-

perwork.g Selling extra processing power. By using off-peak

piocessing powelto develop completely new services for

outsiders, you can transfer sone of the bigh costs of build-

ing your inforrnation nelwork.

i ielemarketing. Testing cold leads by .telephone

first-using conputer runs to feret out the best pros-

pects-helps slash sales-force expenses and boost pro-

ducti vir l ' .

16 Training' Training or retraining workers-u.sing video-

ditkt 1"tt them leam at their own speed-and lets you cut

i ra in iun cos ts .

a"atuiur. to track their orders and shipments, you build

fotuf,y "nO smooth relations'

r Locking iu custolners' B)' cteattng excluslvc conr-

p"utr, ao*tnunications with customers for order entry and

!r.nung. of product and service data, you can help thwart

competitors."i titu.x.t intelligence. By assembling and manipulal-

ing data on dernographics and competitors' -vou can spot

uniupp.a niches, clevelop new products' and avoid inven-

tory cruncnes.< New businesses. Information technologies make

*iole new operations possible' Foderal Express' for one'

could not work without computer-equipped trucks and fa-

c i l i t ies .

6 Product developmcnt. By providing a toll-free num-

Soarce :Adap ted t i omJ 'Hami l t onandC .L 'Han i s , . . I n f o rn ra t i onPowe l , ' ' Bus inessWt :ek 'Oot . 14 , i985 , PP. 108-116

develop strengths by using infbrmation technology to gain a competit ive edge. Quick

access to up-ro-out. data 0n which to base dccisions and n'rake plans is now availablc

to strategisis from all over the coryoration. ln fact, many films have instalied a chief

information officer (clo) in their organizations. These new managers often have

ser cr l l l 'unct ions and character is t j ts :

. oversee the conrpany's technolog,v, includitig data proccssing, office systems,

and t c l ccon tn run i ca t i ons. Report <Jirectly to the chairman or CEO

. Concentralc on long-term strategic use of information, ieaving day-to da,v oper-

ations of the computcr room to subordinates'

Finance and Accounting Factors [61

Exhibit 5.13 hsts some of the major factors in {inance and accounting. The appendix

to this chapter provides a summar) of financial analyses which can be done to help

you assess this area.One objective of the analysis is to determine if the focal firm is stronger financially

than its competitors (Exhibit 5.13, factor 1). can it hold out longer or compete more

effectively because it has thc financial strength to do so?

Analyiis of the comparative linancial condition of the firms is prirnariiy done to

determine whether the firn is capable of undertaking a particular strategy, or if it is

advisable to do so. For example, many entreplcneurs fail to account for their financiai

EXHIBIT 5 .13

1 68 cHAprER 5

INTERNAL FACTORS: FINANCE AND ACCOUNTING

I Total financial resources and strengrh-liquidiry, 5 Advantageous tax conditions and insuranc. ali)il e v e r a g e , p I o f i t a b i 1 i t y , a c t i v i t y , c a s h f l o w s . - r i s k e x p o s u r e2 Low cost of capital in relation to the industry and com- 6 Efficient and effective financial planning, workin,'* l-.petitors because of stock price and dividend policy ital, and capital budgeting procedurei l*,,*O,3 Effective capital structure, allowing flexibility in rais- T,Efficient and effective iccounting systems to,

"^:.i!ing. additional capital as. needed; financial leverage budget and profit planning, and auditing pro..our.rll)i,,4 Amicable relations with owners and stockholders 8 Inventory valuation policies ".

,,ji

weakness in their stafi-up phase. Their firms go "belly-up" because of the cash-fl0u,weakness if they have not planned for it. And many firms have planned .ortru

"i",1expansions only to find that they are financially incapable of paying fo, th.m.' ''*"

Another purpose of financial anarysis is to help pinpoint strengths or weaknessesin other functional areas, liom operational and strategic perspectives. The otherfacionl is led add ef f ic ioncy ( factors 2,5, and 6) or a s t rategic value ( factors: andq)t0afirm. The accounting staff function (factor 7) is a necessary one for legal and'manlagement information purposes. Accounting poiicies for inventory valuation (factoJrcan have strategic value when changed in response to inflation and other externjchanges.

This last point suggests two other important ideas to keep in mind as the financialpositicln of the firm is analyzed. First, the financial value of a firm must be carefullvconsidered in terms ol' the basis upon which the valuation is made. Stock marketprices may reflect short-term judgmenrs of analysts. And these .ludgments may bebased on changes in the accounting treatment of assets for tax purposes, which maymake returns appear better than they are. The book value may be ridiculously outoidate based on long-term historical costs or the method of depreciation used.llneithercase, if a firm or subunit is being valuecl for acquisition (or for divestiture or liqui-dation), the financial valuation process iiself must be assessed in addition to otherfactors affecting such decisions. So the assessment of strength or weakness dependson the analytical approach and the interpretation of "hard" numbers.

A second major issue is the working capital needs for strategic versus ongoingoperations. Because of past strategic choices, firms may have tied up so much cashthat future options are limited. This happened to Ford and seagrams. on the otherhand, cash-rich firms must determine how long existing strengths wil l provide acon-tinuous flow of funds and decide how to invest this wisely. Thus timing questionsareimportant to financial analysis.

The final issue we wish to raise concerns the process of financial management.Earlier we suggested that the way valuations are made influences the content of thefinancial analysis. Also, other corporate resources factors were seen to be important,including the quality of management. Factors 4, 6, and 7 in Exhibit 5.13 hint at the

rSome analysts now suggest the computation of a Q ratio to aid investment decisions. This is theratioof the market value of physical assets to the cost of replacing those assets.

--'-----*\

rance to minirnize

ing, working se:,

;ystems for cost;3 procedures

of the cash-flswmed costiy planlfor them.

rs Or weaknessesThe other factorsrrs 3 and 4) to n: legal and rnnn-uation (factor g)d other external

l as the financialrust be carefullyl. Stock marketlgments may berses, which mayliculously out ofused.r ln e i ther

lstiture or liqui-ddition 1o other:akness depends

versus ongolngp so much cashs. On the otherI provide a con-1g questlons are

rl management.) content of theo be important,5.13 h int at the

rs. This is the ratio


important role of the policies and procedures established for performing financial

analysis. Thus the role of the financial executive in providing support for planning

can lead to a strategic advantage for the finn. Too often, the chief financial manager

is seen as important only at budget preparation stages or for providing "number

crunching" ur input for decisions. These roles are important. But frequently the

financial executives are excluded from real involvement in strategic planning because

it is believed that they have short-term orientations, focus on selective components

rather than on conrprehensive pictures, and value precision over less tangible issues'

(These remarks often apply to executives in other functional areas as well') As a

result, decision processes can suffer frorn what has been called a "paralysis of anal-

ysis." It is suggested that the chief financial officer's tasks of forecasting capital

structurc, determining resource allocation ancl cash flows, and raising external funds

are critical functions in determining the competitive advantage of the firlTr.

Thus a firm at a particular time can be strong (or weak) financially, and this

condition allows it to make (or prevents it from making) strategic changes' Financia-

ratio and accounting analyses help measure this strategic advantage. But an analysis

should also be made of the process of flnancial management, since it too can provide

advantages for the finn. Of course, as suggested in the section on corporate resources,

the quality of management in any of the functional areas can provide advantages for

the firm.ln sum, lrrms can have competitive advantages on a number of the factors just

discussed. Strengths usually lead to greater "slack"-a cushion of resources which

allows an organization to be flexible and adapt internally or externally. Slack enhances

the ability of a firm to choose from a greater number of alternative strategies' Weak-

nesses or disadvantages limit the strategic options of a firm. The list of resources and

factors also serves as a checklist of items to analyze about a firm (or a case) with a

view to improving its operations and identilying its distinctive competencies. It is not

an exhaustive l ist. But it does provide a useful beginning'

OF STRENGTHS AND WEAKNESSES

There are a variety of ways each area of potential competitive advantage (or disad-

vantage) mighr be analyzed. First we will provide some prescriptions for how analysis

should be done. Then we will summarize some evidence about whether it is done that

way and what is analYzed.

Techniques of lnternal Analysis [7]

As suggested eariier, a number of basic references for each area of internal analysis

traue be.n provided. It is beyond the scope of this book to summarize the techniques

of analysis for the areas most business school curriculums cover in detail. For instance,

a partial but far from comprehensive list of toois ls identified in Exhibit 5'14'

Data for analysis and diagnosis of the factors come from several sources. One

source is the data gathered in the environmental analysis and diagnosis stage of stra-

tegic management. The other source is the internal data generated in doing business

ANALYSIS

, , , ; L

EXHIBIT 5 ,14 A FEW TOOLS FOR INTERNAL ANALYSIS

1 - it t v u i - 1 A H t t H 5

Finance and aicounting: Capital asset pricing model;pay-back; accounting return; present value; internal rateof return; f inancial ral ios (see appendixi: f ixed and varj-ab le budgets

Hirman resources: Turnover analysis; morale sur-veys; training budgets; analysis of personnel needs andcaoabil i t ies

Marketing: Sales forecasts: market-sharc analysis:

and market- l ines analysis

ysls

and available from lhe nanagerncnt lnformation system and the functional clepanrnents(such as marketing). One writer has suggested that thc annual report, witfr AL'itsfaults, is another valuable source of infomation. So as before, verbal sources,6q_cuments, formal studies, or a nanallement infornation svstem can provide outu input,lor analys is .

In addition to these sources, there are two other analytical aids you might usehguide the internal analysis. The first is the functional-area profi le. This type of profl lei sshown inExh ib i t 5 l 6 (pages 112 -113 ) . The i dea i s top resen tama t r i xo i f unc t i ona iareas with charactcrislics comrron to each.

T'hen the strategist prepares the functional-area resource,deployment matrix (Ex_hibit 5.1-5). The llrrn rccords whcrc it is spending its dollars and cunently exertinsits e1'1brts. This infornration shr-ruld be recorded each year so that the firm can deterlmine the relative importance of each hrnctional area (cornpared with competitgrs'functional arcas) over time. This approach allows the firn to analy'ze the strategicdeployment ol funds ancl its strengths and weaknesses over time as compared withthose of compet i tors.

we also wish to nrake some sirggcstions about horv you can apply some of thesetechniclues for stratcgic analysis. First, each arca must be considered with respect towhat its policies and approaches wcre, are, and wil l bc. That is, how do cunentconditions relale lo the pasl attainmenl of objectives, future expeclations, or internalrequiremenls? This question is crit ical to the overall gap analysis, and the answerwillhclp you determinc which arcas are most important lbr the f uture . As we noted before,what is viewed as a strength n()w rnay become a weakness later. Looking at each areaovcr l ime allows you to see if advantages are bcing developed or are deteriorating.For inslancc, a dcclinc in the nunbcr o{'patcnts being genclated may be a sign ofpolential problerns in R&D or new-product developrnent. Increasing grievances maysuggesl labor problems. An increase in the cost of goods sold could indicate productiondiff iculties. Incrcases in thc rework rate may indicate quality-control problerns. A hostof indicators in each area can be exarnined over time. In finance, the latios noted inthe appendix can be examined over several years, and pro formas can be prepared forthe future . E,ach indicator also must be analyzed in relation to goals or requirements.

For instance, are sales quotas being met? Does the trend in debt to equity suggest

li

\


le and shop-y1, material;'ement plan-

EXHIBIT s't s A FUNCTIONAL-AREA RESOURCE.DEPLOYMENT MATRIX

Functionalareas

R&D +engineering

Manu{aclunng

% ol strategicdeveloPmenldol lars

Focus oJ eflorts

Marketing

Finance

Management

; value anal.,, 1,,

departmentsu,rrh all i ts;ources, do_: data inputs

right use toie of profileI functional

nalrix (Ex-l1' exertingcan deter-

rmpetitors're strategicpared with

re of theserespect to

do currentor internalnsu er wi l l'ed bc lore,each area

: r i r r r a t i n s- . , - . . . , . . D .

a srgn ofinces mayrroductionns . A hos ts noted in:pared forr i rements.\ suggest

problems in meeting any conditions of loan agreernents with bankers? Are <lur hirrng

procedures meeting the requirernents of the i]qual Opportunity Ernployment Con'r-

mission So that we can continue t() seuure government contracts? Any o1' lhese arcas

could be Sources of weaknesses or strengtl"ts. For example, yor-rr f irm may be a favorcd

employer if i ts hiring practices are "bctter" than thosc of competitors.

Second, the analysis can be dclne on a piccemeal basis, with each area viewed

independently of the others. However, the strengths and weaknesses must he comparcd

in relatiott to one another. f 'rade-offs wil l inevitably result. br"rt it is better to considcr

the needs and desires of each area together rather than let each suboptimiz.e. Consider

Exhibit 5.17 as a case in point. Manufacturing may see strength through a policy ot

long, steady mass production runs of a l imited product l ine. Finance may set policies

which value a low {inished-goods inventory and high turnover for cash-flow impro're-

nent. It may suggest capital budgeting and investment policies which minimize the

number of factories and warehouses, freight costs, etc. So far so good; these policies

172 CHAPTER 5

EXHIBIT 5,16 TYPICAL FUNCTIONAL.AREA PROFILE

R&D engineering(co n ce ive/desig n /deve lop) Manufacturing (produce)

Focus o{ f inancialdeployments

$ for basic research$ for new product

development$ lor producl improvemenls$ lor process improvements

$ rol. pfunt ------a

$ lor equipment$ lor inventory$ lor labor

Physical resources Size. age, and location ofR&D faci l i t ies

Size, age, and location ofdevelopment {aci l i t ies

No., location, size, and aqeot ptants

Degree of automationDegree of integrationType of equipment

Human resources Nos., types, and ages of keyscientists and englneers

Turnover ol key personnel

Nos., types, and ages of kevstafl personnel andloremen

Turnover 01 key personnel

Organizational systems System to monitortechnologicaldevelopmenls

System to controln n n n o n l r r a l / r l o c i n n /

developmenl process

Nature and sophistication ofpurchasing system;production scheduling andcontrol system; qualityconlrol system

Technological capabi l i t ies No. of patentsNo. of new products% of sales trom new

produclsRelat ive producl qual i ty

Baw materials availabilityTrends in total constant $

per-unit costs for rawmalef ials and purchasedparts, direct labor andequrpment

Productivi tyCapacity ut i l izat ionUnionization

Source: Feprinfed by permission lrom Strategy Formulation: Analytical Cancepts by Charles W. Hofer and

Dan Schendel , copyr ight O 1978 by Wesl Publ ishing Company Al i r ights reserved

could be seen as ways to improve efficiency and gain a competit ive advantage' But

suppose malketlng and sales efforts are directed toward the exciusive distribution of

high-quality, high-priced, custom-designed outputs. The company has developed pro-

motiou policies to tap a market opportunity in this area. Its goal is better customer

service through well-stocked warehouses and a wider produ;t line. Suddenly, the

assessment of production and finance strengths takes on a different meaning. And the


'ing (produce)

rent)ry

"t, size, and age

tutomation')legration

ripment

and ages of keyonnet and

key personnel

sophistication ofrg syslem;r scheduling and'stem; qual i ty'slem

als avai labi l i ty)tal constant $osts for rawand purchased)ct labor andIt

l izat ion1

rarles W. Hofer and

ldvantage. Butdistribution of

developed pro-)etter customerSuddenly, the

aning. And the

Marketing(d istribute/sell/service) Finance (finance)

Management(plan/organ izelcontrol)

$ for sales and promotion$ {or distr ibution$ for service$ for market research

$ for shorl-term cashmanagemenl

$ for raising long{erm funds$ for allocatrng long-term

funds$ for management

development

$ for planning system$ lor control system$ for management

development

No. and location of salesoff lces

No. and location ofwarenouses

No. and location of servicefaci l i t ies

No. of lock boxesNo. o{ major lendersn ; ^ ^ ^ - ^ i ^ ^ ^ t ^ + ^ ^ 1 ,u t 5 P v r J r u t I v l J t u u n

ownershipNo. and types of computers

Location of corporatehora ln i l2 r ia ra

Nos., types, and ages of keysarespeopre

Marketing staffTurnover ol key personnel

Nos.. types. and ages of ke,financial and accountingpersonnel

Turnover of key personnel

Nos., types, and ages of keymanagers and corporalestaff

Turnover ol key personnel

Nature and sophist icat ion oidistr ibution syslem;service system : pricrngand credit staff; marketresearch staff

Type and sophisticatlon ofcash managementsystem; financial marketsforecasting system;corporate f jnancialm n d o l c a ^ . ^ r r n l i n ^

system

Nature of organizationalcuiture and values

Sophist icat ion of planninga n d n n n t r n l c \ / e t a m e

Delegalion oJ authorityMeasurement of reward

systems

Trends in total constant $n a r - r r n i t . ^ e i < f n r e a l o c

and promotion; distrrbutionand service

% retaji outlet coverageKey account advantagesPrice competltivenessBreadth of product ilneBrand loyaltyService effectiveness

Credit rat ingCredit avarlabi l i tyLeveragePrice-earnings rat ioStock priceCash fiowDividend payout

Corporate image prestigeInf luence of regulatory and

governmental agenciesQuality of corporaie staffOrganizational synergies

types and numbers of personnel to manufacture custom-designed products, staff ware-houses. process and ship orders, etc., become quite different. Cleariy this is an ex-treme example" But the point should be clear that what may be a strength in each areacar result in overalj weakness if the company is "pushing the cogs" in oppositedirections.

In a simiiar view, weaknesses must be compared with strengths. Weaknesses mayprevent us from taking advantage of an opportunity, They can prevent us from readily

174 cHAPTER s

shifi ing strategies. But too many executives put on unneeded "blinders.' bv.*_,sizing weaknesses instead of strengths lnstead of taking a pessimistic

"i* 'Yll"anything can go wrong. it wil l"). successful srrategists often take an optimisti",)-[("we didn't know it couldn't be done, so we did it"). Thus instead or ,rr.,1tuweaknesses to dominate, it is often more fruitful ro lake advantage of un ooo.,l,l-tl8by capitalizing on strengrhs. However, lhis must be done u,ithin the ' " -^'qrrrrv

constralnts whrch may exisl because of the fir 'r,s weaknesses. tegltlmate' rgi

In addition to being compared over tinle in relation to goals and r, one anorho,strenglhs artd weaknesses are colr.rpared in relation 1o environmental conditions. ri jconrp:u-ison is usually based on competitors. but it could include the' ' - 'rr

rclalive to techno)ogical changes. suppliers. or the producr l i le c1,,cle. ttrm's position

Most strategists are concerned u,ith how their fimrs are placeri strateeically relativgto competibrs in similar businesses. It is vjtal that the proper comparisons bs rnu6r-For exar.nple . as the PIMS data have shorvn, companies lvith a high ,ieg.ee oi in-vestnlenl intensity are often less pro{itable than thosc with lowcr investment-salesratios, Similar differences exist if thc firrn bcing comparer.l is substantially differenton characteristics other than investrnent intenslty. Thus a sLatenent about the missionof thc business as discussed in Chapter I becomes important as a basis for determininsthe relevant comparison groups. Furthen'nore , aside lrom the group itsell, thc.o*ouniwithin the group that )/ou comparc your firrn with makes a cliffcrencc ll,itl regaid tothe interpretation ofstrengths ancl wcakncsscs. Considcr ratio analvsis. for example.Besides studying changes of vour organization over tirne. should you compare thesewith industry (tverages or with the changes erperienced bv leaders? If low performerson Rol in the industry have high l iquidity. for example, is rhe high l iquiclir l ' of yourfirnr a slrength or a we akness? That n'ra1, depencl on other factors unique to your firm'sown sttualion. In other words, many industries are composed of clifferent strategicgroups. Comparing ratios of Anheuser-Busch td l leilenlann or l-oneStar or with beer-industry averages may nol make much sense. l lcncc, comparisons with leaders ofstrateglc groups (or to upper- and lower-quartile performers) is more likely to revealvaiid and meaningful conclusions ti ian using "industry averages" as the basis forcomparing financial ratios or other data such as markcting ourlays. plant size, R&Dexpenditures. iabor costs. and so on. Indeed. TWA was crit icized when irs formerCEO urged execulives lo mcasure their company against industry averages than toshoot for the top. So caution in the interpret.ation of data is requirecl.

It is also in.rportant to compare firms which are in the same or simjlar phases ofthe product-service l ife cycle. If our f im's main products or services are in thematunt)' stage of the lifc cycle. improper compiursons would be made with a firmwhosc main products are in the growth phase of the cycle. One representation of thel i fe cyc le is g iven in Exhib i t 5 .18.

Finally. it is important to compare strengths and weaknesses relative to their overallsignificance to rhe strategy of the firm. crisis managers can get bogged down inanalyzing fine details and "lose sight ofthe forest for the trees." Daily operarionalfluctuations and problems may drive atlcntion away from aeas of strength or weaknessthat are f:u more important to overall success. of course, clinjcal judgmenl is required


F in ished goods

inventory cont ro li...r., b{ ".npt u-

nlsuc vrew (,,ifr opttmrstic yis*ead of allowinp,1.2p spponunil|tegttimate, reol

to One another,conoltlons. Ther firm's position

egically relative:isons be mndg.h degree of in_nvestmenl_salesrtialiy differentout the missionfor determinrnglf, the companywith regard to

;, for example.compare theseow performers

luidity of your, to your firm's'erent

strategicr or with beer-/lth leaders ofikely to reveaithe basis for

rnt size, R&Dren its formerrrages than to

iiar phases ofes are in the: with a firmntation of the

r their overailged down iny operationalor weakness

rt is required

Warehousi ng

\ - - }

Order p rocess tng

F lnance

lV la rke t ing Personne l

EXH|BIT 5'17 "Cogwheels" in a physical distr ibution system'(R.Ball , , ,physical Distr ibution:ASuitab/e caseforTreatment," LongRangePlanninglFebruaryl9S0l,p 3)

EXHIBIT 5.18 A common product-service l i fe cycle'

TransPo r ta t I on

P a c k I n g

. . , ]Phase l , . , : . . t .(Devdloomen!] '

: ' t i

DeveloPment ofthe produi t and/orser.vice and/orprocess andlormarketcharacter ized

.by: lncePt lon; .missionalY worK;

I lack oi .qustomerI knowledge; much

I personel sel l iqg '

I and serv ico; .I cor i i lnued product

**Hil'\lil;fin::"'',1I decrearseq {emand, Il ' ' and coripoti lqrs I I

\

' . " , ' ;* ' ' '

176 CHAPTER 5 ,, , ' :. :1 .. _ , ,

for determining which areas and indicators these are. (We have more to sau o.- '

this in the section on diagnosis.) The key is to identify areas and indicators *i,^llTtmanagement should focus on. Four key questions can be asked as vou.*url. l l lpfive areas: What does this firm do particularly well? Do these competencies ^l.lqeand il 'so, when? What does the firm do poorly? Does it matter? nr .o*p.ni.rl} lcases are analyzed, our advice is to not worry about head colds-if pneur ' - {ru

to be indicated, that requires more serious analysis. (Nonetheless, if i t nontaseetn*

the head cold can become pneumonta, it may requtre trealment.) aPPears that

Descriptions of Internal Analysis [8]

The discussion of analysis so far has been prescriptive. There is little descriptiveresearch on whether and how strategists actually perform strategic advantage ana\srs.On the basis of a feu, studies two things are clear. One is that the process of intematanalysis is subject to inlernal bias by level and ti'pe of executive. There is oftendisagreement among executives about thc distinctive competence of their firm. Sec.ond. it does not appear that clear patterns of strengths ot weaknesses emerge. Ercirf irn seems to be unique in how it develops and uses its advantages.

But this isn't very'helpful. The question is, How do you identify and use compe!it ive advantages'l You identify them on the basis of the diagnosis and analysis ofstrengths and n'eaknesses discussed earliel in the chapter. For exarnple, distinctive

competence could result from a superior delivered low-cost position or a differentiated

prodnct offering. Competit ive advantages could consist of superior quality, superior

servicc or technical assistance, a strong brand name, a unique or innovative product

or service, or the status of being a full- l ine producer with wide distribution. Such

advantages result from the strength of superior skil ls or resources, lower costs of

manufacturing or distribution, lower cost of capital. design expertise, good trade

relationships, fast and flexible responsc capabil it ies, and so on. ldentif ication of these

involves careful analysis oi 'the various faclors identif ied earlier.

One o1 thc factors discussed in the operations and colporate resollrces sectors was

whether size was a strength or weakness. Thc "advantage" of size deserves special

treatment since we think that too many believe "bigger is better." A larger size in

relation to the con"rpetition is normally viewed positively. It can give strength by

allowing greatel economies of scale or providing barriers to ently. However, there

are some potential weaknesses associatecl with a larger size. Diseconomies of scale

ean resul l l rom rapid increases in s ize as uc d iscussed ear l ier ' . The r t rganizat ion

becomes rnore diff icull 10 manage. This is t ltpical of young, overly aggresslve com'

panies. Furthermore. large firms olten become the targets of regulators, legislators'

consuffler activists, and conpctitols; lllany equatc size with the potential for misuse

of power. Moreover, small f irms or SBUs are often thought to have an adl'antage of

i iexibil i ty that allows them to change and maneuver, while larger firrns or units f ind

it more diff icult to do thrs.Another dilemma associated with size is its relationship to goals. A number oI

studies suggest that size is not necessarily directly correlated with better performance'

e to say aboutLtors which 16pu examlne the)tencies count,lompanles and)umonia seemsIt appears that

tle descriptiventage analysis.ress of internalIhere is oftenieir f irm. Sec-energe. Each

d use compet--rd analysis ofrle, distinctiver differentiatedality, superiorvative product"ibution. Suchower costs 0fe, good trade:ation of these

35 SeCtOrS WaS

scrves speciallarger size ine strength bYowever, therermics of scale: organizationgresslve com-'s^ legislators,ia1 for misuseadvantage of

I or units find

A number of

perfbrmance'


For instance, expansion may entail internal diseconomies of scale. And there may be

limits to continued grorvth in a particular business. Under certain circumstances, the

size of the market share itself is related to returns in a U-shaped fashion where large

and small shares may be related to higherROI than medium market shares.

For example, the do-it-yourself retail business has long been dominated by small

mom-and-pop hardware stores and lumberyards. Several large firms (K Mart, Home

centers of America, etc.) believed they could jump in, build mammoth stores, offer

discount prices, 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

.u"n on large warehouse stores. Ir{assive advertising, cost cutting, and loss leaders to

build traffic have cut gross margins tremendously. And the littie guys fought back by'

forming alliances for buying and advertising clout and by offering personal sen'ice to

the naive new do-it-Yourselfers.These and other examples suggest that expansion Strategies carr)'with them seeds

of potential competitive disadvantage where sheer size creates new management prob-

lems. Hence each firm must determine whether it is better to bc a big fish in a iittle

pond or a litrle fish in the sea. There are advantages in both situations, and strength

Lr w.ukn.ss can go along with a large size. Careful thought must go into the diagnosis

of whether conditions being analyzed are strengths or weaknesses'

There are also some descriptions about how businesses can strengthen their cour

petitivc position and develop distinctive competence. Ohmae suggests that managers

snouta use their analysis of strengths and weaknesses in ways which iead to compet-

itive advantage.

I The first approach is to readjust resource allocation to strengthen ccrtain areas

of the business. If management allocates resoulces exactly the same way competitors

do. there will be no change in competitive position. So this approach suggests that

resources should be concenlrated in areas where there are key success factors (KSF)

so the firm can gain a stralegic advantage. Even though a flrm may have no more

toral resources than competitors, it can achieve distinction if it focuses those resources

on one crucial Point.One typical example here is the use of market segmentation. A Japanese shipbuilder

segmented customer groups into seven markets and ship types into 12 product cate-

g-i.r. After identifying ke.v product market groups, it focused its resources and

attention on these sectors to gain competitive advantage'

2 It may be that the KSF struggle is being waged. but a firm may exploit diff'crences

betu,een itself and a competitor. Here the strategist either (a) makes use of the tech-

nology, sales network. and so on. of those of its products which are not directly

competing with the products of competitors or (b) makes use of other differences in

the iomposition of assets. Thus reiative superiority is used to avoid head-on compe-

tit ion.Ohmae provides an example of a Japanese fl1m producer who could not compcte

with Fuji on ttre basis of an image problem associated with its name. Advenising

could not overcome the negative connotations. However. it had a relative advantage

l

tI

. l

'. .1

{ : 178 CHAPTER 5

in its costs of production; hence, it lowered prices and started to do battle

issues where rt possessed superiority.

;r artu \)rorrwu ru uu udtlls on econ0llic

3 A competitor in a well-established stagnant industry may be hard to dislodp"Here an unconventional approach may be needed to upset the keV factors io, su..i*,that the conrpetitor has used to build an advantage The starting point is to challenol

acccpted assurnptions about the waY business is done, or the nature of ptoOu.tsi,

processes, and gait 'r a novel advantage by creattng new success lactors.

For example, a can.rera manuf'acturer wondered wh-v photographs have 1s g.through the negative stage before being printcd, or why a camera couldn't hxys'i

built- in f lash to spare users thc trouble of f inding and fixing an attachment. Federat

Express wondered why packages were delivercd point to polnt lnstead of funneled

throueh a centralized facil i ty. Challenging basic assumptions with questions can lead

$rategists

too fl6fld9

n-^roorate I

l"rto ot ai-consuttant

to novel Loeas.4 Finally, a con'rpetit ivc aclvanlagc may bc obtained by means of innovations which

open ncw markefs or lcad to new products. Innovation olien involves finding new

wa1"s of satisff ing the custotner's uti l i tY function'

,Supp..,r. that you nanufaclurc colfoc and determine that the uti l i ty function of

targct custor.pcrs is supcrior tastc. What cleternrines col' l 'ee tastc'l Kind and quality of

beins, typc of roast, f ineness o1'grind, t ime bctu'een grtnding and brewing, watet

hardness and tet.npcrarure, stylc of brewing. and so on. Some of these are beyond the

nranulacturcr's control. Br.rt olhers involve degrees of 1'reedom: Water hardness could

probably be overcott 'tc bl incorporatit lg u rcgenerable l i l ter in the machine The ap-

proach here is to think crearively i ir innovations tlhich expand degrees of freedom

t i l l r t c r r n t f i l t s h g r r r l s l t t d d c v c l t ' p t t c w s t t c n g l h > '

In each of thesc approaches rhe principal point is to avoid doing the same thing as

the competit i<-rn on the same battlegrouncl. So thc analyst n.rust decide which of these

opf,.ur.h", nrighr bc pursuecl tct clevelop a sustainable distinctive competence.

The Role of Strategis ts in Analys is and Diagnosis

Exhibit -5. 19 shows how each of the groups of strategists is involved in internal analysis

and d iagnosts.lf 'yi comparc this exhibit wirh Exhibit 3.9 you'11 note that the role performances

are siritilar, except that liom what the research tells us, lirms perform internal analysis

less frequetrtly ancl lcss forrnally, which is why tl.rere are differences between the

exhibits. Given sone iin<tings tl iar rnrernal anal,;sis is t ime-consuming and distorted'

we might unclerstand *hy ,iu,]oc.rs are reluctant to perform intcrnal analysis them-

selves. Outside consulta;ts are iot 'ecessarily a panacea, howevcr. An investment

firm's rcport, for instance, may inject a bias for cmphasizing financial ,:p:t:l,t^t-

Irrescriptively, several approaches are probably useful with top management ciiscusston

on points of disagreement.o| course, in a single.SBU firm, advantages ale analyzed and diagnosed at.the

corporale level. In rnutiipt.-SnU firms, the.v are analyzed at the SBU level and then

rcevaluated at the colporate level and compared across SBUs'

DIAGNC

.lil


THE ROLE OF STRATEGISTS IN INTER*O'Non ecolorlic

1o-dislodgg., rut SUCCOSSto chaileneeproducrs

;r

Itave to oôn't nauJa_n-t.- Federalor tunneled)ns can lead

tftl1tl Analysis

Verbalsearch andinterviews

Occasional lY

Docu-mentarYsearch

Formalstudies MIS

Diagnosis anddecision making

Occasional lYOccasional lYRarely

RarelyRarelyRarelYRarely

RarelyOccasionallYRarelyRarely

RarelYRarelyRarelYN A

PerlormsAdvises as requestedOccasional lY advlsesOccasional lY hired 1o advise

Strategists

f^6 1nanaOers

Cohotutt Pt-n"tt

trons whichinding new

function of1 qualiry of/ing, waterbeyond theiness coulde. 'Ihe

ap-rf freedom

ne thing as:h of these

al analysis

formancesai analvs ist\\ een the

L , . - . - ̂ iu t : t ( r l r g u ,

, s ls them-n\ cstnentspecifics.

i iscussion

ied at theand then

DIAGNOSIS OF STBENGTHS AND WEAKNESSES [9]

As indicated earlier, the diagnostic proccss l irr internal l 'aclors parallels thal process

1or environmental 1a.lors. Similar factors such as tl 're strategist's charactelistics' thc

Strategist,s job, and the Stl. ltctsiSt's cnvironttlcnl aflect t lre decrsion. Irocustng on

cliagnosis of internal I 'actors is similar to 1'ocusing on the onvironlcntal.dra[nttsis as

o e s c r i b c d i r . r C h a p t c r 4 . H < l w e v e r , w e w i l l a d r ] s o m c o t h e r f a c t o l ' s , s l l l c c w e a l cd i scuss ing thc ln \ )Or lanceo l . subun i t s to thco rqan i z -a t i onand l t ss t ra tegy

organiz-ation theonsts suggest ihat the most crit ical units arc those in ti 'rc "tcchnical

.ur".i Essentially, rhcs" or""i l. units which pcrfonn thc basic lransfornlalioll of lnputs

rnto olrtputs callccl tor by the mission dcllnirion. Notc that this nced rrr 'r l necessarily

i nc luden iassp roc luc t , nn i t hough i t cou ld ) ,bccauseo thc r t ypcso f r -n i ss i t l nsdono tca l ]it lr ' t l 'r is kirrd o1 tlanslorlnation' H.n.. barrks, wholesalers, retailels, and rcal estato

nlt*iii;:l:l; H*iil*f l ;:':,liJ',,1';l"ilil,lJ'"Xfiil:l' :Tl ff J:lJ]';llthe prinraf ateas f<lr thc init ial diagnosis of slrcngtl is and wcaknesses'

} l o w e v e r . c l t l r c r u n t t s n o t i n t h e r e c h n i c a l c o l c a t t c l n p t t o b u i ] d t h c i r p o w e r a n dbeco tne i rnpo r tan t t ( ) t heo rgan iZa t i onso tha t theynay i t l c reasc thc i r sha reo f resou rceallocation. l<lcnti i,ving rhe;e units is also inportant for nanowing the diagnosis oi

s t r e r r g t h s a n c l w e a k n e s s e s . ' I h c s c u n i t s c a n b e i < l c n t i h e d b i ' d e t c r n r i n i n g h o w m a n yother units thcv are inlerconnectcd with, whethcr thcy have a dilcct impact on the

t e c l r n i c a l c ( ) I e u l l l t s , a n d w h e t h e r t h e y a r c s p c c i a l i z c c l i r r s u c h a w a y t h a t t h g y c a nnJf ,.au.. unccrtainty. Let's considcr an exar.nple. Suppose that a. data processll lg

uni tbui ldsaf f lanagcl l )ent in format ior iSyStemwhic l rprov idesusefu]dataforest tnateso |sa lesanc ip roduc t ro r ' r schcdu l i ngaswe l l as fo r t rack ing thepe r fo r r r ranceo fwarchouse operations lt has positionei itsetf to.deal with important uncertainties. alrd its

work flow is trnporlant input for decisions by several core units' we can expect that

i t s l l o te r r t i a l power in t l r eo rgan i za t i onmay lead i t t obecon l can i r r . r po r l an lun i t f o rthe diagnosis of strengths ,,r, i *"okn.s.cs- To the extent that othel subunits are de-

p"",f""i"" a given unit, it is more powerful and requires analysis by top management'

O | c o u r s e , t h i s d i s c u s s i o n r e l a t e s c s s e n t i a l l y t o f u n c t i o n s w i t h i n S B U s . A t t h ccomorate level of u,.,uryri, ln a multiple-SBU firm, similar suggestions are made. But

: - L

180 cHAprER 5

here one is analyzing the importance of entire strategic business units to ovgl,l lcorporate performance and strategy. That is, how dependent is the cofporotlorl 6n ̂given sBU? At this level, more global assessments of sBU strengths ano w.atness;are olten made and are based on relative competit ive position and e'rrron6g11r1opportunity. chapter 7 exan.rines how these factors can be conrbined to urriri'lnstrategic decision making.

c)nce the key areas for diagnosis have been anaryzed, it is useful to prepare astrategic advantage profi le (SAP) for the firm being analyzed. Similar to the EToplthis is a tool for providing a picture of the rnore crit ical areas, which .an have 3relationship to the stratcgic posture oi'the hrn in the future.

Exhibjt 5.20 presents an exarnple of an SAP for a hypothetical f irnt. Nore that thislirm has wcaknesscs in channels o1 distribution, facil i t ies, and R&D un.r ir.*p.i.encing union diff icultics. This may preclude ccrtain strategies. such as n'rork.r.xpan_sron in the soulhwest. on the other hand, it rnay suggest to managers thar a conscioggchoice to correct thi.s weakness is i lnponant. The final conclusions <lcpend on.nui_ronmental factors, objectives, and thc pattern ol othcr strengths arrd weaknesses iden-tif ied. Fbr exarnple, the l inancial strengths could lcad to a decision to invcst in updatedfacil it ies or build a sales force in thc southwest iI ' the environmcnt showthere. chapter 8 clescribes in more detail how the SAp is combined ,"t,,ru,lJ:;::l;i{to lcad to strategic decision ntaking.

I1'l irst-eeneration planning is used, this cliagnosis is1'uture. If second-generation planning is uscd, severaldraftcd-with best-case, rnost-probable, and worst-cascdiacnoscs are made.

As in the preparation of an Ll'oP, scveral stagcs may be requirecl beforc the finalSAl ' } is d isp layed. That is , each of the subfaclors ident i l iec l rn Exhib i ts 5.3, 5 -5, 5.9,5.1 I , and 5. I 3 should be subjectcd to the comparal ive anaiys is < i iscusseci rn our sochon

EXHIBIT 5 ,20 STBATEGIC ADVANTAGE PROFILE

lnternal area Competit ive strength or weakness

bascd on thc most probablescenarios of' the future areassumpttons. Then several

Marketing

R&D

Operations

Product l ine is extensive, and service is excel lenl.Channels of distr ibution are weak in lhe southwestNo R&D performed.

Excel lent sourcing for raw materials.Facrl i t ies are old and becoming ouldated.

Corporate resources 0 Company size is about average for the industry0 Profi ts have been consistent but average.

- Union employees complarn lrequenily.Finance + Balance sheel shows abi l i ty to obtain needed capital; low debl_

equity rat io, high working capital positron, and favorable stockprice.

Note: + indicates strength; 0 jndicates neutral; indicates weakness

_ , , i L

\


11is to overall

Totuttgn on uro weakngg5gg-.nutaonaantrlo ro assist in

ro prepare ato the ETOP,n can hnyg u

Note that thisrnd is experi_narket expan-rt a consciousrend on envi-knesses iden_:st in updateds opportunityother factors

rost probabletc future areIhen several

fore the finali 5 5 5 a

n our sectlon

low debl-b ie stock

on techn iques fo rana l ys i s 'Fo rexamp le 'ase to f f i nanc ia l ra t i os (see theappend i x )can be exhibited u, u 'upftt-ent to the SAP' Then a diagnosis of the most important

on., fo. the organization is summanzed in the fina1 SAP'

This latter stage ls probably the most crucial and most difficult' In effect' the

compararive analyses fi;"; ytu to consider the environmental factors and time sl-

multaneously. Let's clanfy this statement-

Suppose that your unuly'i' shows a high quick ratio for the firm compared with

rhe ratio of 1'6ut *ujo' to*p"titor' One assessment could be that there is a potential

cashmanagemen tweakness .Bu tSupposeyoua i so iden t i f i ed in theETOPath rea to finsuf f ic ientcapi ta lavat ]ab]etotheindustry forneededinvestment .Nowyourpercep_t i ono f thecashpos i t r ono f th i s f i rmmay tu rnou t to ind i ca tes t reng ths .S im i l a r l y ' ahigh inventory positron which might otherwise be viewed as a weakness could be

considered a strength i1'demand conditions appear to be growing or if a strike appears

tt*tJrr,n. same token, assessments of environmentar opportunities and threats can be

iiltered dependrng on your diagnosis of the internal factors. Let,s say that 1'our enr'i-

ronmental analy.sis indrcated alhreat of the exit of sources of supplies of rarv materials

for your industry' you' i"t"*at analysis' however' shows that your purchasing agent

has developed close contacts with the remaining suppliers; your firm is assured of a

steady stream of needed inputs. Now the p.r.Jp,ion'or the supplier threat is one of

an opportunily to galn a competitive advantage;ue to your firm's particular strength

in thrs area.In theseexamp lesno te tha td iagnos i s i nvo l ves thepe rcep t i on ( ) f t h rea tsandop '

po r tun i t i esands t reng thso r *ea l i nesses in re la t i on tooneano the r .Theana l ys i so fdata and information can be done independently. But diagnosis^requ-1res. thal you

consider integrat ingtherelat ive informat iontodrawconclus ions.onefuf iherSteplSneeded, however.

We have discussed this as a static process. You should recognize that events can

change.Thusdragnostsalsoinvolvesest imat ingscenar iosof l ike ly futurecondi t ionsto reflect dYnamic realities'

Consider the example where your firm's strength of supply contacts offsets a threat

o f t heex i t o f supphe rs 'How longw i ] l t ha tS t reng thex i s t?Wi ] l t hesupp l i e r s l ema lnloyal or bend to pressure to suppti your firm's competitors? will the competitors alter

thei rStrategy?FoI1nstanc. , .o .n"ma,v leavethebusiness.Somemayintegratebackward to make thelr own raw materials' Others may try new methods or materials to

reduce their dependence on the remaining suppliers' Each of these alternat*"t-if-nl

b e c o n s i d e r e d b y y o u r c o m p e t i t o r s . T h e y ' t o o , a r e l o o k i n g t o b u i l d a c o m p e t l t l v eadvantage

n of how long a strength wrll remain ifAnother issue related to time is the questto

i t i s re ] i edon"^ . . n , i u . t yo .ou . . , " o .Fo r i ns tance , theKSFapproachp resc r i besb 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 n a s i n g l e a r e a o r i n a f e wareas. For lnstance. u rJotuuit team may rely on a single superstar to carry the ball'

Severalcondi t ionsmayresul tover t ime'Fi rs t ,compet i torsmayStar t . to . .keyon' ' thefactor-they may try io attack it, steal' or copy you' fittn's strength' If the strength

happenstobetechno]"g i . " r , i tcanbecomeousot" t . . I f thestrength l ies, inpersonnel ,

182 CHAPTER 5

key people mav resign, retire. or die. Finaily, if one area receives ttresources, orher areas where new comperitive advanrages mighr be,.*:.Ti;lll:deveiop their potential_ Suppose. for example,_ rhat tou hui," un"iyr"o your finn,srvork force and found that it is made up or lignty suiteo and trainei personner TL.-coujd be a competitive advantage, but you obse.ue that the facilities, ;;l;;;'r:li'and materiars that they nced ro do their work effectively are

"r, "r or,.'"r'i..T,l

inefficiencies. Thus 1'our firm cannot ase its strength as a potential competrtive n6-vantage unless resources are allocated to correct the weatrlness. Some ol the otherapproaches suggested earlier ma1, be necessarr,.of course' the obverse problem should bc iecognized. If resources are spread 16sthinly across manlr areas' there is a danger that the fim will not develop a distinctivecomperence Fimrs (and individuars) have been kno,,l,n to seize an opportunlty withoutcommensurate abirity. As Chrisrensen et al. suggesl, ' ,opportunism q,ithoui ."i l-.rence rs a path to fairyland." This is p'rtrcurarll 'a oung.. when managers believethal they have superior abil itv and can succeed at almost alnything on rhe basis clf pastsuccess. And as we menlioned before, if the strengtt,, oi int. icependenl units areactuallv u'orking againsr one another (Exhibir 5.1f , rhe resulting suboptimization

may lead 1cl a competit ive disadvantage .The weaknesses ol an.organtzatron maf inhibit or preciude certain strategies frombeing considered as capabre of impremeniation. fjor examprc. a fimr wrth an abnor_mally high debr-equity rario may {incr it is unabre ro purru. a merger because it hasreached its debt "i irnits." Nonetheress, the rore of peiception....pl ,n here in termsof the diagnosis of this u,eakness. That is, the debt weaklcss might be corrected withan lssuancc of equitv, assuming other financial factors iue reasJnable and the equitymarkels (en"'ironmental factor) are favorable. So it is with other u,eaknesses. Morethan one entrepreneur has been he;*d to remark that ..we

didn't knou,rt couldn,t bedone. so we wcnt aheacl and did it."In effect. a firm shourd deverop a slrategy over rime which revorves around an area.f distinctive competence. with this approacn the firm can develop slack resourcesthar can cvorve in10 new areas of rt..ogih when old ones farter lani tt

"y inevitablydo). At the same time. the weakresses which are identif ied as potentlaily importantto the future shou.rd recer'e lranagement attention. This may require a sirare-qy t0acquirc personnel or other strengths which are currenlly lackin-g. ifthe firm rs rncapableof developing them because ol' internal resource wea_hnesses.

_ Many U.s companies are nl' ing t 'be more competlt lve these ciays with the kindof strategic thinking we have identrfied here . Many firms are planning to lnvest rnmore efficrent plants ancr equipmenl. invest in more research and development, im-prote qual i t r o f ser ' ice lo cu\ tomers. adopt more aggressive marJ<ct ing tact ics, andtrv to reduce labor costs in an effort to deverop sustainabie competilive advantage.Exhibit -5.21 shows a firm in this process.

As you may have noriced, the discussion has begun to address the pros and consof alternative strategies. The Boston Consulting Group suggests that the number ofcompetitive advantages and the size of the advantages lead to different kinds of strate-gies Exhibit 5.22 expiains this. For exan'rple, if there are many.uuy. a create ad-vantages such as in the fast food business but the size of thor. uduuntuges is small,then the firm should probabll, seek to stabilize.

ExHll{:lloon['phor

Ii.in,I kelF:of I130I hol'

notheani

eartarpe(

1

fit ,

i .

i. ntIl c e

i , w' . r

i v l

I

p

..lL

\


DEVELOPING A STRATEGIC ADVANTAGErulk of theed will notiour nnX'Srnnel. T[61nes, tools,or lead to

retitive ad-' the other

;pread toolistinctivety withoutIt compe_rs believe;is of pastunrts areimization

lres fromin abnor-rse r t hasin tenns

: t cd * i t hrc equi tv's . \ lorer l d n ' t b e

i an arearsourcesevitablyrportantItegy tocapable

hc kindrveS l tn

n t . i m -

- 's . and

tn t 3 qe .

d cons

Lber of

strate-

rte ad-

smal l ,

ilt[tB,tT s'zt

i li',i.t,tt.t ;tting- data communi cations' In the amal gam

::^r 1800 rural telefhone exchanges spread over.37 statcs'

l l lr ".r.*,

of the subscritrers sti l l share pany l ines' The

; i;d;;;;*y has little research and:development and

1..'runufu.turing capability of its own Compared witlt

i i i" ^trttt of ,qt&t, its $3 bil l ion in assets is minuscule'

i |ro tir-into revenuc of $1' 1 biilion was just ovei 2 per-

i.^-^t nf the revenue or rts giant competitor' The'price-' .*,rt, ratio is ahout standard tor resltat{-11]i']::

::tiiu, fo*"t tlian the ratios of the computer conpanles ex-

I p..t.O to plav a maior role '." ftt Tlll"ll.

i '

However, a key strength is an aggre ssive management

i t.at atypi.ul of the managemcnt of regulated tciophone

i, ."*p*1it, At age 70, the founcler and chairman beltevcs

ilitor'ttt. best defcnse is a good offense A carefully

I ri^t*o series of acquisitions and joint ventures has been

i.l i*t.u so lhal lhe conrPany can devclop the strcngths

, it ne"ds to beconte a nraior supplier ol data anrl votce

{Corpur"aylth AT&:, GTE' and IBI\4' ContinentalTele

!^none would narqly De vrewed by most as a fiim with the

i lri, r s r re n s r h s "...* o 1l _eili :::, ::li: :,::i:i 3l:

anoroach, in particuiar. provides Continental with away

iJ'or. itt lirnitecl resources to ente.r areas that it could not

enter on . i ts own.- .'-Of-"ourr., some observers .are skeptical' A GTE ex-

..u,iu. ,"., little synergy in the recenl acquisitions (but

Continental executives see thetn as complementary)' And

if* i.rt of integrating the pieces ipto a single network is

oiiiif"ft to accJmplish. Further, AT&T, GTE' IBN4' and

Xerox are not standing still' lf it's a game for giants'

Conlincntai does n.rt ycr qual i t5 '

The perccption at Contincntal, though' is that it has a

hcad stait, uni it oon keep the customers it gets before its

regulated competitors are allowed to enter the fray' Fur-

thirrnore, Continental sees its size as an advantage Even

if it captures on1y,5 pcrcent of the market' that will rep-

resent a revenue lncrease of alniost 700 percent lt can

turn its business arouncl faster and has already started

pult ir lg the Pieces togethcr'- nl-. *"okn.rr., lt bclieves require long{erm devel-

opment are the need for aggressive markeling and the need

fc'x skilled personnel who can manage ancl integrate high

technology' ACditional acquisitions and joint ventures are

planned to correct these wcaknesses

You rnight note that several of the points discussed in

this chapter'are brought together here' Perceptions of rcla-

tive strength and weakness, relevant companson grol"lps'

long-term developnrent of resources, and the relationship

betieen con-rpetitive advantage and environmental threats

and opportunities have a1l helped determine the.way 1n

wtrictL ihis flrm has chosen to orient itself strategically

communication services'

A joint venture with Fairchild (Am Sat) gives Contr-

nental strength in satellite transmission A satellite re-

l.iuing rtution can be set up for 10 percent ofthecost of

*ttu, if&f needs to lay out comparable grouud lrrtcs

The purchase of Executone, a PBX markcting firm' pro-

vided a base from which to build a business in intelligent

terminals and digital telephone switches' which will bc-

come the hub of the automated of{ice' The joint-venture

sourcer Aclapted f rom"Cont inental Telephone: Taking on the Giants in Telecomnunicat ions" ' Bt is lness week'Feb9' 1981'

pp,50-56

SUMMARY

However. we think that this ignores some of the environmental l 'actors described

i n o u r e a r l t c r c h a p t e l s . A n d i t i s h o p e d t h a t y o u c a n f i n d w a y s t o i n c r e a s e e i t l r e r t h esize or number of advantages to incrcasc your options Thus, diagnosis of corl-rbining

thc ETOP and the SAi' should lead to cxamining a wi<lel variety of strategy alternatives

than is suggested here, which is the subject of Chapters 6 and'7 '

The chapter described the intcrnal analysis and diagnosis plocess paralleling the en-

vironmental analysls process covered in chapters 3 and 4. lnternal analysis and dtag-

n o s i s i s t h e p r o c e s s b y w h i c h t h e s t r a t e g i s t s e x a m i n e t h e f i r m ' s i n t e r n a l f a c t o r s t o

184 cHAprER s

D i t f e r e n t w a y s

a c o m p e l I v e

a o v a n l a g e c a n

b e c r e a t e c l

l (ey compet i t i ve fea ture :

l ,4any ways to ga in an edge, bu tthe s ize o f the edge counts fo rl i t r l e i n t h e m a r k e t p l a c e ,

St ra tegy prescr ip t ions :. Carue ou t a pos i t ion and

h o t d i r ,lManY r Emphas ize pro f i t s now.

r l \4 in im ize inves tment .

. B e c a u t ; o u s a b o u r e x p a n s i o n .

F c w

Key compet i t i ve fea ture l

A lmost a pure cos t -p r ice game;on o ther fac to rs , a l l f l rms arei n a b o u t e q u a l p o s i t i o n . I n t h eabsence o f p r ice- cosr d i f fe rences ,there is a v i r tua l compet i t i ves ta lemate ,

St ra tegy prescr ip t ions :

. Use aggress ive cos treouc |on s t ra teg tes .

r E m p h a s i z e w a y s t o i m p r o v eef f i c ie ncy .

. l \4anage to inc rease cash f low.

r Look lo r d ivers i f i ca t ionoppor tu n i t les .

Key compet i t i ve fea ture : . :

A spec .a ' ;zed aDproach to the hmarke l segments i r . r . .n i i . i ' l " l .nyis c rear ing and Frorec l ;n j f , , . " "q

so

advantage rn serv ing these segments .

S t ra tegy prescr ip t i6ng

r S e e k a n i c h e ,

. Get , r pos t ion 10 serve se lec ted

::n;'-:l:; sl'lo, heav i rY 1q 6,;16and lo r t . l y the chosen advantage.

c S lav Jhc€d o f r i va ls who aspr rero ga r rhe same advantage.

. Walch ou t fo . change.

Key compet i t i ve fea ture :

Ol l l ] ! " *

who ser and keep one o i thela rge compet r t rve advantages w i l l SUrV iVe.usua l lV low cos t i s the p , :mary aOvan i^ "1rhar i s ava i lao le Of ten . tne nr ra o { th . "q a m e i s v o . l m e .

St ra tegy prescr ip t ions :

r Pursue economies o f sca ie .. R ide th€ exper ience curve downward

by ge t l rng vo lume up.

. Go after the customers of weak fhms,

. l f weak , ge t ou t o r look fo r new ways10 COmpete .

S ize o f the compet i t i ve advan lage wh ich can be ach ieved

S m a l l L a r g e

EXHIBIT 5.22 Strategies based on competit ive advantages.(Adapted fram an approach suggested by Alan Zakon, Baston Cansulttng Group, in an address to theAcademy o f Management , 1982. )

determine where the f i rm has s igni f icant s t ren.sths and weaknesses. fh is is neededsothe firnr can exploit opporlunities. mcel threats. and corrcct weaknesses inhibit ins adesired strategy or putting tire i irnt at a compclit ive clisadvantage.

The areas covered in tl.re chaptcr include internal factors to bc analyzed and diag-nosed- techniques of internal analysis. the reality of intcrnal analysis, the role ofst rategrst \ in th is proecss. and the d iagnosis o1 ' the in tcrnal factgrs.

The internal factors that management analyzes and diagnoses are marketing anddistribution. R&D and engineering. production and operations managentent, corporateresources and pcl sunnei. artd finance and accounting. Each of these factors was brokendown and rlach subcategory was il lustrated to help you digest t ire internal analysis anddiagnosis process. It was suggested that strengths are needed to builcj slack to givefirms greater strategic options, and weaknesses must be overcome where possible.

. .1L

\


e se lec tedly to bu i ldadvantage.

ro asp i retage.

lp one o f thers w i l l surv ive ;ary aovantagenare o f the

E C

r \ e COlvnward

o i v ieak f i rms,

l fo r new way5

s needed s0inhib i t ing a

d and diag-the role of

rkcting andt. corporate\\ as brokennai \ s is and

lck to give

loss ib ie .

Techniques of internal analysis were described' Data and indicators of various

SubfactorsshouldbegatheredSothal re iat i |ecompar isonscanb€made. ,Compar isonsa renecessa ry in the fo ] l ow inga reas toge tac lea re rp i c tu reo fs t reng thsandweak -neSSeS:past ,present ,andfuturecondi t ions; in ternalgoalsandexternal requi lements;the wa1, that each functronal area relates to other functional areas; and environmental

factors: competitors' t"itnotog-v' suppliers' and the product life cycle Two anal-vtical

tools were suggesred as usef; guiies for the analysis, and four key questions were

suggested to help identify distinctive competencies-What does the firm do well? Dcr

these competencles count? What does the firm do poorly? Does it matter?

Resea rchon in te rna lana l ) , s i s i nd i ca tes tha t rh i sp rocess i sno tsc len t i f i c .Bu tve rylitt le research has been JonL on this subject. The studies which exist indicate that

exccu t i vespe rce i veS t reng thsandweaknessesd i f f e ren t ]1 ' and tha t f i rmsseemtobeun ique in the i rpa r t i cu la r "pa t te rno fcompe t i t i r , eadvan lages .Tha tun iquenesscanbedeveloped into competlt ive advantages in a variety of ways'

A brief sectlon on the role of ;traregists in ihe inrernal analysis and diagnosis

p r o c e s s s u g g e s t s t h e n c e c ] t o f o r m a l i z e t h e p r o c e s s o f i n t e m a l a n a i - v s i s f o r b e t t e rst ratec ic n la l la ! (mcnt '

ts for per lorml l lg ln lernal d iagnosis 'The chapter concludes with our suggestlol

Focus ing thed iagnos rs i sa f f ec tedby fac to rsou t l i ned inChap te r l | l . i nadd i t i on 'the anal1,.st should derermine the area.s of greatest importance to strategic performance:

techn i ca ] co leun l t sanc lun i t swh icha repe rvas i veandcan reduceunce r ta in t y .oncethe diagnosis is focused, the strategic advantage profi le (SAP) is defined and its

tleveloPment is outl ined'

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 h a t t h e c o m p a n y l S a S aresult of developing trom pusl strategic decisions and interaction with its environment'

Sugg.rtion, ut. offer"A for interpreting an internal analysis'

Insum' thechapter l .ocusedonhn*.oarra lyzetheinternal factorsreal is t ica l lyandl row tod iagnose the r r s rgn i f i cance .Then theexecu t i vecandeve lopanSAPandmatchir with the E'fOp to creite conditions for adjusting or changing strategies or p.licies'

The process is summarized in proposition form as fbllows:

Thest ra teg icadvanngepro f i |e isa too l fo rmak ingasys lemat lceva |ua t ionof . theenter -prise's internal factars wntch atre significant for the company in its environment'

Proposit ion 5.1

Af i rmwhosest ra tegy f i t s i t senv i ronment ,cons ider ing l tscompet i t i veadvantages ,w i l |bemore effective than one whase strategy does not

Proposit ion 5.2

Af i rmwhichdeve |opss ta}k resources throughd is t inc t i vecompetencewi l lbemoreef fec .tive than one which does not'

186 CHAPTEF 5

This chapter completes the analysis and diagnosis discussion. Chapter 6 begin*u^three-chapter discussion of the choice phase of the strategic management pro.Jrr'i}e

H::J,",:;::i;::'.#:fl ffi :'!;:H:i:#;*'i:111"]L';:T:11;:i:,1 jj;il:ways in which the gap may be reduced, by examining strategy

"tn*",iri*Tffll, 'hoice of a slrategy. - qrt

Appendix: Using Financial Analysis*

:",""::Hffi lll"ilil::tl:li;"'i.":'::i'.T:T:trT:T,i,#::T:?:#tiHffJ:las the beginning point for their financial decision making. lnvestors use financial unutvr.*llmaking dccisions aboul whether to buy or sel l stock, and creditors use them in Oeciding whetne,or nor ro lcnd. Thcy provide nanagors with a measuremenr o1'how the company is doingi icomparison with its performance in past years and with the perlormancg of competitors i;theindustry.

Although f inancial analysis is useful fol decision making, there arc somc weaknesses 1lx1shoulcl [rc notcd. Any picture that it provides of the company is based on past data. Althoughtrends may be noteworthy, this picture should not automatically be assumed to be applicabieto the future. In addit ion, the analvsis is only as good as thc accounting procedures that haveprovided thc inforr lal ion- When nraking comparisons bctween companies, one should keepinnrind the variabrlity of accounting procedures from lirm to firm.

Therc are lbur basic groups of llnancial ratios: licluidity, levcrage, activity, and profitability.Depicted jn Exhibit 5.23 arc the specific ratros calculated lor each of the basic groups.

Licluidity and leverage rat ios represent an assessmenL of the r isk of the i i rm. Activi ty andprofitability ratios are mcasures of thc return generated by the asscts of the firrn. The interactionbetwcen cerlarn groups of ratios is indicated by arrows.

Typical ly two common f inancial statements are used in { inancial analyses: thc balance sheetand t lre income slatement. Exhibit -5.24 is a baiance shcet and Exhibit 5.25 an income statemenlfor thc ABC Company. These statements wil i be used to i l lustrate the f inancial analyses.

L iqu id i ty Rat ios

Liquidity ratros arc used as indicators of a firnr's ability to meet its short-term obligations,These obl igations include any current l iabi l i t ies, including currently maturing long-term debt.Current assets move through a normal cash cyclc of inventories-sales-accounts receivable-cash, The l lrm then uscs cash to pay off or reduce i ts current l iabi l i t ies. The best-known l iquidityratio is the currcnt ratio: currenl assets divided by current liabilities. For the ABC Companythe cufenl rat io is calcu]ated as fol lows:

Current assets $4,12-5,000 _ 1 64 0988)Curren t l iab i l i t ies 52 .512.500

- $3 '618 'oqq : i .6 l ( re87)s1 lJ . 2_5()

*Prepared by Ijlizabeth Gatewood, University of Georgia.

\

,Tif.liSj}:$:reate a gxp L

;il;..'];Iffi

TNTERNAL ANALYSIs AND DlAGNosls 187

L q u i d r 1 y Leverage Ac l rv ty P r o t r l a b r i l t V

II Net income

i sates I

f--.-rta-".-*. II Net worth

'rthrn its industry1 sf

.this analysi5tctal analyses inleciding whetherran)' rs doing inrntpetttors in hs

,,r e:rknesses $31. dara. AlthoughIrt be applicable:dures that have' shouid keep in

nd profimbil i ty.e basic groups,n. Acrivi ty andThe interaction

re balance sheetrcom€ StatO[l0ntI analyses.

rm obligations,long-term debt.Its receivable-inou n l iquidity{B(' ( .ompany

R e l u r nm e a s u r S s

EXHIBIT 5 .23 F inanc ia l ra t ios .

Mo-q t ana lys ts suggcs l a cunen l ra t i0 o1 ' l to 3 . A la rgc cu i l c l l t ra t i ( ) i s no t nccessar i l y a

goocl sign. i t rnav rnean t i lat an organiz-at ion iS not n-iaking. t l re most ei l tcicnt usc oi assct 's ' Thc

optimum current rat io wil l var.v fronr industr) to inclustry. "vi th

the more volat i lc industries

rcqu i r ing h ighc l ra t ios .

Sincc slow ntovtng or obsolescct.t t inventories could overstatc a l l rnl 's abl l i ty to lnect Short-

term dcnran(is. thc qurcK rat io is sonretinles prelcreci to assess a f ir ]n's l iquidit l ' The quick

ratio is current assets nrinus inventories. drvrded bv curenl i iabi l i t ies. The quick rat io for the

ABC Company is ca lcu la ted as fo l lows:

j

188 CHAPTEF 5

Current assets - inventories

Curent l iabi l i t ies

A qurck rat io of approxinrately I would

is less variabi l i t l , in the qurck rat io than insalely operate rvith a lorver rat io.

$1.950.000

$ r a " i a t : 0 7 8 ( 1 9 8 8 )

s1 .618 .000- O 7 a r l q x ' 7 '

$ : . : 1 : . : 50

he t l pical for Americrn inductr ies. Although therethc currcnt ral io. \ laLi lc induslr ies *outO beaUie t i

EXHIBIT 5 .24 ABC COMPANY BALANCE SHEET AS OF DECEMBER 31

1 987

AssetsCurrenl assets:

CashAccounts receivablelnventoryPrepaid expenses

Total currenl assetsFixed assets.

| ^ n ^ - t o r m r o e o i r r a h l e c

Property and planlI ess Annr rmr r la lFd r ipDrec ta l ton

Nel property and plantOther f ixed assets

Total Jixed assetsTotal assets

Liabilities and Stockholders' EquityCur ren t l iab i l i t ies :

Accounts payableEank loans payableAccrued {ederal taxesCurrenl maturi t ies ( long-term debt)f l i r r i r l o n r l c n 2 v 2 h l o

Tolal current l iabi l i t iesLong-term l iabi l i t ies

Total l iabi i i t iesStockho lders 'equ i ty :

Common stock (104,046 sharesouts tand ing in 1983; 101,204 sharesouts tand ing in 1982)

Addit ionai paid-in capitalRetained earnrngs

Total stockholders' equityTotal l iabi l i t ies and stockholders' equity

$ 140,0001,760,0002 , 1 7 5 , 0 0 0

50.000

$4,12s ,000

s1,255,000$2,037,000

862,000

1 ,1 75 ,000550,000

$2,980,000

_q!_ar_q9g

91,325,000475,000675,000

17,500

$2,s12,5001,350,000

$3,862,500

$ 44,s00568,000

2,630,000

$ 1 15,0001,440,0002,000,000

63,000$3,618,000

$1 ,090,000$2,015,000

860,0001,1 55,000

530,000

$3,242,500$7,'1 05,000

$2,775,000_46,99!pA

$1,225,000550,000425,00026,00016,250

$2,242,2501,425,000

$3,667,250

$ 43,300372,450

2.310,000

$2,725,750-qq9l9!4

I, tL

EXHIBIT 5'25 ABC COMPANY INCOME STATEMENT FOR THE

TNTERNAL ANALYSIS AND DIAGNOSIS 189

YEARS ENDING DECEMBER 31

1 9BB 1 987

Net salesLess: Cost of goods sold

Admrnistrat ive exPensesOther exPenses

Total

Earnings belore interest and laxes

Less; Inlerest exPense

Earnings betore taxesLess: Federal income taxes

Earnings a{ter taxes (net income)

Common-stock cash dividends

Addit ion to retained earnings

Earnings Per common share

Dividends Per common share

$B'250 '000

$5,1 00 ,0001,750,000

420,0007,270,000

$ 980'0002 1 0 , 0 0 0

$ 770,000360,000

jg$ 9o,0oo$ 320,000

$ 3 9 4 0$ 0 8 6 5

$8,000,000$5,000,000

1,680,000390.000

tlhough there-ld be able 1q

7,070,000

$ 930,000210,000

$ 720,000325,000

$_!99p99$ B4,ooo$ 3 1 1 , 0 0 0

$ 3 9 0$ 0 8 3

s 1 15,0001,440,0002,000,000

63,000s3,618,000

s1,090,000

Leverage Ratios

Leveragc raLrios idenri ly the s()urce o1.:r f i rrr-r,s capit i i l -owners or or.] tsidc credi lr lrs, . I . l te |crt l t

, , leverage" rcl 'ors to the fact that using capital wirh a f ixcd intcrest chalgc wil l "ampli f i / l '

ei thcr prol i ts or lOsses in rclzrt ion to the equity of holders o1'colt lmon stock' ' f hc nlost colt lmonly

used rario is toral debt a,uiJcd ny total asseis. Total dcbt includes currcnt l iabi l i t ics and long-

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 . u n d s p r w i d c d b y d e b t . Atotal dcbt-total assets ratro hrghcr than 0.5 rs usually considered sa1'e only for f i rns in stablc

industr ies.s2 775,000s6.393,000

s1.225,000550,000425,00026,00016,250

$2,242,2501,425,000

$3,667,250

$ 43,300372,450

2,310.000s2,725,750q9!99!00

' l o t : - r l d u b t i ' . \ . 8 b 1 . l i 1 0 , , < / , r u k ! \

' l 'otal asscts $7 . 105 ,000

( ' 1 n L 7 ? 5 0. t r < f r I O Q ? \- \ , . . , \ r , ! , , /

sr6.393,000

Thc rat icr of long tcrnr dcbt to equrty ls

tcrnr f inancing are providcd by crcdrtors.

s tockho lders 'equr {Y.

a mcasurc of the extent to which sources of long-

It is computcd by dividing long-term dcbt by thc

Long- te rm dcbt _ $1 ,350.000 : 0 .42 (19gg)Equ i ty $3 ,242 '500

_ S 1 . 4 2 5 . 0 0 0 _ . ( ) 5 2 ( t q 8 7 J$ 2 . 7 2 5 , 7 5 0

Activity Batios

190 cHAPTEF 5

Activi t l ' rat ios indicate how cffect ively a f irm is using i ts resources. By .o.puri lg,,uan,,*rvith the resources usecl 1o generale them, it is pgssible to establish an efficiency o1 ono,^..-,!Thc as : r ' t lu lnu \c l re t i . in i l i ra res huu e f l i c ien t l ) tnanaFentenr i s cmpk,1 ing to r i l u r r .L " tu j t * .turnover is calculatcd by divrding sales by total assets. For the ABC Company, urr. , i , ,Jrt , tis r 'alr ulalcd l . f , ' l lou s:

' - ' t tuVtl

. Sa lcs 1 ,8 .150.000/ \ S 5 C t l U I l l ( ' V e l

T l r l l r s s c t r $ 7 . l { } l . O { ) 0

The rat i . o1' salcs t. l ixcd assels is a rreasurc of thc turnovcr on planl and eca lcu la ted h ' d i ' i c l ing . sa les by ne t f i xed assets .

r rL tu r r r ( rvLr ' t r Prdr r t d l to cqurpment ] t i s

Sa lcs $8.250,000I j ixed asscl lurnover -

. S:r lesl n \ C n l o r ) t U t I , ) \ C r l -

I l t vcn t0ry

2 . 1 1

r i

t

I

. :. l

: i

i

i il 1I tl tt iI ti r

t ,1 'l l

Net { i xcd rsse ts $2 ,980.000

$8,000.000. r - r ; - , . , , 2 8 8 r l q k T )b r , / / ) , u r l u

lnrlustry figurcs 1or assct lumovcr wrll vary u,ith capital-intcnsive indrrstrres, and thoserequir inr : large in l 'cntor ies wi l l havc ntuch sntal ler ratros.

A t t r r l l 1 , ' 1 i r - t r \ t l \ r : r l i r r i r l 11ygn1o r ) l un l { ) \C r . t . : t i t na l r . , l h v d i v rd rng s : i l c s b i ave l . age i nven -tor l ' . 1 'hc nortn 1or Anrcr ioan i r rdustr ies is 9. but whethcr rhc rat io for a part icular- f i rm is h igheror lor 'ver normal l t ' depends upon thc produc( sold. Snal l , inexpensivo i tenrs usual ly turn overat a l l luch highcr rate than larccr ' , expcnsive oncs. Sincc invcntor ics arc normal ly canied atcosl ' t t r ' r 'ou]c l be nlote accuraie lo usc the cost of goods sold in p lace of salcs in the numeratorof th ls rat io. I js tabl ishcd compi lers o1' rndustry ra l ios such as Dun and Bradstreei , nowever,use t hc r a t i o o l sa l cs l o i nvcn to r y .

$8. t .5U.000v , [ . r r L ,o

- 3 .74 t l 9BE t

$8.000.000$r{,0r1000

- 4 (1981)

l -he accounts reccivabic tLrrnover is a measurc of thc average col lect ion period on sales. I fthe avcrasc numbcr of davs varies widely lront thc industr-y nornr, i1 may bc an indication ofpoor nlanagemcnt. A too low ratro could indicatc thc loss of sales because of a too restr ict ivecrcdit pol icy. I f the rat io is too high, too much capital is being t ied up in accounts receivable,and management may be increasing thc chance ol bad debts. Becausc of varying industry creditpol icies, a cotrparison 1or thc f irm ovcr t imc or within an industry is the only useful analysis.Because inl-ormation on credrt sales fbr other f irms is gcncral ly unavailable, total sales mustbeused. Since not all firms have the sarre percentagc of credit sales, there is only approximatec( ) tn f r rab i l i t ) a r r ru l rg f i rn rs .

-!

parlng revenues!). ul oper?tig1_tal assets. Asset,, asset tumover


Accounls receivable rumover : A;*#*ffiG

: *#ffi

: 4.6e (1e88)

- $8,ooo,ooo = 5.56 (1987)$ I ,440,000

360Average coilection Period = Accounts receivable tufilover

360 - ?7 davs (1988)4 6 9

16n

5 5 6

,qulpment. I t is

)88)

,87)

ies, and those

tvcrage inven--f irm is higherrally turn overally carried atthe numerator'ect, however,

d on sales. I findication of

oo restrictivels receivable,rdustry credit: ful analysis.;ales must be

approximate

Profitabil itY Ratiosprofitability is thc nct rcsult of a large number of policies and dccisions chosen by an organl-

Za t ion ,smanagement .Pro f i tab i l i t y ra . t ios lnd ica tehowef fec t ive ly the to ta l f i rmtsbe ingman-a g e d . T h e p r o f i t m a r g i n l o r a l i r m i s c a l c u l a t e d b y d i v i d i n g n e l e a r n i n g s b y s a l e s . T h e r e i s w i d cvariation antong industnes, but the averagc for Amcrican firms is approximatcly 5 percent'

Net earn ings - $410,000 - 0 .0497 (1988)Saies $8,250'000

- xi395'ooo : o.o'+94 (19tJ7)$8,000 '000

A seconcl useful ratio 1or evaluating profilability is the re'turn on investment--or ROI' as it

is frequenrly called-fbund by dividin! net earnings by total assets The ABC Company's ROI

is calculated as fol lows:

Nct earn ings - $410 '000 - 0 .U577 (1988)Tota l asse ts $7 '105 '000

$395,000: f f i :oo6 i8(1e87)

l.he ratio ol net earnrngs to net worth is a measure of the rate ol retunl or profitability of

the stockholders, investme;t. I t is calculated by dividing ner earnings by net worth' the common-

s tockequ i tyandre ta tned-earn ingsaccount .ABCCclmpany,s le tu rnonnetwor th .a lsoca l iedROE, is calculated as follows:

Net earn ings _ $410,000 : 0.1264 (1988)Net worth $3,242'500

- $395'ooo : 0.r449 (r987)s2;125,150

192 cHAprER 5

It is often difficult to determine causes for lack of profitability. The Du pont svst"financial analvsis provides management with clues ro rhe lack

"11.:.:, of a firm. ill; ,ftitool brings together act ivi tv, prof i tabi l i ty, and leverage measures and shows how,h;;. ;ut^,

ilgfflo; l:j:*""" the overall profitability of the firm. A depicrion of the system i, ,.,'tonr,

The right side of the f ieule deveJops the turnover rat io. This section breaks down tohl assetrlnto current assets (cash, n-rafkelable securities, accounts reccrvable, and inventorierl unO'n*aOassets. Sales divided bv these lotal assets gives the turnover on assers.Thc left side of the f igure develops the profi t nrargin on sales The individual expense rtemsplus inconie laxes are subtracted from sales to produce net profits after taxes. N.t pronrriin,ora

b1" sales gives the profi t margin on sales. When the asset rurnover rat io on tr-, . . iglr i , io. oiExhibit 5.26 is multrpl ied bv the profi t margin on sales developed on rhe lefr siae oit tre ngurc,thc producr is rhe rerurn on assers (ROI) for thc f irm. l .his can be shown br,h;" i ;1.formu]a. " 'u rurlOwlng

Salcs Net earnrngs Nct earninqs; - , - . - + - R ( ) Jtotr l assets Sajes Toti i l assers

EXHIBIT 5.26 Du Pont's l inancial analvsis.

I t 4 u l t r p l i e d b y

P r o f i t m a r g i n0 . 0 5

t ) i v idedI n 1 0

Su b1 rac ledl ro rn

D iv idedi n l o

F ixed assets$2,980,000

P l u s

otal assets/equit\i$7,1 05,000/$3,242,500 =

2 . 1 9

N e t i n c o m e$41 0 ,000

Total assets$7,'r05,000

Tota l ccs ts$7,840,000

Cu r ren lassetS

$4, r 25,000

Cost o fgoods so ld$ 5 , 1 0 0 , 0 0 0

Adm in is t rat ive€x penses

$1 ,750 .000

Accountsrece ivab le

$ 1 ,760,000

\

)nt system nffnis financiaiv tnese ratios* rs set forth

1n total a55gts

res) and fi1g6


The lasr step in rhe Du Pont analysis is to multiply the rate of return on assets (ROI) by the^ f - ^ 1 , . - - ^ -

*"io "'"ii'ot':',;;;; the ratio of assets to common "o"ttJ: l?,i.l,tl]1t::i::;',"i.,':::i:'::

ffii ffi'il. ir'* o.'.*,.te rate of return:"*'"-t':'l::;::-'it^':':::i:'j:';y.-:1#i:iil:egur t - r \ ' \ vs l ' : . - , 1L^ n , , D , how the re tu rnnet income by common equity Flowever, the Du Pont anaiysrs demonstrates l

on assets and the use of debt interact to determine the return on equlty'

ffiilil;tr""-, .- o" used to analyze and improve the performance of a firm' on the1 - ^ ^ . - l J L ^ : - r , a c f l n e t p dr r r t r vu I u r r l r - ln rv r r r vq !

: p ro f i t s and sa les cou ld be inves t iga tedleft, or profit, side of thc figure, attemPts to lncreasl

.,nlrrme) c

il ;#;i';* "i .^"t"* o?itt' tn i"'i'out profits (or lou'e"y

lt':t^'-:"-:T:::,:,:Ttl,:::i:iil;.;:;il;;;";;-.i', r,,,I-^*pre' courd o"'*"1:-t::1"i":::1T:'::t"t,::;"ffi ""t"i*"".""il

inut"igut" wavs to rcducc costs on !e 'ltil.""l]lll"]""1,"t'itl.

Juut lurr t r r rErrrv , - " ' - " : - - ^r , ' - -1, ̂, - - r , , . ; . , sets as wel l as

financial ,,fi,.aru could anall"ze the eflect of reducing investment ln varlous asr

'xpense itern5rofirs dividedright side ofof the figure,he following

I assets/equityt,105,000/) ,242,500 =

2 . 1 5

Prepa idexpenses$50,000

the effccl of altcmattve f inanctal structures'

T h e r e a r e t w o b a s l c a p p r t l a c h c s t o u s i n g | r n a n c i a l r a t i o s . ( ) n e a p p r o a c h i s t o e v a l u a t e t h ecorporation,s perforrlancc ovcr severai ycars. Frnanctal ratios are computed for diflerent -vears'

and then an assessmenr rs made about ri,hethcr there has been an improvement or deterioration

::ilJffi:ilT:I*:::.;l'*J: 'o'nu'"o ror projected' or pro rorma' statements and

Theothcrapproach ls toe \ ,a lua tea f i rm,s f inanc ia lcond i t ionandcompare i tw i lh the l inanc ia i

il$':'ri'Jthllrf * ; ;llJi::[J.l:r.[ 'l;i',il:ff:]"f' " :#' T':;1::' :::":iJ::

,r . pr"" io"a by Robcrt Morris Associates. Dun and I lradstrect ' and various tradc assoclat lon

publications. (Associat ions and their addresses are l isted in the Encyclopedia of Asso(iatktns

;;,'.Tf#i*'yli:i:'li;;::,iT:,"il:'J:;'"il,i",Tlilll*:i:i::';:::lTili:il.Jl::l:l roldeis, and rhc najor brokerage houscs

To the extent possib}e, ,..o,unting data {.rom different conrpanies must be standardized stl

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 o d w i t h i n d u s t r ydara. I t is irnportant t0 reacl an1"footnotes of f inancial statements, si t lcc various accountinp ot

maragcmcnt practiccs can han. an effcct on thc f inancial picturc oI the company l jor example'

f t r n l s u s i n g s a ] c - l e a s e b a c k m e t h t r d s r r r a y h a v c l c v e r a g e p i c t u r c s t h a t a l c q u i t c d i f f e r c n t f r o n l.ha t i s shown urs dcb ls t r r a \ \c l \ on l l te ba lancc shcr t

Analysis of the Sources and Uses of Funds

. I . h e p u r p o s c o f t h i s a n a l y s i s i s t o d e t c r m i n c h t l w t h c c o n r p a n y i s u s i n g i t s f i n a n c i a l r c s o t l r c c s

lrolrr year tO year. By comparint balance sheets lrclm one year t0 the next, one may determinc

how funds werc obtaincd ̂"a ui. way in which thcse funds were employcd during thc ycar'

To prcpare a statcrrenr of the sou.ces and uscs of lunds i t ts necessary to (1) classify balance

shcet changcs thal rncrease cash and changes that decrease cash, (2) classify from thc lncomc

statemenl factors that increasc or dccrcase cash, and (3) consolidate this information on a sources

and uses of funds statenlent lonr'

Sources of funds that increase cash are as follows'

I A net dccreasc in any asset other than a deprecrable fixed asset

2 A gros dectease in a depleciable fixed asset

3 A net increase in anY l iabi l i tY

4 Proceeds from the sale of stock

5 The operatron o1 the company (net income. and depreciation if the cornpany is profitable)

Uses of lunds include

I nventoryi2,17 5,000

194 cHAPTEF 5

I A net increase in any asset other than a depreciable fixed asset

2 A gtoss increase in depreciable fixed assets

3 A net decrease in any liabiliry4 A retiremenl or purchase of stock5 Payment of cash dividends

\\'e compute gross changes to depreciable fixed assels by adding depreciation from the

income stalement for the period to net fixed assets at the end ol the period and then subtracting

fron the rotal the net fired assers at the beglnning of the period. The resrdual represents the

change in depreciable fixed asscts for the period.

For the ABC Companl' the follo\\'ing change wouJd bc caiculated:

s 100.000

T6 aveid double counting, thc change in retained earnings is not shou'n directly in the funds

statement. When the funds statement is preparecl, this account is replaced bv the earnrngs after

taxes. or net income, as a source of funds and dividends paid during the year as a use ot funds.

The difference between ner income and the change rn the retained-earnings account will equal

the amount of dividends paid during rhe year. The accomparying sources and uses of funds

statement was prepared for the ABC Companv.

A funds analysis rs useful for dctermining trends in working-capital positions and for dem-

onstrating how the firm has acquired and emploved its funds during some period-

ABC CO. 'S SOURCES AND USES OF FUNDS STATEMENT

FOB 19BB

Net property and plant (1988i

Depreciation for 1988

Net property'and plant (1987)

! ; 1 .175 .000- 80.000

l;1,25-5.000- 1 . r 5 5 . 0 0 0

SorrcesPrepaid expensesAccounts PayableAccrued federal taxesDividends payableCommon stocKAddit ional paid-in caPitalEarnings after taxes (net income)Depreciat ion

Toial sources

CashAccounts receivableInventoryLong{erm receivablesPropedy and plantOther fixed assetsBank loans payableCurrent maturi t ies oi long-term debtLong-term l iabi l i t iesDividends paid

Totai uses

$ 13 ,000100,000250,000

3,7501,200

195,500410,00080.000

$1,0s3,450

$ 25,000320,000175,000.165,000

100,00020,00075,0008,500

75,00090,000

$1,053,450

-

thei n s

the

Fat ios andw o r k r n gcap i ta l

L iq u id i t y :Cu r ren l

0uick

Leverage

(e tc . )

\ / o r k I n gcap i ta ip o s i l i o n

EXHIBIT 5 .27 A summary of the f inancial posit ion of a f irm

REFERENCES

tl I Strategic Advantage Factors

Croon . l ' . . "A i ds r n De te rn r i r l i n ! S t l a t e 9 \

i l . n o . 4 ( A u g u s t . 1 9 7 9 1 ' P P 6 5 7 3

( . 'onclus ionI t is r .c()nrnlct ldc-c l that \ ' ( ) l l preperc a char l sLlch as Erhib i t 5 27 so that YOU cal l c levcl t ) l ) a

usc l r r l po r t r a !a l 0 l l l t c sc i r nanc ra l ana1 l ' s t ' s . l ' l t c cha r t a l l ous a t l i sp l aV o1 ' l l t c r a l tUs t ' r c t L i t t l t

' f h i : ' l r enc i co l un r r r cOu i t l i t l c l udc a r rows t o i n t i i ca t c " f avo rab l c " ( ' l ) ' " ncu t ra l " ( - - ) ' anc l

. r . r n f aV0 rab l c " ( l l l 0 f t hc r l t i o s ovc r t l n l e . ' l

h c S tenda l c l co l u l nn cOu ld i r l c l u r l c t hc dcs t r c ' d

(O r r c t l u r r cc l l r a l i o . - l ' h c

l n t e rp r c ta f iOn co lu t t l n can bc t r s t t i l o dcse l i bc t hc l nc l r l l l n ! t t i t he r a t tC l s

{ i r r th is l r r r r r . l 'hc chart r . r "cs a b i ,s ic t i ispl : rv o i t l te rar ios as onc aspecrt o i thc f i rn l 's f inancia i

cond l t l o t l .

INTERNAL ANALYSIS AND D IAGNOSIS 195

I 'he Intcnr l i l Analvsis. ' ' Long Rdtt 'Qe l ' l r t r r r i t r l ,q vol

Strr r tcgi r ' l \ lanagentct t l Jovt ' r ln1 ' vol

ndsiterds .ualrds

Portcr ' . \4. F. . . Cont l tc t i t i t e S/rr t l t ' ,qr" 7 cLht t r t luas. l r t tAnr i t : i t tg lndu's l r i ts unl Crnt l tc l i t t t r ' r (Neu'

York . l j rec Press . l9 i r ( ) ) '

Stcincr. (1.:"! l rrrt t , ! i r ' l .at ' l rn"s i t t rgtts ' i (ss sl l .rr : .ss (Ncu YOrk: Ir inlncr:Ll I lxCCUtiYe-q Rcscarch

l j o u n t l a t r o n , 1 9 6 5 ) .\ \ ' i rner le l t . R . . ' 'A Rcsourcc-Based V ieu 'o l thc I " i r t t r '

5 ( 1 9 8 ' 1 ) . p p . l 7 l - l f i O

12) Analyzing Marketing and Distribution

Abell . t) . Ir . . and J. S. Harnnrontl : Srratc:g. ic Mttrkt ' t Plonnit?q (EnglcwoLrd cl i i fs ' N l : Ptenltcc

l l a l l . 1 9 7 9 ) .

Kotlcr. l ) . : iv4arke t ing Md11{)8(i t1(tt t (Englewood Cli l ' l ' ' r ' N i : PLentice-} lal l ' l9E0l

"N{arketing. The New I 'r ior iry." IJuri irc 's 's l l 'cr l t Nov l l ' 1981" pp 96-106'

l3 l Ana lYz ing F&D and Eng ineer ing

Boseman. B . . N I . Crow. and A. L ink (eds .1 : s r ra l rg i tManag,ement o f Indusr r lo l R&D (Lex-

ing ton . N lass . : Lex ing ton Books . 1984) .

i

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