consulting process 3

Module III

Characteristics and dynamics

of the individual companies

Roll-out

Action 1

Action 2

Action 3

Action 4

Action 5

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Introduction

Conclusion

Module I

Module II Module III Module IV

Module V

Module VI

2 Module III A.T. ConsultingBUSINESS UNIT STRATEGY TRAINING

Contents of Module III

Introduction

Overall company profile

• Purpose of the organization

• Stakeholder analysis

• Strategic era analysis

• Strategic planning framework

Product/market focus

• Evaluation of product/market segments

Overview of the value chain

• Value chain analysis

• Cost and margin driver analysis

Financial resources and performance

• Development over time

• Financial ratios

Company analysis frameworks

• 7S

• Benchmarking

• SWOT


Schedule for the A.T. ConsultingBusiness Unit Strategy Training Program

Source: A.T. Kearney

Introduction

Dinner

Monday Tuesday Wednesday Thursday Friday

Introduction

Module II

Lunch

Final presentation

Conclusion

Module III

Case presentation

Case preparation

Dinner

Case preparation

Dinner Dinner

Module V

Case preparation

Lunch

Module I

Lunch Lunch

Dinner

Case preparation

Case presentation

Guest Speaker

Strategy literature

review

Module VI

Lunch

Module IV Guest Speaker

Case presentation

8-9

9-10

10-11

11-12

12-1

1-2

Time

2-3

3-4

4-5

6-7

8-9

9-10

10-?

7-8

5-6


Positioning of Module III in the overall training context

Module II

Structure and

dynamics of the

industry

Module III

Characteristics and

dynamics of the

individual companies

Module IV

Execution

capacity of the

client

Module VI

Implementable

recommendations

Module V

Definition and

evaluation of strategic

alternatives

Roll-out

Action 1

Action 2

Action 3

Action 4

Action 5

Qtr 1 Qtr 2 Qtr 3 Qtr 4


Module I

Identification of the key

issues of the

engagement

Note: The order of presentation of the curriculum elements should not be interpreted as a sequential guideline for a strategy engagement. Different

elements of the program may be referenced at different times in the engagement

Introduction


Module III teaches the analysis of individual company characteristics and

dynamics, which can be applied to both the client and its competitors

• Establish an overview of the most

prominent players in the client’s industry

• Determine the individual competitors’

levels of success in their respective

segments (where they compete)

• Study the processes that companies use to

deliver value to their customers (how they

compete)

• Evaluate the financial situations of the

companies


Introduction


Deliverables and techniques in Module III


Deliverables Techniques






Product/market focus • Evaluation of product/market segments








• 7S

• Benchmarking

• SWOT

Introduction



Introduction















• 7S

• Benchmarking

• SWOT


An evaluation of the overall profile is the first step in understanding the business

unit’s history, how it is structured today and its future direction

Fundamental aspects of the company

• Overall “raison d’être” of the company

• Degrees of freedom

• Development until today

• Strategic overview of the business unit today

Technique for analysis






Introduction Overall company profile



Introduction















• 7S

• Benchmarking

• SWOT


A review of the business unit’s and corporation’s mission/vision statements,

objectives and strategies helps one to understand the future direction and

orientation of the business unit

Objectives

Strategy

Mission/

vision • Purpose and aim of the

organization

• Quantitative or specific

goals to be attained

within a given

timeframe that usually

ranges between a few

months and several

years

• Means to achieve the

objectives

Definition


Description Overall company profile Purpose of the organization


Clarification of terminology in this technique

* For definition, see previous page

** For definition, see Introduction Module and previous page


Term Comment

Mission/Vision*

• These two are often given different meanings by different companies,

sometimes interchangeably and other times hierarchically. A mission implies

duty or a role of a company whereas a vision implies management’s ideal

positioning of the company

Objectives* • Objectives are often used interchangeably with “goals.” We will use the term

objectives in the module

Strategy** • If no explicit articulation of strategy exists, simply evaluate those actions that the

company has taken. Strategy can usually be inferred this way

Value proposition

• Articulation of what value a company offers the market, its stakeholders, and

its value chain partners (sometimes defined in value/price terms) - it is

sometimes used interchangeably with strategy

Action/business plan • Specific actions initiated to implement the defined strategy - often thought of

as included in the definition of strategy

Focus of this training

Overall company profile Purpose of the organization Description


An assessment of the corporate mission/vision statement helps one to understand

the business unit’s context within the entire company and therefore how the

business unit supports the corporate mission/vision

• The corporate mission/vision

statement sets the context for the

business unit’s existence

• The business unit’s mission/vision

statement illustrates how the

business unit identifies its purpose

within the corporation

• If the business unit does not have a

mission/vision statement, the

corporate statement should be

analyzed/understood carefully


Corporate level

Business unit

level



The mission/vision statement is a company’s means of expressing its desired

direction


• Expresses a management style that encourages people to

go beyond “business as usual”

• Mobilizes the organization and should inspire its

employees to reach beyond their current resources and

capabilities

• Gives meaning to everyone’s efforts

• Raises the collective level of ambition



Mission/vision statements reveal information about a company’s core ideology and

envisioned future

* Several authors have discussed differences and similarities between missions and visions. Some argue that missions and visions can be one and

the same, while others strongly disagree. When arguing that visions and missions are not identical, the most commonly used distinction is that the

mission is a brief explanation of the organization's purpose whereas the vision is a more elaborate statement

Source: Collins, J.C. and Porras, J.I. (1996); Building Your Company’s Vision

• Essential and enduring tenets of an

organization that illustrate the company’s

beliefs

• Require no external justification. They have

intrinsic value only

Core values

• The organization’s reason for being

• Reflects people’s idealistic motivations for

doing the company's work

• Captures the soul of the company and is the

“raison d’être,” not an objective or strategy

Core purpose • Defines the enduring character of an

organization

• Provides the glue that holds an

organization together through time

Core ideology

• It should be clear and compelling, creating a

challenge

• It should serve as a unifying focal point of

effort and act as a catalyst for team spirit

10-30 year long-term

goal

• A vibrant, engaging and specific description of

what it would be like to obtain the long-term

goals

Vivid description • Conveys concreteness - something

visible, vivid and real

• Involves a time yet unrealized - with

dreams, hopes and aspirations

Envisioned future

Mission/vision*



An analysis and interpretation of the business unit’s mission/vision statement

reveals insights about a company’s intended direction*

• Sense of direction and focus areas

• Shared values and standards of behavior

• Corporate context and cultural issues

• Stakeholder requirements and degree of commitment to

them

• Objectives of the company and its understanding of

how to reach them

• Perception of the market/competition (e.g., overly

optimistic?)

• View of the company’s own strengths and weaknesses

• Shortfalls in execution capacity

Overall company profile Purpose of the organization Usage

* An accounting objective is not appropriate as a mission/vision. The statement must be deeper and serve to inspire people



How to develop a mission/vision statement

What a mission/vision

statement should include

• Description of the business in which

the organization competes

• Strategic intent of the organization

• Key strengths of the organization

• Broad strategies to be pursued to

achieve the mission/vision

• Organization’s values


How to develop mission/vision

statements

• Developed by the CEO

– Appeals to a common purpose

– Communicates sincere belief in

mission/vision

• Developed by CEO and senior team

– Discuss in small team

– Validate with employees

– Present mission/vision to

organization

• Developed bottom-up

– Employ scenario development

– Hold informal and formal

discussions

– Use a lower level manager to help

in development and then facilitate

in communicating



The company’s objectives and strategies reveal information about its purpose*

Insights from objectives

• Plans for growth (organic or through

acquisitions)

• Plans for product development

• Plans for cost cutting

• Plans for diversification

• Sense of urgency

• Turnaround or business as usual

• Priorities of management

• Degree of organizational focus

Insights from strategy

• What resources does the company

commit to achieve its objectives?

• In which segments does it compete?

• How does the company create

value/differentiate itself?

• Is the company aggressive or

passive?


* Shareholder value is an outcome of the objective and should not be the objective by itself. An objective to increase shareholder value

does not serve to inspire employees and provide them with an understanding of the drivers required for competitive success



3

The mission/vision statements of two copier business units

* “Spirit of the Corporation” in which individuals and organizations live and work together for the common good

Source: Annual reports; Web sites

The mission/vision statement indicates a company’s intended direction


A comparison of

the

missions/visions

of key competitors

provides an

understanding of

their different

focus and overall

values

Copypro

• Kyosei*

• To be one of the world’s top

ten manufacturing

companies within the next

30 years

Copycat

• The document company

• To be the leader in the

global document market,

providing solutions that

enhance business

productivity

Overall company profile Purpose of the organization Example


3

The objectives of two copier business units


The organization’s objectives indicate the company’s overall focus


Both companies

have clear

objectives Copypro

• Focus on high value added

businesses - create superior

products and technologies with

the potential to set de facto

industry standards

• From being a world leader in

image and information

technology to a leading

corporation in the field of

multimedia

Copycat

• To achieve profitable revenue

growth and world class

productivity by building on

strengths in black-and-white

copying, office and data center

printing, production publishing,

and together with affiliate

Company X, lead the industry in

color copying and printing

Copypro’s main

objectives are

diversification and

globalization



3

The strategies of two copier business units


An evaluation of specific strategies can indicate a business unit’s prioritized areas

of focus


The strategies

reveal an

intensified focus on

global expansion

• Develop cross-functional

alliances

• Accelerate development of new

multimedia businesses

• Grow the solar energy business

• Achieve financial flexibility

– Strengthen financial structure

– Reduce vulnerability to

exchange-rate fluctuations

• Create an international staffing

system

• Re-emphasize the tradition of

“no defects-no complaints”

Copypro Copycat

• Introduce new products that

leverage the power of digital

technology

• Respond aggressively to

increased demand for enterprise-

wide document services

• Pursue growth in emerging

markets

• Focus on lowering time to

market requirements

• Put the customers first

An analysis of

Copypro’s

strategies reveals

six primary areas

of importance

– Management

– Environment

– Products

– Markets

– Finances

– Processes



3

An example of a proper and an improper mission/vision statement from the

automotive industry

Source: Foster, T. (1993) 101 Great Mission Statements

Proper mission/vision statements focus on a limited number of business areas and

are inspirational to a company’s employees


Toyota’s

mission/vision

attempts to cover too

many aspects of

business. The

company cannot

successfully be all

things to all people.

Honda Motor Company • Maintaining an international

viewpoint, we are dedicated to supplying products of the highest efficiency at a reasonable price for worldwide customer satisfaction

FOCUSED UNFOCUSED

Toyota Motor Corporation • Guiding principles • 1. Be a company of the world. • 2. Serve the greater good of people

everywhere by devoting careful attention to safety and to the environment.

• 3. Assert leadership in technology and in customer satisfaction.

• 4. Become a contributing member of the community in every nation.

• 5. Foster a corporate culture that honors individuality while promoting teamwork

• 6. Pursue continuing growth through efficient, global management.

• 7. Build lasting relationships with business partners around the world.

Honda’s

mission/vision

focuses on fewer

aspects of business,

such as innovation

and operational

excellence.



Methodology for analyzing and/or defining the purpose of the organization

1

Fact gathering

2

Synthesis and

evaluation

3

(Re-)formulate as

required

Input Output

• Research literature

about the company

• Interview top

managers

• Study company

advertisements

• Decipher company

mission/vision

statements

• Determine whether the

statements are

consistent with the

company’s objectives,

strategy and value

proposition

• Compare the client’s

mission/vision,

objective, strategy and

value proposition to

those of its competitors

• Work with management

to develop priorities

• (Re-)formulate the

mission/vision, objective,

strategy and value

proposition as required

• Strategic direction

of the company

• Level of ambition

• Players analysis

• Strategic group

analysis

• Industry strategic

era analysis

• Top management

statements

• Client

data/interviews

• Expert interviews

• Analyst reports

• SEC filing*

• Company

mission/vision

documents

* Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q


Overall company profile Purpose of the organization Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• Much can be learned about a company’s (and its executives’) nature and culture from its mission/vision

statements, value proposition, etc.

• Not many companies differentiate themselves in terms of these statements

• Statements need to be updated as the company evolves

• Mission/vision statements should be linked to the strategies and objectives

• A corporation as a whole as well as its individual business units should have developed such statements

• Provides insight into a company's culture, purpose, goals and means of achieving them

• Provides insight into the attitudes of higher management

• Quite easy to confuse mission/vision and objectives

• Can sometimes be misleading

• Different companies apply different meanings to the terms mission/vision, value proposition,

strategic intent, etc.

Abraham, J. (1995); The Mission Statement Book: 5301 Corporate Mission Statements from

America’s Top Companies

Campbell, A. & Young, S. (1991); Creating a Sense of Mission

Christopher, W.F. (1994); Vision, Mission, Total Quality

Collins, J.C. & Poras, J.I. (1996); Building Your Company’s Vision Statement

Foster, T.R.V. (1998); 101 Great Mission Statements

Graham, J.W. & Harlick, W.C. (1994); Mission Statements

Jick, T.D. (1993); Managing Change

Stone, R.A. (1996); Mission Statements Revised

Overall company profile Purpose of the organization Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


A stakeholder analysis reveals the pressures that a company faces from its

constituents and the degrees of freedom that are available to the company in

determining its strategic direction

• To determine who

the stakeholders are

and their impact on

the client

• To determine the

most critical

stakeholders and

their relative levels

of power

Deliverables


Client Local community

Shareholders

Corporation

Creditors

Top management

Employees

Unions

Customers

Government and

regulatory bodies

Media

Strategic partners

Suppliers

Overall company profile Stakeholder analysis Description


An understanding of stakeholders and their objectives allows one to calculate a

business unit’s freedom in establishing its strategic direction

Stakeholder Objective Measurement/value criteria


• Shareholders

• Competitive risk adjusted rate of financial

return

• EVA/SVA

• Market value

• Resource allocation

• Dividends

• Corporation

• Secure optimal performance of business unit

• EVA

• Market value

• Dividend

• Creditors

• Secure principal and interest repayment

• Collateral value

• Interest payments and coverage

• Principal payments

• Top

management

• Remuneration

• Recognition

• Pride

• Salary/options/pension

• Peer group respect

• Ownership (family owned)

• Degree of delegation

• Level of control

• Employees

• Secure, well paid, satisfying work

• Job security

• Pay, options, pension package

Overall company profile Stakeholder analysis Usage



business unit’s freedom in establishing its strategic direction (cont’d)

• Unions

• Secure, well paid, satisfying work

• Job security

• Pay, options, pension package

• Number of different unions

• Number of members /

total employees

• Customers

• Value for money

• Service, price, quality,

customer structure

• Length of relationship

• Level of integration

• Business volume

• Contractual obligations

• Suppliers

• Long term, profitable, reliable contracts

• Length of relationship

• Level of integration

• Business volume

• Contractual obligations

• Credit ratings






business unit’s freedom in establishing its strategic direction (cont’d)

• Government

and

regulatory

bodies

• Non-monopolistic / competitive market

• Tax revenue

• Environmental protection

• Treasury, taxes collected

• National interest and security

• Redundant sources of supply

• Local

community

• Environmental protection

• Employment opportunities

• Ethics

• Local employment

• Environment friendly

operations

• Percentage of workforce

employed

• Strategic

partners

• Profitable relationship

• Synergies

• Length of relationship and

integration

• Profit

• Media • Perceived well • Quality and quantity of

coverage permitted





When performing a power/dynamism analysis one assesses where “political efforts”

should be channeled to gain support for strategic initiatives

Source: Johnson, G. and Scholes, K. (1984); Exploring Corporate Strategy

Greatest

danger

or

opportunity

Powerful

but

predictable

Unpredictable

but

manageable

Few

problems

Predictability

Power

High

Low

Low High

C D

B A

• The most difficult entities to deal

with are those located in segment

D, because they are in a

powerful position to block or

support new strategies; however,

their “stance” is difficult to

predict

• Difficult stakeholders to manage

are ones lower in the

organization who yield

significant influence over people

in powerful positions.



A power/interest matrix indicates which stakeholders should be influenced to

support the adoption of a strategic initiative


Keep

satisfied

Key

players

Minimal

effort

Keep

informed

Level of interest

Power

High

Low

Low High

D C

A B

Although the entities

categorized in segment C

might be relatively

passive, they can become

fierce adversaries, if they

strongly oppose a new

strategy



A power/dynamism matrix can reveal a strategy for playing and controlling the

“political game”


3

Stakeholder analysis for Copypro - the power/dynamism matrix


Predictability

Power

High

Low

Low High

• Strategic partners

• Customers

• Suppliers

• Creditors

• Shareholders

• Corporation

• Employees

• Local community

• Government

It is essential to gain

the co-operation of

unpredictable

stakeholders who

wield a great deal of

power

Although the

shareholders and the

corporation do have a

high degree of power,

their reactions to a

strategic initiative can

often be predicted,

which allows

appropriate measures

to be taken early in

the strategy making

process to gain their

support

Overall company profile Stakeholder analysis Example


Initially, every stakeholder might be perceived as having a high level of interest in a

new strategy; however, it is important to thoroughly evaluate their underlying

objectives and categorize them appropriately in the power/interest matrix


3

Stakeholder analysis for Copypro - the power/interest matrix


Level of interest

Power

High

Low

Low High

• Shareholders

• Corporation

• Employees

• Suppliers

• Creditors

• Media

• Strategic partners

• Customers

• Local community

• Government

Copypro should

be especially

sensitive to the

objectives of its

key stakeholders



Another way of mapping stakeholders is by their anticipated reactions to specific

changes in the organization or to its expected strategy


3

Potential scenarios for Copypro


Whole company

Internal stakeholders External stakeholders

Marketing

dept.

Production

dept.

Supply

dept. Customers Suppliers

Sell to competitors -

Introduce

computerized

systems -

Close plant +

Develop market X

Subcontract

production

- + -

+ +

+ - +

+

- + +

?

+

- -

? -

+ ?

+ +

- -

+

+ +

Indicate potential

scenarios where

entities will be at

stake

Determine

whether individual

stakeholders will

support or reject

the potential

change

Possible

changes

Stakeholders



Methodology for performing a stakeholder analysis

1

Identify the

stakeholders

2

Determine the

stakeholders’

objectives

3

Assess the impor-

tance of each

stakeholder

Input Output


• Based on an

evaluation of the

input data and a

review of the

potential

stakeholder groups

discussed in this

module, compile a

complete list of

stakeholders

• Determine the

underlying

interests that each

stakeholder group

has in the company

• Identify the

important issues

for each

stakeholder group

• Assess the potential

importance of the

stakeholder groups in

terms of their influence,

interest and power

• Plot the stakeholders in the

power/interest, the

power/dynamism, or other

matrices as relevant

• Assess the anticipated

reactions of the

stakeholders to strategic

initiatives


stakeholders to those of its

competitors

• Determination

of the strategic

degrees of

freedom

available to the

company

relative to its

competitors

• Client

data/interviews


• Analyst reports

• Annual reports

• SEC filings*

• Trade journals

• Press clippings

• Customer

surveys

• Supply chain

analysis


Overall company profile Stakeholder analysis Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• While performing the stakeholder analysis, be aware that:

– Stakeholders cannot be viewed in isolation (stakeholder interests might be linked)

– Stakeholders reactions might vary depending on the specific context and timeframe of the

strategic initiative

– The position of stakeholders might change over time

• Reveals the pressures faced by a company

• Reflects degrees of freedom available to a company in pursuing certain strategies

• Mapping stakeholders incorrectly can result in significant negative consequences

• Johnson, G. and Scholes, K. (1984); Exploring Corporate Strategy

Overall company profile Stakeholder analysis Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


A strategic era analysis illustrates how the company has evolved to reach its

present structure and position


A strategic era analysis is A strategic era analysis provides A strategic era analysis presents

• A segmented time line

• A breakdown of the

company’s history according

to major shifts in its strategic

paradigm

• An answer to “How did the

company get to where it is

today?”

• A basic introduction to the

corporation and/or the

business unit

• A description of the

company’s history and likely

perspective on its business

•Strategic development

•Business focus

•Company evolution

•Major events

Overall company profile Strategic era analysis Description


A strategic era analysis has many project applications


Modes of usage Examples

• To create an appreciation of the client’s

business perspective through an

understanding of its history

• To establish an understanding of

possible inertia in moving from one

stage of development to the next

• To brief project team members about a

client or a particular company

• To illustrate how the business unit has

evolved within the context of the

corporation

• To create a starting-point to initiate

change

• Preparation for client meetings

• Many company profiles

• Internal briefings

• Company reports

Overall company profile Strategic era analysis Usage


3

The Copycorp Corporation has evolved from a camera company to into a

diversified corporation


A strategic era analysis should concisely convey the client’s strategic evolution


Dates of eras

The eras should

have titles

Brief description of

the governing

strategic paradigm

A list of key events

that categorize an

era (with their dates)

Specifics of the

business focus

• Become a leading company

in the field of multimedia

• Further diversification into

semiconductors and other key

industries

• Joint venture with Olivetti

(1987)

• Joint venture with NTT

Internet Co. (1989)

• Develop first notebook sized

personal computer with built-

in printer with IBM Japan

(1993)

• Introduction solar power

generating systems (1996)

• Introduction of word

processor with Internet

functions (1997)

• Global marketing and

production of networked

products which forms the

basis for multimedia solutions

• Diversified into

semiconductors

• Diversification into areas where

Copycorp’s core competencies

(precision mechanics, fine optics

and micro electronics) can be

leveraged

• Introduce world’s first key

electronic calculator (1964)

• Enter the copying machine field

(1965)

• Enter the facsimile market (1976)

• Introduction of the bubble jet

printer (1981)

• Copycorp Inc. USA established

(1966)

• Export ratio surpasses 50%

(1967)

• Start regional offices in Eastern

Europe

• Global marketing and production

of office machines and cameras

Focus on multi-media

and continued

diversification

Diversification and

globalization Start Internationalization

• Build a world-class 35 mm

camera company

• Company is founded (1937)

• Introduction of 35 mm

camera (1937)

• In-house production of solar

lens (1939)

• Concentration of head office

and manufacturing plants in

Tokyo

• Cameras in Japanese markets

• Entry into selected markets

• Focus on camera

• New York branch opens (1955)

• Copycorp Europe, the European

distributor is established in

Amsterdam (1957)

• Copycorp Latin America is

established in Panama (1962)

• Cameras in selected markets

Strategic

theme

Key events

Business focus

1937 1955 1964 1987

Era

Era analysis of the

corporation

Overall company profile Strategic era analysis Example


3

Copypro has played an instrumental role in Copycorp’s strategy


A strategic era analysis of the business unit will provide even more detailed

information on the client


Strategic

theme

Key

events

Business

focus

Era

Entry into

multimedia

• Catch Copycat

through

technological

differentiation and

entry into the high

volume market

• Entered high

volume market with

IT image retention

system

• In Japan, the size of

the dealer network

is increased

• In Europe,

distribution

function is taken

over for a number

of distributors

• Expansion of

product line

• Introduce NP

color copier

• Microprocessor

controlled

systems

• Global

distribution

through a

mixture of own

dealer network,

partners and

joint ventures

Technological

differentiation

Product

development

Internatio-

nalization Entry

• Build

organizational

capacity

• Establish R&D

organization

dedicated to

Electro

photography

• Develop low

volume copiers

• Close international

cooperation

agreements with

the international

image industry in

Japan and through

an OEM deal in

the USA

• Enter market

segments in Japan

and Europe where

Copycat was weak

• Introduce NP 1100 in

1970

• Launch second

generation NP

system in Japan

(1972) and overseas

(1974)

• In Japan, copiers are

sold through a

separate sales force

and dealer network.

In US, copiers are

sold through

subsidiaries and

independent dealers

1959 1969 1974 1978

• Copypro supports the

Copycorp’s

multimedia strategy

by developing

networked products

• Development of

digital copying

machines (full image

processing capability)

and multifunctional

machines (printers,

scanners and

facsimile machines)

• Starts production of

copiers in Europe and

in the US

• Alliances with

companies such as

Eastman Kodak to

develop standards and

new technologies

1990

Dates of eras

The eras should

have titles

Brief description

of the governing

strategic paradigm

A list of key

events that

categorize an era

(with their dates)

Specifics of the

business focus

Era analysis of

the business unit

Overall company profile Strategic era analysis Example


1 2 3

Methodology for performing a strategic era analysis

Output

• Understanding of the

company’s history

and development to

the present day

• The drivers of

strategic paradigm

shifts

Input

• Company founding

date

• Client

data/interviews

• Annual report

• SEC filings*

• Press clippings

• Company

chronology

• Anniversary reports

• Industry report

• Collect and group

historical company

information

– Company founding

– Product evolution

– Sales growth

– Key events

characterizing change

– Key success factors

• Segment the history of the

company into “eras”

according to a common

strategic theme

• Each era must reflect a

strategically distinct

period for the company

• List the key events and the

company’s primary business

focus during each era

Fact finding Determine

strategic

paradigms

Structure

analysis



Overall company profile Strategic era analysis Methodology


Conclusion


Key points

Weaknesses

References

Strengths • Concise instructions to a company’s past

• Presentation of background facts and summarizes an company's relevant history

• Briefs colleagues about the client

• Introduction to a company presentation

• Easy to incorrectly group eras by key events in a company’s past and not by changes in strategic

paradigms

• The key determinant of an era is the strategic paradigm that was dominant

• All era analyses should include the strategy and the key events that characterized the era

Overall company profile Strategic era analysis Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


A strategic planning framework maps out the company’s business: it is not an

organizational chart - a company might be organized one way and strategically

operated in a different way

• A grouping of product units might constitute a business

area

• A business area may be, for instance, product categories,

geographical regions, or distribution channels

• Each business area should reflect homogenous capabilities

by which the business unit interacts with its market

Product unit a

Product unit b

Product unit c

Corporation

Business line Business line


Overall company profile Strategic planning framework Description


A strategic planning framework is a high-level profile of the company’s business

structure


• A chart of a company’s business

areas/activities

• A strategically structured description of what

the company does

• A versatile tool that can be used to

summarize the products, competitors,

customers, markets, and other characteristics

of a company’s business areas/activities

• Not equal to the organization’s structure

A strategic planning framework is:

• An introduction and overview of a

company’s and/or a competitor's business

areas (not necessarily as the company sees

its business)

• An establishment of a common

understanding between clients and

consultants

• A common platform for further analysis

• An understanding of the client’s business

from a strategic standpoint

A strategic planning framework provides:

Overall company profile Strategic planning framework Usage



A deliverable of the analysis is a map of the clients’ current business activities and

strategies for each activity

* This is a strategic planning framework for a corporation. The technique can also be performed for the business unit. See next page for example


Include key

statistics

The corporation

should be positioned

at the top of the

framework*

Definitions of the

business areas

Primary functions

of the division or

business areas

Critical categories

such as these can be

included contingent

on the availability of

data

Business

areas

Turnover

in %

Turnover = 22,054

Net income = 812

Number of employees = 75,628

• Manufacturing and

sale of computer

peripherals

– Bubble jet printers

– Toner cartridges

– Laser beam

printers

• 25.0%

• Speed up

development of

multifunctional

systems

Copycorp

Computer

peripherals

Business

systems Cameras

Optical

products

7,570

34

7,060

32

3,798

17

Copypro

1,843

9

1,783

8

• Manufacturing, sale,

and servicing of a

wide range of copiers

– Color models

– Office models

– Personal models

• 9.4%

• Focus on product

development’s

environmental effects


sale of:

– Fax machines

– Electronic

typewriters

– Calculators

– Micro computers

• 19.4%

• n.a.


sale of:

– A range of 35 mm

single-lens reflex

cameras

– Video systems

– Shutter cameras

• 20.4%

• n.a.


sale of steppers and

aligns used in:

– Broadcasting

– Semiconductor

industry

– Medical equipment

• 23.2%

• Focus on product

development

Activities

Growth

Strategy

Copypro is an important business unit for the Copycorp because the

business unit generates 32% of its revenue

Information on

business size

Overall company profile Strategic planning framework Example



A strategic planning framework can also be performed on the level of the business

unit (as opposed to corporate)


Business

areas

Turnover

Turnover as %

Turnover = 7060

Net income = 917.8

Number of employees = 32,247

• High capacity

• Broad sales network

• Direct sales

distribution

• Rental or sales

• low-cost/high quality

to penetrate

• Strong brand names

Copypro

2895

41%

Business

products Service

Personal

products

• Cater to individuals

and small businesses

• Use retailers to

distribute

• Mass market

strategy

• Experiencing large

growth in sales,

1993-1997 CAGR=

22%

• High quality

• High R6D investment

• Direct distribution

• High quality, high

price, low volume

• Low returns

• Pushes brand name

• Strong R&D

• Cater to business

products

• Global service

network

• Reap large margins

• High employee

turnover

Activities

Strategy

Other

Copypro is an important business unit for the Copycorp because the

business unit generates 32% of its revenue


494

7%

1412

20%

2259

32%

Professional

products

Include key statistics

Group the types of

business (or business

lines)

Describe the relevant

characteristics of the

business unit

The highest level

should be the

business unit, which

could be a subset of

a greater corporation


3 Source:A.T. Kearney

Do not confuse the organizational chart with the strategic planning framework


The organizational

chart does not focus

on the strategic

business units of the

corporation, but

rather on the internal

organizational

structure of the

company

Organizational chart for Copycorp’s Corporation

General affairs development

Personnel and organization development

Training center

Finance and accounting development

Business information processing development

Purchasing development

Construction development

Physical distribution development

Audio and visual aids division

CIMS promotion center

Quality assurance center

Research center

Camera options

Business machines operation

Optimal products group

Production engineering research laboratory

Component development center

Corporate technical planning and operations center

Corporate patents and legal center

Chief executive officers

Secretarial office

Corporate communication

Internal auditing

Advanced technology center

Chairman

President

Board

• Development system committee

• Production system committee

• International marketing committee

Executive committee



Methodology for constructing a strategic planning framework

Output

• Company’s strategic

business structure

• An understanding of

where a company’s

business structure

deviates from its

organizational

structure

Input

• Purpose of the

organization

• Client data/interviews

• SEC filings*

• Annual reports

• Trade journals

• Press clippings

• Customer surveys

• Collect and group

company operations

information

• Develop a framework that

illustrates the company’s

distinct strategic business

areas (and the interaction

among them)

• Review information about

significant company

characteristics such as

key products, markets,

positioning, customers

and subsidiaries to realize

the separate business

thrusts

• Expand the framework to

include key facts about each

of the business areas and the

total revenue, profit and

number of employees for

each

1 2 3

Fact finding Develop business

structure

Expand upon

business

framework



Overall company profile Strategic planning framework Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• Mistaking an organization chart for being a strategic planning framework

• Automatically equating “business area” or “business activity” with an SBU

• Strategic planning framework will not necessarily correspond with the client’s perception of the

company

• Gives a common platform for further analysis

Overall company profile Strategic planning framework Conclusion

• Brief overview of the company’s strategic operating structure

• Overview of the business unit’s strategic importance for the corporation



Introduction















• 7S

• Benchmarking

• SWOT


After having performed the overall product/market segmentation*, it is critical to

analyze the company’s and its key competitors’ product/market focus and

development

*

• How has the client’s product/market portfolio developed

vis-à-vis the market?

– Geographical perspective

– Distribution perspective

– Product perspective

– Customer perspective

• How are the individual segments expected to develop in

terms of size/growth/value/importance/etc. in the future,

and how does this development fit with the client’s

product/market position?

See Module II. By matching the overall product/market segmentation in Module II with the company specific segmentation, a complete understanding of

the client’s and its key competitors' product/market positions are obtained


Key questions

Product/market focus Evaluation of product/market segments Description


• Current and future

competitive coverage

of evolving customer

needs/requirements

in terms of:

- Baseline

expectation

- Purchasing

criteria

- Satisfaction

level

• Perceived customer

value from

competitor offerings

• Complete overview

of the evolution of

product market

shares

• Product strategies for

market players and

their evolution

• Manufacturing,

distribution,

advertising and

pricing charac-

teristics of

competitive products

• Market share of

distribution

channels

• Position within

channel structure

(margins,

exclusivity etc.)

• Current

geographical

coverage of

competitive

products

• Evolution of

geographical

coverage of

competitors

• Geographical

differences in

competitive offering

characteristics

Geographic Customer Distribution Product

There are four main types of segments which should be analyzed


Product/market focus Evaluation of product/market segments Description


By analyzing the client’s product/market position and development vis-à-vis the

market development, a deeper understanding of the client’s positioning is obtained

50

75

25

15 25

10

Segment X

Segment Y

Segment Z

AA BB

1994 1998E

Development of client's sales in segments

X, Y, and Z as a % of total sales

50

15

25

75

25 10

Segment X

Segment Y

Segment Z

AA BB

1994 1998E

Market development of segments

X, Y, and Z as a % of total sales

• The client focuses heavily on segment X which is expected to experience a

significant decline in its share of the market

• The client must realize that it has focused on a segment decreasing in size and

financial importance

Note: The segments X, Y and Z can potentially refer to all different segment types: geography, distribution channels, customers or products


Product/market focus Evaluation of product/market segments Usage


Changes in the size and relative significance of the segments must be assessed in

conjunction with changes in the overall market


Development of the overall size of

the market

Development of the

relative importance of

the targeted segment

Development

of the

company’s

share of the

segment

Product/market focus Evaluation of product/market segments Usage


3

Product offerings within the global plain paper copier market


Before a company determines which of the segments to pursue, it must evaluate its

product offering within the business dynamics of the individual segments and the

market as a whole


Choose axes that

have the greatest

relevance in defining

the market segments

Evaluate the

company’s product

offering with respect

to the other players’

offerings in the

market to determine

which market

segments the

company can serve

Low margins and

yearly sales volume

(200,000)

High margins and

yearly sales volume

(2,000)

High copy volume

and high quality

Low copy volume

and low quality

IBM Kodak

Xerox

Mita

Ricoh Canon

Sharp Xerox

Payol

Olivetti 3M Minolta

Toshiba Savin

Canon

Product/market focus Evaluation of product/market segments Example


Floor model

Table models

3

Copypro’s current brand-portfolio


A mapping of product offerings against the individual segments reveals the

company’s market strengths and weaknesses


Matching product

offerings against key

segments illustrates

which groups the

company can serve

(effectively marked

by an X)

If a company offers

several brands, the

product lines can be

listed separately

NP

6212

NP

6016

GP

215

GP

30F

NP

6050

NP

6085

X

X

X

X

X

X

Small

(1-15 users)

Medium

(16-35 users)

Large

(36-99 users)

Very large

(>100 users)

Segment

Product

Key office segments

X

X

X

X



Developing an overview of the shares and trends of the product/market

segments is fundamental to strategic analysis


The importance of a segment should be evaluated in terms of its relative size and

change in size


It is important to note

the growth in the size

of the market

Analyze the growth in

individual segments -

in this case- segment B

presents a greater

opportunity for growth

in sales and share than

does segment A

Segment A Segment B

100

25

0 0 100

Size of the overall market

12.5

5.0

Segment A Segment B

100

25

0 0 150


12.5

10.0

10 10

1996 1997

Company’s share

of the

segment (%)

Size of the market

Company sales

Company share

1996

100.0

17.5

17.5%

1997

150.0

22.5

15.0%

Growth in market

Growth in sales

Change in share

50.0%

28.6%

-2.5%

50 50



3

Decline in the size of the overall market changes the importance of certain

segments and forces the re-evaluation of a company’s strategy


The importance of a segment should be evaluated in terms of its relative size and

change in size (cont’d)


Note that even a

significant increase

in market share will

not make up for the

decline in the

overall size of

segment B

Segment A Segment B 100

0 0 100


Segment A Segment B 100

0 0 75

1996 1997

? Company’s share

of the

segment (%)


Size of the market

Company sales

Company share

1996

100.0

30.0

30.0%

1997

75.0

21.3

28.3%

25

12.5

17.5 35.0

25 12.5

35.0 8.8

50 50



Methodology for evaluation of product/market segments

1

Assess the

company’s

product offering

2

Evaluate product/

market alignment

3

Assess segment

importance

Input Output

• Study the

company’s and its

competitors’

product offerings

• Identity major

areas of

differentiation

• Match product

offerings to the

market segments

identified in

Module II

• Determine whether

the company’s

offerings are

appropriate to

serve their targeted

segments

• Assess the size of the

individual segments within

the overall market

• Evaluate the market shares

that each company posses

within each individual

segment and the overall

market

• Determine how the sizes of

the individual segments and

the companies’ shares within

each one are expected to

change

• Assess relative importance of

each segment to the company

• Understanding of

the client’s

product/market

positioning

• Relative

importance of

the various

segments to the

client

• Market

opportunities and

threats


• Trends analysis

• Size and growth of

the market

• Product/market

segmentation

• Strategic planning

framework

• Client

data/interviews


• Annual reports

• Analyst reports

• SEC filings*

• Trade journals




Product/market focus Evaluation of product/market segments Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• Studying trends affecting the market segmentation can be critical in identifying segment

attractiveness

• Relative importance of a segment is necessary for strategic planning and resource allocation as

investment and growth in a stagnant or shrinking segment may limit the growth of the company

• Reveals attractive segments

• Provides data to assess matching products to customers

• Helps prioritize product lines

• Identifies gaps in product offerings

• Does not look at miscellaneous factors affecting segment importance such as branding,

reputation, etc.

• Kotler, P. (1997); Marketing Management

Product/market focus Evaluation of product/market segments Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


An evaluation of the value chain and the underlying cost and margin drivers

should be an integral part of an overall company analysis

The value chain disaggregates a company into

its strategically important activities to

understand the behavior of costs and the

existing and potential sources of differentiation

Value chain

analysis

The cost and margin driver analysis provides

an identification of sources of competitive

advantage and therefore opportunities for profit

generation

Cost and

margin

driver

analysis


Introduction Overview of the value chain



Introduction















• 7S

• Benchmarking

• SWOT


The generic value chain divides the company into strategically distinct activities

PRIMARY ACTIVITIES

SUPPORT

ACTIVITIES

Inbound

logistics

Operations Outbound

logistics

Marketing

and sales

Service

Company infrastructure

Human resource management

Technology development

Procurement

Source: Porter, M.E. (1980); Competitive Advantage

A value chain analysis

breaks a company’s

business process into its

component steps. It

represents the stages

required to transform the

“raw material” into the

“final product”

Overview of the value chain Value chain analysis Description


The value chain of a company is embedded in a larger stream of activities

- the value system

Supplier Company Customer

Competitor

A

Competitor

B

1 3 2

4

5

1 Improve company’s operations through:

• Reorganization

• Inhouse/outsource activities

• Cost reductions 2 Identify opportunities to add

value to the customer

• Product/service differentiation

• Cost reductions to customers

5 Identify the competitors’ value

chain activities for benchmarking

purposes

• Sequence of activities

• Inhouse/outsource activities

• Cost structures

3 Identify suppliers’ cost

structures to increase the

value captured through

negotiations

4 Identify the linkages between

activities across the supply

chain for cooperation/

integration purposes

Source: A.T. Kearney; Porter, M.E. (1980); Competitive Advantage

The supply chain

value chain

The value system

Overview of the value chain Value chain analysis Description


A value chain analysis is a critical technique that examines how a company

competes

Source: Porter, M.E. (1980); Competitive Advantage

• Study the entire business process of a company

• Assign costs to given processes

• Determine the value generated by different processes

• Examine which parts are performing optimally and

which are not

– Cost

– Speed

– Efficiency

• Compare the above to competitors

A value chain analysis is performed to:

Overview of the value chain Value chain analysis Usage


An evaluation of the value chain can indicate a company’s present or potential

competitive advantages in its industry

• Activities associated with receiving, sourcing and disseminating inputs to be

used in the manufacture of the product, such as material handling,

warehousing, inventory control, vehicle scheduling, and returns to suppliers

Inbound logistics

• Activities associated with transforming inputs into the final product form,

such as machining, packaging, assembly, equipment maintenance, testing,

patenting and facility operations

Operations

• Activities associated with collecting, storing and physically distributing the

product to buyers, such as finished goods warehousing, material handling,

delivery vehicle operation, and order processing and scheduling

Outbound logistics

• Activities associated with providing a means by which buyers can purchase the

product and introducing them to do so, such as advertising, promotion, sales

force efforts, quoting, channel selection, channel relationships and pricing

Marketing and sales

• Activities associated with providing service to enhance or maintain the value

of the product, such as installation, repair, training, parts supply and product

adjustment

Service

• Company infrastructure consists of activities including general management,

planning, finance, accounting, legal, government affairs, and quality

management


• Human resource management consists of activities involved in the recruiting,

hiring, training, development and compensating of all types of personnel Human resource management

• Technology development consists of a range of activities that can be broadly

categorized into efforts to improve the products and the business process Technology development

Procurement

Primary

activities

Support

activities

Identifying value

creating activities

requires the

isolation of

activities that are

technologically and

strategically distinct

Source: Porter, M.E. (1979); The Value Chain

• Procurement refers to the function of purchasing inputs used in the

company's value chain, not the cost of purchased inputs themselves



Although value creating activities are the building blocks of competitive advantage,

the value chain is not a collection of independent activities but a system of

interdependent ones


• Linkages often reflect trade-offs among activities to achieve the same overall result

• A company must optimize such linkages to achieve competitive advantage

Optimization

• The ability to coordinate linkages often reduces costs or enhances differentiation (on-time delivery, for example, may require coordination of activities in operations, outbound logistics, and service)

Co-ordination

Linkages in the value chain are formed, because the performance or cost of a single activity can effect many other activities in the process. Relationships among activities can lead to competitive advantage in two ways:



3

The value chain of a copier manufacturer


The value chain is defined by dividing each generic category into discrete activities


Primary activities

Support activities

Inbound

logistics

Operations Outbound

logistics

Marketing

& Sales

Service

Human resource management

Technology development

Procurement


• Design of

automated

system

• Transpor-

tation

services

• Compo-

nent

design

• Design of

assembly

line

• Machine

design

• Testing

procedures

• Energy and

management

• Information

system

development

• Market

research

• Sales aids and

technical

literature

• Service

manual and

procedures

• Recruiting training • Recruiting • Recruiting

• Materials

• Energy

• Electrical/

electronic parts

• Other parts

• Suppliers

• Computer

services

• Transportation

services

• Media agency

• Suppliers

• Travel

subsistence

• Spare parts

• Travel and

subsistence

• Inbound

material

handling

• Inbound

inspection

• Components fabrication

• Assembly

• Fine tuning and testing

• Maintenance

• Facilities operation

• Order

processing

• Shipping

• Advertising

• Promotion

• Sales force

• Service reps.

• Spare parts

systems

Overview of the value chain Value chain analysis Example

The definition of

the correct

activities and their

proper level of

detail is key to the

successful

construction of a

value chain


3

Copypro focuses on the low cost/high volume segment of the industry

* Plain Paper Copies


The value chain can be used to describe areas of strength and weakness


Description of

strengths and

weaknesses in

support activities

Description of

strengths and

weaknesses in

primary activities

Innovation is ensured through a flexible organization, where new initiatives are supported by

top management and its allocation of resources

• Two groups

of parts:

Electric

parts and

mechanical

parts

• Dual

sourcing

• Long-term

supplier

relations

5% of PPC* revenue spent on R&D. Cross functional coordination to catch market signals

and target research in customer oriented areas. This is supported by corporate R&D in core

competency areas

Empowerment and involvement through quality circles. Help to ensure quality and continuous

improvement

• Factories in

Germany,

Japan and

USA

• Highly

automated to

reduce cost

and increase

flexibility

• JIT, Kaizen

and worker

involvement

• Wholly

owned

subsidiaries

• In Japan,

combination

of direct sales

and dealers.

In overseas

markets,

primarily

dealers

• Heavy

advertising in

overseas

markets

• Service

through own

subsidiary

and through

dealers

• Services

often

bundled in a

monthly “per

copy based”

price

Inbound Production Distribution Selling Service

Human resource

management

Technology

Procurement



3

Mapping of selected copier players’ apparent skills base


The differentiation advantage of the company in its value activities in comparison

to competitors can be mapped across the value chain


Map the value

chain

Skills level

High 5 Medium 3 Low 1

Client

Player A

Player B

Player C

Player D

3

3

5

1

2

5

5

3

2

1

2

1

1

5

5

5

3

3

5

1

3

5

5

5

5


Map the different

players’

performance and

differentiating

factors


A value chain can

be useful to

approximate

performance

figures and

determine which

should be explored

in greater depth


3

Mapping of Copypro’s cost structure


A value chain analysis provides an understanding of the company’s cost structure


Map the value

chain

Describe the costs

for each activity

relative to the total

cost incurred

Detail the costs for

each activity


3,300

10,000

3,500

1,000

1,200

1,000

18% 16%

41%

25%

Depreciation

Other cash

Labor

Raw material

Total

full

cost

33% 35% 10% 12% 10% 100%



3

Copypro must improve its production capabilities


A company’s relative cost position of its various value chain activities can be

assessed and compared to its competitors’ cost positions


Benchmarking the

value activities of a

company against its

competitors’

activities reveals

cost distinctions

and might lead to

insights into the

reasons for those

distinctions 33% 33% 33%

25% 25%

35%

20% 20% 10%

12% 12% 12%

10% 10% 10% Service

Selling

Distribution

Production

Inbound logistics

100% = 10,000 8,000 9,000

Competitor A Competitor B Client



Methodology for using a value chain analysis

1 Identify all of

the activities

performed

2 Categorize the

activities

3 Structure and

order the

activities

4 Define linkages

within and

across the value

chain

Input Output

• Determine which

activities are

actually performed

by the company

and which are

completed by

suppliers,

customers or other

third party

companies

• Divide the

activities into

primary and

supporting

categories

• Position the activities

within the value chain

framework

• Analyze and structure

the activities at the

appropriate level of

detail - break down

major activities into

their various sub-

activities

• Determine the

company’s cost

structure

• Define the linkages

among the various

primary and supporting

activities

• Assess the value

derived from each step

• Assess the importance

of these linkages and

whether they are

resulting in the desired

benefits


value chain to those of

its competitors

• Benchmarking

• Cost analysis

• Resources

analysis

• SWOT analysis

• Evaluation of

product/market

segments


• Supply chain

analysis

• Exit and entry

barriers analysis

• Client data/

interviews

• Annual reports


• Analyst reports

• SEC filings*

• Trade journals

• Benchmarking

studies




Overview of the value chain Value chain analysis Methodology


Conclusion

* See module II for information about the supply chain


Weaknesses

References

Key points

• Value chains are often specific to each product

• Drawing a value chain for the business unit might hide key differences among product value

chains

• Fifer, R.M. (1998); Cost Benchmarking Functions in the Value Chain; Planning Review May/June

• Normann, R. and Ramirez, R. (1993); From Value Chain to Value Constellation: Designing Interactive Strategy;

Harvard Business Review, July/August

• Porter, M.E. (1985); Competitive Advantage: Creating and Sustaining Superior Performance ,The Free Press

• Quinn, J.B. and Hilmer, F.G. (1994); Strategic Outsourcing; Sloan Management Review, Summer

• Rayport J.F., Sviokla J.J. (1995); Exploiting the Virtual Value Chain; Harvard Business Review,

November/December

• Reimann, B.C. (1998); Sustaining the Competitive Advantage; Planning Review, March/April

• The “how to compete” for a company

• Value chain (company level) should not be confused with the supply chain* (industry level).

• Often one can simulate the cost structure if “real” data is not available

• Extremely powerful technique for clients

• Defines the process of a company

• Reveals the value/cost of each step in the business

• Can be used to evaluate efficiency and effectiveness of each step in the business

• Through benchmarking, cost advantages/disadvantages can be defined

• Can be useful during a post-merger integration project to help identify the better processes

Strengths

Overview of the value chain Value chain analysis Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


An analysis of cost and margin drivers is essential to determining sources of

competitive advantage

The relative resource attractiveness

is determined by the analysis of the

cost drivers

Cost drivers

Profit


Superior growth and profitability

potential is determined by the

margin drivers

Margin drivers

Overview of the value chain Cost and margin drivers Description


Cost and margin drivers reveal interesting information about how a company can

optimize its functions

Critical mass

(economics of scale)

Technology

Complexity

(e.g. products/technologies/lot sizes)

Utilization

(shared resources)

Experience

Factor costs

Management effectiveness

Cost drivers

Profit

Sales force/service quality

Margin drivers

Customer mix

Customer retention

Perceived customer value

(application/quality/price)

Product mix

(hardware/projects/service)

Product innovation cycle

Examples

provided in the

following pages


Overview of the value chain Cost and margin drivers Usage


3

Identifying economics of scale is essential in determining cost drivers


Economies of scale might lead to points with a cost advantage

Unit cost

0

25

50

75

High end copiers

(high volume - high quality)

Medium copiers

(high volume - low quality)

Low end copiers

volume - low growth)

100

Number of units

* Structural drivers derive from a company’s choice about its underlying economic structure

** Executional drivers are those determinants of a company's cost position that hinge on its ability to “execute” successfully


Develop relationship

between driver and

costs (linear,

logarithmic, etc.)

Identify cost drivers

for each activity,

beginning with the

activities that result

in the highest costs

• Structural drivers*

• Executional

drivers**

Overview of the value chain Cost and margin drivers Example


3

Different technologies result in unit cost advantages at different volumes


Technology might be an important cost driver


No substantial

cost advantage

through

additional

volume

x 2x 3x

Type A

Type B

x 2x 3x

Volume

Unit cost

Economies

of scale

High volume

allows cost

advantage

when

technology B is

used

Technology A

results in cost

advantages at

lower volumes

while technology

B results in cost

advantages at

higher ones Technology

Type

P Q

R

R Q

P



3

It is essential for Copypro to determine and focus on its most profitable

customers


An important margin driver can be the customer mix - by focusing on specific

customers, the margins might be improved


The example shows

a company that

generates 80% of

its sales and 72%

of its gross profit

with only 14% of

its customers

14%

86%

80%

44%

72%

20%

56%

28%

Customer base

7,638

Sales

USD 97.7 mill.

Orders

22,335

Gross profit

USD 32.1 mill.

A

B



3

Customer profitability is a function of the length of a relationship

Source: Harvard Business Review

Customer retention is essential to improving customer profitability


Analysis has shown

that customer

retention leads to

higher profitability

0

Customer

acquisition cost

1 2 3 4 5 6 7

Profit from price

premium

Profit from referrals

Profit from reduced

operating costs

Profit from

increased

purchases and

higher balances

Base profit

Year

Customer profitability Company profile



Methodology for using a cost and margin driver analysis

1

Perform a cost

driver analysis

2

Perform a

margin driver

analysis

3

Identify relative

advantages/

weaknesses

Input Output

• Identify drivers for each

activity, beginning with the

activity that generates the

highest costs

• Evaluate the structural

drivers (scale, product line

complexity, scope of

operations, experience

effects and level of

technology)

• Evaluate the exceptional

drivers (TQM, capacity

utilization, and workforce

participation)

• Develop relationships between drivers and costs (linear, logarithmic, etc.)

• Identify drivers for each

activity

– Customer mix

– Customer retention

– Customer value

– Product mix

– Product innovation

cycle

– Service quality

• Benchmark drivers against competitors’ for each activity to identify where the client has a competitive advantage, such as greater cost control, improved value to customers, stronger ability to reconfigure the supply chain or where it demonstrates a weakness

• Relative strengths

and weakness as

compared to the

competition from a

cost and margin

perspective

• SWOT analysis


• Strategic group

analysis

• Supply chain analysis

• Evaluation of

product/market

segments

• Cost accounting data

• Client data/interviews

• Analyst reports

• SEC filings*

• Trade journals


• Benchmarking studies



Overview of the value chain Cost and margin drivers Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• Each activity may have more than one cost driver

• Selecting the appropriate cost driver is dependent on the situation and the decision being made

• Developing the relationship between cost and the driver requires significant amount of data

• In identifying relationships between costs and drivers, one can take two approaches

– Develop a hypothesis and then test it by collecting appropriate data. This approach is suitable

in situations where data is scarce and data collection is expensive (in time and cost)

– Obtain all data available and assess different relationships to see which is the most

significant, using PC based tools. This approach is suitable in situations where significant

amounts of data are already available. Knowledge of data mining techniques (EDS can help)

might be helpful here. Regression analysis is another option.

• Produces a truer measure of margins and costs

• Considers revenue generating operations as well as costs

• Considers all cost and margin drivers, not just volume

• External analysts will find it difficult to obtain the data about various activities and drivers unless

the individuals have significant industry experience and data

• Data collection might be quite difficult, especially with antiquated systems

• Shank, J.K. and Govindaraj, V. (1993); Strategic Cost Management

Overview of the value chain Cost and margin drivers Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


A company’s performance can be broken down into many components — we will

focus primarily on operating performance, financial performance and

shareholder value performance


A financial

analysis provides

the answers to

these questions

Operating performance

Financial performance

Shareholder value performance

Absolute Relative to

previous years

Relative to

competitors Performance indicators

What are the company’s operating margins?

How well does the company utilize its assets?

Is the company’s financial structure optimized?

How well has the company’s stock price performed?

Financial resources and performance Introduction


Financial data located in the income statement, the balance sheet and the cash

flow statement provide the foundation to develop financial and strategic insights

about a company’s performance


Income

statement

Measures income flows

Revenues – expenses = income

Balance

sheet

Measures stocks at a “snap shot” in time

Assets – liabilities = shareholder equity

Cash flow

statement

Measures cash flows

Reflects changes in available cash

Financial

and strategic insights



The income statement contains both operational and financial elements

Revenues Costs of Goods

Sold

Operating

Expenses

EBIT or

Operating

Income

Interest

Expense

Corpo-

ration

tax

Net

Income

Dividends Retained

Earnings

Gross

Profit




A overview of a company’s balance sheet

Long-Term

Liabilities

Current Liabilities

Shareholder’s

Equity

Underlying business

structure designed to create

future cash flows

Financing structure

designed to pay for assets

Fixed

Assets

Current

Assets




Major components of the balance sheet

Current Assets

Cash and Marketable Securities

Accounts Receivable

Inventory

Other Current Assets

Total Current Assets

Fixed Assets

Property, Plant and Equipment (PP&E)

(Accumulated Depreciation)

Net PP&E

Intangibles

Goodwill

Advertising

Patents

Research and Development

Total Fixed Assets

Total Assets

Current Liabilities

Accounts Payable

Short -term Debt

Current Maturities of Long-Term debt

Other Current Liabilities

Total Current Liabilities

Long-Term Liabilities

Long-Term Debt

Other Long-Term Liabilities

Total Long-Term Liabilities

Total Shareholder’s Equity

Total Liabilities and Shareholder’s Equity

Shareholder’s Equity

Preferred Stock

Common Stock

Additional Paid-in-Capital

(Treasury Stock)

Retained Earnings




Cash flow from operations reflects changes in the income statement and balance

sheet accounts over a given time period

Net Income

Increases in

Working

Capital*

Investments in

Fixed Assets

Increase in

Debt Cash Flow

Income

Statement

Balance

Sheet

Cash Flow

statement

Operations Investments Debt

Financing

Equity

Financing

Increase in

Equity

Losses

Decreases in

Working

Capital

Sales of Fixed

Assets

Pay Back Debt Buy Back

Equity

So

urc

es o

f ca

sh

Use

s of

cash

=

Depreciation

Working capital: the amount of additional funding required by a company to operate its fixed assets, e.g., money to pay staff and bills while waiting for customers to

pay. Working capital is equal to capital employed less fixed assets


*




Introduction















• 7S

• Benchmarking

• SWOT


An assessment of a company’s financial development over time provides an

understanding of its rate of sales growth and present and historical operating

margins, financial strength and ability to satisfy its shareholders’ return

requirements


Analyze

• Income statement

• Balance sheet

• Cash flow

• Shareholder value

Financial resources and performance Development over time Description


A development over time analysis can reveal the financial strategies that

management has pursued over the company’s history and can provide an

indication of future financial performance


Income

Statement

Measures income flow for a period of time (e.g. one year)

• Revenues

• Operating profit

• Net income

• Revenue mix by product, geography and fiscal quarter

Balance Sheet

Statement of a company’s assets and the claims on those assets at a given

point in time

• Assets

• Liabilities

• Equity

Cash Flow

The change in a company’s cash balance during a particular accounting

period

• Retained earnings

• Net investment in fixed assets (capital expenditures)

• Change in working capital

• Cash flow

Shareholder Value Maximization of shareholder value is often an external yardstick for

measuring financial performance (e.g. share price)

Financial resources and performance Development over time Usage


3

Although Copycorp’s top line growth has been modest, its bottom line

growth has been substantial Yen Billions


The income statement indicates the company’s size and its rates of revenue and

profit growth


Revenues

Net income

CAGR=

53.9%

1,836 1,933

2,165 2,558

2,761

118

94

55

31 21

CAGR=

10.7%

1993 1994 1995 1996 1997

Indicate currency

Choose relevant

period for analysis

Calculate CAGR

(see definition in

Module II)

Financial resources and performance Development over time Example


3

Optical and other products have become Copycorp’s fastest growing

business segment, while business machines represent the company’s

largest segment Percent, Yen Bill.


An assessment of a company’s development over time can include a historical

review of its business and product mix


1993 1994 1995 1996 1997

The development

in business mix

identifies areas of

high growth as

well as problem

areas

83.3% 84.1% 84.8% 84.0% 83.6%

9.0% 9.9% 8.5% 8.2% 8.4%

6.7% 6.0% 7.8% 8.0% 7.7%

+6.2%

-9.6%

+17.6%

+5.3%

+10.9%

+8.0%

+30,4

+12.0

+17.6%

+21.0%

+21.2%

+18.2%

+7.5%

+15.6%

+3.9%

+7.9%

Optical and other

products

Cameras

Business machines

100% = 1,836 1,933 2,165 2,558 2,761

CAGR = 10.5%

CAGR = 8.1%

CAGR = 17.9%

CAGR = 10.7%



3

Copycorp’s growth in Japan and the Americas has dropped to single

digit rates Percent, Yen Bill.


A development over time assessment can include an evaluation of the company’s

geographical business mix over time


1993 1994 1995 1996 1997

A rapid increase in

revenue can be

explained by

superior

performance in a

geographic

segment or

segments

+11.7%

-1.3%

-3.5%

+5.3%

+13.0%

+17.4%

+14.9%

+12.0

+15.3%

+15.6%

+21.1%

+18.2%

+3.6%

+10.3%

+13.3%

+7.9%

Other areas

Europe

Japan

100% = 1,836 1,933 2,165 2,558 2,761

+7.3% +5.8% +22.8% +8.9% 32.3% 32.0% 32.6% 30.8% 32.0%

31.1% 31.0% 32.9% 33.2% 32.4%

26.8% 28.6% 28.1% 27.5% 28.1%

8.5% 8.1% 7.9% 7.7% 8.4%

Americas CAGR = 11.0%

CAGR = 10.8%

CAGR = 10.3%

CAGR = 11.1%

CAGR = 10.7%



3

Copycorp has demonstrated moderate growth in assets and shareholder

equity over the past four years Yen Bill.


An analysis of the balance sheet’s key components


Asset and

shareholder equity

levels indicate the

company’s

investment in its

future

2,282 2,300

2,519

2,746

3,001

1993 1994 1995 1996 1997

Total assets

CAGR=

7.1%

721 781 850

982

1993 1994 1995 1996 1997

Shareholder equity

1,099

CAGR=

11.1%



3

Copycorp’s cash flow has declined significantly in 1998


An analysis of the company’s cash flow development


Cash income, net

investments in

fixed assets,

change in working

capital and cash

flow are normally

obtained from the

cash flow

statement

Cash income

Net investment in fixed assets

94 95 96 97 98

94 95 96 97 98

100 110

150 170

160

30 40 45

60 60

Change in working capital

Cash flow

94 95 96 97 98

94 95 96 97 98

20 30

50

75

100

70

CAGR=

12.5%

CAGR=

18.9%

CAGR=

8.8%

CAGR=

10.7%

30 10

30

40



An evaluation of a stock can generate insights into how well a company has

performed relative to its peers as well as provide information on investors’

perception of future growth and profitability

0

20

40

60

80

100

120

26-0

3-9

3

26-0

6-9

3

26-0

9-9

3

26-1

2-9

3

26-0

3-9

4

26-0

6-9

4

26-0

9-9

4

26-1

2-9

4

26-0

3-9

5

26-0

6-9

5

26-0

9-9

5

26-1

2-9

5

26-0

3-9

6

26-0

6-9

6

26-0

9-9

6

26-1

2-9

6

26-0

3-9

7

26-0

6-9

7

26-0

9-9

7

26-1

2-9

7

26-0

3-9

8

Copycat has outperformed Copycorp over the past five years

3 Source: A.T. Kearney


Benchmark a

company’s share

price performance

against the

performance of its

closest

competitor(s) stock

Copycat

Copycorp



Methodology for using development over time

1

Identify most

relevant

financial data

2

Calculate

growth rates

3

Compare to

competitors

Input Output

• Obtain data for

years considered to

be relevant

• Identify revenue

generated within

the overall market

and on a segment

by segment basis

• Projected data is

useful to forecast

expected

performance

• Evaluate the

development of the

client against the

market trends

• Compare the

company’s

performance to

that of its

competitors and

account for

discrepancies

• Benchmarking

studies

• Performance

analysis

• Financial trends


• Evaluation of

product/market

segments

• Cost and margin

driver analysis

• Client

data/interviews

• Analyst reports

• SEC filings*

• Calculate the CAGR or

annual growth rate

• Determine the drivers of

growth and reasons for

changes in performance



Financial resources and performance Development over time Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• Eliminate extraordinary, non-recurring items to arrive at true financial estimates

• Choose appropriate time periods when calculating CAGR

• Match financial highlights against a chronology of company initiatives to realize the reason for a

particular trend in financial strength or weakness

• Illustrates the company’s present financial strength relative to its financial health during other

phases of its history

• Highlights whether the company is improving or declining in its operating performance

• Can illustrate changes occurring in the industry that have not been fully uncovered

• Finances cannot tell an entire story about a company. Data on trends and changes in the industry

must also be assessed to develop a complete picture of the company

Financial resources and performance Development over time Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


The essence of ratio analysis is taking relevant financial data and using it to gain

insights into the company’s financial performance


• Financial ratios are the fundamental tools of financial analysis

• Determine which ratios are relevant based upon specific objectives

and circumstances

• Break down and manipulate financial data to provide information

about performance or to locate areas that require further

investigation

• Ratio analysis gives some indication of the levers to pull to improve

the company’s performance

• Ratio analysis is based on a knowledge of financial accounting, and

performed on the company’s financial statements

Financial resources and performance Financial ratios Description


A calculation of profitability, asset utilization and financial leverage ratios can

result in key insights about a company’s operations

Profitability

Asset turnover

Financial leverage

• Measure of the company’s ability to turn sales into (accounting) profits

• Measure of the company’s operational asset utilization

• Measure of the company’s use of debt in its capital structure




Ratio ABBR Equation Definition What Is It?

Gross Margin Gross Margin

Sales – COGS Gross profit as % of sales Sales

Operating Margin EBIT Margin

EBIT Operating income as % of sales Sales

EBT Margin EBT Margin

EBT Earnings before tax as % of sales Sales

Return on Sales (ROS)/Net Income Margin

Net Income Margin

Net Income Net income as % of sales Sales

Seven widely used profitability ratios

Percent of income after the cost of goods sold are paid for

Percent of income after the cost of goods sold and operating expenses are paid for

Percent of income after the cost of goods sold, operating expenses and interest expense are paid for

Percent of income after all expenses are paid for, including taxes

ROI EBIT % Return on capital investment Average Total Book Capital

ROE Net Income % Return on invested equity Average Book equity

Profitability of the business relative to the amount of equity invested

Return on Equity

Return on Investment

Focus on next slides

Profitability of the business relative to the amount of capital invested

ROA Net Income % Return on invested assets Average Assets

Return on Assets Profitability of the business relative to the amount of assets invested




Return on assets provides information about how efficiently a company utilizes its

assets to generate profit

• Cost control

– Wages

– Purchases

– Overhead

• Capacity utilization

– Higher utilization rates

– Capacity reductions

• Revenue increases

– Pricing

– Product mix

– Volumes

• Working capital measurement

– Accounts receivable

– Inventories

– (Accounts payable)

Improvement opportunities

Net income

Average assets

Return on assets

(ROA)

Net income

Sales

Return on sales

Sales

Average assets

Asset turnover

= X


Financial resources and performance Financial ratios Usage


Net income

Average book equity

Return on equity

(ROE)

Net income

Sales

Return on sales

Return on equity measures performance from the shareholders perspective

= X Sales

Average assets

Asset turnover

X Average assets

Average book equity

Financial leverage




Inventory Turns COGS # Times inventory

sold in period Average Inventory

Days Inventory Average Inventory # Days of inventory on Balance Sheet COGS

Accounts Receivable Turns

A/R Turns

Sales # Times accounts receivable sold in period

Average Accounts Receivable

Days Accounts Receivable

Average Accounts Receivable # Days accounts receivable on Balance

Sheet Sales

Accounts Payable Turns

A/P Turns

COGS # Times accounts

payable used in period Average Accounts Payable

Days accounts payable

Average Accounts Payable # Days accounts payable on Balance Sheet

COGS

Fixed Asset Turnover

Sales # Times fixed asset

value is sold in period Average Net Fixed Assets

Eight widely used measures of asset utilization

Days A/R

Days A/P

Measures the rate of turnover, or the number of times inventory stocks are replaced over the period

The number of days of inventory stocks that the company holds on its balance sheet

Measures the rate of turnover, or the number of times accounts receivable are replaced over the period

The number of days of accounts receivable that the company holds on its Balance Sheet

Measures the rate of turnover, or the number of times accounts payable are replaced over the period

Measures the rate of turnover, or the number of times fixed assets produce their value in revenues

The number of days of accounts payable that the company holds on its balance sheet

x 360

x 360

x 360

Focus on next slide

Asset Turnover Sales # Times asset value

sold in period Average Assets

Measures the rate of turnover, or the number of times assets produce their value in revenues

Ratio ABBR Equation Definition What it is?




Asset turnover is the revenue produced by the assets of the business — a measure

of the company’s operational asset utilization

Asset

Turnover

Sales

Average Assets =

Sales

Average cash

balance

=

Sales

Average accounts

receivable

=

Cost of goods sold

Average inventory =

(1) Current Asset Turnover =

(2) Net Fixed Asset Turnover = Sales

Average

Net PP&E

Sales

Average

Current Assets

Notes:


Net Fixed(2)

Asset

Turnover

Current Asset(1)

Turnover

Accounts

Receivable

Turnover

Inventory

Turnover

Cash

Turnover



Liq

uid

ity

D

ebt

Co

ver

ag

e

Current Ratio End Current Assets % Current assets to current liabilities End Current Liabilities

Quick Ratio End Liquid Assets % Liquid assets to current liabilities End Current Liabilities

Cash Flow Coverage EBIT + Depreciation

# x EBITDA covers interest

Interest Expense

Liquidity and debt coverage ratios

Measures the size of the working capital commitment relative to current liabilities

Measures the ability of the firm to meet its obligations in the current period — a liquidity reference

Measures the ability of the firm to meet the interest obligations of outstanding debt. Banks often establish covenents based on this and other similar ratios

Focus on next slide

Leverage End Debt % Debt to

total capital Book Debt and Equity

Relative measure of the firm’s use of debt in the capital structure — the definition of leverage is different in both the equity and capital approaches to the DuPont equation

Ratio Equation Definition What is it?




Financial leverage measures the assets controlled by the book capital invested in

the business

Financial

Leverage

NIBLs ($)(2)

Debt ($)

Other NIBLs

Turnover(3)

Accounts

Payable

Turnover(4)

Book

Equity ($)

(1) Total Assets

Total Capital

Average Assets(1)

Average Capital

Short Term

Debt ($)

Long Term

Debt ($)

Preferred

Stock ($)

= NIBLs + Debt + Equity

Debt + Equity =

Debt + Equity

Debt + Equity +

NIBLs

Debt + Equity =

NIBLs

Debt + Equity 1 +

(2) NIBLs = Non-Interest Bearing Liabilities = Accounts Payable + Other NIBLs as disclosed in the notes to financial statements

(4) Accounts Payable Turnover = COGS

Average Accounts

Payable

=

(3) Other NIBLs Turnover = Revenue

Other NIBLs

Notes:




The fully integrated DuPont equation provides an analytical framework to assess

the company’s operating and financing decisions

ROI %

EBIT

Margin

Gross

Margin

Operational

Expense

Extra

Items

Sales

COGS %

Price

Unit

Volume

Asset

Turnover

Current Asset

Turnover

Net Fixed

Asset Turnover

Other Asset

Turnover

Cash

Turnover

Accounts Receivable Turnover

Inventory

Turnover

Financial

Leverage

NIBLs(1)

Debt

Book

Equity

Other NIBLs

Turnover

Accounts Payable

Turnover

Short-Term

Debt

Long-Term

Debt

Preferred

Stock

Note: (1) NIBLS = Accounts Payable + Other NIBLs as disclosed in the notes to financial statements

Total Assets

Total Capital = 1 +

NIBLs

Debt + Equity = ( )




3

Copycat’s ROE and ROI has increased significantly compared to Copycorp’s


ROI and ROE are key ratios in a financial analysis


0

2

4

6

8

10

12

14

16

1992 1993 1994 1995 1996

Copycorp

Copycat

Percent

Return on investment (ROI)

-10

-5

0

5

10

15

20

25

30

1992 1993 1994 1995 1996

Copycorp

Copycat

Percent

Return on equity (ROE)

Benchmark key

ratios for the client

against competitors’

ratios

Financial resources and performance Financial ratios Example


3

Copycat’s ROI increase was mainly driven by its improvement in asset

turnover


Return on investment can be further analyzed by evaluating the net margin and

asset turnover figures


0

2

4

6

8

10

12

14

16

18

1992 1993 1994 1995 1996

Copycorp

Copycat

Percent

Net margin

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1992 1993 1994 1995 1996

Copycorp

Copycat

Percent

Asset turnover

Net margin

multiplied by asset

turnover equals

ROI



3

Copycat’s improvement in performance can be explained by an increased

return on assets


Gross margin and return on assets are key ratios which can indicate a margin

improvement ability and the company’s ability to create wealth


0

10

20

30

40

50

60

70

80

1994 1995 1996

Percent

Gross margin

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1992 1993 1994 1995 1996

Percent

Return on assets Copycorp

Copycat

Copycorp

Copycat

Gross margin

indicates the percent

of sales after the

cost of goods sold

has been deducted

Return on assets

indicates the

profitability of the

business relative to

the amount of

assets invested



Methodology for using ratio analysis

1

Obtain

information

2

Calculate key

ratios

3

Compare against

competitors’

ratios

Input Output

• Use the income statement,

balance sheet and cash

flow statement from

annual reports to obtain

the data required to

calculate the ratios for the

company as a whole

• Access databases such as

Excel, Bloomberg,

Datastream and World

Equities to obtain

supporting data and

information

• Obtain information on

divisions from

management

• Calculate the most

relevant ratios and

margins, such as

profitability, asset

turnover and financial

leverage ratios

• The ratios of

importance will vary

by industry

• Assess the capital

structure, operating

efficiency, free cash

flow and returns to

shareholders

• Compare the ratios to

those of key

competitors and

determine the reasons

for discrepancies

• Cost and margin

drivers

• Development over

time

• Client

data/interviews

• Analyst reports

• Annual reports

• SEC filings*

• Performance

analysis

• Reasons for

improvements or

deteriorations in

performance

• Ability to launch

strategic initiatives

and defend against

competitor actions



Financial resources and performance Financial ratios Methodology


Conclusion


• Hard to find “pure plays”, i.e. it is hard to compare companies unless they have a very similar business

portfolio (apples must be compared to applies)

• Operating expense (%): exclude extraordinary charges (e.g., restructuring charge); exclude depreciation

• Interest expense (%): use gross interest expense, not net of interest income

• Income tax (%): use provision for income taxes; Exclude deferred taxes

• Balance sheet: long-term debt includes all interest bearing liabilities (e.g., post retirement benefits and

other long-term liabilities); capital = total assets less BIBLs; book equity = total shareholder equity less

preferred stock

• Atkinson, A.A.; Banker R.D.; Kaplan, R.S.; and Young S.M. (1997); Management Accounting

• Drury, C. (1991); Management Accounting for Business Decisions

• Grant, R.M. (1998); Contemporary Strategy Analysis, 3 ed.

• Shank, J.K. and Govindarajan, V. (1993); Strategic Cost Management

• Wilson, R.M.S (1997); Strategic Cost Management

• Young, S.M. (1993); Readings in Management Accounting

Key points

Weaknesses

References

Strengths • Key ratios will define areas of concern and make it possible to direct analyses

• Be careful that your definitions of ratios match the client’s definitions

Financial resources and performance Financial ratios Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


The company assessment builds on three areas


Context

SWOT

7S

Benchmarking

Client Competitor

Company analysis frameworks Introduction



Introduction















• 7S

• Benchmarking

• SWOT


The 7S framework provides a basis for understanding and designing organizations

The 7S framework asserts that the effectiveness of

an organization is the consequence of the

relationships between:

• Strategy

• Shared values

• Skills

• Structure

• Systems

• Staff

• Style

Definition

Source: A.T. Kearney; Waterman, R.; Peters,T.; and Phillips, J. (1980); Structure Is Not Organization

Company analysis frameworks 7S Description


There are seven factors of organizational effectiveness

Strategy

• A coherent set of actions aimed

at gaining a sustainable

advantage over competition

Structure

• The division of

responsibility and control

• How decisions are made

• How communication flows

Systems

• The processes and

procedures through

which things get done

from day to day

Staff

• The people in the

organization, considered

in terms of corporate

demographics, not

individual personalities

Style

• How the management leads

– Controlling

– Analyzing

– Promoting

– Supporting

Skills

• Capabilities possessed by the

organization as a whole as

distinct from those of individuals

Shared values

• Those ideas of what is right and

desirable which are typical of the

organization and common to

most of its members

Source: Waterman, R.; Peters T.; and Phillips, J. (1980); Structure Is Not Organization

Structure

Systems

Style

Staff

Skills

Strategy

Shared

values

Company analysis frameworks 7S Description


The 7S framework can be presented as an intertwined matrix or as a hierarchical

model

Shared

values

Source: Waterman, R.; Peters T.; and Phillips, J. (1980); Structure Is Not Organization

Shared values

Strategy

Skills

Structure Systems Staff Style

Emphasizes the interaction of all

of the seven characteristics

Emphasizes a hierarchical

structure of the seven

characteristics

Strategy Systems

Style Skills

Staff

Structure

Company analysis frameworks 7S Usage


3

Organizational analysis based on findings from interviews


A 7S analysis provides a concise familiarization with a company’s culture as well as

its organizational strengths and weaknesses


• Functional with little tradition for effective cross-border cooperation

• BU specific activities handled through duplication

• Look at effective MIS with adequate and timely planning and follow-up information

• Technical and product oriented

• Little formal business management background

• Lack of time spent on follow-up and lessons learned

• Highly operational and hands-on

• “Company XX” is a great place to work”

• “We are entrepreneurs – we are good at getting things started”

• “We are willing to take risks”

• Lack of total overall planning for the group

• Well established and well distributed skills base

• Solid operating base (with a potential for trimming rather than a need for restructuring)

Shared values

Strategy

Skills

Structure Systems Staff Style

Through the 7S

framework, a

thorough overview

of an organization’s

potential strengths

and weaknesses is

established

Company analysis frameworks 7S Example


Methodology for using a 7S organizational analysis

Input Output


• Research the

company’s policies,

philosophies, history

and development

• Perform interviews

across the organization

• Investigate the 7S’s as

they actually exist in

practice within the

company

• Create a 7S analysis,

assessing the details of

the organizational

characteristics

• Define causal linkages

between the 7S’s

• A thorough

understanding of

the organization

• An understanding

of how to

facilitate change

• Company

data/interviews

• Overview of the

value chain

• Purpose of the

organization

• Benchmarking

• Stakeholder

analysis

1

Research the

company

2

Describe the

7S’s

3

Evaluate

strengths and

weaknesses

• Synthesize findings

into conclusions about

organization’s

strengths and

weaknesses

• Identify areas of

particular importance

for future focus

Company analysis frameworks 7S Methodology


Conclusion


Key points

Weaknesses

References

Strengths

• Systems are seen as perhaps the most powerful characteristic, and the one that can be modified

without disrupting the organization by changing the structure

• The main assertion is that effective organizational change is really brought about via the relationships

between these 7S’s

• Demonstrates the dependent relationships between the 7S’s

• Useful in characterizing a company

• Waterman, R; Peters, T.; and Phillips, J. (1980); Structure Is Not Organization; Business

Horizon, June

Company analysis frameworks 7S Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


Benchmarking is the process of comparing areas of a company against one or

several other companies which are recognized as representing the best practice in

those same designated areas


A.T. Kearney’s definition

Benchmarking is a process of measuring performance relative

to competitors or other companies and identifying the key

business practices which lead to the most productive and

effective operations

Company analysis frameworks Benchmarking Description


There are two types of benchmarking which can be used in combination


Examples of areas of

benchmarking analysis

• Functional

• Process

• Issue specific

• Measuring

against the best

direct competitor

• Learning from the best

across industries

Definition:

Purpose:

Analyses:

Dual

benchmarking

“Traditional”

benchmarking

“Best

practice”

benchmarking

• Determine

relative purpose

• Trigger innovative

thinking and activating

imagination

Company analysis frameworks Benchmarking Description


Benchmarking helps to identify the core competencies of the company and the

resources needed by the company to achieve its objectives

Capabilities critical for

strategic advantage are

not known

• Identify competencies of the company

• Determine in which dimensions companies that are successful in

the industry excel

• Conduct comprehensive benchmarking for new strategy

formulation

Capabilities critical for

strategic advantage are

known

• Benchmark across the strategic dimensions and capabilities (1)

against companies in the same industry to compare against the

competition or (2) against companies that represent the “best-

practice” in other industries

• Conduct strategic gap analysis


Company analysis frameworks Benchmarking Usage


Why companies use benchmarking?

Gain strategic advantage

Understand relative (cost) position

Improve performance

Increase rate of organizational

learning

• Helps companies to focus on capabilities critical to building

strategic advantage by understanding the key success

factors in the industry and relative competitive position of

the company

• Reveals a company’s relative (cost) position and indicates

opportunities for improvement

• Illustrates alternative methods to improve operational

efficiency and product design. Helps to define the way to

become a “leading” company by highlighting the profiles of

the winners and losers

• Brings new ideas into the company, facilitates experience

sharing, and stimulates thinking "out of the box"


Objective Benchmarking's role

Company analysis frameworks Benchmarking Usage


3

Company X must aggressively lower its cost structures to become more

competitive


Functional benchmarking considers competence/performance in a particular area

within an organization


Cost benchmarking

Today Cost level

required

Target

level

14

20

16

31

22

50

21

49

18

21

14

20

10

15

12

49

21

Company Competitor A Best practice

27

13

10

6

180

153

126

Cost

benchmarking is

a common form

of functional

benchmarking

“Best practice”

comparisons might

be a measurement

across industries or

within the same

industry

A

B

C

D

E

F

G

Company analysis frameworks Benchmarking Example


3

Process benchmarking enables the identification of process-

related potential for improvement, based on standardized

process definitions


Process benchmarking compares linkages within the organization - how things

work together


Customer

Service

Customer

Order

Processing

Supplier

Order

Processing

Warehousing

and

Distribution

Product

Receipt by

Customer

Customer

Order

Start of process Sub Processes End of process

Different

business

processes can be

benchmarked for

efficiency,

organization,

effectiveness,

etc.

Skill level

High 5 Medium 3 Low 1

Client

Player A

Player B

Player C

Player D

3

3

5

1

2

5

5

3

2

1

2

1

1

5

5

5

3

3

5

1

3

5

5

5

5

3

3

5

1

2



3

The client lags behind its competitors in the areas of technology, order

processing, service, price, and employee skills


General issue-driven benchmarking considers various items deemed important for

comparison


Particular issues of

importance can be

benchmarked

Such a gap analysis

illustrates

differences in

performance

Customer's evaluation of Client

Customer's evaluation of competitors

Technology

Quality

Order processing

Service

Price

Employee skills

Internationality

Image

Achievement

Advertising

Critical

success factor 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1

Weight B A C D

Competitor



3

Competitor ratings


General issue-driven benchmarking considers various items deemed important for

comparison (cont’d)


By benchmarking

particular issues,

players can be

ranked in terms of

performance

The best performer

is identified and a

more thorough

analysis against this

competitor can be

conducted

Key

players

Total

score

Overall

ranking Technical

Know-how

Product

Know-how

Business

Know-how

Areas for powerful performance

Low cost producer

Product focus

Channel control

Performance Power

Cost Premium Revenue

7

9

1

3

6

2

10

4

8

5

9.4

9.1

12.5

10.6

9.5

11.5

8.5

10.5

9.3

10.0

A

B

C

D

E

F

G

H

I

Client



Methodology for using benchmarking

Output

• Improved

understanding

of industry

players

• Understanding

of competitive

situation

• Determination

of areas that

require

improvement

Input

• Key success

factors


• Value chain

• 7S

• More depending

on the study


• Choose between

– Dual

– Traditional

– “Best practice”

• Choose between

comprehensive or

single-dimensional

benchmarking

• For single-dimensional

benchmarking choose

between

– Functional

– Process

– Issue driven

Determine

benchmarking

approach and

criteria

Gather internal

data for

comparison

Identify the

type of

benchmarking

to be

performed

Gather external

information

Analyze data

and

summarize

findings

Derive

company

specific goals

• Identify areas

under

consideration

• Assemble data

from within

the

organization

• For traditional

benchmarking,

identify industry

leaders

• For “best practice”

benchmarking,

identify the issue

of interest and

choose the leader,

independent of

industry

• Sources can include

– Supplier interviews

– Experts

– Public databases

– A.T. Consulting

databases

– Financial statements

– Competitor

interviews

– Customer surveys

• Choose mode of

presentation

• Define goals with

respect to

opportunities and

threats and the

purpose of the

organization

1 2 3 4 5 6

Company analysis frameworks Benchmarking Methodology


Conclusion


Key points

Weaknesses

References

Strengths • A.T. Consultinghas a wealth of benchmarking databases (contact IRC)

• Provides insight and a new perspective towards competitors

• Provides new targets

• Illuminates areas requiring focus as well as new opportunity areas

• Breaks down “arrogance” of companies

• Company can become defensive

• Study can be used as a delaying mechanism

• Not driven by results

• Spendolini, M.J. (1992); The Benchmarking Book

• A.T. Consultinghas a wealth of benchmarking databases (contact IRC)

• Many aspects of a company can be benchmarked

Company analysis frameworks Benchmarking Conclusion



Introduction















• 7S

• Benchmarking

• SWOT


The SWOT analysis refers to the internal strengths and weaknesses of the

organization and the opportunities and threats it faces from the external

environment

Strengths

Internal environment

External environment


Only by knowing and

capitalizing on its internal

strengths and weaknesses,

can the company effectively

exploit opportunities and

seek to neutralize threats in

its external environment

Weak-

nesses

Opportu-

nities Threats

Company analysis frameworks SWOT Description


The SWOT analysis identifies the competencies and development needs of the

client with respect to the threats and opportunities in the market place

Strengths Weaknesses

• …

• …

• ...

• …

• …

• ...

Opportunities Threats

• …

• …

• ...

• …

• …

• ...

What are the company's

core competencies?

Where does the company

have a competitive

edge?

In what areas does the

company lag behind?

What are the company’s

development needs?

What trends or

developments would

lead to sales or profit

deterioration in the

absence of defensive

action?

What opportunities exist

where the company can

perform profitably?


Company analysis frameworks SWOT Description


3

Assessment of strategic challenges faced by a company in the cordless

telephone industry


It is essential to synthesize the information of the SWOT analysis

Note: OEM refers to original equipment manufacturer


•High-growth in Asia/ Pacific and Latin America

•OEMs divesting specific capabilities

•Growth potential related to certain products

•Convergence

Opportunities

•Poor delivery performance against commitments

•Not able to deal with production volume variations

•Long development lead-times and time-to-volume

• Inadequate relationships with subcontractors and distributors

Weaknesses

1. Enhance global business processes

2. Global marketing/sales focus

3. Leverage existing product competencies

Strategic challenges

•OEMs increasingly outsourcing production to subcontractors

•Distributors gaining power •Capacity flexibility required •Smaller, more flexible and lower cost competitors

Threats

•Largest supplier with broad offering

•Technology and quality leader •Substantial R&D capabilities

Strengths

The “so what” of a

SWOT analysis is

that it illuminates

the strategic

challenges the

company faces -

both internally and

externally

Company analysis frameworks SWOT Example

The SWOT

analysis is an

excellent chart to

hand-off to clients

for them to review

and complete. An

evaluation of a

client-completed

SWOT can lead to

insights into the

client’s beliefs

about its company

and industry


Methodology for using the SWOT analysis

1

Define SWOT

2

Rank according to priority

3

Determine strategic implications

Input Output

• Determine strengths and

weaknesses within the

company’s internal processes

– Marketing

– Manufacturing

– Organization

– Strategy

– Finance

• Determine opportunities and

threats in the macro

environment

– Demographic

– Economic

– Technological

– Political

– Social

– Cultural

• Determine opportunities and

threats in the micro

environment

– Customers

– Competitors

– Distribution channels

– Suppliers

• Evaluate each of the SWOT

elements

– Strengths: Determine

importance and ability

to exceed

– Weaknesses: Determine

development needs

– Opportunities:

Determine attractiveness

and probability of

success

– Threats: Determine

seriousness and

probability of

occurrence

• Synthesize the

components of the SWOT

analysis into a set of

coherent strategic

challenges facing the

company

• Client data/

interviews

• Annual reports

• Industry reports

• Analysts reports

• Value chain

• Benchmarking

• Product/market

segmentation

• Execution capacity

of the organization

• 7S

• Organizational

development

• Identification of

strategic

implications for

the business unit

and the

organization’s

development

Company analysis frameworks SWOT Methodology



Conclusion


Key points

Weaknesses

References

Strengths

• The SWOT analysis should lead to some conclusions about the challenges the company faces

• A SWOT analysis for a speculative business will contain many opportunities and threats,

whereas a SWOT analysis for a mature business should indicate fewer threats and opportunities

• Provides an overview of the strengths and weaknesses as well as the opportunities and threats

facing the client, in a concise manner

• May not always convey the entire message or explanation

• The SWOT analysis can easily be turned into a one-time-exercise, providing a snap-shot, rather

than being conducted periodically

• Gross et. al (1996); Business Marketing

• Kotler, P. (1997); Marketing Management

Company analysis frameworks SWOT Conclusion

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