Internal Analysis Lecture 4
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Transcript of Internal Analysis Lecture 4
7/27/2019 Internal Analysis Lecture 4
http://slidepdf.com/reader/full/internal-analysis-lecture-4 1/25
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Internal Analysis
7/27/2019 Internal Analysis Lecture 4
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Lecture Topics
• Purpose of Internal Analysis
• Competitive Advantage and Core
Competence
• Value Chain
• Financial Analysis
• Combining Internal and External
Analyses
7/27/2019 Internal Analysis Lecture 4
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Purpose of Internal Analysis
• An organization’s future successdepends on its own internal conditions
as well as external conditions
• Managers need to be able to identify – Strengths that the company can relay on in
order to compete
– Weaknesses that need to be corrected or minimized as competitive factors
7/27/2019 Internal Analysis Lecture 4
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Competitive Advantage
• The collection of factors that sets a
company apart from its competitors
and gives it a unique position in themarket
• Means to add value for stakeholders
• Focus especially on adding value for customers
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Core Competence
A unique set of lasting capabilities thata company relies on to achieve
competitive advantage and add value
• Innovation• Efficiency
• Customer Responsiveness
• Quality
• Special Expertise
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Value Chain
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Value Chain Interpretation
• Represents a company or any organization
• Simplified illustration of all activities that an
organization must perform
• Framework for analyzing a company’s
strengths and weaknesses
• Margin represents profit- expand margin by
– Being able to charge a higher price
– Operating at a lower cost within the Value Chain
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Primary Activities in the
Value ChainActivities directly involved in producing,selling, distributing, and servicing productfor buyer.
• Inbound logistics: receiving, storing, and distributinginputs for production
• Operations: all activities involved in transforminginputs into final products
• Outbound logistics: collecting, storing, distributing
product to final buyer • Marketing and Sales: activities used to get customers
to buy company products
• Service: installation, repair, support, training for using
a product
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Applying Value Chain Analysis
• Framework for identifying company’sstrengths and weaknesses
• Means to focus on where the
company’s core competencies exist andcan be used to achieve competitive
advantage and add value
• Comparison with competitors revealsopportunities for improving company’s
competitive position
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Income StatementSales
Cost of Goods SoldGross Profit
Operating Expenses
Wages and Salaries
Rent
Advertising
Insurance
Research and Development
Depreciation
Total Operating Expenses
Operating Income (Earnings Before Interest and Taxes – EBIT)
Interest
Income Before Taxes
Taxes
Net Income
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Balance Sheet Assets
Current Assets
CashMarketable Securities
Accounts Receivable
Inventory
Total Current Assets
Fixed AssetsProperty, Plant, Eqt.
Less: Accumulated
Depreciation
Net Fixed Assets
Other Assets
Patents, Trademarks
Goodwill
Total Other Assets
Total Assets
Liabilities and Owners’ Equity
Liabilities
Current Liabilities Accounts Payable
Wages Payable
Notes Payable
Taxes Payable
Total Current LiabilitiesLong Term Liabilities
Loans
Mortgages
Total Long Term Liabilities
Owners’ Equity
Stock
Retained Earnings
Total Owners’ Equity
Total Liabilities and Owners’ Equity
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Types of Ratios
• Profitability• Activity – Efficiency
• Liquidity
• Debt - Leverage
• Growth
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Profitability Ratios
• Gross Profit Margin = Gross Profit
Sales
• Net Profit Margin = Net IncomeSales
• Operating Profit = Operating Income
Margin Sales
• Return on Equity = Net Income___
Owner’s Equity
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Profitability Ratios
Du Pont Formula• Return on = Net Income__
Assets Total Assets
= Net Income X __Sales___ Sales Total Assets
= Net Profit X Total Asset
Margin Turnover
= Profitability X Efficiency
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Activity – Efficiency Ratios
• Inventory = Cost of Goods SoldTurnover Inventory
• Average = _________365 days____
Collection (Sales/Accounts Receivable)
Period
• Fixed Asset = _________Sales________
Turnover Net Fixed Assets
• Total Asset = _________Sales________
Turnover Total Assets
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Liquidity Ratios
• Current = __Current Assets___ Current Liabilities
• Quick = Current Assets – Inventories
Current Liabilities
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Debt –Leverage Ratios
• Debt = Current + Long Term LiabilitiesTotal Assets
• Debt = Current + Long Term Liabilities
Total Owners’ Equity • Times = Operating Income (EBIT)
Interest Interest
Earned
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Growth
• Sales = SalesYear 2 - SalesYear 1 Growth ___________________ X 100
SalesYear 1
• Profit = Profit Year 2 - Profit Year 1
Growth ___________________ X 100
Profit Year 1
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Combining Internal and
External Analyses• Internal and External Analyses commonly
referred to as SWOT:Strengths
Weaknesses
Opportunities
Threats
• Strengths and Weaknesses identified fromInternal Analysis
• Opportunities and Threats identified fromExternal Analyses
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Internal Analysis
• Strengths and Weaknesses identified
through the use of tools such as:
– Core Competencies
– Stakeholder Analysis
– Value Chain
– Financial Analysis
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External Analysis
• Opportunities and Threats identified through
the use of tools such as:
– General Environment Assessment – Five Force Analysis
– Key Success Factors in Industry
– Competitive Changes during Industry Evolution
– Strategic Groups
– National Competitive Advantage
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Results of Internal and
External Analysis
• Requires creative interpretation
• Understanding of company’s competitiveposition in its industry
• Identification of strategic issues the companyfaces
• Strategic issues – Represent dangers to the company’s long-term
survival – Suggest areas where the company should
concentrate its efforts in order to grow