MNGT 322 Project Case Analysis using Strategic Audit
vukasin jovic
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Introduction to
Case Analysis
PA R T5
Howard Schilit, founder of the Center for Financial Research & Analysis
(CFRA), works with a staff of 15 analysts to screen financial databases and analyze
public financial filings of 3,600 companies, looking for inconsistencies and aggres-
sive accounting methods. Schilit calls this search for hidden weaknesses in a com-
pany’s performance forensic accounting. “I’m like an investigative reporter,” explains
Schilit. “I’m interested in finding companies where the conventional wisdom is that they’re
very healthy, but if you dig a bit deeper, you find the emperor is not wearing the clothes you
thought.”1 He advises anyone interested in analyzing a company to look deeply into its financial
statements. For example, when the CFRA noticed that Kraft Foods made $122 million in acquisi-
tions in 2002, but claimed $539 million as “goodwill” assets related to the purchases, it concluded
that Kraft was padding its earnings with one-time gains. According to Schilit, unusually high
goodwill gains related to recent acquisitions is a red flag that suggests an underlying problem.
Schilit proposes a short checklist of items to examine for red flags:
� Cash flow from operations should exceed net income: If cash flow from operations drops
below net income, it could mean that the company is propping up its earnings by selling as-
sets, borrowing cash, or shuffling numbers. Says Schilit, “You could have spotted the prob-
lems at Enron by just doing this.”2
� Accounts receivable should not grow faster than sales: A firm facing slowing sales can
make itself look better by inflating accounts receivable with expected future sales and by
making sales to customers who are not credit worthy. “It’s like mailing a contract to a dead
person and then counting it as a sale,” says Schilit.3
� Gross margins should not fluctuate over time: A change of more than 2% in either direc-
tion from year to year is worth a closer look. It could mean that the company is using other
revenue, such as sales of assets or write-offs to boost profits. Sunbeam reported an increase
of 10% in gross margins just before it was investigated by the SEC.
� Examine carefully information about top management and the board:When Schilit learned
that the chairman of Checkers Restaurants had put his two young sons on the board, he
warned investors of nepotism. Two years later, Checkers’ huge debt caused its stock to fall
85% and all three family members were forced out of the company.
suggestions for Case Analysis
CHA P T E R 12
365
� Research the case situation as needed � Analyze financial statements by using
ratios and common-size statements
� Use the strategic audit as a method of organizing and analyzing case information
Learning Objectives After reading this chapter, you should be able to:
12.1 The Case Method
The analysis and discussion of case problems has been the most popular method of teaching
strategy and policy for many years. The case method provides the opportunity to move from
a narrow, specialized view that emphasizes functional techniques to a broader, less precise
analysis of the overall corporation. Cases present actual business situations and enable you to
examine both successful and unsuccessful corporations. In case analysis, you might be asked
to critically analyze a situation in which a manager had to make a decision of long-term cor-
porate importance. This approach gives you a feel for what it is like to face making and imple-
menting strategic decisions.
� Footnotes are important: When companies change their accounting assumptions to
make the statements more attractive, they often bury their rationale in the footnotes.
Schilit dislikes companies that extend the depreciable life of their assets. “There’s only
one reason to do that—to add a penny or two to earnings—and it makes me very mis-
trustful of management.”4
Schilit makes his living analyzing companies and selling his reports to investors. Annual re-
ports and financial statements provide a lot of information about a company’s health, but
it’s hard to find problem areas when management is massaging the numbers to make the
company appear more attractive than it is. That’s why Michelle Leder created her Web site,
www.footnoted.org. She likes to highlight “the things that companies bury in their rou-
tine SEC filings.”5 This type of in-depth, investigative analysis is a key part of analyzing
strategy cases. This chapter provides various analytical techniques and suggestions for
conducting this kind of case analysis.
12.2 Researching the Case Situation
366 PART 5 Introduction to Case Analysis
You should not restrict yourself only to the information written in the case unless your instruc-
tor states otherwise. You should, if possible, undertake outside research about the environmen-
tal setting. Check the decision date of each case (typically the latest date mentioned in the case)
to find out when the situation occurred and then screen the business periodicals for that time
period. An understanding of the economy during that period will help you avoid making a se-
rious error in your analysis, for example, suggesting a sale of stock when the stock market is
at an all-time low or taking on more debt when the prime interest rate is over 15%. Informa-
tion about the industry will provide insights into its competitive activities. Important Note:
Don’t go beyond the decision date of the case in your research unless directed to do so by your
instructor.
Use computerized company and industry information services such as Compustat, Com-
pact Disclosure, and CD/International, available on CD-ROM or online at the library. On the
Internet, Hoover’s OnLine Corporate Directory (www.hoovers.com) and the Security Ex-
change Commission’s Edgar database (www.sec.gov) provide access to corporate annual re-
ports and 10-K forms. This background will give you an appreciation for the situation as it was
experienced by the participants in the case. Use a search engine such as Google to find addi-
tional information about the industry and the company.
A company’s annual report and SEC 10-K form from the year of the case can be very
helpful. According to the Yankelovich Partners survey firm, 8 out of 10 portfolio managers and
75% of security analysts use annual reports when making decisions.6 They contain not only
the usual income statements and balance sheets, but also cash flow statements and notes to the
financial statements indicating why certain actions were taken. 10-K forms include detailed
information not usually available in an annual report. SEC 10-Q forms include quarterly fi-
nancial reports. SEC 14-A forms include detailed information on members of a company’s
board of directors and proxy statements for annual meetings. Some resources available for re-
search into the economy and a corporation’s industry are suggested in Appendix 12.A.
A caveat: Before obtaining additional information about the company profiled in a par-
ticular case, ask your instructor if doing so is appropriate for your class assignment. Your strat-
egy instructor may want you to stay within the confines of the case information provided in
the book. In this case, it is usually acceptable to at least learn more about the societal environ-
ment at the time of the case.
12.3 Financial Analysis: A Place to Begin
Once you have read a case, a good place to begin your analysis is with the financial statements.
Ratio analysis is the calculation of ratios from data in these statements. It is done to identify
possible financial strengths or weaknesses. Thus it is a valuable part of SWOT analysis. A re-
view of key financial ratios can help you assess a company’s overall situation and pinpoint
some problem areas. Ratios are useful regardless of firm size and enable you to compare a
company’s ratios with industry averages. Table 12–1 lists some of the most important finan-
cial ratios, which are (1) liquidity ratios, (2) profitability ratios, (3) activity ratios, and
(4) leverage ratios.
CHAPTER 12 Suggestions for Case Analysis 367
TABLE 12–1 Financial Ratio Analysis
Formula How Expressed Meaning
1. Liquidity Ratios
Current ratio Current assets
Current liabilities
Decimal A short-term indicator of the company’s
ability to pay its short-term liabilities from
short-term assets; how much of current
assets are available to cover each dollar of
current liabilities.
Quick (acid test) ratio Current assets Inventory
Current liabilities
Decimal Measures the company’s ability to pay off
its short-term obligations from current
assets, excluding inventories.
Inventory to net
working capital
Inventory
Current assets Current liabilities
Decimal Ameasure of inventory balance; measures
the extent to which the cushion of excess
current assets over current liabilities may
be threatened by unfavorable changes in
inventory.
Cash ratio Cash � Cash equivalents
Current liabilities
Decimal Measures the extent to which the
company’s capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from cash
or near-cash assets.
2. Profitability Ratios
Net profit margin
Net profit after taxes
Net sales
Percentage Shows how much after-tax profits are
generated by each dollar of sales.
Gross profit margin Sales Cost of goods sold
Net sales
Percentage Indicates the total margin available to
cover other expenses beyond cost of goods
sold and still yield a profit.
Return on investment
(ROI)
Net profit after taxes
Total assets
Percentage Measures the rate of return on the total
assets utilized in the company; a measure
of management’s efficiency, it shows the
return on all the assets under its control,
regardless of source of financing.
Return on equity
(ROE)
Net profit after taxes
Shareholders’ equity
Percentage Measures the rate of return on the book
value of shareholders’ total investment in
the company.
Earnings per share
(EPS) Net profit after taxes –
Preferred stock dividends
Average number of
common shares
Dollars
per share
Shows the after-tax earnings generated for
each share of common stock.
3. Activity Ratios
Inventory turnover
Net sales
Inventory Decimal Measures the number of times that average
inventory of finished goods was turned
over or sold during a period of time,
usually a year.
Days of inventory Inventory
Cost of goods sold ! 365
Days Measures the number of one day’s worth
of inventory that a company has on hand at
any given time.
continued
368 PART 5 Introduction to Case Analysis
TABLE 12–1 Financial Ratio Analysis
Formula How Expressed Meaning
Net working capital
turnover
Net sales
Net working capital
Decimal Measures how effectively the net working
capital is used to generate sales.
Asset turnover Sales
Total assets
Decimal Measures the utilization of all the
company’s assets; measures how many
sales are generated by each dollar of assets.
Fixed asset turnover Sales
Fixed assets
Decimal Measures the utilization of the company’s
fixed assets (i.e., plant and equipment);
measures how many sales are generated by
each dollar of fixed assets.
Average collection
period
Accounts receivable
Sales for year ! 365
Days Indicates the average length of time in
days that a company must wait to collect a
sale after making it; may be compared to
the credit terms offered by the company to
its customers.
Accounts receivable
turnover
Annual credit sales
Accounts receivable
Decimal Indicates the number of times that accounts
receivable are cycled during the period
(usually a year).
Accounts payable
period
Accounts payable
Purchases for year ! 365
Days Indicates the average length of time in
days that the company takes to pay its
credit purchases.
Days of cash Cash
Net sales for year ! 365
Days Indicates the number of days of cash on
hand, at present sales levels.
4. Leverage Ratios
Debt to asset ratio
Total debt
Total assets Percentage Measures the extent to which borrowed
funds have been used to finance the
company’s assets.
Debt to equity ratio Total debt
Shareholders’ equity
Percentage Measures the funds provided by creditors
versus the funds provided by owners.
Long-term debt to
capital structure
Percentage Measures the long-term component of
capital structure.
Times interest earned Profit before taxes �
Interest charges
Interest charges
Decimal Indicates the ability of the company to
meet its annual interest costs.
Coverage of fixed
charges
Profit before taxes �
Interest charges �
Lease charges
Interest charges �
Lease obligations
Decimal Ameasure of the company’s ability to
meet all of its fixed-charge obligations.
Current liabilities
to equity
Current liabilities
Shareholders’ equity
Percentage Measures the short-term financing portion
versus that provided by owners.
, (continued)
Long-term debt
Shareholders’ equity
CHAPTER 12 Suggestions for Case Analysis 369
TABLE 12–1 Financial Ratio Analysis
Formula How Expressed Meaning
5. Other Ratios
Price/earnings ratio
Market price per share
Earnings per share
Decimal Shows the current market’s evaluation of a
stock, based on its earnings; shows how
much the investor is willing to pay for each
dollar of earnings.
Divided payout ratio Annual dividends per share
Annual earnings per share
Percentage Indicates the percentage of profit that is
paid out as dividends.
Dividend yield on
common stock
Annual dividends per share
Current market price per share
Percentage Indicates the dividend rate of return to
common shareholders at the current market
price.
NOTE: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular in-
dustry. Refer to Standard & Poor’s and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad,
Dean, Business School, Texas A&M University—Corpus Christi, Corpus Christi, Texas, for his definitions of these ratios.
ANALYZING FINANCIAL STATEMENTS
In your analysis, do not simply make an exhibit that includes all the ratios (unless your instruc-
tor requires you to do so), but select and discuss only those ratios that have an impact on the
company’s problems. For instance, accounts receivable and inventory may provide a source of
funds. If receivables and inventories are double the industry average, reducing them may pro-
vide needed cash. In this situation, the case report should include not only sources of funds but
also the number of dollars freed for use. Compare these ratios with industry averages to dis-
cover whether the company is out of line with others in the industry. Annual and quarterly in-
dustry ratios can be found in the library or on the Internet. (See the resources for case research
inAppendix 12.A.) In the years to come, expect to see financial entries for the trading of CERs
(Certified Emissions Reductions). This is the amount of money a company earns from reduc-
ing carbon emissions and selling them on the open market. To learn how carbon trading is
likely to affect corporations, see the Environmental Sustainability Issue.
A typical financial analysis of a firm would include a study of the operating statements for
five or so years, including a trend analysis of sales, profits, earnings per share, debt-to-equity ra-
tio, return on investment, and so on, plus a ratio study comparing the firm under study with in-
dustry standards. As a minimum, undertake the following five steps in basic financial analysis.
1. Scrutinize historical income statements and balance sheets: These two basic state-
ments provide most of the data needed for analysis. Statements of cash flow may also be
useful.
2. Compare historical statements over time if a series of statements is available.
3. Calculate changes that occur in individual categories from year to year, as well as the
cumulative total change.
4. Determine the change as a percentage as well as an absolute amount.
5. Adjust for inflation if that was a significant factor.
Examination of this information may reveal developing trends. Compare trends in one
category with trends in related categories. For example, an increase in sales of 15% over three
years may appear to be satisfactory until you note an increase of 20% in the cost of goods sold
, (continued)
370 PART 5 Introduction to Case Analysis
Do you know about carbon trading, emissions al- lowances, cap-and-trade, or
CERs? These are terms you can expect to hear a lot more in the
years to come. The concept of carbon trading is something that will soon be affecting the bal- ance sheets and income statements of all corporations, es- pecially those with international operations. It is one way to account for environmental sustainability initiatives.
The Kyoto Protocol established an emissions trading program that assigned annual limits on greenhouse gases emitted by facilities within each country’s boundaries. The countries signing the pact, including Canada, Japan, and the European Union, were then able to trade emission sur- pluses and deficits with each other. In addition, individual countries or companies could invest in projects in develop- ing nations that would reduce emissions and use those re- ductions to meet their own targets.
In 2005 the European Union initiated a trading system allowing individual facilities to sell credit allowances they had earned for reducing greenhouse gas emissions. It cre- ated a tradable commodity, the Certified Emissions Reduc- tion (CER), which gave a facility the right to emit one metric ton of carbon dioxide annually. The CER was created by another facility that reduced its carbon dioxide emis- sions. (Reducing or trapping one metric ton of methane from entering the atmosphere was worth 21 CERs due to
IMPACT OF CARBON TRADING
ENVIRONMENTAL sustainability issue
methane’s greater impact on global warming.) By 2006, a CER traded on the European market for around 25 euros with trading volume totaling one million CERs per day. Bar- clays, Citibank, Credit Suisse, HSBC, Lehman Brothers, and Morgan Stanley soon opened trading desks for CERs at London’s Canary Wharf, the global center for carbon trad- ing. By 2007, European and Asian traders bought and sold approximately $60 billion worth of emission CERs.
Carbon trading has created an opportunity for new and established companies. For example, Mission Point Capital Partners is one of more than 50 private equity and hedge funds specializing in carbon finance and clean energy. Mis- sion Point created a joint venture in 2008 with GE and AES to develop large volumes of emissions credits. These would be sold to U.S. companies like Yahoo! and News Corp that wanted to become carbon neutral by offsetting their car- bon emissions. Assuming that the U.S. federal government would soon establish a cap-and-trade market for emissions, the joint venture partners expected to produce 10 million tons of emission credits by 2010. According to Kevin Walsh, managing director of GE Energy Financial Services, “We think this is going to be an enormous market.”
SOURCE: A. White, “Environment: The Greening of the Balance Sheet,” Harvard Business Review (March 2006), pp. 27–28; M. Gunther, “Carbon Finance Comes of Age,” Fortune (April 28, 2008), pp. 124–132.
during the same period. The outcome of this comparison might suggest that further investiga-
tion into the manufacturing process is necessary. If a company is reporting strong net income
growth but negative cash flow, this would suggest that the company is relying on something
other than operations for earnings growth. Is it selling off assets or cutting R&D? If accounts
receivable are growing faster than sales revenues, the company is not getting paid for the prod-
ucts or services it is counting as sold. Is the company dumping product on its distributors at the
end of the year to boost its reported annual sales? If so, expect the distributors to return the un-
ordered product the next month, thus drastically cutting the next year’s reported sales.
Other “tricks of the trade” need to be examined. Until June 2000, firms growing through
acquisition were allowed to account for the cost of the purchased company, through the pool-
ing of both companies’ stock. This approach was used in 40% of the value of mergers between
1997 and 1999. The pooling method enabled the acquiring company to disregard the premium
it paid for the other firm (the amount above the fair market value of the purchased company
often called “good will”). Thus, when PepsiCo agreed to purchase Quaker Oats for $13.4 bil-
lion in PepsiCo stock, the $13.4 billion was not found on PepsiCo’s balance sheet. As of June
2000, merging firms must use the “purchase” accounting rules in which the true purchase price
is reflected in the financial statements.7
CHAPTER 12 Suggestions for Case Analysis 371
The analysis of a multinational corporation’s financial statements can get very compli-
cated, especially if its headquarters is in another country that uses different accounting stan-
dards. See the Global Issue for why financial analysis can get tricky at times.
A multinational corporation follows the accounting rules
for its home country. As a re- sult, its financial statements may
be somewhat difficult to understand or to use for comparisons with competitors from other countries. For example, British firms such as British Petro- leum use the term turnover rather than sales revenue. In the case of AB Electrolux of Sweden, a footnote to an an-
GLOBAL issue FINANCIAL STATEMENTS OF MULTINATIONAL CORPORATIONS: NOT ALWAYS WHAT THEY SEEM
nual report indicates that the consolidated accounts have been prepared in accordance with Swedish accounting standards, which differ in certain significant respects from U.S. generally accepted accounting principles (U.S. GAAP). For one year, net income of 4,830m SEK (Swedish kronor) approximated 5,655m SEK according to U.S. GAAP. Total assets for the same period were 84,183m SEK according to Swedish principle, but 86,658m accord- ing to U.S. GAAP.
COMMON-SIZE STATEMENTS
Common-size statements are income statements and balance sheets in which the dollar fig-
ures have been converted into percentages. These statements are used to identify trends in each
of the categories, such as cost of goods sold as a percentage of sales (sales is the denomina-
tor). For the income statement, net sales represent 100%: calculate the percentage for each cat-
egory so that the categories sum to the net sales percentage (100%). For the balance sheet, give
the total assets a value of 100% and calculate other asset and liability categories as percent-
ages of the total assets with total assets as the denominator. (Individual asset and liability
items, such as accounts receivable and accounts payable, can also be calculated as a percent-
age of net sales.)
When you convert statements to this form, it is relatively easy to note the percentage that
each category represents of the total. Look for trends in specific items, such as cost of goods
sold, when compared to the company’s historical figures. To get a proper picture, however, you
need to make comparisons with industry data, if available, to see whether fluctuations are
merely reflecting industry-wide trends. If a firm’s trends are generally in line with those of the
rest of the industry, problems are less likely than if the firm’s trends are worse than industry
averages. If ratios are not available for the industry, calculate the ratios for the industry’s best
and worst firms and compare them to the firm you are analyzing. Common-size statements are
especially helpful in developing scenarios and pro forma statements because they provide a
series of historical relationships (for example, cost of goods sold to sales, interest to sales, and
inventories as a percentage of assets) from which you can estimate the future with your sce-
nario assumptions for each year.
Z-VALUE AND INDEX OF SUSTAINABLE GROWTH
If the corporation being studied appears to be in poor financial condition, use Altman’s
Z-Value Bankruptcy Formula to calculate its likelihood of going bankrupt. The Z-value formula
372 PART 5 Introduction to Case Analysis
USEFUL ECONOMIC MEASURES If you are analyzing a company over many years, you may want to adjust sales and net income
for inflation to arrive at “true” financial performance in constant dollars. Constant dollars are
dollars adjusted for inflation to make them comparable over various years. One way to adjust
for inflation in the United States is to use the Consumer Price Index (CPI), as given in
Table 12–2. Dividing sales and net income by the CPI factor for that year will change the fig-
ures to 1982–1984 U.S. constant dollars (when the CPI was 1.0). Adjusting for inflation is es-
pecially important for companies operating in the emerging economies, like China and Russia,
where inflation in 2008 rose to 6.6%, the highest in 10 years. In that same year, Zimbabwe’s
inflation rate was the highest in the world at 2.2 million%!11
Another helpful analytical aid provided in Table 12–2 is the prime interest rate, the rate
of interest banks charge on their lowest-risk loans. For better assessments of strategic deci-
sions, it can be useful to note the level of the prime interest rate at the time of the case. A de-
cision to borrow money to build a new plant would have been a good one in 2003 at 4.1% but
less practical in 2007 when the average rate was 8.1%.
combines five ratios by weighting them according to their importance to a corporation’s finan-
cial strength. The formula is:
Z" 1.2x1 � 1.4x2 � 3.3x3 � 0.6x4 � 1.0x5
where:
x1 "Working capital/Total assets (%)
x2 " Retained earnings/Total assets (%)
x3 " Earnings before interest and taxes/Total assets (%)
x4 "Market value of equity/Total liabilities (%)
x5 " Sales/Total assets (number of times)
A score below 1.81 indicates significant credit problems, whereas a score above 3.0 indi-
cates a healthy firm. Scores between 1.81 and 3.0 indicate question marks.8 The Altman Z
model has achieved a remarkable 94% accuracy in predicting corporate bankruptcies. Its ac-
curacy is excellent in the two years before financial distress, but diminishes as the lead time
increases.9
The index of sustainable growth is useful to learn whether a company embarking on a
growth strategy will need to take on debt to fund this growth. The index indicates how much
of the growth rate of sales can be sustained by internally generated funds. The formula is:
where:
P " (Net profit before tax/Net sales)#100
D " Target dividends/Profit after tax
L " Total liabilities/Net worth
T " (Total assets/Net sales)#100
If the planned growth rate calls for a growth rate higher than its g*, external capital will be
needed to fund the growth unless management is able to find efficiencies, decrease dividends,
increase the debt-equity ratio, or reduce assets through renting or leasing arrangements.10
g* =
3P11 - D211 + L24
3T - P11 - D211 + L24
CHAPTER 12 Suggestions for Case Analysis 373
TABLE 12–2
Year
GDP (in $ billions) Gross Domestic
Product
CPI (for all items) Consumer Price
Index
PIR (in %) Prime Interest
Rate
1980 2,789.5 .824 Ï15.27
1985 4,220.3 1.076 9.93
1990 5,803.1 1.307 10.01
1995 7,397.7 1.524 8.83
1996 7,816.9 1.569 8.27
1997 8,304.3 1.605 8.44
1998 8,747.0 1.630 8.35
1999 9,268.4 1.666 7.99
2000 9,817.0 1.722 9.23
2001 10,128.0 1.771 6.92
2002 10,469.6 1.799 4.68
2003 10,960.8 1.840 4.12
2004 11,685.9 1.889 4.29
2005 12,421.9 1.953 6.10
2006 13,178.4 2.016 7.94
2007 13,807.5 2.073 8.08
2008 14,280.7 2.153 5.21
NOTES: Gross Domestic Product (GDP) in Billions of Dollars; Consumer Price Index for All Items (CPI) (1982–84
" 1.0); Prime Interest Rate (PIR) in Percentages.
SOURCES: Gross Domestic Product (GDP) from U.S. Bureau of Economic Analysis, National Economic Accounts
(www.bea.gov). Consumer Price Index (CPI) from U.S. Bureau of Labor Statistics (www.bls.gov). Prime Interest
Rate (PIR) from www.moneycafe.com.
U.S. Economic Indicators
In preparing a scenario for your pro forma financial statements, you may want to use the
gross domestic product (GDP) from Table 12–2. GDP is used worldwide and measures the
total output of goods and services within a country’s borders. The amount of change from one
year to the next indicates how much that country’s economy is growing. Remember that sce-
narios have to be adjusted for a country’s specific conditions. For other economic information,
see the resources for case research in Appendix 12.A.
12.4 Format for Case Analysis: The Strategic Audit
There is no one best way to analyze or present a case report. Each instructor has personal pref-
erences for format and approach. Nevertheless, in Appendix 12.B we suggest an approach for
both written and oral reports that provides a systematic method for successfully attacking a
case. This approach is based on the strategic audit, which is presented at the end of Chapter 1
in Appendix 1.A). We find that this approach provides structure and is very helpful for the typ-
ical student who may be a relative novice in case analysis. Regardless of the format chosen,
be careful to include a complete analysis of key environmental variables—especially of trends
in the industry and of the competition. Look at international developments as well.
If you choose to use the strategic audit as a guide to the analysis of complex strategy cases,
you may want to use the strategic audit worksheet in Figure 12–1. Print a copy of the work-
sheet to use to take notes as you analyze a case. See Appendix 12.C for an example of a com-
pleted student-written analysis of a 1993 Maytag Corporation case done in an outline form
Analysis
Strategic Audit Heading (+) Factors (−) Factors Comments
I. Current Situation
A. Past Corporate Performance Indexes
B. Strategic Posture:
Current Mission
Current Objectives
Current Strategies
Current Policies
SWOT Analysis Begins:
II. Corporate Governance
A. Board of Directors
B. Top Management
III. External Environment (EFAS):
Opportunities and Threats (SWOT)
A. Natural Environment
B. Societal Environment
C. Task Environment (Industry Analysis)
IV. Internal Environment (IFAS):
Strengths and Weaknesses (SWOT)
A. Corporate Structure
B. Corporate Culture
C. Corporate Resources
1. Marketing
2. Finance
3. Research and Development
4. Operations and Logistics
5. Human Resources
6. Information Technology
V. Analysis of Strategic Factors (SFAS)
A. Key Internal and External
Strategic Factors (SWOT)
B. Review of Mission and Objectives
SWOT Analysis Ends. Recommendation Begins:
VI. Alternatives and Recommendations
A. Strategic Alternatives—pros and cons
B. Recommended Strategy
VII. Implementation
VIII. Evaluation and Control
FIGURE 12–1 Strategic Audit
Worksheet
NOTE: See the complete Strategic Audit on pages 34–41. It lists the pages in the book that discuss each of the eight headings.
SOURCE: T. L. Wheelen and J. D. Hunger, “Strategic Audit Worksheet.” Copyright © 1985, 1986, 1987, 1988, 1989, 2005, and 2009 by T. L. Wheelen. Copyright © 1989, 2005, and 2009 by Wheelen and Hunger Associates. Revised 1991, 1994, and 1997. Reprinted by permission. Additional copies available for classroom use in Part D of Case
Instructors Manual and on the Prentice Hall Web site (www.prenhall.com/wheelen).
374
CHAPTER 12 Suggestions for Case Analysis 375
End of Chapter SUMMARY Using case analysis is one of the best ways to understand and remember the strategic manage-
ment process. By applying to cases the concepts and techniques you have learned, you will be
able to remember them long past the time when you have forgotten other memorized bits of
information. The use of cases to examine actual situations brings alive the field of strategic
management and helps build your analytic and decision-making skills. These are just some of
the reasons why the use of cases in disciplines from agribusiness to health care is increasing
throughout the world.
E C O - B I T S A 2007 McKinsey & Company survey of 7,751 people
in eight countries found that 87% of consumers worry
about the environment and the social impact of the
products they buy.
The same 2007 survey found that only 33% of the con-
sumers said that they were ready to buy green products
or had already done so.
In a 2007 Chain Store Age survey of U.S. consumers,
only 25% of them had bought any green products other
than organic food or energy-efficient lighting.12
D I S C U S S I O N Q U E S T I O N S 1. Why should you begin a case analysis with a financial
analysis? When are other approaches appropriate?
2. What are common-size financial statements? What is
their value to case analysis? How are they calculated?
3. When should you gather information outside a case by
going to the library or using the Internet? What should
you look for?
4. When is inflation an important issue in conducting case
analysis? Why bother?
5. How can you learn what date a case took place?
using the strategic audit format. This is one example of what a case analysis in outline form
may look like.
Case discussion focuses on critical analysis and logical development of thought. A solu-
tion is satisfactory if it resolves important problems and is likely to be implemented success-
fully. How the corporation actually dealt with the case problems has no real bearing on the
analysis because management might have analyzed its problems incorrectly or implemented a
series of flawed solutions.
376 PART 5 Introduction to Case Analysis
S T R A T E G I C P R A C T I C E E X E R C I S E Convert the following two years of income statements from
the Maytag Corporation into common-size statements. The
dollar figures are in thousands. What does converting to a
common size reveal?
K E Y T E R M S
activity ratio (p. 366)
Altman’s Z-Value Bankruptcy
Formula (p. 371)
annual report (p. 366)
common-size statement (p. 371)
constant dollars (p. 372)
gross domestic product (GDP) (p. 373)
index of sustainable growth (p. 372)
leverage ratio (p. 366)
liquidity ratio (p. 366)
prime interest rate (p. 372)
profitability ratio (p. 366)
ratio analysis (p. 366)
SEC 10-K form (p. 366)
SEC 10-Q form (p. 366)
SEC 14-A form (p. 366)
strategic audit worksheet (p. 373)
Consolidated Statements of Income: Maytag Corporation
1992 % 1991 %
Net sales $3,041,223 100 $2,970,626 100 Cost of sales 2,339,406 — 2,254,221 —
Gross profits 701,817 — 716,405 —
Selling, general, & admin. expenses 528,250 — 524,898 —
Reorganization expenses 95,000 — 0 —
Operating income 78,567 — 191,507 —
Interest expense (75,004) — (75,159) —
Other—net 3,983 — 7,069 —
Income before taxes and
accounting changes
7,546 — 123,417 —
Income taxes (15,900) — (44,400) —
Income before accounting changes (8,354) — 79,017 —
Effects of accounting changes
for postretirement benefits
(307,000) — 0 —
Net income (loss) $(315,354) — $79,017 —
N O T E S 1. M. Heimer, “Wall Street Sherlock,” Smart Money (July 2003),
pp. 103–107.
2. Ibid., p. 105.
3. Ibid., p. 105.
4. Ibid., p. 105.
5. D. Stead, “The Secrets in SEC Filings,” Business Week
(September 1, 2008), p. 12.
6. M. Vanac, “What’s a Novice Investor to Do?” Des Moines Reg-
ister (November 30, 1997), p. 3G.
7. A. R. Sorking, “New Path on Mergers Could Contain Loop-
holes,” The (Ames, IA) Daily Tribune (January 9, 2001), p. B7;
“Firms Resist Effort to Unveil True Costs of Doing Business,”
USA Today (July 3, 2000), p. 10A.
8. M. S. Fridson, Financial Statement Analysis (New York: John
Wiley & Sons, 1991), pp. 192–194.
9. E. I. Altman, “Predicting Financial Distress of Companies: Re-
visiting the Z-Score and Zeta Models,” Working paper at http://
pages.stern.nyu.edu/~ealtman/Zscores.pdf (July 2000).
10. D. H. Bangs, Managing by the Numbers (Dover, N.H.: Upstart
Publications, 1992), pp. 106–107.
11. “Economic Focus: A Tale of Two Worlds,” The Economist
(May 10, 2008), p. 88; “Zimbabwe: A Worthless Currency,”
The Economist (July 19, 2008), pp. 56–57.
12. S. M. J. Bonini and J. M. Oppenheim, “Helping ‘Green’ Prod-
ucts Grow,” McKinsey Quarterly (October 2008), pp. 1–8.
Company Information
1. Annual reports
2. Moody’s Manuals on Investment (a listing of companies within certain industries that contains a
brief history and a five-year financial statement of each company)
3. Securities and Exchange Commission Annual Report Form 10-K (annually) and 10-Q (quarterly)
4. Standard & Poor’s Register of Corporations, Directors, and Executives
5. Value Line’s Investment Survey
6. Findex’s Directory of Market Research Reports, Studies and Surveys (a listing by Find/SVP of more
than 11,000 studies conducted by leading research firms)
7. Compustat, Compact Disclosure, CD/International, and Hoover’s Online Corporate Directory
(computerized operating and financial information on thousands of publicly held corporations)
8. Shareholders meeting notices in SEC Form 14-A (proxy notices)
Economic Information
1. Regional statistics and local forecasts from large banks
2. Business Cycle Development (Department of Commerce)
3. Chase Econometric Associates’ publications
4. U.S. Census Bureau publications on population, transportation, and housing
5. Current Business Reports (U.S. Department of Commerce)
6. Economic Indicators (U.S. Joint Economic Committee)
7. Economic Report of the President to Congress
8. Long-Term Economic Growth (U.S. Department of Commerce)
9. Monthly Labor Review (U.S. Department of Labor)
10. Monthly Bulletin of Statistics (United Nations)
11. Statistical Abstract of the United States (U.S. Department of Commerce)
12. Statistical Yearbook (United Nations)
13. Survey of Current Business (U.S. Department of Commerce)
14. U.S. Industrial Outlook (U.S. Department of Defense)
15. World Trade Annual (United Nations)
16. Overseas Business Reports (by country, published by the U.S. Department of Commerce)
Industry Information
1. Analyses of companies and industries by investment brokerage firms
2. Business Week (provides weekly economic and business information, as well as quarterly profit and
sales rankings of corporations)
377
Resources for Case Research
A P P E N D I X 12.A
3. Fortune (each April publishes listings of financial information on corporations within certain
industries)
4. Industry Survey (published quarterly by Standard & Poor’s)
5. Industry Week (late March/early April issue provides information on 14 industry groups)
6. Forbes (mid-January issue provides performance data on firms in various industries)
7. Inc. (May and December issues give information on fast-growing entrepreneurial companies)
Directory and Index Information on Companies and Industries
1. Business Periodical Index (on computers in many libraries)
2. Directory of National Trade Associations
3. Encyclopedia of Associations
4. Funk and Scott’s Index of Corporations and Industries
5. Thomas’Register of American Manufacturers
6. Wall Street Journal Index
Ratio Analysis Information
1. Almanac of Business and Industrial Financial Ratios (Prentice Hall)
2. Annual Statement Studies (Risk Management Associates; also Robert Morris Associates)
3. Dun’s Review (Dun & Bradstreet; published annually in September–December issues)
4. Industry Norms and Key Business Ratios (Dun & Bradstreet)
Online Information
1. Hoover’s Online—financial statements and profiles of public companies (www.hoovers.com)
2. U.S. Securities and Exchange Commission—official filings of public companies in Edgar database
(www.sec.gov)
3. Fortune 500—statistics for largest U.S. corporations (www.fortune.com)
4. Dun & Bradstreet’s Online—short reports on 10 million public and private U.S. companies
(smallbusiness.dnb.com)
5. Ecola’s 24-Hour Newsstand—links to Web sites of 2,000 newspapers, journals, and magazines
(www.ecola.com)
6. Competitive Intelligence Guide—information on company resources (www.fuld.com)
7. Society of Competitive Intelligence Professionals (www.scip.org)
8. The Economist—provides international information and surveys (www.economist.com)
9. CIA World Fact Book—international information by country (http://www.cia.gov)
10. Bloomberg—information on interest rates, stock prices, currency conversion rates, and other gen-
eral financial information (www.bloomberg.com)
11. The Scannery—information on international companies (www.thescannery.com)
12. CEOExpress—links to many valuable sources of business information (www.ceoexpress.com)
13. Wall Street Journal—business news (www.wsj.com)
14. Forbes—America’s largest private companies (http://www.forbes.com/lists/)
15. CorporateInformation.com—subscription service for company profiles
(www.corporateinformation.com)
16. Kompass International—industry information (www.kompass.com)
17. CorpTech—database of technology companies (www.corptech.com)
18. ADNet—information technology industry (www.companyfinder.com)
19. CNN company research—provides company information (http://money.cnn.com/news/crc/)
378 PART 5 Introduction to Case Analysis
CHAPTER 12 Suggestions for Case Analysis 379
20. Paywatch—database of executive compensation (http://www.aflcio.org/corporatewatch/paywatch/)
21. Global Edge Global Resources—international resources (http://globaledge.msu.edu/resourceDesk/)
22. Google Finance—data on North American stocks (http://finance.google.com/finance)
23. World Federation of Exchanges—international stock exchanges (www.world-exchanges.org/)
24. SEC International Registry—data on international corporations (http://www.sec.gov/divisions/
corpfin/internatl/companies.shtml)
25. Yahoo Finance—data on North American companies (http://finance.yahoo.com)
First Reading of the Case
� Develop a general overview of the company and its external environment.
� Begin a list of the possible strategic factors facing the company at this time.
� List the research information you may need on the economy, industry, and competitors.
Suggested Case Analysis Methodology Using the Strategic Audit
A P P E N D I X 12.B
1. READ CASE
2. READ
THE CASE
WITH THE
STRATEGIC
AUDIT
3. DO OUTSIDE
RESEARCH
Second Reading of the Case
� Read the case a second time, using the strategic audit as a framework for in-depth analysis. (See
Appendix 1.A on pages 34–41.) You may want to make a copy of the strategic audit worksheet
(Figure 12–1) to use to keep track of your comments as you read the case.
� The questions in the strategic audit parallel the strategic decision-making process shown in
Figure 1–5 (pages 28–29).
� The audit provides you with a conceptual framework to examine the company’s mission, objectives,
strategies, and policies as well as problems, symptoms, facts, opinions, and issues.
� Perform a financial analysis of the company, using ratio analysis (see Table 12–1), and do the cal-
culations necessary to convert key parts of the financial statements to a common-size basis.
Library and Online Computer Services
� Each case has a decision date indicating when the case actually took place. Your research should be
based on the time period for the case.
� See Appendix 12.A for resources for case research. Your research should include information about
the environment at the time of the case. Find average industry ratios. You may also want to obtain
further information regarding competitors and the company itself (10-K forms and annual reports).
This information should help you conduct an industry analysis. Check with your instructor to see
what kind of outside research is appropriate for your assignment.
� Don’t try to learn what actually happened to the company discussed in the case. What management
actually decided may not be the best solution. It will certainly bias your analysis and will probably
cause your recommendation to lack proper justification.
BYTE PRODUCTS, INC., IS PRIMARILY INVOLVED IN THE PRODUCTION OF ELECTRONIC components
that are used in personal computers. Although such components might be found in a few com-
puters in home use, Byte products are found most frequently in computers used for sophisti-
cated business and engineering applications. Annual sales of these products have been
steadily increasing over the past several years; Byte Products, Inc., currently has total sales
of approximately $265 million.
Over the past six years, increases in yearly revenues have consistently reached 12%.
Byte Products, Inc., headquartered in the midwestern United States, is regarded as one
of the largest-volume suppliers of specialized components and is easily the industry leader,
with some 32% market share. Unfortunately for Byte, many new firms—domestic and for-
eign—have entered the industry. A dramatic surge in demand, high profitability, and the rela-
tive ease of a new firm’s entry into the industry explain in part the increased number of
competing firms.
Although Byte management—and presumably shareholders as well—is very pleased
about the growth of its markets, it faces a major problem: Byte simply cannot meet the demand
for these components. The company currently operates three manufacturing facilities in vari-
ous locations throughout the United States. Each of these plants operates three production
shifts (24 hours per day), 7 days a week. This activity constitutes virtually all of the company’s
production capacity. Without an additional manufacturing plant, Byte simply cannot increase
its output of components.
This case was prepared by Professors Dan R. Dalton and Richard A. Cosier of the Graduate School of Business at Indiana University and Cathy A. Enz of Cornell University. The names of the organization, individual, location, and/or financial information have been disguised to preserve the organization’s desire for anonymity. This case was edited for SMBP–9th, 10th, 11th, and 12th Editions. Reprint permission is solely granted to the publisher, Prentice Hall, for the book, Strategic Management and Business Policy – 12th Edition and cases in Strategic Management
and Business Policy, 12th Edition by copyright holders Dan R. Dalton, Richard A. Cosier, and Cathy A. Enz. Any other publication of this case (translation, any form of electronic or other media), or sold (any form of partnership) to another publisher will be in violation of copyright laws, unless the copyright holders have granted an additional written reprint permission.
401
C A S E 1 The Recalcitrant Director
at Byte Products, Inc.: CORPORATE LEGALITY VERSUS CORPORATE RESPONSIBILITY
Dan R. Dalton, Richard A. Cosier, and Cathy A. Enz
S E C T I O N A
Corporate Governance and Social Responsibility
Analysis
Strategic Audit Heading (+) Factors (−) Factors Comments
I. Current Situation
A. Past Corporate Performance Indexes
B. Strategic Posture:
Current Mission
Current Objectives
Current Strategies
Current Policies
SWOT Analysis Begins:
II. Corporate Governance
A. Board of Directors
B. Top Management
III. External Environment (EFAS):
Opportunities and Threats (SWOT)
A. Societal Environment
B. Task Environment (Industry Analysis)
IV. Internal Environment (IFAS):
Strengths and Weaknesses (SWOT)
A. Corporate Structure
B. Corporate Culture
C. Corporate Resources
1. Marketing
2. Finance
3. Research and Development
4. Operations and Logistics
5. Human Resources
6. Information Systems
V. Analysis of Strategic Factors (SFAS)
A. Key Internal and External
Strategic Factors (SWOT)
B. Review of Mission and Objectives
SWOT Analysis Ends. Recommendation Begins:
VI. Alternatives and Recommendations
A. Strategic Alternatives—pros and cons
B. Recommended Strategy
VII. Implementation
VIII. Evaluation and Control
FIGURE 12–1 Strategic Audit
Worksheet
NOTE: See the complete Strategic Audit on pages 26–33. It lists the pages in the book that discuss each of the eight headings.
SOURCE: T. L. Wheelen and J. D. Hunger, “Strategic Audit Worksheet.” Copyright © 1985, 1986, 1987, 1988, 1989, 2005, and 2009 by T. L. Wheelen. Copyright © 1989, 2005, and 2009 by Wheelen and Hunger Associates. Revised 1991, 1994, and 1997. Reprinted by permission. Additional copies available for classroom use in Part D of Case
Instructors Manual and on the Prentice Hall Web site (www.prenhall.com/wheelen).
380
CHAPTER 12 Suggestions for Case Analysis 381
External Environmental Analysis: EFAS
� Analyze the natural and societal environments to see what general trends are likely to affect the
industry(s) in which the company is operating.
� Conduct an industry analysis using Porter’s competitive forces from Chapter 4. Develop an Indus-
try Matrix (Table 4–4 on page 119).
� Generate 8 to 10 external factors. These should be the most important opportunities and threats fac-
ing the company at the time of the case.
� Develop an EFAS Table, as shown in Table 4–5 (page 126), for your list of external strategic factors.
� Suggestion: Rank the 8 to 10 factors from most to least important. Start by grouping the 3 top fac-
tors and then the 3 bottom factors.
Internal Organizational Analysis: IFAS
� Generate 8 to 10 internal factors. These should be the most important strengths and weaknesses of
the company at the time of the case.
� Develop an IFAS Table, as shown in Table 5–2 (page 164), for your list of internal strategic factors.
� Suggestion: Rank the 8 to 10 factors from most to least important. Start by grouping the 3 top fac-
tors and then the 3 bottom factors.
TABLE 4–5 External Factor Analysis Summary (EFAS Table): Maytag as Example
External Factors Weight Rating Weighted Score Comments
1 2 3 4 5
Opportunities
� Economic integration of European Community .20 4.1 .82 Acquisition of Hoover
� Demographics favor quality appliances .10 5.0 .50 Maytag quality
� Economic development of Asia .05 1.0 .05 Low Maytag presence
� Opening of Eastern Europe .05 2.0 .10 Will take time
� Trend to “Super Stores” .10 1.8 .18 Maytag weak in this channel
Threats
� Increasing government regulations .10 4.3 .43 Well positioned
� Strong U.S. competition .10 4.0 .40 Well positioned
� Whirlpool and Electrolux strong globally .15 3.0 .45 Hoover weak globally
� New product advances .05 1.2 .06 Questionable
� Japanese appliance companies .10 1.6 .16 Only Asian presence in
Australia
Total Scores 1.00 3.15
OTES:
1. List opportunities and threats (8–10) in Column 1.
2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the com-
pany’s strategic position. The total weights must sum to 1.00.
3. Rate each factor from 5.0 (Outstanding) to 1.0 (Poor) in Column 3 based on the company’s response to that factor.
4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4.
5. Use Column 5 (comments) for rationale used for each factor.
6. Add the individual weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is
responding to the factors in its external environment.
OURCE: T. L. Wheelen and J. D. Hunger, “External Factors Analysis Summary (EFAS).” Copyright © 1987, 1988, 1989, 1990, 2005 and
07 by T. L. Wheelen. Copyright © 1991, 2003, 2005 and 2009 by Wheelen and Hunger Associates. Reprinted by permission.
4. BEGIN SWOT
ANALYSIS
5. WRITE YOUR
STRATEGIC
AUDIT:
PARTS I TO IV
First Draft of Your Strategic Audit
� Review the student-written audit of an old Maytag case in Appendix 12.C for an example.
� Write Parts I to IV of the strategic audit. Remember to include the factors from your EFAS and IFAS
Tables in your audit.
6. WRITE YOUR
STRATEGIC
AUDIT: PART V
FIGURE 6–1 Strategic Factor Analysis Summary (SFAS) Matrix
*The most important external and internal factors are identified in the EFAS and IFAS tables as shown here by shading these factors.
Weighted
External Strategic Factors Weight Rating Score Comments
1 2 3 4 5
Opportunities
O1 Economic integration of
European Community .20 4.1 .82 Acquisition of Hoover
O2 Demographics favor quality
appliances .10 5.0 .50 Maytag quality
O3 Economic development of Asia .05 1.0 .05 Low Maytag presence
O4 Opening of Eastern Europe .05 2.0 .10 Will take time
O5 Trend to “Super Stores” .10 1.8 .18 Maytag weak in this channel
Threats
T1 Increasing government regulations .10 4.3 .43 Well positioned
T2 Strong U.S. competition .10 4.0 .40 Well positioned
T3 Whirlpool and Electrolux strong
globally .15 3.0 .45 Hoover weak globally
T4 New product advances .05 1.2 .06 Questionable
T5 Japanese appliance companies .10 1.6 .16 Only Asian presence is Australia
Total Scores 1.00 3.15
Weighted
Internal Strategic Factors Weight Rating Score Comments
1 2 3 4 5
Strengths
S1 Quality Maytag culture .15 5.0 .75 Quality key to success
S2 Experienced top management .05 4.2 .21 Know appliances
S3 Vertical integration .10 3.9 .39 Dedicated factories
S4 Employee relations .05 3.0 .15 Good, but deteriorating
S5 Hoover’s international orientation .15 2.8 .42 Hoover name in cleaners
Weaknesses
W1 Process-oriented R&D .05 2.2 .11 Slow on new products
W2 Distribution channels .05 2.0 .10 Superstores replacing small
dealers
W3 Financial position .15 2.0 .30 High debt load
W4 Global positioning .20 2.1 .42 Hoover weak outside the
United Kingdom and
Australia
W5 Manufacturing facilities .05 4.0 .20 Investing now
Total Scores 1.00 3.05
1 2 3 4 Duration 5 6
I
N
T
E
R
M
E
Strategic Factors (Select the most S D
important opportunities/threats H I L
from EFAS, Table 4–5 and the most O A O
important strengths and weaknesses Weighted R T N
from IFAS, Table 5–2) Weight Rating Score T E G Comments
S1 Quality Maytag culture (S) .10 5.0 .50 X Quality key to success
S5 Hoover’s international
orientation (S) .10 2.8 .28 X X Name recognition
W3 Financial position (W) .10 2.0 .20 X X High debt
W4 Global positioning (W) .15 2.2 .33 X X Only in N.A., U.K., and
Australia
O1 Economic integration of
European Community (O) .10 4.1 .41 X Acquisition of Hoover
O2 Demographics favor quality (O) .10 5.0 .50 X Maytag quality
O5 Trend to super stores (O + T) .10 1.8 .18 X Weak in this channel
T3 Whirlpool and Electrolux (T) .15 3.0 .45 X Dominate industry
T5 Japanese appliance
companies (T) .10 1.6 .16 X Asian presence
Total Scores 1.00 3.01
Notes:
1. List each of the most important factors developed in your IFAS and EFAS Tables in Column 1.
2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the compa-
ny’s strategic position. The total weights must sum to 1.00.
3. Rate each factor from 5.0 (Outstanding) to 1.0 (Poor) in Column 3 based on the company’s response to that factor.
4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4.
5. For duration in Column 5, check appropriate column (short term—less than 1 year; intermediate—1 to 3 years; long term—over 3 years).
6. Use Column 6 (comments) for rationale used for each factor.
SOURCE: T. L. Wheelen and J. D. Hunger, “Strategic Factors Analysis Summary (SFAS).” Copyright © 1987, 1988, 1989, 1990, 1991, 1992,
1993, 1994, 1995, 1996, 2005, and 2009, by T. L. Wheelen. Copyright © 1997, 2005, and 2009 by Wheelen and Hunger Associates. Reprinted by
permission.
(see Figure 6–2)—where a company is able to satisfy customers’ needs in a way that rivals
cannot, given the context in which it operates.7
Finding such a niche or sweet spot is not always easy. A firm’s management must be al-
ways looking for a strategic window—that is, a unique market opportunity that is available
only for a particular time. The first firm through a strategic window can occupy a propitious
niche and discourage competition (if the firm has the required internal strengths). One com-
pany that successfully found a propitious niche was Frank J. Zamboni & Company, the man-
ufacturer of the machines that smooth the ice at ice skating rinks. Frank Zamboni invented the
Strategic Factor Analysis Summary: SFAS
� Condense the list of factors from the 16 to 20 identified in your EFAS and IFAS Tables to only
the 8 to 10 most important factors.
� Select the most important EFAS and IFAS factors. Recalculate the weights of each. The weights still
need to add to 1.0.
� Develop a SFAS Matrix, as shown in Figure 6–1 (page 178), for your final list of strategic factors.
Although the weights (indicating the importance of each factor) will probably change from the
EFAS and IFAS Tables, the numeric rating (1 to 5) of each factor should remain the same. These
ratings are your assessment of management’s performance on each factor.
� This is a good time to reexamine what you wrote earlier in Parts I to IV. You may want to add to or
delete some of what you wrote. Ensure that each one of the strategic factors you have included in
your SFAS Matrix is discussed in the appropriate place in Parts I to IV. Part V of the audit is not the
place to mention a strategic factor for the first time.
� Write Part V of your strategic audit. This completes your SWOT analysis.
� This is the place to suggest a revised mission statement and a better set of objectives for the com-
pany. The SWOTanalysis coupled with revised mission and objectives for the company set the stage
for the generation of strategic alternatives.
TABLE 5–2 Internal Factor Analysis Summary (IFAS Table): Maytag as Example
Internal Factors Weight Rating Weighted Score Comments
1 2 3 4 5
Strengths
� Quality Maytag culture � Experienced top management � Vertical integration � Employer relations � Hoover’s international orientation
.15
.05
.10
.05
.15
5.0
4.2
3.9
3.0
2.8
.75
.21
.39
.15
.42
Quality key to success
Know appliances
Dedicated factories
Good, but deteriorating
Hoover name in cleaners
Weaknesses
� Process-oriented R&D � Distribution channels � Financial position � Global positioning
� Manufacturing facilities
.05
.05
.15
.20
.05
2.2
2.0
2.0
2.1
4.0
.11
.10
.30
.42
.20
Slow on new products
Superstores replacing small dealers
High debt load
Hoover weak outside the United
Kingdom and Australia
Investing now
Total Scores 1.00 3.05
NOTES:
1. List strengths and weaknesses (8–10) in Column 1.
2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s
strategic position. The total weights must sum to 1.00.
3. Rate each factor from 5.0 (Outstanding) to 1.0 (Poor) in Column 3 based on the company’s response to that factor.
4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4.
5. Use Column 5 (comments) for rationale used for each factor.
6. Add the individual weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is
responding to the factors in its internal environment.
SOURCE: T. L. Wheelen and J. D. Hunger, “Internal Factor Analysis Summary (IFAS).” Copyright © 1987, 1988, 1989, 1990, 2005, and 2009
by T. L. Wheelen. Copyright © 1991, 2003, 2005, and 2009 by Wheelen and Hunger Associates. Reprinted by permission.
382 PART 5 Introduction to Case Analysis
8. WRITE YOUR
STRATEGIC
AUDIT: PART VII
Implementation
� Develop programs to implement your recommended strategy.
� Specify who is to be responsible for implementing each program and how long each program will
take to complete.
� Refer to the pro forma financial statements you developed earlier for your recommended strategy.
Use common-size historical income statements as the basis for the pro forma statement. Do the
numbers still make sense? If not, this may be a good time to rethink the budget numbers to reflect
your recommended programs.
9. WRITE YOUR
STRATEGIC
AUDIT: PART VIII
Evaluation and Control
� Specify the type of evaluation and controls that you need to ensure that your recommendation is car-
ried out successfully. Specify who is responsible for monitoring these controls.
� Indicate whether sufficient information is available to monitor how the strategy is being imple-
mented. If not, suggest a change to the information system.
TABLE 10–1 Example of an Action Plan
Action Plan for Jan Lewis, Advertising Manager, and Rick Carter, Advertising Assistant, Ajax Continental
Program Objective: To Run a New Advertising and Promotion Campaign for the Combined Jones Surplus/Ajax
Continental Retail Stores for the Coming Christmas Season Within a Budget of $XX.
Program Activities:
1. Identify Three Best Ad Agencies for New Campaign.
2. Ask Three Ad Agencies to Submit a Proposal for a New Advertising and Promotion Campaign for Combined Stores.
3. Agencies Present Proposals to Marketing Manager.
4. Select Best Proposal and Inform Agencies of Decision.
5. Agency Presents Winning Proposal to Top Management.
6. Ads Air on TV and Promotions Appear in Stores.
7. Measure Results of Campaign in Terms of Viewer Recall and Increase in Store Sales.
Action Steps Responsibility Start–End
1. A. Review previous programs
B. Discuss with boss
C. Decide on three agencies
Lewis & Carter
Lewis & Smith
Lewis
1/1–2/1
2/1–2/3
2/4
2. A. Write specifications for ad
B. Assistant writes ad request
C. Contact ad agencies
D. Send request to three agencies
E. Meet with agency acct. execs
Lewis
Carter
Lewis
Carter
Lewis & Carter
1/15–1/20
1/20–1/30
2/5–2/8
2/10
2/16–2/20
3. A. Agencies work on proposals
B. Agencies present proposals
Acct. Execs
Carter
2/23–5/1
5/1–5/15
4. A. Select best proposal
B. Meet with winning agency
C. Inform losers
Lewis
Lewis
Carter
5/15–5/20
5/22–5/30
6/1
5. A. Fine-tune proposal
B. Presentation to management
Acct. Exec
Lewis
6/1–7/1
7/1–7/3
6. A. Ads air on TV
B. Floor displays in stores
Lewis
Carter
9/1–12/24
8/20–8/30
7. A. Gather recall measures of ads
B. Evaluate sales data
C. Prepare analysis of campaign
Carter
Carter
Carter
9/1–12/24
1/1–1/10
1/10–2/15
10. PROOF AND
FINE-TUNE
YOUR AUDIT
Final Draft of Your Strategic Audit
� Check to ensure that your audit is within the page limits of your professor. You may need to cut some
parts and expand others.
� Make sure that your recommendation clearly deals with the strategic factors.
� Attach your EFAS and IFAS Tables, and SFAS Matrix, plus your ratio analysis and pro forma
statements. Label them as numbered exhibits and refer to each of them within the body of the audit.
� Proof your work for errors. If on a computer, use a spell checker.
SPECIALNOTE: Depending on your assignment, it is relatively easy to use the strategic audit you have
just developed to write a written case analysis in essay form or to make an oral presentation. The strate-
gic audit is just a detailed case analysis in an outline form and can be used as the basic framework for
any sort of case analysis and presentation.
1
Determine what to measure.
Establish predetermined standards.
Measure performance.
No
5432
Yes
STOP
Does perfor-
mance match stan- dards?
Take corrective action.
FIGURE 11–1 Evaluation and Control Process
5. Take corrective action: If actual results fall outside the desired tolerance range, action
must be taken to correct the deviation. The following questions must be answered:
a. Is the deviation only a chance fluctuation?
b. Are the processes being carried out incorrectly?
c. Are the processes appropriate to the achievement of the desired standard? Action
must be taken that will not only correct the deviation but also prevent its happen-
ing again.
d. Who is the best person to take corrective action?
Top management is often better at the first two steps of the control model than it is at
the last two follow-through steps. It tends to establish a control system and then delegate
the implementation to others. This can have unfortunate results. Nucor is unusual in its
ability to deal with the entire evaluation and control process.
11.1 Evaluation and Control in Strategic Management
Evaluation and control information consists of performance data and activity reports (gathered
in Step 3 in Figure 11–1). If undesired performance results because the strategic management
processes were inappropriately used, operational managers must know about it so that they can
correct the employee activity. Top management need not be involved. If, however, undesired
performance results from the processes themselves, top managers, as well as operational man-
agers, must know about it so that they can develop new implementation programs or proce-
dures. Evaluation and control information must be relevant to what is being monitored. One
of the obstacles to effective control is the difficulty in developing appropriate measures of im-
portant activities and outputs.
An application of the control process to strategic management is depicted in Figure 11–2.
It provides strategic managers with a series of questions to use in evaluating an implemented
strategy. Such a strategy review is usually initiated when a gap appears between a company’s
financial objectives and the expected results of current activities. After answering the proposed
set of questions, a manager should have a good idea of where the problem originated and what
must be done to correct the situation.
Strategic Alternatives and Recommendation
A. Alternatives
� Develop around three mutually exclusive strategic alternatives. If appropriate to the case you are an-
alyzing, you might propose one alternative for growth, one for stability, and one for retrenchment.
Within each corporate strategy, you should probably propose an appropriate business/competitive
strategy. You may also want to include some functional strategies where appropriate.
� Construct a corporate scenario for each alternative. Use the data from your outside research to pro-
ject general societal trends (GDP, inflation, and etc.) and industry trends. Use these as the basis of
your assumptions to write pro forma financial statements (particularly income statements) for each
strategic alternative for the next five years.
� List pros and cons for each alternative based on your scenarios.
B. Recommendation
� Specify which one of your alternative strategies you recommend. Justify your choice in terms of
dealing with the strategic factors you listed in Part V of the strategic audit.
� Develop policies to help implement your strategies.
7. WRITE YOUR
STRATEGIC
AUDIT: PART VI
GROWTH STRATEGIES
CHAPTER 7 Strategy Formulation: Corporate Strategy 207
By far the most widely pursued corporate directional strategies are those designed to achieve
growth in sales, assets, profits, or some combination. Companies that do business in expand-
ing industries must grow to survive. Continuing growth means increasing sales and a chance
to take advantage of the experience curve to reduce the per-unit cost of products sold, thereby
increasing profits. This cost reduction becomes extremely important if a corporation’s indus-
try is growing quickly or consolidating and if competitors are engaging in price wars in at-
tempts to increase their shares of the market. Firms that have not reached “critical mass” (that
is, gained the necessary economy of large-scale production) face large losses unless they can
find and fill a small, but profitable, niche where higher prices can be offset by special product
or service features. That is why Oracle acquired PeopleSoft, a rival software firm, in 2005. Al-
though still growing, the software industry was maturing around a handful of large firms. Ac-
cording to CEO Larry Ellison, Oracle needed to double or even triple in size by buying smaller
and weaker rivals if it was to compete with SAP and Microsoft.7 Growth is a popular strategy
because larger businesses tend to survive longer than smaller companies due to the greater
availability of financial resources, organizational routines, and external ties.8
A corporation can grow internally by expanding its operations both globally and domes-
tically, or it can grow externally through mergers, acquisitions, and strategic alliances. A
merger is a transaction involving two or more corporations in which stock is exchanged but
in which only one corporation survives. Mergers usually occur between firms of somewhat
similar size and are usually “friendly.” The resulting firm is likely to have a name derived from
its composite firms. One example is the merging of Allied Corporation and Signal Companies
Concentration
Vertical Growth Horizontal Growth Diversification
Concentric Conglomerate
Pause/Proceed with Caution No Change Profit
Turnaround Captive Company Sell-Out/Divestment Bankruptcy/Liquidation
GROWTH STABILITY RETRENCHMENT
FIGURE 7–1 Corporate
Directional Strategies
A corporation’s directional strategy is composed of three general orientations (some-
times called grand strategies):
� Growth strategies expand the company’s activities.
� Stability strategies make no change to the company’s current activities.
� Retrenchment strategies reduce the company’s level of activities.
Having chosen the general orientation (such as growth), a company’s managers can select
from several more specific corporate strategies such as concentration within one product
line/industry or diversification into other products/industries. (See Figure 7–1.) These strate-
gies are useful both to corporations operating in only one industry with one product line and
to those operating in many industries with many product lines.
I. Current Situation
A. Current Performance Poor financials, high debt load, first losses since 1920s, price/earnings ratio negative. � First loss since 1920s. � Laid off 4,500 employees at Magic Chef. � Hoover Europe still showing losses.
B. Strategic Posture 1. Mission
� Developed in 1989 for the Maytag Company: “To provide our customers with prod-
ucts of unsurpassed performance that last longer, need fewer repairs, and are pro-
duced at the lowest possible cost.” � Updated in 1991: “Our collective mission is world class quality.” Expands Maytag’s
belief in product quality to all aspects of operations.
2. Objectives � “To be profitability leader in industry for every product line Maytag manufactures.”
Selected profitability rather than market share. � “To be number one in total customer satisfaction.” Doesn’t say how to measure
satisfaction. � “To grow the North American appliance business and become the third largest ap-
pliance manufacturer (in unit sales) in North America.” � To increase profitable market share growth in North American appliance and floor
care business, 6.5% return on sales, 10% return on assets, 20% return on equity, beat
competition in satisfying customers, dealer, builder and endorser, move into third
place in total units shipped per year. Nicely quantified objectives.
3. Strategies � Global growth through acquisition, and alliance with Bosch-Siemens. � Differentiate brand names for competitive advantage. � Create synergy between companies, product improvement, investment in plant and
equipment.
383
A P P E N D I X 12.C Example of Student-Written Strategic Audit (For the 1993 Maytag Corporation Case)
4. Policies � Cost reduction is secondary to high quality. � Promotion from within. � Slow but sure R&D: Maytag slow to respond to changes in market.
II. Strategic Managers
A. Board of Directors 1. Fourteen members—eleven are outsiders.
2. Well-respected Americans, most on board since 1986 or earlier.
3. No international or marketing backgrounds.
4. Time for a change?
B. Top Management 1. Top management promoted from within Maytag Company. Too inbred?
2. Very experienced in the industry.
3. Responsible for current situation.
4. May be too parochial for global industry. May need new blood.
III. External Environment (EFAS Table; see Exhibit 1)
A. Natural Environment 1. Growing water scarcity
2. Energy availability a growing problem
B. Societal Environment 1. Economic
a. Unstable economy but recession ending, consumer confidence growing—could in-
crease spending for big ticket items like houses, cars, and appliances. (O)
b. Individual economies becoming interconnected into a world economy. (O)
2. Technological
a. Fuzzy logic technology being applied to sense and measure activities. (O)
b. Computers and information technology increasingly important. (O)
3. Political–Legal
a. NAFTA, European Union, other regional trade pacts opening doors to markets in
Europe, Asia, and Latin America that offer enormous potential. (O)
b. Breakdown of communism means less chance of world war. (O)
c. Environmentalism being reflected in laws on pollution and energy usage. (T)
4. Sociocultural
a. Developing nations desire goods seen on TV. (O)
b. Middle-aged baby boomers want attractive, high-quality products, like BMWs and
Maytag. (O)
c. Dual-career couples increases need for labor-saving appliances, second cars, and
day care. (O)
d. Divorce and career mobility means need for more houses and goods to fill them. (O)
384 PART 5 Introduction to Case Analysis
C. Task Environment 1. North American market mature and extremely competitive—vigilant consumers de-
mand high quality with low price in safe, environmentally sound products. (T)
2. Industry going global as North American and European firms expand internationally. (T)
3. European design popular and consumer desire for technologically advanced
appliances. (O)
4. Rivalry High. Whirlpool, Electrolux, GE have enormous resources & developing
global presence. (T)
5. Buyers’ Power Low. Technology and materials can be sourced worldwide. (O)
6. Power of Other Stakeholders Medium. Quality, safety, environmental regulations
increasing. (T)
7. Distributors’Power High. Super retailers more important: mom and pop dealers less. (T)
8. Threat of Substitutes Low. (O)
9. Entry Barriers High. New entrants unlikely except for large international firms. (T)
IV. Internal Environment (IFAS Table; see Exhibit 2)
A. Corporate Structure 1. Divisional structure: appliance manufacturing and vending machines. Floor care man-
aged separately. (S)
2. Centralized major decisions by Newton corporate staff, with a time line of about three
years. (S)
B. Corporate Culture 1. Quality key ingredient—commitment to quality shared by executives and workers. (S)
2. Much of corporate culture is based on founder F. L. Maytag’s personal philosophy, includ-
ing concern for quality, employees, local community, innovation, and performance. (S)
3. Acquired companies, except for European, seem to accept dominance of Maytag
culture. (S)
C. Corporate Resources 1. Marketing
a. Maytag brand lonely repairman advertising successful but dated. (W)
b. Efforts focus on distribution—combining three sales forces into two, concentrating
on major retailers. (Cost $95 million for this restructuring.) (S)
c. Hoover’s well-publicized marketing fiasco involving airline tickets. (W)
2. Finance (see Exhibits 4 and 5)
a. Revenues are up slightly, operating income is down significantly. (W)
b. Some key ratios are troubling, such as a 57% debt/asset ratio, 132% long-term
debt/equity ratio. No room for more debt to grow company. (W)
c. Net income is 400% less than 1988, based on common-size income statements. (W)
3. R&D
a. Process-oriented with focus on manufacturing process and durability. (S)
b. Maytag becoming a technology follower, taking too long to get product innovations to
market (competitors put out more in last 6 months than prior 2 years combined), lag-
ging in fuzzy logic and other technological areas. (W)
CHAPTER 12 Suggestions for Case Analysis 385
4. Operations
a. Maytag’s core competence. Continual improvement process kept it dominant in the
U.S. market for many years. (S)
b. Plants aging and may be losing competitiveness as rivals upgrade facilities. Quality
no longer distinctive competence? (W)
5. Human Resources
a. Traditionally very good relations with unions and employees. (S)
b. Labor relations increasingly strained, with two salary raise delays, and layoffs of
4,500 employees at Magic Chef. (W)
c. Unions express concern at new, more distant tone from Maytag Corporation. (W)
6. Information Systems
a. Not mentioned in case. Hoover fiasco in Europe suggests information systems need
significant upgrading. (W)
b. Critical area where Maytag may be unwilling or unable to commit resources needed
to stay competitive. (W)
V. Analysis of Strategic Factors
A. Situational Analysis (SWOT) (SFAS Matrix; see Exhibit 3) 1. Strengths
a. Quality Maytag culture.
b. Maytag well-known and respected brand.
c. Hoover’s international orientation.
d. Core competencies in process R&D and manufacturing.
2. Weaknesses
a. Lacks financial resources of competitors.
b. Poor global positioning. Hoover weak on European continent.
c. Product R&D and customer service innovation areas of serious weakness.
d. Dependent on small dealers.
e. Marketing needs improvement.
3. Opportunities
a. Economic integration of European Community.
b. Demographics favor quality.
c. Trend to superstores.
4. Threats
a. Trend to superstores.
b. Aggressive rivals—Whirlpool and Electrolux.
c. Japanese appliance companies—new entrants?
B. Review of Current Mission and Objectives 1. Current mission appears appropriate.
2. Some of the objectives are really goals and need to be quantified and given time horizons.
VI. Strategic Alternatives and Recommended Strategy
A. Strategic Alternatives 1. Growth through Concentric Diversification: Acquire a company in a related industry
such as commercial appliances.
a. [Pros]: Product/market synergy created by acquisition of related company.
b. [Cons]:Maytag does not have the financial resources to play this game.
386 PART 5 Introduction to Case Analysis
2. Pause Strategy: Consolidate various acquisitions to find economies and to encourage
innovation among the business units.
a. [Pros]:Maytag needs to get its financial house in order and get administrative con-
trol over its recent acquisitions.
b. [Cons]:Unless it can grow through a stronger alliance with Bosch-Siemens or some
other backer, Maytag is a prime candidate for takeover because of its poor financial
performance in recent years, and it is suffering from the initial reduction in effi-
ciency inherent in acquisition strategy.
3. Retrenchment: Sell Hoover’s foreign major home appliance businesses (Australia and
UK) to emphasize increasing market share in North America.
a. [Pros]: Divesting Hoover improves bottom line and enables Maytag Corp. to focus
on North America while Whirlpool, Electrolux, and GE are battling elsewhere.
b. [Cons]: Maytag may be giving up its only opportunity to become a player in the
coming global appliance industry.
B. Recommended Strategy 1. Recommend pause strategy, at least for a year, so Maytag can get a grip on its European
operation and consolidate its companies in a more synergistic way.
2. Maytag quality must be maintained, and continued shortage of operating capital will
take its toll, so investment must be made in R&D.
3. Maytag may be able to make the Hoover UK investment work better since the reces-
sion is ending and the EU countries are closer to integrating than ever before.
4. Because it is only an average competitor, Maytag needs the Hoover link to Europe to
provide a jumping off place for negotiations with Bosch-Siemens that could strengthen
their alliance.
VII. Implementation
A. The only way to increase profitability in North America is to further involve Maytag
with the superstore retailers; sure to anger the independent dealers, but necessary for
Maytag to compete.
B. Board members with more global business experience should be recruited, with an eye
toward the future, especially with expertise in Asia and Latin America.
C. R&D needs to be improved, as does marketing, to get new products online quickly.
VIII. Evaluation and Control
A. MIS needs to be developed for speedier evaluation and control. While the question of
control vs. autonomy is “under review,” another Hoover fiasco may be brewing.
B. The acquired companies do not all share the Midwestern work ethic or the Maytag Cor-
poration culture, and Maytag’s managers must inculcate these values into the employ-
ees of all acquired companies.
C. Systems should be developed to decide if the size and location of Maytag manufactur-
ing plants is still correct and to plan for the future. Industry analysis indicates that
smaller automated plants may be more efficient now than in the past.
CHAPTER 12 Suggestions for Case Analysis 387
388 PART 5 Introduction to Case Analysis
EXHIBIT 1 EFAS Table for Maytag Corporation 1993
External Factors Weight Rating Weighted Score Comments
1 2 3 4 5
Opportunities
� Economic integration of European Community .20 4.1 .82 Acquisition of Hoover � Demographics favor quality appliances .10 5.0 .50 Maytag quality � Economic development of Asia .05 1.0 .05 Low Maytag presence � Opening of Eastern Europe .05 2.0 .10 Will take time � Trend to “Super Stores” .10 1.8 .18 Maytag weak in this channel
Threats
� Increasing government regulations .10 4.3 .43 Well positioned � Strong U.S. competition .10 4.0 .40 Well positioned � Whirlpool and Electrolux strong globally .15 3.0 .45 Hoover weak globally � New product advances .05 1.2 .06 Questionable � Japanese appliance companies .10 1.6 .16 Only Asian presence in
Australia
Total Scores 1.00 3.15
EXHIBIT 2 IFAS Table for Maytag Corporation 1993
Internal Factors Weight Rating Weighted Score Comments
1 2 3 4 5
Strengths
� Quality Maytag culture .15 5.0 .75 Quality key to success � Experienced top management .05 4.2 .21 Know appliances � Vertical integration .10 3.9 .39 Dedicated factories � Employer relations .05 3.0 .15 Good, but deteriorating � Hoover’s international orientation .15 2.8 .42 Hoover name in cleaners
Weaknesses
� Process-oriented R&D .05 2.2 .11 Slow on new products � Distribution channels .05 2.0 .10 Superstores replacing small dealers � Financial position .15 2.0 .30 High debt load � Global positioning .20 2.1 .42 Hoover weak outside the United
Kingdom and Australia � Manufacturing facilities .05 4.0 .20 Investing now
Total Scores 1.00 3.05
Ratio Analysis for Maytag Corporation 1993
CHAPTER 12 Suggestions for Case Analysis 389
EXHIBIT 3 SFAS Matrix for Maytag Corporation 1993
1 2 3 4 Duration 5 6
Strategic Factors (Select the most important opportunities/threats from EFAS, Table 4–5 and the most important strengths and weaknesses from IFAS, Table 5–2) Weight Rating
Weighted Score
S H O R T
I N T E R M E D I A T E
L O N G Comments
�S1 Quality Maytag culture (S) .10 5.0 .50 X Quality key to success �S5 Hoover’s international
orientation (S) .10 2.8 .28 X X Name recognition �W3 Financial position (W) .10 2.0 .20 X X High debt �W4 Global positioning (W) .15 2.2 .33 X X Only in N.A., U.K., and
Australia �O1 Economic integration of
European Community (O) .10 4.1 .41 X Acquisition of Hoover �O2 Demographics favor quality (O) .10 5.0 .50 X Maytag quality
�O5 Trend to super stores (O � T) .10 1.8 .18 X Weak in this channel �T3 Whirlpool and Electrolux (T) .15 3.0 .45 X Dominate industry �T5 Japanese appliance
companies (T) .10 1.6 .16 X Asian presence
Total Scores 1.00 3.01
EXHIBIT 4 1990 1991 1992 1993
1. LIQUIDITY RATIOS Current 2.1 1.9 1.8 1.6
Quick 1.1 1.0 1.1 1.0
2. LEVERAGE RATIOS
Debt to Total Assets 61% 60% 76% 57%
Debt to Equity 155% 151% 317% 254%
3. ACTIVITY RATIOS
Inventory turnover—sales 5.7 6.1 7.6 6.9
Inventory Turnover—cost of sales 4.3 4.6 5.8 6.5
Avg. Collection Period—days 57 55 56 0
Fixed Asset Turnover 3.9 3.6 3.6 3.6
Total Assets Turnover 1.2 1.2 1.2 1.1
4. PROFITABILITY RATIOS
Gross Profit Margin 24% 24% 23% 5%
Net Operating Margin 8% 6% 3% 5%
Profit Margin on Sales 3% 3% 0% 2%
Return on Total Assets 4% 3% 0% 2%
Return on Equity 10% 8% 1% 8%
Common Size Income Statements for Maytag Corporation 1993
390 PART 5 Introduction to Case Analysis
EXHIBIT 5 1992 1991 1990
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 76.92 75.88 75.50
Gross Profit 23.08 24.12 24.46
Selling, general/admin. expenses 17.37 17.67 16.90
Reorganization Expenses .031 ———————— ————————
Operating Income .026 .064 .075
Interest Expense (.025) (.025) (0.26)
Other-net .001 .002 .009
Income before accounting changes .002 .042 .052
Income taxes .005 .015 .020
Income before accounting changes (.002) .026 .032
Effect of accounting changes for
post-retirement benefits other than
pensions and income taxes
(.101) — — — — — — — — — — — —
Total Operating Costs and Expenses 74.9 76.0 76.3
Net Income (.104) .026 .032
EXHIBIT 6 Implementation, Evaluation, & Control Plan for Maytag Corporation 1993
Strategic Factor Action Plan
Priority System (1–5)
Who Will Implement
Who Will Review
How Often Review
Criteria Used
Quality
Maytag
culture
Build quality in
acquired units
1 Heads of
acquired units
Manufacturing
VP
Quarterly Number defects
& customer
satisfaction
Hoover’s
international
orientation
Identify ways to
expand sales
2 Head of
Hoover
Marketing VP Quarterly Feasible
alternatives
generated
Financial position Pay down debt 1 CFO CEO Monthly Leverage ratios
Global
positioning
Find strategic
alliance partners
2 VP of Business
Development
COO Quarterly Feasible
alternatives
generated
EU economic
integration
Grow sales
throughout EU
3 Hoover UK
Head
Marketing VP Annually Sales growth
Demographics
favor quality
Simplify
controls
3 Manufacturing
VP
COO Annually Market research
user satisfaction
Trend to super
stores
Market through
Sears
1 Marketing VP CEO Monthly Sales growth
Whirlpool &
Electrolux
Monitor
competitor
performance
1 Competition
committee
COO Quarterly Competitor sales
& new products
Japanese
appliance
companies
Monitor
expansion
4 Head of
Hoover
Australia
Competition
committee
Semi-
annually
Sales growth
outside Japan
CHAPTER 12 Suggestions for Case Analysis 391
Ending Case for Part Five
IN THE GARDEN
Walking with my watering can underneath the cherry
tree, the apricot tree, the plum tree, and the nectarine
tree, strawberry vines and raspberry canes at my feet,
I gazed at my hedge and thought what would it take to
avoid disease in the garden this year? I was amazed
how this garden, so similar and different from previ-
ous seasons, had evolved from two saplings, pur-
chased by chance, placed by happenstance, but
planted with care. Now I wondered at the wild order.
Was this the fruit I should be growing? How could I
end up with the sweetest fruit, and what about the
most fruit and the largest fruit? How would I set my-
self up for more success next year, and what of the
years after that? And, I sadly thought, what shall I do
with the wonderful apple tree I climbed as a child that
now yielded so little fruit?
All these thoughts I had walking with my watering
can under the cherry tree, the apricot tree, the plum tree,
and the nectarine tree, strawberry vines and raspberry
canes at my feet.
This case was written by Mark Meckler, University of Portland and
presented to the North American Case Research Association at its
2006 annual meeting. Copyright © 2006 by Mark Meckler. Edited for
publication in Strategic Management and Business Policy, 12th
edition and Concepts in Strategic Management and Business Policy,
12th edition. Reprinted by permission of Mark Meckler and the North
American Case Research Association.