Critical Analysis Paper
bixgyn.zhou
FrameworksSituationAnalysis021918.pdf
Situation Assessment: Frameworks
Is the company
experiencing any
performance problems?
Poor Performance Declining Sales Declining Profits Poor Cash Flow
Cause of the Problems ?
Know Cause Fix Problem
Situation Assessment
External Analysis
Internal Analysis
Company
Industry
Macro environment
Situation Assessment
External Analysis
Internal Analysis
Review Financial Statement information to determine possible causes of the
lower revenues, profits or cash flow.
Internal Analysis
Financial Performance
Financial Review
Revenue Analysis
Which products represent the largest percentage of revenue?
What regions represent the largest
percentage of revenue?
Revenue Analysis
Revenue Analysis
Revenue Analysis
Fewer Consumers
Fewer Units
Lower Price
Revenue Analysis
Number Consumers
Number Units Price
Revenue Analysis
100 Consumers
10 Units
Revenue
$2 $2,000
50 Consumers
10 Units $2 $1,000
100 Consumers
5 Units $2 $1,000
100 Consumers
10 Units $1 $1,000
Financial Review
Profitability Analysis
Which products represent the largest percentage of profit?
What regions represent the largest
percentage of profit?
Profit Analysis
Profit Analysis
If profit has declined, then assess if the costs have recently increased.
Price
Labor Costs
Material Costs
Contribution Margin
Price
Labor Costs
Material Costs
Contribution Margin
Depreciation
Contribution Margin
Net Margin
SG&A: R&D
SG&A: Promotion/Sales
SG&A: Administrative
Financial Review
Liquidity and Solvency
Short Term Long Term
Short Term Long Term
Current Liabilities
Accounts Payable
Interest Payments
Is the company generating enough operating profit (net margin) to meet the
interest obligations of its lenders?
Are the interest payments too large and dragging down net profit?
Other (fees, writeoffs,TQM)
Net Margin
Net Profit
Interest
Taxes (35%)
Profit Sharing
Financial Review
Cash Flow Analysis
Cash Flow
Operating
Investing
Financing
Examples of Operating Decisions that Decrease Cash Flow
§ Poor forecasting sometimes results in excessive inventory, which decreases cash flow.
§ Sometimes Accounts Receivables increase because of the company’s A/R policy is too long or the company’s customers are not paying on time.
2011 2012 Inventory
Decrease in Cash
2011 2012
Accounts Receivable
Decrease in Cash
Our Customers Our Customers
Example of Investing and Financing Decisions that Decrease Cash Flow
Sometimes a company makes large investments in needed assets but does not fund the investment appropriately with enough external funding (LT Debt, Equity). As a result the internal cash position of the company is depleted.
2011 2012
Long Term Assets
Decrease in Cash
Asset Management
Asset Turnover measures how efficiently a company is using its assets to create revenue.
Is there a sufficient base of revenues
given the current set of fixed assets?
Are sales declining?
Are fixed assets too large given current revenues?
Internal Analysis
Long Term Assets
Internal Analysis
Long Term Assets
Internal Analysis
Long Term Assets
Internal Analysis
Intangible Assets
Asset Management
Company 1
Company 2
Company 2 is able to produce more revenue with the same amount of assets as Company 1.
Internal Analysis 7 S Model
Style
Staff
Skills
Shared Values
Strategy
Structure
Systems
Hardware Software
McKinsey 7 S Model
Internal Analysis
7 S Model Markets?
Products?
Geographies?
Channels?
Consumer Segments?
Organization Structure determines group structure within the company
and roles and responsibilities.
Structure
Structure
Do people understand roles?
How are decisions made?
Quality of Decision Making
A symptom of a dysfunctional
organizational structure is that the company does
not make effective decisions because the appropriate groups or
people were not involved in decision making.
Quality of Decision Making Another symptom of a
dysfunctional organizational structure is that the company does not make decisions fast enough because either
too many groups must be consulted before a
decision can be made or mid level or lower level employees are are not given the authority to
make simple decisions.
Processes – How Work is Done
Examples of Major Systems § Customer Management Systems
§ Human Resources Systems
§ Risk Management Systems
§ Financial Reporting Systems
Customer Data Systems
Is the company collecting enough information about customers so that it can
effectively market to them?
Systems: Customer Data
Compensation Systems
Is the company effectively attracting,
retaining and developing its employees?
Are policies fair?
Are policies motivating the right behaviors?
Are policies rewarding strong performance?
Attraction of Talent
Retention of Talent
Systems: Compensation
Motivation and Performance
Systems: Compensation
Systems: Compensation
Financial Reporting Systems
Is the company able to produce financial reports at the appropriate level (business
unit, region etc) so that managers can make effective decisions?
Systems: Financial Reporting
Systems: Financial Reporting
Every organization has formal work rules within the company, but sometimes there are
informal rules of conduct.
Are the informal rules of conduct affecting performance?
What is the predominant leadership style of key managers within the company?
Is the leadership style negatively impacting the quality of decision making, productivity
or morale?
Style
Style
Does the company maintain staffing levels that are sufficient to:
§ Ensure the productivity of its employees
§ Create customer satisfaction § Grow the company in the future
Staff
Not enough staff – Low Customer Satisfaction
Institutional Skills
Individual Skills
Institutional Skills
Some companies are great at innovation and new
product development.
Some companies are great at Research &
Development.
Some companies are great at Marketing and Sales.
Some companies are great at Operations and are
able to operate efficiently and cheaper than their competitors.
Individual Skills
What are the skills that individual employees need to have?
Who should we recruit?
How should we train and develop them?
Skills
Required Skills
Skill Development
Shared Values
Shared Values
Shared Values
Great Work Environment
Respect and Dignity
Embrace Diversity
Highest Standards for
purchasing, roasting and delivery of fresh coffee
Environmental Leadership
Contribute to communities
and environment
External Analysis
Situation Assessment
External Analysis
Internal Analysis
Understand the difference
Market (Industry)
vs. Segment
Low End
Traditional
High End
Performance
Size
Performance
Si ze
Market (Industry)
Low End
Traditional
High End
Performance
Size
Performance
Si ze
Segment
What is the market size and projected growth of the
markets in which the company competes?
Is revenue declining because the
market is becoming smaller?
External Analysis Market Size and Growth
Smaller Market
Fewer Consumers or Units
Lower Revenue
External Analysis Segment
Size and Growth
What is the size and projected growth of the segments in which the company competes?
Is revenue declining because these segments are
becoming smaller?
Maybe the company’s current strategy is focused on the wrong segments.
Smaller Segment
Fewer Consumers or Units
Lower Revenue
External Analysis Are Customer
Needs Changing?
Low Tech
Traditional
High Tech
Performance
Size
Customer Needs Changed
Company Did not Change Product/Service
Lower Market Share
Lower Revenues
Industry Analysis
Porter’s 5 Forces
Porter’s 5 Forces
Industries with high rivalry are those where the
participants are fighting for market share.
Industry Rivalry Metrics Number of Competitors
Concentration Ratio
Amount of Fixed Assets
Asset Specificity
Industry Rivalry Metrics
Number of Competitors
Concentration Ratio
The Auto Manufacturing Industry has
high rivalry because:
• There are Many Competitors
• Concentration Ratio of the top 4 companies in the industry is less than 70%
The Fast Food Industry has
high rivalry because:
• There are Many Competitors
• Concentration Ratio of the top 4 companies in the industry is less than 70%
The Commercial Aircraft Manufacturing
Industry does not have high rivalry because:
• There are not many competitors
• Concentration Ratio of the top 4 companies in the industry is greater than 70%. In fact, the top
2 companies control over 70% of the market.
Commercial Aircraft: Market Share 2011
Company Sales ($M) Market Share Airbus 41,277 39% Boeing 36,171 34% Bombardier 8,594 8% Gulfstream 5,998 6% Embraer 4,828 5% Dassault Aviation 3,199 3% Cessna 2,990 3% Hawker Beechcraft 2,435 2% ATR 1,300 1%
106,792 100%
Industry Rivalry
Amount of Fixed Costs
Some industries have higher fixed costs
than other industries.
In these industries there is greater pressure to
maintain sales volumes that are necessary to
reach break even points.
( (Price – VC) x Units) – Fixed Costs
Break Even Unit Volume
Fixed Costs (Price – VC)
0
Units
Break Even Unit Volume
Fixed Costs (Price – VC)
Units
$100 $2
50 $1,000 $2
500
Companies in the airline industry have high fixed costs and they fight for market share to maintain sales volumes to reach
the break even point.
Companies in the cable industry have high fixed costs and they fight for market share to maintain sales volumes to reach the
break even point.
Companies that are satellite television providers have high fixed costs and they fight for market share to maintain sales
volumes to reach the break even point.
Sales in some industries follow the business
cycle. As a result they need enough assets to
meet production needs in peak times, but
when the business cycle turns downward,
they fight for market share to maintain
sufficient volumes to reach the break even
point.
When commercial
construction is at its peak, the
steel industry must have the
assets to meet the production
needs of its customers. When
the business cycle turns
downward, the steel
manufacturers fight for
market share to meet the break
even point.
Industry Rivalry
Asset Specificity
Asset for Specific Use Only?
Can Asset be Easily Sold?
The ship building industry has very specific assets that can only
be used in that industry. In times of trouble these assets would be
difficult to sell because the market for these assets is so limited.
As a result, ship builders fight for
market share to maintain sales volumes
to reach the break even point.
Porter’s 5 Forces
Power of Buyers
Number of Buyers (customers)
Customers Revenue
Power of Buyers
Standardization of Products
Low Switching Costs
Power of Buyers
Backward Integration Potential
Supplier Manufacturer Buyer
Porter’s 5 Forces
Power of Suppliers
Number of Suppliers
Standardization of Suppliers
Power of Suppliers
Forward Integration Potential
Supplier Manufacturer Buyer
Supplier Manufacturer Buyer
Porter’s 5 Forces
Threat of Substitutes
Availability of Substitute Products
Porter’s 5 Forces
Potential Entrants
Is it easy to enter my industry?
Needed Assets?
Economies of Scale?
Exit Costs?
Easy Entry To Industry
More Competitors
Lower Revenue
Low Barriers to Entry
High Barriers to Entry
Porter’s 5 Forces
It is important to
understand how each of the five forces affects
performance.
High Rivalry
Lower Market Share
Lower Revenue
Powerful Buyers
Negotiate Lower Prices
Lower Revenues
Powerful Suppliers
Higher Material Costs
Lower Profits
New Entrants Backward Integration Forward
Integration
More Competitors
Lower Market Share
Lower Revenue
Threat of Substitutes
If Increase Price – Consumers consider Substitutes
Limits Price Increases
Constrains Revenues
What macro-environment
factors may affect my
industry?
External Analysis
PESTEL Political
Economic
Sociological
Technology
Environmental
Legal
Are there PESTEL trends which have affected the company’s past performance?
Remember our discussion of the PEST trends which have impacted the Higher Education industry and Temple University.
Economic
Political
Political
Economic
Sociological
Technology
Environmental
Legal
Legal
The End
