Strategic Leadership Real Life Case Study Assignment (Individual Basis)

Purpose of the learning activity: This project will allow the students to use the concepts of Strategic Leadership learned over the duration of the course to analyze a real life case (i.e. local business) in their community by following the case analysis steps

Project Task:

Your real life case for analysis will be: a local business in your community. A company dealing in logistics is preferred, but not necessary.

Your task is to read Appendix 1 The Case Method in the text book and analyze a local business in your community using the steps of the case method. Your goal is to analyze this local business. Use the steps of the case method to back your decision, (i.e. SWAT analysis, ethical responsibility, HRM, Strategic Alternatives). You may want to outline your project like Figure 1 page 327.

In your report you do not have to apply all the steps of the case method as outlined in Appendix 1. For example, some local businesses may not want to give out their financial information. Choose the steps as outlined in the case method that you feel will help you to analyze your local business. Use this information to explain alternative strategies and recommendations for this local business.

Resources needed: Approach a local business and explain your project to them. Internet and library research may be required for this project.

Role of Teacher/Trainer: Act as a mentor for suggestions and examples.

Case Analysis The analysis and discussion of case problems has been the most popular method of teaching strategic management for many yearrs. The case method provides the oPportunity to move from a narrow, specialized view that emphasizes functional techniques to a broader, less pre- cise analysis of the overall organization. Cases present actual business situations and enable you to examine both successful and unsuccessful organizations. In case analysis, you might be asked to critically analyze a situation in which a manager had to make a decision of long-term corporate importance. This aPproach gives you a feel for what it is like to be faced with malk 1 The Case Method What we refer to as a "case" in university teaching is a story of an organization-facs, events, people, circumstances that describe a situation you would encounter if you were a con- sultant to, or a member of, that organization. Cases can depict complex, multidimensional business problems and issues so that students can use their knowledge and experience to diag nose the root causes of the situation as it is described and then recommend a suitable course of action. In other words, case analysis provides students the opportunity to put their skills and knowledge into practice without leaving the classroom. Among the benefits that students can ing and implementing strategic decisions. derive from case analysis are these: .An understanding of the role individuals play in guiding their organizations to succes Sharpened analytical skills in assessing firm resources or capabilities as well as industry or competitive scenarios Practice in identifying key strategic issues and options to address them, and in formulating workable action plans An enhanced sense of business judgment and exposure to a range of industries and companies Strategic management is not the type of discipline you can learn by memorizing a texthwck and lecture notes. Knowing facts, theories, and concepts permits you to make good recom mendations by providing you with an experiences and different values, they do not always see problems in exactly the same way-or the best solutions to them. In a case of "wrong" ones. It is unreasonable to expect that all students agree on what a company should do in the situation described in a case. Nor should we expect reaching a decision about what to do to be straightforward or clear-cut. In the real world, people routinely have to make decisions without knowing whether their decisions are "right." They make their decisions based on a range of factual knowledge, experience and skill, and intuition. How do they know whether their decisions are analytic toolbox. And because students all have different analysis, there is rarely one "right" answer and a number 2 good? Only the passage of time permits that sort of assessment. The only important determinant of decision quality is results. Good decisions result in improved pe- formance, whether that is defined by sales, profits, share price, return on equity, reputation, or some other measure. Doing a good job on a case analysis is not about picking the "right sole tion, but rather undergoing a thorough process of identifying issues, diagnosing situations Appendix encrating and evaluating options, and preparing implementation plans that will result in improved organizational performance. Your objective is therefore to create a strong argument or a particular course of action, not to investigate what an organization really did in order to reare an elaborate post hoc justification. Keep in mind that organizations make unwise deci- ions all the time, not because they are ll-informed or irresponsible, but just because things do not always turn out as expected. In fact, many cases are written about exactly these sorts of sit- uations. So just because an organization did something in real life does not mean that what it did was necessarily the best thing to do. In hindsight, many organizations would do things dif- ferently. Do not fall into the trap of using what an organization actually did as a starting point and working backward from there to justify or make sense of it. If you do, you will find your- self terribly unprepared to answer questions about the foundations of your recommendation, and unable to learn from the experiences of conducting a strategic analysis. Your objective in case analysis is to prepare a well-justified course of action to improve firm performance. A specific recommendation must be made, and it must be supported by system- atic analysis and clear thinking. Consider preparing for a case analysis in the following way: SL S28 1. Read the case twice. The first time gives you a sense of the context of the case (time, indus- try, firm, products) and the issues or problems you will have to address. Resist trying to analyze or solve the case at this point. Rather, read it through to get the big picture of the issues presented in the case. The second reading permits you to identify information in the case that you will use in your analysis, to generate ideas about possible solutions, and to pri- A Numby 50 Nups PO.D Receis oritize issues or concerns raised in the case. 2. Examine the content of exhibits. Often there are interesting bits of information in the organizational charts, process maps, or financial statements at the end of the case. Usually there is something in the exhibits worth using, or else they wouldn't be there. 3. Identify strategic issues and factors. Some cases are written in such a way that these are patently obvious. But don't count on this. Until you have identified issues to address or problems to solve, you are not in a position to start analyzing information or making rec- ommendations. As a guide, look to the beginning and/or ending of the case for a statement of issues. If you cannot find them there, you will need to infer from the facts of the case. 4. Analyze the situation described in the case. Analysis is not repetition of the facts of the case. It is a process of adding meaning to facts in order to interpret them for later use. Similarly, analysis is not just your opinion (however good it might be). Use tools and tech- niques from the textbook to produce important insight and understanding of strategic sit- uations. If you find yourself "analyzing" the case by cutting and pasting large chunks of text into your report or reporting on common sense observations, you are not doing an analy- sis that shows what you know about the concepts of strategic management. 5. Don't treat the facts of the case as gospel. Many cases are written from the perspective of people with particular opinions, values, and assumptions. Their view of the situation is therefore not necessarily the same one that you might have, or that others within the organ- ization might have. Similarly, financial statements might be inaccurate or misleading, or projections might be made on dubious assumptions. Feel free to challenge the validity of the data and information provided in the case, because you will not sound convincing jus- tifying your recommendation by saying "but that's what the case said. 6. Use strong rationale. Everything you include in your report needs to be explained and justified. Opinions should be avoided, not because they are necessarily wrong, but because they are not supported by any form of evidence. When you use strong rationale. you take away the "Why?" questions that make analysis look thoughtless or incomplete. Including your rationale demonstrates the comprehensiveness and clarity of your think- ing., and makes it much easier for a listener or reader to understand how you reached 03430-03 your recommendation. APPENDIX CASE ANALYSIS 309 PR1091 an3/2019 generating and evaluating options, and preparing implementation plans that will result in improved organizational performance. Your objective is therefore to create a strong argument for a particular course of action, not to investigate what an organization really did in order to prepare an elaborate post hoc justification. Keep in mind that organizations make unwise deci- ns all the time, not because they are ill-informed or irresponsible, but just because things do not always turn out as expected. In fact, many cases are written about exactly these sorts of sit- uations, So just because an organization did something in real life does not mean that what it did was necessarily the best thing to do. In hindsight, many organizations would do things dif ferently. Do not fall into the trap of using what an organization actually did as a starting point and working backward from there to justify or make sense of it. If you do, you will find your- self terribly unprepared to answer questions about the foundations of your recommendation, and unable to learn from the experiences of conducting a strategic analysis Your objective in case analysis is to prepare a well-justified course of action to improve firm performance. A specific recommendation must be made, and it must be supported by system- atic analysis and clear thinking. Consider preparing for a case analysis in the following way: to 1. Read the case twice. The first time gives you a sense of the context of the case (time, indus- try, firm, products) and the issues or problems you will have to address. Resist trying to analyze or solve the case at this point. Rather, read it through to get the big picture of the issues presented in the case. The second reading permits you to identify information in the case that you will use in your analysis, to generate ideas about possible solutions, and to pri- oritize issues or concerns raised in the case. 2. Examine the content of exhibits. Often there are interesting bits of information in the organizational charts, process maps, or financial statements at the end of the case. Usually there is something in the exhibits worth using, or else they wouldn't be there. 3. Identify strategic issues and factors. Some cases are written in such a way that these are patently obvious. But don't count on this. Until you have identified issues to address or problems to solve, you are not in a position to start analyzing information or making rec- ommendations. As a guide, look to the beginning and/or ending of the case for a statement of issues. If you cannot find them there, you will need to infer from the facts of the case. 4. Analyze the situation described in the case. Analysis is not repetition of the facts of the case. It is a process of adding meaning to facts in order to interpret them for later use. Similarly, analysis is not just your opinion (however good it might be). Use tools and tech- niques from the textbook to produce important insight and understanding of strategic sit- uations, If you find yourself "analyzing the case by cutting and pasting large chunks of text into your report or reporting on common sense observations, you are not doing an analy- sis that shows what you know about the concepts of strategic management. s Don't treat the facts of the case as gospel. Many cases are written from the perspective of people with particular opinions, values, and assumptions. Their view of the situation is therefore not necessarily the same one that you might have, or that others within the organ- iration might have. Similarly, financial statements might be inaccurate or misleading, or proiections might be made on dubious assumptions. Feel free to challenge the validity of the data and information provided in the case, because you will not sound convincing jus- tifying your recommendation by saying "but that's what the case said. 6 Use strong rationale. Everything you include in your report needs to be explained and justified. Opinions should be avoided, not because they are necessarily wrong, but because they are not supported by any form of evidence. When you use strong rationale, wou take away the "Why?" questions that make analysis look thoughtless or incomplete Including your rationale demonstrates the comprehensiveness and clarity of your think- ing, and makes it much easier for a listener or reader to understand how you reached 50 Number P0Date A Number Received 03430-03 50 your recommendation. 7Prepare a detailed action plan. The tough part about strategic management is not s aTpood" decision based on the facts available, but turning that decision into actions that will produce the desired results. Here is where you can demonstrate your creativity and thonoaghness by specifying what needs to be done, by whom, at what time, and at what cost. The mone detail you provide here, the more likely you are to be convincing about the overall recomnedation yor make. Nothing looks worse than a recommendation that is mot accompanied by details on how to implement it. It's easy to say "we need to sell mote products "But is anyone going to be prepared to act on that sort of recommendation with making APEC CASE ANAYSES In conclusion, there is a definite skill in preparing case analyses. The case is both a way no introduce a little "real life" to students without leaving the classroom and a way for sta dents to demonstrate their ability to apply concepts from the class to a particular situation. To do well on your cases, you therefore need to be thorough in preparing your analysis and recommendations, have clear reasons for the choices you have made, use evidence to sup- port pour reasons, and show a conviction to your course or action. Try not to worry about what actually happened-it is not always a good indicator of what should have happened. If you are convincing in your recommendation as described above, you will do wel on your case analyses. But do not interpret this as meaning that any case report is as good as the next, or that any case report will receive a top grade. Some analyses, recommendations, and action plans are better than others are. You must be prepared to clarify the process by which your decisions were made. If you do so in a way that most reasonable people can see merit in, then you know you've done a good job. Be worried if you cannot answer "Why ques tions for every piece of advice you give. And be sure you understand how every section of out knowing how to do it your strategic reports tells the reader something about why, how, when, and by whom firm performance will be improved. 2 Researching the Case Situation Depending on the type of assignment used by your instructor, you may be required to con- duct your own research on the case situation prior to preparing your recommendations. Here you should undertake outside research into the environmental setting. Check the decision (typically the latest date mentioned in the case) to find out when the situs date of each case tion occurred, and then screen the business periodicals for that time period. Use computer- ized company and industry information services such as COMPUSTAT, Compact Discdosre ABUINFORM Global, CBCA (Canadian Business and Current Affairs), and CD/International available on CD-ROM or online at many university libraries. On the internet, Hoover's Online Corporate Directory (www.hoovers.com), the Financial Post (www.nationalpost.com financialpost), and the CBC (www.cbc.ca/business) provide a wide range of business activ- ity and the circumstances at the time a case was written. These sites also have links to company and industry sites, as well as their own archives of stories and reports. A company's annual report from the year of the case can be very helpful. Annual reports contain not only the usual income statements and balance sheets, but also cash flow state ments and notes to the financial statements indicating why certain actions were taken. An understanding of the economy during that period will help you avoid making a serious e in your analysis, for example, suggesting a sale of stock when the stock market is at an all-m low or taking on more debt when the prime interest rate is over 15%. Information on the industry will provide insights research into the economy and a corporation's industry are suggested in later in this chapter Many instructors, however, want students to work only with the facts as provided in the case on its competitive activities. Some resources available to This changes the experience of analyzing a case from one of researching and investigating to one of working with a limited amount of information and trying to do the most with it. The reality of decision making in any organizational context is one of incomplete information. But it is both timely and costly to collect and interpret data. Unfortunately, with so much informa- tion available through the internet and other computerized sources, decision makers can easily be flooded with information. Do they make better decisions as a result? Not necessarily. Although the cases you will study in a strategic management class contain much less informa- tion than a strategic decision maker would like to have, it is good practice to work with the information you have, making judicious assumptions only where necessary and not using a lack of information as an excuse for not making a decision. In other words, use the informa tion that is presented in the case to the best of your abilities. All professionally written cases provide you with more than enough material to conduct a strategic analysis as described in this book, Learn to construct defensible recommendations in the context of imperfect information, and most important, use whatever information you do have at your disposal as support or rationale for the decisions you do make. APPENDO CASE ANALYSIS 311 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 the inter Ratio analysis is the calculation of ratios from data in these statements. It is done to identify pos sible financial strengths or weaknesses. Thus, it is a valuable part of SWOT analysis. A review of key financial ratios can help you assess the compamy's overall situation and pinpoint some prob- lem areas. Ratios are useful regardless of firm size and enable you to compare a company's ratios with industry averages. Table I on page 312 lists some of the most important financial ratios which are (1) liquidity ratios, (2) profitability ratios, (3) activity ratios, and (4) leverage ratios These ratios are usually used in one of two ways (a) to identify financial trends over time for an organization or one of its divisions; or (b) to make comparisons across companies at a given point in time. Financial ratios in isolation are rarely particularly revealing. Having some basis of comparison allows for analysts to make comparisons that point to improving or deteriorating financial position, suggesting how future performance will be affected by recent changes. gretation of financial atios computed from an organization's finan- cial statements 30- LIQUIDITY RATIOS Liquidity ratios indicate how easily an organization can complete its operating cycle. In finan- cial terms, an operating cycle is the length of time it takes to produce its product, sell it, and use the proceeds to product more products. Normally, organizations need to finance their production through paying for raw materials and components in cash or on credit. When products are sold, the organization uses cash or creates accounts receivable to meet its accounts payable ity, a surplus of current assets that can be used to finance operating activities and moet cur rent liabilities. Liquidity analysis, therefore, compares the organization's current asset endowments with its obligations. This suggests a margin of safety provided by the cash and other current assets available to the organization in comparison with its obligations. In real- ity, no organization liquidates all its current assets. If it did, it would have no inventory to sell and would therefore not be able to operate as a going concern. Liquidity rations need to he interpreted carefully, with the optimal level of liquidity determined by economic and real- world factors. In other words, a current ratio of 2.0 is virtually meaningless out of context. For some organizations it might be very high, while for others it might be dangerously low. replenish inventory levels. The ability to repeat this cycle requires liquid- PROFITABILITY RATIOS An organization's owners are concerned with its ability to generate, sustain, and increase prof. itability. This is normally measured by examining the organization's net profits and two interrelated dimensions First, comparing profits to sales indicates the residual return an organ- ination earns for every dollar of sales revenue. By measuring how well an organization is able to trol costs in nelation to revenues, returm on sales points to the earning power of the oegani- aation Second, comparing profits to the investments required to generate them allows ownes o compare the return per dollar invested in the organization with the returns possible in det or oaity markets Whichever method is used, some form of profitability index is invariably used by management as an assessment of its overall performance. This is particularly important in highly competitive industries, where a firm's above-average levels of profitability will allow it to withstand the dowmward pressure on prices that occurs as industry profits attract new entrants Activity ratios describe the relationship between an organization's operations (such as manu facturing and selling products, providing services) and the investment in assets required to sustain that level of activity. Whatever the scope of an organization's activities might be, it mquires both current assets (e.g., cash, inventory, accounts receivable) and fixed assets (e.g property plant, equipment) in order to function. A high activity ratio indicates efficiency in aperations because fewer assets are required to produce a certain level of activity. Trends in this ratio can be predictive of changes in profitability, given that inefficient operations tend to put organizations at some level of competitive disadvantage. Activity ratios are also useful in forecasting an organization's capital requirements because they point to the increased ACTIVITY RATIOS The first set of activity ratios presented in Table 1 are referred to as short-term or operat investments necessary to support targeted sales increases. ing activity ratios. They focus on how efficiently current or short-term assets such as cash, inventory, and accounts receivable are used. Low ratios in these areas indicate a drain on cur- rent assets based on poor credit policies and/or inventory management. Long-term or invest ment activity ratios specifically examine the efficiency of fixed assets such as property, plant, and equipment. Larger investments like these are usually made periodically to meet planned increases in sales. So as production levels near capacity, fixed asset turnover appears very good. But as soon as a capacity expansion is made, the ratio declines. Using an aggregate measure of overall investment efficiency such as total asset turnover can, therefore, be helpful. LEVERAGE RATIOS Leverage is the term referring to the partial use of debt to finance investments. Leveraged firms can provide superior returns to their shareholders when there is a gap between the cost of debt (the interest rate associated with the debt) and the return on the investments made by it. These henefits, however, come with certain risks. Any time debt financing is used, firms create fived costs of interest and principal repayment. If demand or profit margins decline, these newly created fixed financing costs can decrease profitability. A normal amount of financial leverage often varies by industry. Some are very capital- intensive, such as steel production, automobile manufacturing, and oil refining. In these industries it is normal to incur high levels of debt to finance the capital equipment necessary to finance business activity. Generally speaking, debt should be long term to match the useful life of the assets it was used to acquire. Analysts also want to consider the organization's ability to meet current debt obligations, more specifically the interest expense created by incurning debt. Once again matching is what is desired-an ability to meet current interest or principal payments based on current net profit levels. OTHER RATIOS A variety of ratios are used for securities valuation. Corporations have common shares that may be publicly or privately traded. Potential investors look to certain measures of firm performance to gauge the desirability of investment in particular organizations, and as such look to its profitability in relation to the number and value of shares outstanding. Earnings per share is the most widely used performance indicator for publicly traded firms. It permits a quick comparison of the profits associated with each dollar of equity invested in the firm. The price earnings ratio is another popular measure, showing the degree to which the market capitalizes a firm's earnings. By showing how much investors are willing to pay per dollar of reported profits, the price earnings ratio indicates the growth prospects for a firm and the associated risks in its operations. A high ratio indicates market perceptions that a firm's operations are less risky than most, that growth prospects are good, or both. ANALYZING FINANCIAL STATEMENTS te the preceding section you were introduced to a variety of financial ratios that are com- monly used in the analysis of financial statements. These ratios (liquidity, profitability, activ ity, and leverage) all measure some aspect of an organization's operating, investment, and financing activities. They are intended to give insight into different dimensions of firm per- formance, both by an organization's managers in their decisions about the future, as well as by potential creditors and investors. In case analysis, the analysis of financial statements forms part of the assessment of the organization's current position and serves as an indica- tor of its financial resources that may permit further investments associated with changes in firm strategy. Ratio analysis cannot answer all questions about an organization's perform- ance, but it can point to aspects of a firm's operations, investments, and financing that have strategic importance. How should the financial ratios you calculated be used? In your analysis, do not simply make an exhibit including all the ratios; select and discuss only those ratios that have an impact on the company's problems. For instance, accounts receivable and inventory may pro- vide a source of funds. If receivables and inventories are double the industry average, reduc- ing them may provide 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 discover whether the company is out of line with others in the industry. 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, carnings per share, debt-to-equity ratio, return on investment, and so on, plus a ratio study comparing the firm under study with industry standards. Developing trends may be revealed through examination of the informa- tion obtained through these steps: Scrutinize historical income statements and balance sheets. These basic two statements provide most of the data needed for analysis. Statements of cash flow may also be useful Compare historical statements over time ifa series of statements is available. Calculate changes that occur in individual categories from year to year, as well as the cumu- lative total change. Determine the change as a percentage as well as an absolute amount. Adjust for inflation if that was a significant factor. 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 during the same period. The outcome of this comparison might suggest that further investigation into the manufacturing process is necessary. If a company is reporting strong net income growth but negative cash flow, this would suggest that the com- pany 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 products or services it is counting as sold. Is the company dumping expect the distributors to return the unordered product the next month-thus drastically cut prodct on its distributors at the end of the year to boost its reported annual salest 1 so J AYENCN CASE ANSss Ocher "tricks of the trade" need to be examined. Until June 2000, firms growing through aoguisition were allowed to account for the cost of the purchased company through the pool eing the neat year's reported sales was used in 40% of the value of mergs between 1997 and 1999, The pooling method enabled the acquiring company to diseegand the premium it paid for the other firm (the amount above the fair market value of the purchased company ofhen called gooddwill"). Thus, when PepsiCo agreed to purchase Quaker Oats for $134 billion in PepsiCo stock, the $13.4 billion was not found on PepsiCo's balance shee. As of hune 2000 merging firms must use the "purchase" accounting rules in which the trae put ing of both companies stocks This approach dee gowt aow Note that multinational corporations follow the accounting rules for their home country As a result, their financial statements may be somewhat difficult to understand or to use for comparisons with competitors from other countries. For example, British firms sach British Petroleum and The Body Shop use the term "turnover" rather than sales revenae. ln the case of AB Electrolux of Sweden, a footnote to the annual report indicates that the con solidated accounts have been prepared in accordance with Swedish accounting standards which differ in certain significant respects from generally accepted accounting principles (GAAP) in Canada. For one year, net income of 4830 million SEK (Swedish kronor) appro imated 5655 SEK according to GAAP Total assets for the same period were 84 183 million chase price is reflected in the financial statements aon can b ands SEK according to the Swedish principle, but 86 658 according to GAAP COMMON-SIZE STATEMENTS Common-size statements are income statements and balance sheets in which the dollar fig ures have been converted into percentages. For the income statement, net sales tepresent 100%: calculate the percentage of each category so that the categories sum to the net sales per- centage (100%6). For the balance sheet, give the total assets a value of 100 % and calculate other asset and liability categories as percentages of the total assets. (Individual asset and lability items, such as accounts receivable and accounts payable, can also be calculated as a percentage of net sales.) When you comvert 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 with the company's historical figures. To get a proper picture, however, make comparisons with industry data, if available, to see if fluctuations are merely reflecting industry-wide trends. If a firm's trends are generally in line with those of the rest of the ind try, problems are less likely than if the firm's trends are worse than industry averagrs Common-size statements are ments 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 e mate the future with your scenario assumptions for each year. especially helpful in developing scenarios and pro forma se Z-VALUE, INDEX OF SUSTAINABLE GROWTH, AND FREE CASH FLOW If the organization being studied appears to be in poor financial condition, use Altman's bankruptcy formula to calculate its Z-value. The Z-value formula combines five ratios y weighting them according to their importance formula: Altman's bankruptcy formula a composite index of an organize ton's financial strength to a corporation's financial strength. This is the Z= 1,2x + 1.4x,+3.3x, + 0.6x, 1.0x + APPENDDX CASE ANALYSIS 317 where Working capital/Total assets (%) x, x, Retained earnings/Total assets (%) Earnings before interest and taxes/Total assets (%) Market value of equity/Total liabilities (%) x, Sales/Total assets (number of times) x, x, Scores below 1,81 indicate significant credit problems, whereas a score above 3.0 indicates a bealthy firm. Scores between 1,81 and 3.0 indicate question marks, The index of sustainable growth is useful to learn if 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. Here is the formula for it: of sustainabie gwthameasure of wmch of an organ ossales growth an be sustained by analy generated P1-D)(1+L)] [T-P(1-D1+L) where P (Net profit before tax/Net sales) X 100 Target dividends/Profit after tax D Total liabilities/Net worth L T (Total assets/Net sales) X 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 to equity ratio, or reduce assets by renting or leasing arrangements. Takeover artists and LBO (leveraged buyout) specialists look at an organization's financial statements for operating cash flow: the amount of money generated by a company before the cost of financing and taxes. This is the company's net income plus depreciation plus depletion, amortization. interest expense, and income tax expense. LBO specialists will take on as much debt as the company's operating cash flow can support. A similar measure, EBITDA (earnings before interest, taxes, depreciation, and amortiza- tion), is sometimes used, but it is not determined in accordance with generally accepted accounting principles and is thus subject to varying calculations. Although operating cash flow is a broad measure of a company's funds, some takeover artists look at a much narrower free cash flow: the amount of money a new owner can take out of the firm without harming the business. This is net income plus depreciation, depletion, and amortization less capital expenditures and dividends. The free cash flow ratio is very useful in evaluating the stability of an entrepreneurial venture. The danger in using these instruments is that they appear to be ca same as cash flow-which they are not. According to Martin Fridson, chief of high-vield research with Merrill Lynch, "A capital intensive company isn't earning a profit if its assets are constant dollars an adjustment for inflation that permits direct com- parison of sales and revenue figures wearing down from wear and tear. USEFUL ECONOMIC MEASURES If you are analyzing a company over many years, you may want to adjust sales and net income Gor inflation to arrive at "true" financial performance in constant dollars, Constant dollars are dollars adiusted for inflation to make them comparable over various years. See the Global ne feature to learn why inflation can be an important issue for multinational corporations, One way to adjust for inflation is to use the consumer price index (CPI), as given in Table 2 consumer price index a measure of intation based on the cost of a basket of items repre- senting typical house- hold expenditures Case Analysis The analysis and discussion of case problems has been the most popular method of teaching strategic management for many yearrs. The case method provides the oPportunity to move from a narrow, specialized view that emphasizes functional techniques to a broader, less pre- cise analysis of the overall organization. Cases present actual business situations and enable you to examine both successful and unsuccessful organizations. In case analysis, you might be asked to critically analyze a situation in which a manager had to make a decision of long-term corporate importance. This aPproach gives you a feel for what it is like to be faced with malk 1 The Case Method What we refer to as a "case" in university teaching is a story of an organization-facs, events, people, circumstances that describe a situation you would encounter if you were a con- sultant to, or a member of, that organization. Cases can depict complex, multidimensional business problems and issues so that students can use their knowledge and experience to diag nose the root causes of the situation as it is described and then recommend a suitable course of action. In other words, case analysis provides students the opportunity to put their skills and knowledge into practice without leaving the classroom. Among the benefits that students can ing and implementing strategic decisions. derive from case analysis are these: .An understanding of the role individuals play in guiding their organizations to succes Sharpened analytical skills in assessing firm resources or capabilities as well as industry or competitive scenarios Practice in identifying key strategic issues and options to address them, and in formulating workable action plans An enhanced sense of business judgment and exposure to a range of industries and companies Strategic management is not the type of discipline you can learn by memorizing a texthwck and lecture notes. Knowing facts, theories, and concepts permits you to make good recom mendations by providing you with an experiences and different values, they do not always see problems in exactly the same way-or the best solutions to them. In a case of "wrong" ones. It is unreasonable to expect that all students agree on what a company should do in the situation described in a case. Nor should we expect reaching a decision about what to do to be straightforward or clear-cut. In the real world, people routinely have to make decisions without knowing whether their decisions are "right." They make their decisions based on a range of factual knowledge, experience and skill, and intuition. How do they know whether their decisions are analytic toolbox. And because students all have different analysis, there is rarely one "right" answer and a number 2 good? Only the passage of time permits that sort of assessment. The only important determinant of decision quality is results. Good decisions result in improved pe- formance, whether that is defined by sales, profits, share price, return on equity, reputation, or some other measure. Doing a good job on a case analysis is not about picking the "right sole tion, but rather undergoing a thorough process of identifying issues, diagnosing situations Appendix encrating and evaluating options, and preparing implementation plans that will result in improved organizational performance. Your objective is therefore to create a strong argument or a particular course of action, not to investigate what an organization really did in order to reare an elaborate post hoc justification. Keep in mind that organizations make unwise deci- ions all the time, not because they are ll-informed or irresponsible, but just because things do not always turn out as expected. In fact, many cases are written about exactly these sorts of sit- uations. So just because an organization did something in real life does not mean that what it did was necessarily the best thing to do. In hindsight, many organizations would do things dif- ferently. Do not fall into the trap of using what an organization actually did as a starting point and working backward from there to justify or make sense of it. If you do, you will find your- self terribly unprepared to answer questions about the foundations of your recommendation, and unable to learn from the experiences of conducting a strategic analysis. Your objective in case analysis is to prepare a well-justified course of action to improve firm performance. A specific recommendation must be made, and it must be supported by system- atic analysis and clear thinking. Consider preparing for a case analysis in the following way: SL S28 1. Read the case twice. The first time gives you a sense of the context of the case (time, indus- try, firm, products) and the issues or problems you will have to address. Resist trying to analyze or solve the case at this point. Rather, read it through to get the big picture of the issues presented in the case. The second reading permits you to identify information in the case that you will use in your analysis, to generate ideas about possible solutions, and to pri- A Numby 50 Nups PO.D Receis oritize issues or concerns raised in the case. 2. Examine the content of exhibits. Often there are interesting bits of information in the organizational charts, process maps, or financial statements at the end of the case. Usually there is something in the exhibits worth using, or else they wouldn't be there. 3. Identify strategic issues and factors. Some cases are written in such a way that these are patently obvious. But don't count on this. Until you have identified issues to address or problems to solve, you are not in a position to start analyzing information or making rec- ommendations. As a guide, look to the beginning and/or ending of the case for a statement of issues. If you cannot find them there, you will need to infer from the facts of the case. 4. Analyze the situation described in the case. Analysis is not repetition of the facts of the case. It is a process of adding meaning to facts in order to interpret them for later use. Similarly, analysis is not just your opinion (however good it might be). Use tools and tech- niques from the textbook to produce important insight and understanding of strategic sit- uations. If you find yourself "analyzing" the case by cutting and pasting large chunks of text into your report or reporting on common sense observations, you are not doing an analy- sis that shows what you know about the concepts of strategic management. 5. Don't treat the facts of the case as gospel. Many cases are written from the perspective of people with particular opinions, values, and assumptions. Their view of the situation is therefore not necessarily the same one that you might have, or that others within the organ- ization might have. Similarly, financial statements might be inaccurate or misleading, or projections might be made on dubious assumptions. Feel free to challenge the validity of the data and information provided in the case, because you will not sound convincing jus- tifying your recommendation by saying "but that's what the case said. 6. Use strong rationale. Everything you include in your report needs to be explained and justified. Opinions should be avoided, not because they are necessarily wrong, but because they are not supported by any form of evidence. When you use strong rationale. you take away the "Why?" questions that make analysis look thoughtless or incomplete. Including your rationale demonstrates the comprehensiveness and clarity of your think- ing., and makes it much easier for a listener or reader to understand how you reached 03430-03 your recommendation. APPENDIX CASE ANALYSIS 309 PR1091 an3/2019 generating and evaluating options, and preparing implementation plans that will result in improved organizational performance. Your objective is therefore to create a strong argument for a particular course of action, not to investigate what an organization really did in order to prepare an elaborate post hoc justification. Keep in mind that organizations make unwise deci- ns all the time, not because they are ill-informed or irresponsible, but just because things do not always turn out as expected. In fact, many cases are written about exactly these sorts of sit- uations, So just because an organization did something in real life does not mean that what it did was necessarily the best thing to do. In hindsight, many organizations would do things dif ferently. Do not fall into the trap of using what an organization actually did as a starting point and working backward from there to justify or make sense of it. If you do, you will find your- self terribly unprepared to answer questions about the foundations of your recommendation, and unable to learn from the experiences of conducting a strategic analysis Your objective in case analysis is to prepare a well-justified course of action to improve firm performance. A specific recommendation must be made, and it must be supported by system- atic analysis and clear thinking. Consider preparing for a case analysis in the following way: to 1. Read the case twice. The first time gives you a sense of the context of the case (time, indus- try, firm, products) and the issues or problems you will have to address. Resist trying to analyze or solve the case at this point. Rather, read it through to get the big picture of the issues presented in the case. The second reading permits you to identify information in the case that you will use in your analysis, to generate ideas about possible solutions, and to pri- oritize issues or concerns raised in the case. 2. Examine the content of exhibits. Often there are interesting bits of information in the organizational charts, process maps, or financial statements at the end of the case. Usually there is something in the exhibits worth using, or else they wouldn't be there. 3. Identify strategic issues and factors. Some cases are written in such a way that these are patently obvious. But don't count on this. Until you have identified issues to address or problems to solve, you are not in a position to start analyzing information or making rec- ommendations. As a guide, look to the beginning and/or ending of the case for a statement of issues. If you cannot find them there, you will need to infer from the facts of the case. 4. Analyze the situation described in the case. Analysis is not repetition of the facts of the case. It is a process of adding meaning to facts in order to interpret them for later use. Similarly, analysis is not just your opinion (however good it might be). Use tools and tech- niques from the textbook to produce important insight and understanding of strategic sit- uations, If you find yourself "analyzing the case by cutting and pasting large chunks of text into your report or reporting on common sense observations, you are not doing an analy- sis that shows what you know about the concepts of strategic management. s Don't treat the facts of the case as gospel. Many cases are written from the perspective of people with particular opinions, values, and assumptions. Their view of the situation is therefore not necessarily the same one that you might have, or that others within the organ- iration might have. Similarly, financial statements might be inaccurate or misleading, or proiections might be made on dubious assumptions. Feel free to challenge the validity of the data and information provided in the case, because you will not sound convincing jus- tifying your recommendation by saying "but that's what the case said. 6 Use strong rationale. Everything you include in your report needs to be explained and justified. Opinions should be avoided, not because they are necessarily wrong, but because they are not supported by any form of evidence. When you use strong rationale, wou take away the "Why?" questions that make analysis look thoughtless or incomplete Including your rationale demonstrates the comprehensiveness and clarity of your think- ing, and makes it much easier for a listener or reader to understand how you reached 50 Number P0Date A Number Received 03430-03 50 your recommendation. 7Prepare a detailed action plan. The tough part about strategic management is not s aTpood" decision based on the facts available, but turning that decision into actions that will produce the desired results. Here is where you can demonstrate your creativity and thonoaghness by specifying what needs to be done, by whom, at what time, and at what cost. The mone detail you provide here, the more likely you are to be convincing about the overall recomnedation yor make. Nothing looks worse than a recommendation that is mot accompanied by details on how to implement it. It's easy to say "we need to sell mote products "But is anyone going to be prepared to act on that sort of recommendation with making APEC CASE ANAYSES In conclusion, there is a definite skill in preparing case analyses. The case is both a way no introduce a little "real life" to students without leaving the classroom and a way for sta dents to demonstrate their ability to apply concepts from the class to a particular situation. To do well on your cases, you therefore need to be thorough in preparing your analysis and recommendations, have clear reasons for the choices you have made, use evidence to sup- port pour reasons, and show a conviction to your course or action. Try not to worry about what actually happened-it is not always a good indicator of what should have happened. If you are convincing in your recommendation as described above, you will do wel on your case analyses. But do not interpret this as meaning that any case report is as good as the next, or that any case report will receive a top grade. Some analyses, recommendations, and action plans are better than others are. You must be prepared to clarify the process by which your decisions were made. If you do so in a way that most reasonable people can see merit in, then you know you've done a good job. Be worried if you cannot answer "Why ques tions for every piece of advice you give. And be sure you understand how every section of out knowing how to do it your strategic reports tells the reader something about why, how, when, and by whom firm performance will be improved. 2 Researching the Case Situation Depending on the type of assignment used by your instructor, you may be required to con- duct your own research on the case situation prior to preparing your recommendations. Here you should undertake outside research into the environmental setting. Check the decision (typically the latest date mentioned in the case) to find out when the situs date of each case tion occurred, and then screen the business periodicals for that time period. Use computer- ized company and industry information services such as COMPUSTAT, Compact Discdosre ABUINFORM Global, CBCA (Canadian Business and Current Affairs), and CD/International available on CD-ROM or online at many university libraries. On the internet, Hoover's Online Corporate Directory (www.hoovers.com), the Financial Post (www.nationalpost.com financialpost), and the CBC (www.cbc.ca/business) provide a wide range of business activ- ity and the circumstances at the time a case was written. These sites also have links to company and industry sites, as well as their own archives of stories and reports. A company's annual report from the year of the case can be very helpful. Annual reports contain not only the usual income statements and balance sheets, but also cash flow state ments and notes to the financial statements indicating why certain actions were taken. An understanding of the economy during that period will help you avoid making a serious e in your analysis, for example, suggesting a sale of stock when the stock market is at an all-m low or taking on more debt when the prime interest rate is over 15%. Information on the industry will provide insights research into the economy and a corporation's industry are suggested in later in this chapter Many instructors, however, want students to work only with the facts as provided in the case on its competitive activities. Some resources available to This changes the experience of analyzing a case from one of researching and investigating to one of working with a limited amount of information and trying to do the most with it. The reality of decision making in any organizational context is one of incomplete information. But it is both timely and costly to collect and interpret data. Unfortunately, with so much informa- tion available through the internet and other computerized sources, decision makers can easily be flooded with information. Do they make better decisions as a result? Not necessarily. Although the cases you will study in a strategic management class contain much less informa- tion than a strategic decision maker would like to have, it is good practice to work with the information you have, making judicious assumptions only where necessary and not using a lack of information as an excuse for not making a decision. In other words, use the informa tion that is presented in the case to the best of your abilities. All professionally written cases provide you with more than enough material to conduct a strategic analysis as described in this book, Learn to construct defensible recommendations in the context of imperfect information, and most important, use whatever information you do have at your disposal as support or rationale for the decisions you do make. APPENDO CASE ANALYSIS 311 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 the inter Ratio analysis is the calculation of ratios from data in these statements. It is done to identify pos sible financial strengths or weaknesses. Thus, it is a valuable part of SWOT analysis. A review of key financial ratios can help you assess the compamy's overall situation and pinpoint some prob- lem areas. Ratios are useful regardless of firm size and enable you to compare a company's ratios with industry averages. Table I on page 312 lists some of the most important financial ratios which are (1) liquidity ratios, (2) profitability ratios, (3) activity ratios, and (4) leverage ratios These ratios are usually used in one of two ways (a) to identify financial trends over time for an organization or one of its divisions; or (b) to make comparisons across companies at a given point in time. Financial ratios in isolation are rarely particularly revealing. Having some basis of comparison allows for analysts to make comparisons that point to improving or deteriorating financial position, suggesting how future performance will be affected by recent changes. gretation of financial atios computed from an organization's finan- cial statements 30- LIQUIDITY RATIOS Liquidity ratios indicate how easily an organization can complete its operating cycle. In finan- cial terms, an operating cycle is the length of time it takes to produce its product, sell it, and use the proceeds to product more products. Normally, organizations need to finance their production through paying for raw materials and components in cash or on credit. When products are sold, the organization uses cash or creates accounts receivable to meet its accounts payable ity, a surplus of current assets that can be used to finance operating activities and moet cur rent liabilities. Liquidity analysis, therefore, compares the organization's current asset endowments with its obligations. This suggests a margin of safety provided by the cash and other current assets available to the organization in comparison with its obligations. In real- ity, no organization liquidates all its current assets. If it did, it would have no inventory to sell and would therefore not be able to operate as a going concern. Liquidity rations need to he interpreted carefully, with the optimal level of liquidity determined by economic and real- world factors. In other words, a current ratio of 2.0 is virtually meaningless out of context. For some organizations it might be very high, while for others it might be dangerously low. replenish inventory levels. The ability to repeat this cycle requires liquid- PROFITABILITY RATIOS An organization's owners are concerned with its ability to generate, sustain, and increase prof. itability. This is normally measured by examining the organization's net profits and two interrelated dimensions First, comparing profits to sales indicates the residual return an organ- ination earns for every dollar of sales revenue. By measuring how well an organization is able to trol costs in nelation to revenues, returm on sales points to the earning power of the oegani- aation Second, comparing profits to the investments required to generate them allows ownes o compare the return per dollar invested in the organization with the returns possible in det or oaity markets Whichever method is used, some form of profitability index is invariably used by management as an assessment of its overall performance. This is particularly important in highly competitive industries, where a firm's above-average levels of profitability will allow it to withstand the dowmward pressure on prices that occurs as industry profits attract new entrants Activity ratios describe the relationship between an organization's operations (such as manu facturing and selling products, providing services) and the investment in assets required to sustain that level of activity. Whatever the scope of an organization's activities might be, it mquires both current assets (e.g., cash, inventory, accounts receivable) and fixed assets (e.g property plant, equipment) in order to function. A high activity ratio indicates efficiency in aperations because fewer assets are required to produce a certain level of activity. Trends in this ratio can be predictive of changes in profitability, given that inefficient operations tend to put organizations at some level of competitive disadvantage. Activity ratios are also useful in forecasting an organization's capital requirements because they point to the increased ACTIVITY RATIOS The first set of activity ratios presented in Table 1 are referred to as short-term or operat investments necessary to support targeted sales increases. ing activity ratios. They focus on how efficiently current or short-term assets such as cash, inventory, and accounts receivable are used. Low ratios in these areas indicate a drain on cur- rent assets based on poor credit policies and/or inventory management. Long-term or invest ment activity ratios specifically examine the efficiency of fixed assets such as property, plant, and equipment. Larger investments like these are usually made periodically to meet planned increases in sales. So as production levels near capacity, fixed asset turnover appears very good. But as soon as a capacity expansion is made, the ratio declines. Using an aggregate measure of overall investment efficiency such as total asset turnover can, therefore, be helpful. LEVERAGE RATIOS Leverage is the term referring to the partial use of debt to finance investments. Leveraged firms can provide superior returns to their shareholders when there is a gap between the cost of debt (the interest rate associated with the debt) and the return on the investments made by it. These henefits, however, come with certain risks. Any time debt financing is used, firms create fived costs of interest and principal repayment. If demand or profit margins decline, these newly created fixed financing costs can decrease profitability. A normal amount of financial leverage often varies by industry. Some are very capital- intensive, such as steel production, automobile manufacturing, and oil refining. In these industries it is normal to incur high levels of debt to finance the capital equipment necessary to finance business activity. Generally speaking, debt should be long term to match the useful life of the assets it was used to acquire. Analysts also want to consider the organization's ability to meet current debt obligations, more specifically the interest expense created by incurning debt. Once again matching is what is desired-an ability to meet current interest or principal payments based on current net profit levels. OTHER RATIOS A variety of ratios are used for securities valuation. Corporations have common shares that may be publicly or privately traded. Potential investors look to certain measures of firm performance to gauge the desirability of investment in particular organizations, and as such look to its profitability in relation to the number and value of shares outstanding. Earnings per share is the most widely used performance indicator for publicly traded firms. It permits a quick comparison of the profits associated with each dollar of equity invested in the firm. The price earnings ratio is another popular measure, showing the degree to which the market capitalizes a firm's earnings. By showing how much investors are willing to pay per dollar of reported profits, the price earnings ratio indicates the growth prospects for a firm and the associated risks in its operations. A high ratio indicates market perceptions that a firm's operations are less risky than most, that growth prospects are good, or both. ANALYZING FINANCIAL STATEMENTS te the preceding section you were introduced to a variety of financial ratios that are com- monly used in the analysis of financial statements. These ratios (liquidity, profitability, activ ity, and leverage) all measure some aspect of an organization's operating, investment, and financing activities. They are intended to give insight into different dimensions of firm per- formance, both by an organization's managers in their decisions about the future, as well as by potential creditors and investors. In case analysis, the analysis of financial statements forms part of the assessment of the organization's current position and serves as an indica- tor of its financial resources that may permit further investments associated with changes in firm strategy. Ratio analysis cannot answer all questions about an organization's perform- ance, but it can point to aspects of a firm's operations, inve