Prentice Hall, Inc. © 200615-1 STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER CHAPTER 15 Suggestions for Case Analysis.

Prentice Hall, Inc. © 2006 15-1

STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 15 Suggestions for Case

Analysis


Strategic Audit Worksheet Part I

Analysis

Comments

Strategic Audit Heading

(+) Factors

(-) Factors

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


Strategic Audit Worksheet Part II

Strategic Audit Heading

Analysis

Comments

(+) Factors

(-) Factors

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 B. Recommended Strategy VII. Implementation

VIII. Evaluation and Control

I. Current SituationCurrent Performance

Mission-Objectives-Strategies-Policies

II. Corporate GovernanceBOD and Management

III. External Environment (O-T)Societal-Task

IV. Internal Environment (S-W)Structure-Culture-Resources by Functional Area

V. Analysis of Strategic FactorsSWOT-Review of Mission/Objectives

VI. Strategic Alternatives/RecommendationsCorporate-Business-Functional

VII. ImplementationPrograms-Cost-Priorities

VIII. Evaluation and ControlsFeedback-Standards-Measures


Strategic Audit Outline

1. First Reading– General Overview– Potential Strategic Factors– Research needed

2. Second Reading– Using Strategic Audit Worksheet, make notes/comments on appropriate items– Perform financial analysis of the company including ratio analysis and common sizing the statements.

3. Do outside Research

4. SWOT Analysis– External Factors Analysis (EFAS)– Internal Factors Analysis (IFAS)

5. First Draft Sections I – IV (Author/Editor)

6. Strategic Factors Analysis Summary (SFAS Table Optional)– Reduce the EFAS and IFAS to the most significant factors– Write Analysis of Strategic Factors (Section V)

7. Strategic Alternatives and Recommendations– List Pros and Cons for each alternative (No Proforma IC is necessary)– Justify your recommendation

8. Implementation (Matrix of Change Ch.9)– Describe the programs that would be necessary to accomplish the strategic objective.

9. Evaluation and Control– How will you determine if you are successful.

10. Proof and Fine Tune the ReportPrentice Hall, Inc. © 2006 15-5

Case Analysis Methodology


Suggestions for Case Analysis

Research –

–Reach beyond the information in the case–Focus on environmental setting–Check decision date of case - stay in the timeframe of the Case.–Use information services

•COMPUSTAT•www.hoovers.com•www.sec.gov

http://www.hoovers.com/

http://www.sec.gov/



Financial Ratios are Important –

–Ration Analysis

•Liquidity ratios•Profitability ratios•Activity ratios•Leverage ratios



Case Analysis –

–Research•Annual reports•10K, 10Q, 14A forms•Income statement•Balance sheets•Cash flow statements•Economic conditions•Industry information



Financial Analysis –– 5 Basic Steps

1. Historical income statements/balance sheets (3 – 5 years)

2. Compare historical statements over time (trend analysis)

3. Calculate changes for individual categories as well as cumulative change

4. Change as percentage and absolute amount (Common Size Statements)

5. Adjust for inflation if significant factor (??)

Industry and/or Competitor Comparisons can be helpful – Investigate…



Checklist for Red Flags –

–Cash flow from operations should exceed net income–Accounts receivable should not grow faster than sales–Gross margins should not fluctuate over time–Information on top management and Board should be

examined carefully–Footnotes are important


Financial Ratio Analysis -- Liquidity

1. Liquidity Ratios

Current ratio

Quick (acid test) ratio

Inventory to net working capital

Cash ratio

HowFormula Expressed Meaning

Current assets

—————————

Current liabilities Decimal

Decimal

Decimal

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.

Measures the company’s ability to pay off its short-term obligations from current assets, excluding inventories.

A measure 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.

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.

Current assets – Inventory

————————————

Current liabilities

Inventory

———————————————

Current assets – Current liabilities

Cash + Cash equivalents

———————————

Current liabilities


Financial Ratio Analysis -- Profitability

2. Profitability Ratios

Net profit margin (ROS)

Gross profit margin

Return on investment (ROI)

Return on equity (ROE)

Earnings per share (EPS)


Net profit after taxes

—————————

Net sales Percentage

Percentage

Percentage

Percentage

Dollars per share

Shows how much after-tax profits are generated by each dollar of sales.

Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit.

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.

Measures the rate of return on the book value of shareholders’ total investment in the company.

Shows the after-tax earnings generated for each share of common stock.

Sales – Cost of goods sold

—————————————

Net sales


—————————

Shareholders’ equity

Net profit after taxes – preferred stock dividends

————————————

Average number ofcommon shares


—————————

Total assets


Financial Ratio Analysis -- Activity

3. Activity RatiosInventory turnover

Days of inventory

Net working capital turnover

Asset turnover

Fixed asset turnover

Average collection period

Accounts receivable turnover

Accounts payable period

Days of cash


Net sales———————

Inventory Decimal

Days

Decimal

Decimal

Decimal

Days

Decimal

Days

Days

Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year.Measures the number of one day’s worth of inventory that a company has on hand at any given time.Measures how effectively the net working capital is used to generate sales.Measures the utilization of all the company’s assets; measures how many sales are generated by each dollar of assets.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.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.Indicates the number of times that accounts receivable are cycled during the period (usually a year).Indicates the average length of time in days that the company takes to pay its credit purchases.Indicates the number of days of cash on hand, at present sales levels.

Inventory———————————

Cost of goods sold ÷ 365

Net sales—————————Net working capital

Sales—————————

Total assets

Sales———————

Fixed assets

Accounts receivable—————————Sales for year ÷ 365

Annual credit sales—————————Accounts receivable

Accounts payable————————————Purchases for year ÷ 365

Cash———————————Net sales for year ÷ 365


Financial Ratio Analysis -- Leverage

4. Leverage Ratios

Debt to asset ratio

Debt to equity ratio

Long-term debt to capital structure

Times interest earned

Coverage of fixed charges

Current liabilities to equity


Total debt

———————

Total assetsPercentage

Percentage

Percentage

Decimal

Decimal

Percentage

Measures the extent to which borrowed funds have been used to finance the company’s assets.

Measures the funds provided by creditors versus the funds provided by owners.

Measures the long-term component of capital structure.

Indicates the ability of the company to meet its annual interest costs.

A measure of the company’s ability to meet all of its fixed-charge obligations.

Measures the short-term financing portion versus that provided by owners.

Total debt

—————————


Long-term debt

—————————


Profit before taxes +Interest charges + Lease charges

————————————————

Interest charges + Lease obligations

Profit before taxes + Interest charges

————————————————

Interest charges

Current liabilities

—————————



Financial Ratio Analysis -- Other

Financial Ratio Analysis — Other

5. Other Ratios

Price/earning ratio

(PE Ratio)

Dividend payout ratio

Dividend yield on common stock


Market price per share

—————————

Earnings per share Decimal

Percentage

Percentage

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.

Indicates the percentage of profit that is paid out as dividends.

Indicates the dividend rate of return to common shareholders at the current market price.

Annual dividends per share

————————————

Annual earnings per share

Annual dividends per share

———————————————

Current market price per share



Resources – Library –

– Moody’s Manuals on Investment–Standard & Poor’s Register–Value Line’s Investment Survey –Business Cycle Development–U.S. Census Bureau–Current Business Reports–Economic Indicators



Common Size Statements --

– Income statements and balance sheets in which the dollar figures have been converted into percentages

–Identify Trends–Allows Comparison of companies of varying sizes

–Income Statement as a % of Sales–Balance Sheet as a % of Assets


Altman’s Bankruptcy Formula

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

where

x1 = Working capital divided by total assets.

x2 = Retained earnings divided by total assets.

x3 = Earnings before interest and taxes dividedby total assets.

x4 = Market value of equity divided by totalliabilities.

x5 = Sales divided by total assets.

Z = Overall index of corporate fiscal health.

•Below 1.81 => Credit Problems•Above 3.0 => Healthy Company•Between => ???

Altman’s Bankruptcy Formula


Index of Sustainable Growth

g*= [ p (1 – D) (1 + L)] / [T – P (1 – D) (1+L)]

where

P = (Net profit before taxes/net sales) x 100

D = Target dividends/profit after tax

L = Total liabilities/net worth

T = (Total assets/net sales) x 100

If planned growth is greater than g* than external capital will be needed.

Index of Sustainable Growth


Strategic Audit

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?

1992 % 1991 %

Net sales $3,041,223 $2,970,626

Cost of sales 2,339,406 2,254,221————— ————— ————— —————

Gross profits 701,817 716,405

Selling, general, and admin. 528,250 524,898

expenses

Reorganization expenses 95,000 —————— ————— ————— —————

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

post-retirement benefits (307,000) —————— ————— ————— —————

Net income (loss) $(315,354) $79,017————— ————— ————— —————————— ————— ————— —————


STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 15 Suggestions for Case

Analysis

Prentice Hall, Inc. © 200615-1 STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER CHAPTER 15 Suggestions for Case Analysis.

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