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Week 4
January 21, 2020 2:51 PM

Knowledge
Vocab of finance and other financial tools
• Identify key performance metrics
• Perform a financial analysis
• Conclude the state of a company's financial health

Chapter 3: Resources and Capabilities

Example of Hundai's Development Process:

THE ROLE OF RESOURCES AND CAPABILITIES IN STRATEGY FORMULATION

• Emphasis shifts from interface between strategy and the firms internal environment, more specifically,
the relationship between strategy and the firm's resources and capabilities.
• Two main reasons the shift occurred:
• As firms' industry environment have become more unstable, so internal resources and capabilities
rather than external market focus have been viewed as a more secured base for formulating
strategy
• It has become increasingly apparent that competitive advantage rather than industry
attractiveness is the primary source of superior profitability

Basic Strategy on Resources and Capabilities

• During the 1990s, ideas concerning the role of resources and capabilities as the principal basis for firm
strategy and the primary source of profitability merged into what has become knowns as the resource-
based view of the firm.
• Where customer preferences are volatile and the identity of customers and the technologies for serving
them are changing, a market-focused strategy may not provide the stability and constancy of direction
needed to guide strategy over for the long term.
• When the external environment is in a state of flux, the firm itself, in terms of its bundle of resources
and capabilities, may be a much more stable basis to define its identity.
• The greater the rate of change in a firm's external environment, the more likely it is that internal
resources and capabilities rather than external market focus will provide a secure foundation for long-

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term strategy,
THE REMOTE ENVIRONMENT • political Drivers • Economic Drivers • Social Drivers •
Technological Drivers • Ecological • Legal Drivers • Goals and Values • and Capabilities •
Stn_Kture Systems Firm-strategy frHE INDUSTRY ENVIRONMENT • Competitors • Customers •
Suppliers Figure 3.3 Analyzing resources and capabilities: the interface between strategy and
the firm

How Resources and Capabilities Affect Competitive Advantage

• Resources are the productive assets owned by the firm; capabilities are what the firm can do.
• Individual resources do not confer competitive advantage alone; they must work together to create
organizational capability.

COMPETITIVE ADVANTAGE TANGIBLE • Finaruial capacity) • ph"ical

(plant. land, mineral reserves) ORGANIZATIONAL CAPABILITIES
INTANGIBLE • Technology (pate nts, trade re ts) relationships) •
Culture INDUSTRY KEY SUCCESS FACTORS HUMAN • Capacity for and
Figure 3.4 The links among resources, capabilities, and competitive
advantage

IDENTIFYING THE ORGANIZATION'S RESOURCES

• We need to first identify and classify them
• Three principle types of resources: tangible, intangible, and human resources.

Tangible Resources
• Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are
identified and valued in the firm's financial statements.

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Last Week Recap:

• When trying to understand KSF, it's at the level of the industry.
• Essence of KSFs is combine customers wants and what is provided by the firms -> literally say what
customers get
• Two questions have to be combined.
• We can only see what customers get, so we're really combining what customers want and what they're
getting is one thing.
• Speak in terms of availability, accessibility
• Laundry list of KSF talking about the industry - 5-6 (min 5)
○ Competitive pricing
• Acknowledge that they're good or not good in some KSF (so what)

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• Say WHY you chose those two factors (your logic). Do not say differentiation (must discuss cause of
differentiation).
• Do not just say differentiation --> you have to say what is the cause of differentiation (how are
they very cool)
• 3rd question, you have to revisit previous weeks work. Answer each question, by looking at the specific
analysis and the point from that analysis.
• So what analysis - 3 reasons why the company is going to make profits?

Internal Analysis
1. Financial analysis (4 pages max). Conduct a thorough financial analysis.
• Choose 2 or 3 ratios and give a chart
• Upload separate excel sheet
THE REMOTE ENVIRONMENT • political Drivers • Economic Drivers • Social Drivers •
Technological Drivers • Ecological • Legal Drivers • Goals and Values • and Capabilities •
Stn_Kture Systems Firm-strategy frHE INDUSTRY ENVIRONMENT • Competitors • Customers •
Suppliers Figure 3.3 Analyzing resources and capabilities: the interface between strategy and
the firm

Why do we care?
• Where are the sales coming from?
• Think about short-term and long-term
• See what they're investing in
• Solvency, liquidity --> get a sense of financial position

Key Objectives of Financial Analysis

1. Establish current financial health of company form case data.
2. Use financial analysis results as one of the metrics to gauge whether the company's strategy is
okay
3. Draw conclusions from financial analysis to understand whether financials are a constraint or
facilitator (whether existing assets are enough to do something --> ROA are assets being used up?)
for future growth (can costs be reduced? Can the same assets be used elsewhere?)
4. Study numbers over time (historical), across peers (social) for comparisons
• E.g., 2008 crisis
• During recession, they came up with this streaming stuff.

Questions:
1. Is this the Current Strategy Effective?
• Sluggish financial performance and second-rate market accomplishments almost always signal
weak strategy, weak execution, or both.
• Can we like financial content to see if causes an increase in customers.
• E.g., an increased subscriber comes at what cost?
2. Is what we're doing working?
• Sales?
• Profit margin
• Revenue increase
• Market Share?
• If you have stuff related to the competitors, you will get a sense of market share?
• If you start early, there's a learning advantage, so overtime your costs will go down.
• Is their market share really increasing? Link it to the growth stage of a firm.
• They guide what is happening in the industry.

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• How much the industry is growing as a whole. Compared to that, what is their share?
• Old + New Customers = Churn??
• Existing folks are loyal to you
• Ratio
• Image and reputation
• Who is saying good things about this company?
• E.g., celebrities willing to endorse them
• Increase profits, margins, ROI (every $1 invested, are we getting returns, where are we getting
returns)
• Growing financial capacity & credit rating
• Borrowing and getting more leverage
• If retained earnings are increasing
• Lead the industry in the KSF
• Yes we said differentiated content, at what cost, what price?
• Choose one KSF looking across the analysis (external and internal)

Key Metrics in Financial Analysis

1. Cash --> Liquidity
2. Return on Assets --> Are assets being used well overtime?
3. Are all assets being used (asset turnover ratio)
4. Growth or decline --> what is the YOY store overtime?
5. You have limited funds, will you invest in this company?
• Does it seem like a reliable / great company?
Typically they want us to do 10 ratios!

Key Metrics Statements in Financial Analysis

• Balance Sheet
• Net working Capital (current assets - current liabilities)
• Inventory level and its change over time
• Leverage (debt:equity)
• Income Statement
• Gross margin/Net margin
• EBITDA (EBIT IS HER PREFERENCE. SHE WANTS TO KNOW DIFF BETWEEN OPERATING INCOME
AND PROFIT AFTER TAX)
• Expenses
• Cash Flow Statement
• Various activities .. How much cash is generated?
• Change in cash position
• Can they pay off expenses and invest in growth
Say given the info I have I would like to invest in the company or say i don't have enough info

She wants one activity ratio --> efficiency ratios

Wants asset turnover and one of (days of inventory, inv turnover, acp)
She likes PE or Internal Cash flow ratio

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