A Guide to Case Analysis , Study Guides, Projects, Research of Strategic Management

Download A Guide to Case Analysis and more Study Guides, Projects, Research Strategic Management in PDF only on Docsity! A Guide to Case Analysis I keep six honest serving men (They taught me all I knew); Their names are What and Why and When; And How and Where and Who. — Rudyard Kipling A Guide to Case Analysis2 In most courses in strategic management, students use cases about actual companies to practice strategic analysis and to gain some experience in the tasks of crafting and implementing strategy. A case sets forth, in a factual manner, the events and organizational circumstances surrounding a particular managerial situation. It puts readers at the scene of the action and familiarizes them with all the relevant circumstances. A case on strategic management can concern a whole industry, a single organization, or some part of an organization; the organization involved can be either profi t seeking or not-for-profi t. The essence of the student’s role in case analysis is to diagnose and size up the situation described in the case and then to recommend appropriate action steps. Why Use Cases to Practice Strategic Management? A student of business with tact Absorbed many answers he lacked. But acquiring a job, He said with a sob, “How does one fi t answer to fact?” The foregoing limerick was used some years ago by Professor Charles Gragg to characterize the plight of business students who had no exposure to cases.1 The facts are that the mere act of listening to lectures and sound advice about managing does little for anyone’s management skills and that the accumulated managerial wisdom cannot effectively be passed on by lectures and assigned readings alone. If anything had been learned about the practice of management, it is that a storehouse of ready-made textbook answers does not exist. Each managerial situation has unique aspects, requiring its own diagnosis, judgment, and tailor- made actions. Cases provide would-be managers with a valuable way to practice wrestling with the actual problems of actual managers in actual companies. The case approach to strategic analysis is, fi rst and foremost, an exercise in learning by doing. Because cases provide you with detailed information about conditions and problems of different industries and companies, your task of analyzing company after company and situation after situation has the twin benefi t of boosting your analytical skills and exposing you to the ways companies and mana gers actually do things. Most college students have limited managerial backgrounds and only frag mented knowledge about companies and real-life strategic situations. Cases help substitute for on-the-job experience by (1) giving you broader exposure to a variety of industries, organizations, and strategic problems; (2) forcing you to assume a managerial role (as opposed to that of just an onlooker); (3) providing a test of how to apply the tools and techniques of strategic management; and (4) asking you to come up with pragmatic managerial action plans to deal with the issues at hand. Objectives of Case Analysis Using cases to learn about the practice of strategic management is a powerful way for you to accom plish fi ve things:2 1. Increase your understanding of what mana gers should and should not do in guiding a business to success. 2. Build your skills in sizing up company resource strengths and weaknesses and in conducting strategic analysis in a variety of industries and competitive situations. 5A Guide to Case Analysis to support your diagnosis. Work through the case preparation exercises on Case-TUTOR conscientiously or, if you are using study questions provided by the instructor, generate at least two pages of notes! 9. Develop an appropriate action plan and set of recommendations. Diagnosis divorced from corrective action is sterile. The test of a manager is always to convert sound analysis into sound actions—actions that will produce the desired results. Hence, the fi nal and most telling step in preparing a case is to develop an action agenda for management that lays out a set of specifi c recommendations on what to do. Bear in mind that proposing realistic, workable solutions is far preferable to casually tossing out off-the- top-of-your-head suggestions. Be prepared to argue why your recommendations are more attractive than other courses of action that are open. You’ll fi nd the case preparation exercises on Case-TUTOR helpful in performing this step, too. Table 1 Key Financial Ratios: How to Calculate Them and What They Mean Ratio How Calculated What It Shows Profi tability ratios 1. Gross profi t margin Sales – Cost of goods sold Sales Shows the percentage of revenues available to cover operating expenses and yield a profi t. Higher is better and the trend should be upward. 2. Operating profi t margin (or return on sales) Sales – Operating expenses Sales or Operating income Sales Shows the profi tability of current operations without regard to interest charges and income taxes. Higher is better and the trend should be upward. 3. Net profi t margin (or net return on sales) Profi ts after taxes Sales Shows after tax profi ts per dollar of sales. Higher is better and the trend should be upward. 4. Return on total assets Profi ts after taxes + interest Total assets A measure of the return on total investment in the enterprise. Interest is added to after tax profi ts to form the numerator since total assets are fi nanced by creditors as well as by stockholders. Higher is better and the trend should be upward. 5. Return on stockholders’ equity Profi ts after taxes Total stockholders’ equity Shows the return stockholders are earning on their investment in the enterprise. A return in the 12-15% range is “average”, and the trend should be upward. 6. Earnings per share Profi ts after taxes Number of shares of common stock outstanding Shows the earnings for each share of common stock outstanding. The trend should be upward, and the bigger the annual percentage gains, the better. Liquidity Ratios 1. Current ratio Current assets Current liabilities Shows a fi rm’s ability to pay current liabilities using assets that can be converted to cash in the near term. Ratio should defi nitely be higher than 1.0; ratios of 2 or higher are better still. 2. Quick ratio (or acid-test ratio) Current assets – Inventory Current liabilities Shows a fi rm’s ability to pay current liabilities without relying on the sale of its inventories. A Guide to Case Analysis6 3. Working capital Current assets – current liabilities Bigger amounts are better because the company has more internal funds available to (1) pay its current liabilities on a timely basis and (2) fi nance inventory expansion, additional accounts receivable, and a larger base of operations without resorting to borrowing or raising more equity capital. Leverage Ratios 1. Debt-to-assets ratio Total debt Total assets Measures the extent to which borrowed funds have been used to fi nance the fi rm’s operations. Low fractions or ratios are better—high fractions indicate overuse of debt and greater risk of bankruptcy. 2. Debt-to-equity ratio Total debt Total stockholders’ equity Should usually be less than 1.0. High ratios (especially above 1.0) signal excessive debt, lower creditworthiness, and weaker balance sheet strength. 3. Long-term debt-to- equity ratio Long-term debt Total stockholders’ equity Shows the balance between debt and equity in the fi rm’s long-term capital structure. Low ratios indicate greater capacity to borrow additional funds if needed. 4. Times-interest-earned (or coverage) ratio Operating income Interest expenses Measures the ability to pay annual interest charges. Lenders usually insist on a minimum ratio of 2.0, but ratios above 3.0 signal better creditworthiness. Activity Ratios 1. Days of inventory Sales ÷ 365 Inventory Measures inventory management effi ciency. Fewer days of inventory are usually better. 2. Inventory turnover Sales Inventory Measures the number of inventory turns per year. Higher is better. 3. Average collection period Accounts receivable Total sales ÷ 365 or Accounts receivable Average daily sales Indicates the average length of time the fi rm must wait after making a sale to receive cash payment. A shorter collection time is better. Other Important Measures of Financial Performance 1. Dividend yield on common stock Annual dividends per share Current market price per share A measure of the return that shareholders receive in the form of dividends. A “typical” dividend yield is 2-3%. The dividend yield for fast-growth companies is often below 1% (maybe even 0); the dividend yield for slow-growth companies can run 4-5%. 2. Price-earnings ratio Current market price per share Earnings per share P-e ratios above 20 indicate strong investor confi dence in a fi rm’s outlook and earnings growth; fi rms whose future earnings are at risk or likely to grow slowly typically have ratios below 12. 3. Dividend payout ratio Annual dividends per share Earnings per share Indicates the percentage of after-tax profi ts paid out as dividends. 4. Internal cash fl ow After tax profi ts + Depreciation A quick and rough estimate of the cash a company’s business is generating after payment of operating expenses, interest, and taxes. Such amounts can be used for dividend payments or funding capital expenditures. Table 1 continued 7A Guide to Case Analysis As long as you are conscientious in preparing your analysis and recommendations, and have ample reasons, evidence, and arguments to support your views, you shouldn’t fret unduly about whether what you’ve prepared is “the right answer” to the case. In case analysis there is rarely just one right approach or set of recommendations. Managing companies and crafting and executing strategies are not such exact sciences that there exists a single provably correct analysis and action plan for each strategic situation. Of course, some analyses and action plans are better than others; but, in truth, there’s nearly always more than one good way to analyze a situation and more than one good plan of action. So, if you have carefully prepared the case by either completing one of the Case-TUTOR case preparation exercises or developing your own answers to the assignment questions for the case, don’t lose confi dence in the correctness of your work and judgment. Participating in Class Discussion of a Case Classroom discussions of cases are sharply different from attending a lecture class. In a case class students do most of the talking. The instructor’s role is to solicit student participation, keep the discussion on track, ask “Why?” often, offer alternative views, play the devil’s advocate (if no students jump in to offer opposing views), and otherwise lead the discussion. The students in the class carry the burden for analyzing the situation and for being prepared to present and defend their diagnoses and recommendations. Expect a classroom environment, therefore, that calls for your size-up of the situation, your analysis, what actions you would take, and why you would take them. Do not be dismayed if, as the class discussion unfolds, some insightful things are said by your fellow classmates that you did not think of. It is normal for views and analyses to differ and for the comments of others in the class to expand your own thinking about the case. As the old adage goes, “Two heads are better than one.” So it is to be expected that the class as a whole will do a more penetrating and searching job of case analysis than will any one person working alone. This is the power of group effort, and its virtues are that it will help you see more analytical applications, let you test your analyses and judgments against those of your peers, and force you to wrestle with differences of opinion and approaches. To orient you to the classroom environment on the days a case discussion is scheduled, we compiled the following list of things to expect: 1. Expect the instructor to assume the role of extensive questioner and listener. 2. Expect students to do most of the talking. The case method enlists a maximum of individual participa– tion in class discussion. It is not enough to be present as a silent observer; if every student took this approach, there would be no discussion. (Thus, expect a portion of your grade to be based on your participation in case discussions.) 3. Be prepared for the instructor to probe for reasons and supporting analysis. 4. Expect and tolerate challenges to the views expressed. All students have to be willing to submit their conclusions for scrutiny and rebuttal. Each student needs to learn to state his or her views without fear of disapproval and to overcome the hesitation of speaking out. Learning respect for the views and approaches of others is an integral part of case analysis exercises. But there are times when it is OK to swim against the tide of majority opinion. In the practice of management, there is always room for originality and unorthodox approaches. So while discussion of a case is a group process, there is no compulsion for you or anyone else to cave in and conform to group opinions and group consensus. 5. Don’t be surprised if you change your mind about some things as the discussion unfolds. Be alert to how these changes affect your analysis and recommendations (in the event you get called on). A Guide to Case Analysis10 By all means state your recommendations in suffi cient detail to be meaningful—get down to some defi nite nitty-gritty specifi cs. Avoid such unhelpful statements as “the organization should do more planning” or “the company should be more aggressive in marketing its product.” For instance, if you determine that “the fi rm should improve its market position,” then you need to set forth exactly how you think this should be done. Offer a defi nite agenda for action, stipulating a timetable and sequence for initiating actions, indicating priorities, and suggesting who should be responsible for doing what. In proposing an action plan, remember there is a great deal of difference between, on the one hand, being responsible for a decision that may be costly if it proves in error and, on the other hand, casually suggesting courses of action that might be taken when you do not have to bear the responsibility for any of the consequences. A good rule to follow in making your recommendations is: Avoid recommending anything you would not yourself be willing to do if you were in management’s shoes. The importance of learning to develop good managerial judgment is indicated by the fact that, even though the same information and operating data may be available to every manager or executive in an organization, the quality of the judgments about what the information means and which actions need to be taken does vary from person to person.4 It goes without saying that your report should be well organized and well written. Great ideas amount to little unless others can be convinced of their merit—this takes tight logic, the presentation of convincing evidence, and persuasively written arguments. Preparing an Oral Presentation During the course of your business career it is very likely that you will be called upon to prepare and give a number of oral presentations. For this reason, it is common in courses of this nature to assign cases for oral presentation to the whole class. Such assignments give you an opportunity to hone your presentation skills. The preparation of an oral presentation has much in common with that of a written case analysis. Both require identifi cation of the strategic issues and problems confronting the company, analysis of industry conditions and the company’s situation, and the development of a thorough, well-thought out action plan. The substance of your analysis and quality of your recommendations in an oral presentation should be no different than in a written report. As with a written assignment, you’ll need to demonstrate command of the relevant strategic concepts and tools of analysis and your recommendations should contain suffi cient detail to provide clear direction for management. The main difference between an oral presentation and a written case is in the delivery format. Oral presentations rely principally on verbalizing your diagnosis, analysis, and recommendations and visually enhancing and supporting your oral discussion with colorful, snappy slides (usually created on Microsoft’s PowerPoint software). Typically, oral presentations involve group assignments. Your instructor will provide the details of the assignment—how work should be delegated among the group members and how the presentation should be conducted. Some instructors prefer that presentations begin with issue identifi cation, followed by analysis of the industry and company situation analysis, and conclude with a recommended action plan to improve company performance. Other instructors prefer that the presenters assume that the class has a good understanding of the external industry environment and the company’s competitive position and expect the presentation to be strongly focused on the group’s recommended action plan and supporting analysis and arguments. The latter approach requires cutting straight to the heart of the case and supporting each recommendation with detailed analysis and persuasive reasoning. Still other instructors may give you the latitude to structure your presentation however you and your group members see fi t. 11A Guide to Case Analysis Regardless of the style preferred by your instructor, you should take great care in preparing for the presentation. A good set of slides with good content and good visual appeal is essential to a fi rst-rate presentation. Take some care to choose a nice slide design, font size and style, and color scheme. We suggest including slides covering each of the following areas: • An opening slide covering the “title” of the presentation and names of the presenters. • A slide showing an outline of the presentation (perhaps with presenters’ names by each topic). • One or more slides showing the key problems and strategic issues that management needs to address. • A series of slides covering your analysis of the company’s situation. • A series of slides containing your recommendations and the supporting arguments and reasoning for each recommendation—one slide for each recommendation and the associated reasoning has a lot of merit. You and your team members should carefully plan and rehearse your slide show to maximize impact and minimize distractions. The slide show should include all of the pizzazz necessary to garner the attention of the audience, but not so much that it distracts from the content of what group members are saying to the class. You should remember that the role of slides is to help you communicate your points to the audience. Too many graphics, images, colors, and transitions may divert the audience’s attention from what is being said or disrupt the fl ow of the presentation. Keep in mind that visually dazzling slides rarely hide a shallow or superfi cial or otherwise fl awed case analysis from a perceptive audience. Most instructors will tell you that fi rst-rate slides will defi nitely enhance a well-delivered presentation but that impressive visual aids, if accompanied by weak analysis and poor oral delivery, still adds up to a substandard presentation. Researching Companies and Industries via the Internet and Online Data Services Very likely, there will be occasions when you need to get additional information about some of the assigned cases, perhaps because your instructor has asked you to do further research on the industry or company or because you are simply curious about what has happened to the company since the case was written. These days it is relatively easy to run down recent industry developments and to fi nd out whether a company’s strategic and fi nancial situation has improved, deteriorated, or changed little since the conclusion of the case. The amount of information about companies and industries available on the Internet and through online data services is formidable and expanding rapidly. It is a fairly simple matter to go to company Web sites, click on the investor information offerings and press release fi les, and get quickly to useful information. Most company Web sites allow you to view or print the company’s quarterly and annual reports, its 10K and 10Q fi lings with the Securities and Exchange Commission, and various company press releases of interest. Frequently, a company’s Web site will also provide information about its mission and vision statements, values statements, codes of ethics, and strategy information, as well as charts of the company’s stock price. The company’s recent press releases typically contain reliable information about what of interest has been going on—new product introductions, recent alliances and partnership agreements, recent acquisitions, summaries of the latest fi nancial results, tidbits about the company’s strategy, guidance about future revenues and earnings, and other late-breaking company developments. Some company Web pages also include links to the home pages of industry trade associations where you can fi nd information about industry size, growth, recent industry news, statistical trends, and future outlook. Thus, an early step in researching a company on the Internet is always to go to its Web site and see what’s available. A Guide to Case Analysis12 Online Data Services Lexis-Nexis, Bloomberg Financial News Services, and other on-line subscription services available in many university libraries provide access to a wide array of business reference material. For example, the web- based Lexis-Nexis Academic Universe contains business news articles from general news sources, business publications, and industry trade publications. Broadcast transcripts from fi nancial news programs are also available through Lexis-Nexis, as are full-text 10-Ks, 10-Qs, annual reports, and company profi les for more than 11,000 U.S. and international companies. Your business librarian should be able to direct you to the resources available through your library that will aid you in your research. Public and Subscription Websites with Good Information Plainly, you can use a search engine such as Google or Yahoo! or MSN to fi nd the latest news on a company or articles written by reporters that have appeared in the business media. These can be very valuable in running down information about recent company developments. However, keep in mind that the information retrieved by a search engine is “unfi ltered” and may include sources that are not reliable or that contain inaccurate or misleading information. Be wary of information provided by authors who are unaffi liated with reputable organizations or publications and articles that were published in off-beat sources or on Web sites with an agenda. Be especially careful in relying on the accuracy of information you fi nd posted on various bulletin boards. Articles covering a company or issue should be copyrighted or published by a reputable source. If you are turning in a paper containing information gathered from the Internet, you should cite your sources (providing the Internet address and date visited); it is also wise to print Web pages for your research fi le (some Web pages are updated frequently). The Wall Street Journal, Business Week, Forbes, Barron’s, and Fortune are all good sources of articles on companies. The Wall Street Journal Interactive Edition contains the same information that is available daily in its print version of the paper, but also maintains a searchable database of all Wall Street Journal articles published during the past few years. Fortune and Business Week also make the content of the most current issue available online to subscribers as well as provide archives sections that allow you to search for articles related to a particular keyword that were published during the past few years. The following Websites are particularly good locations for company and industry information: Securities and Exchange Commission EDGAR database (contains company 10-Ks, 10-Qs, etc.) http://www.sec.gov/cgi-bin/srch-edgar CNN Money http://money.cnn.com Hoover’s Online http://hoovers.com The Wall Street Journal Interactive Edition http://www.wsj.com Business Week http://www.businessweek.com Fortune http://www.fortune.com MSN Money Central http://moneycentral.msn.com Yahoo! Finance http://fi nance.yahoo.com/ Some of these Internet sources require subscriptions in order to access their entire databases. Learning Comes Quickly With a modest investment of time, you will learn how to use Internet sources and search engines to run down information on companies and industries quickly and effi ciently. And it is a skill that will serve you well into the future. Once you become familiar with the data available at the different Web sites mentioned above and with using a search engine, you will know where to go to look for the particular information that you want. Search engines nearly always turn up too many information sources that match your request rather than two few; the trick is to learn to zero in on those most relevant to what you