A “Quick & Dirty” Strategic Audit Dorothy E. Brawley, Ph.D. Professor of Management & Entrepreneurship Kennesaw State University Coles College of Business Kennesaw, Georgia ABSTRACT In teaching Strategic Management, it is imperative that students first learn how to audit the firm before they begin analysis, planning and implementation. Unfortunately this is a step often overlooked. Without a complete and up to date audit, any analysis conducted would have questionable validity and reliability. This report focuses on an instructional tool that faculty can utilize to guide students through a strategic audit of a com- pany. The objective in auditing the organization is to describe the firm in terms of its current position in the industry, its strategy, structure, and performance. This paper describes the Company Profile Sheet and explains how it can be an invaluable tool for the students to understand the company under review and the strategic management concepts. INTRODUCTION THE STRATEGIC AUDIT In looking at the nature of strategy, organizations, and The objective in auditing the organization is to describe strategic thinking, the field is: the firm in terms of its current position relative to its over- all plans, configurations, and assets. • complex, messy and ambiguous; Strategy (plans and processes) looks at what the firm does • the stage in which strategic managers must perform and how it does it. is in a constant state of change; and, Structure (configurations) looks at how the organization • there are no universally accepted right answers- integrates the parts. everything we do in managing strategically is contingent upon reality (environment), feasibility Performance (assets) looks at the outputs. (resources) and desirability (goals). In developing the template I thought about what students Even experienced managers can become overwhelmed need to know to conduct an effective and efficient strategic with the complexity and dynamic nature of the variables audit. My objective in developing the Company Profile that must be considered in making, implementing, and Sheet was to come up with a one page strategic audit that managing strategic decisions. Imagine how hard it is to would cover the key elements that influence strategic be- stay fresh, creative, visionary and focused on the future havior and decisions. when the present is so demanding. As a result, much work To plan for the future you need a baseline in the present- in the area has focused on the strategic management pro- like a doctor taking a patient history, a strategist needs to cess and the development of tools to help us get our arms understand the current position of the firm prior to ana- around “the beast.” lyzing alternatives. Three areas led to the development of This paper focuses on an instructional tool to help stu- the Company Profile Sheet: lack of understanding of stra- dents understand the elements that go into looking at a tegic terminology; inconsistent operational definitions and firm strategically. This template, the “Company Profile metrics to measure those concepts; and a consistent plat- Sheet”, guides the student through the preliminary pro- form to conduct comparative analysis, both longitudinal cess of conducting the strategic management audit. and cross-sectional. Journal of Learning in Higher Education 15 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT TERMINOLOGY • It provides a foundation for more in-depth and Figure 1 qualitative narratives of strategy. Company Profile Sheet-General Information Strategic Management is usually taken at the end of the • It serves as a complement to case analysis. program of study in business—the capstone experience. GENERAL INFORMATION www________________________________________email__________________________________ Although students taking this course have been exposed 1.Firm Name Address Phone to the basic concepts of business in their core courses THE COMPANY PROFILE SHEET 2.Trading Name/Symbol Trading Markets (AMEX NYSE OTC) 3.SIC Numbers 4.Sector (Manufacturing; Service (includes retail, wholesale, distribution); Mining/Oil/Gas; Combined) 5.Date founded incorporated public (Management, Accounting, Finance, Marketing, Eco- 6.Industry Type (Science based; Non Science) 7.Distribution areas (Local; regional; national; international ( %) The Company Profile Sheet, Appendix A, provides a nomics, Information Systems), their ability to apply those 8.Key Subsidiaries concepts in an integrative way into a company study is “quick and dirty” strategic snap shot of the firm. The com- 9.Number of outlets 10.Number of full-time employees 20XX (n-1) 20XX(n) limited. Because of the dynamic and complex nature of pany profile sheet is divided into three primary sections **(n=current year; n-1=last year) and is composed of 34 questions. Primary data can cover the field of strategy there are many concepts and variables the most current year, but to really understand strategic Figure 2 students must consider in conducting a strategic audit of a change, it is good to look at data over several years. Company Profile Sheet-Strategy & Structure Information firm. Exposure to such concepts as company demographics- sector, trading, company type, industry classification, dis- The first section (items 1-10) includes general informa- STRATEGY, STRUCTURE INFORMATION tribution areas tend to be abstract concepts, not grounded tion on the firm: its name, address, phone number, trad- 11.Business Description 12.Identifiable Businesses (Corporate)(SQ-G-R-L) in application. Strategic concepts including corporate/ ing name/ symbol/ markets, industry classification, dates 13.Strategy of Growth: (Single Business (Single line; Dominant);Multi-business (Related; Unrelated)) business/functional level strategies, structural forms, and founded/ incorporated/ public, sector, industry type, dis- 1S3pae.criaatliiozsa tion Ratio=Rev.largest discrete bus./total revenues: S egment 20XX(n-1) 20XX(n) process strategies tend to be new variables to students, tribution areas, key subsidiaries, outlets, and employees. Relatedness Ratio=Rev.largest group discrete bus./total rev: 13b.strategy of growth classification 20XX(n-1) 20XX(n) covered superficially in earlier courses but forgotten. Per- Single Business Single line (SR > .95) 1.1 1.1 formance indicators including an ability to really look at The second section of template is Strategy, Structure in- Dominant (.7<SR<.95) 1.2 1.2 formation, items 11-18. Once you have collected general Multi-Business Related (RR>.7) 2.3 2.3 balance sheets, income statements and ratios, analyzed Unrelated (RR<.7) 2.4 2.4 and memorized for tests in earlier courses, have long been demographic data on the firm, you can begin to dig deeper 14.Competitive Strategy (Business) Segment (ADRF) Cost leadership or Differentiation Market Focus: Narrow or Broad B2B and/or B2C 15.Primary Markets put aside as unimportant. into the strategy and structural configurations: business Primary Products/Brands/Patents,Copyright,Trademark description, identifiable businesses, strategy of growth 16.Integration Vertical and /or Horizontal 17.Process of Growth Internal Development and/ or External Process (Acquisitions, Mergers, Joint Ventures, Strategic Alliances) Additionally, students tend to have been exposed to text classification (single business or multi), competitive strat- 18.Structure 20XX(n-1) 20XX(n) cases, where data is available in a concise, problem specific egy, primary markets/ products/ brands, integration (ver- DFuivnicstiioonnaall 21 21 Type 20XX(n) (product, geographic, holding, other) context. Reality is not written like a textbook case. Ask- tical or horizontal), process of growth classification, and Other 3 3 Identify ing students to learn to pull current data from real com- structure. pany documents like the annual reports and 10k may be a Figure 3 The third section of the profile includes performance new experience for them. Company Profile Sheet-Performance information (items 19-34). Taking information from the income statement, balance sheet and key ratios this pro- OPERATIONAL DEFINITIONS AND METRICS PERFORMANCE ($OOOXXX) (Conversion rate: $1USD=___) vides a quick look into financial standing of the firm. Per- 20XX(n-1) 20XX(n) 20XX(n-1) 20XX(n) It is one thing to be exposed to the concepts—it is another formance looks at the outputs. A strategic manager must 19. Net Revenues 27. P/E Ratio (date) to understand the metrics required to operationalize those look at the financial numbers in order to understand what 20. Net Income 28. Net Income/Revenue (profitability) 21. EPS 29. ROC (profitability) concepts. Most Strategic Management texts give theoreti- is going on in the company. It is critical that the student 22. # Shares 30. D/E (leverage) cal definitions of terminology. My objective in developing learn to appreciate and “love” the numbers in order to de- 23. Stock Price 31. Working Capital (liquidity) the template with definitional instructions was to give the velop effective strategy. 24. Dividends 32. Marketing Expense students a guide with operational metrics for each of the 25. Total Assets 33. R&D Expense variables under audit. DATA COLLECTION 26. Long Term 34. Patents Debt Guiding students in data collection is the first step in the CONSISTENT PLATFORM strategic audit process. Begin with documentary publica- On the first day of class I give the Company Profile Sheet team. At this point students discover they “knew more The template provides a consistent platform for conduct- tions and self-reported firm information. If the firm un- along with the instructions to the students. I assign a than they thought they knew” and they have begun to ing a strategic audit. der investigation is traded publically, have your students specific company to audit, so all students are working on learn how to draw information from real company doc- begin their research by reviewing the documents filed • It serves as a map that guides the student through the same case. (I refer to “real company analysis” as “live” uments. At this point students can begin collecting the with the SEC-the annual report, the 10K, and proxy state- the key elements of the audit. cases). I usually pick a publically held firm where on-line data for their individual company reports on firms they ments. Original company documents provide the cleanest access to the Annual Report/10K is available. Their as- chose. Over the next month together we cover line by line • It provides an integrative approach to strategic information on the firm, and the pictures, letters, and nar- signment is to complete the template as much as they can the concepts in the Company Profile Sheet. By the time audit versus disjointed presentation of concepts. ratives provide some insight into the company character, over the week, recognizing that we have not yet covered we have completed reviewing the 34 questions, we have values and image. The company website and investor pre- • It provides the ability to examine not only a single the material in class. This gives a baseline of what they covered most of the concepts in Strategic Management- sentations provide essential information to understand- company, but to conduct longitudinal and cross- currently know. When we come back to class I put them corporate, business, and functional level strategy. ing the company strategy, goals and performance. The sectional company comparisons using an integra- in teams and give them time to compare their work, and company profile sheet can also help the students to focus tive template for data collection. again complete the assignment as much as they can as a interview questions when collecting primary data. 16 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 17 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT I recommend that students be consistent in how they pres- • to understand some key questions to ask when PepsiCo, Inc. (FYE 12/31:1993). 10K, http://www.get- URFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lk- ent data from a strategic perspective. Strategists read left to considering a potential company opportunity. filings.com/o0000077476-95-000017.html (May 5, PTU3, (May 5, 2015) right, so it makes sense to present the data in that format 2015) Time Warner, Inc. Organization Chart. http://www. (unlike the way Accountants present data). I recommend PepsiCo, Inc. (FYE 12/31:2014). 10K. http://www.pep- theofficialboard.com/org-chart/time-warner (May 5, using annual data. When students mix quarterly and an- I have found using the Company Profile Sheet assignment sico.com/Investors/SEC-Filings (September 29,2016) 2015). nualized data, everything gets confused. Another obser- helps the faculty vation is that students have a hard time getting the units Time Warner, Inc. (FYE 12/31:2014). 10K, http:// • structure class discussions using the template as a on the performance measures correct and consistent. More ir.timewarner.com/phoenix.zhtml?c=70972&p=irol- foundation for teaching strategic concepts; often than I would like to admit they think the company SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2 revenues are in the trillions! • makes it easier to evaluate student work because it l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPT follows a consistent, standardized format; EwMTAzNzQ3JkRTRVE9MCZTRVE9MCZTU- Appendix B includes the instructions to guide the stu- dents in collecting the data and filling out the sheet, item • helps ensure that key concepts are covered and not by item. Upon completion of the data collection in the forgotten; template, your students will have created a one page, in- • highlights the importance of doing a critical strate- depth strategic audit of the firm. gic audit prior to analysis and planning. • Also, I have each student pick a different company SUMMARY to audit and as a result, I am exposed to many new Completing the Company Profile Sheet is the first step in and different firms I would not normally review the strategic audit and provides a “quick and dirty” stra- each term. tegic snapshot of the firm. It highlights general company • The template could also serve as a research platform information, strategy and structure information, and for data collection for faculty conducting longitu- performance information on one concise and integrated dinal and/or cross sectional company analysis. page. Page two of the sheet provides additional informa- tion on the company description, a breakout of its stra- A completed sample Company Profile Sheet for Time tegic segments including revenue and operating income Warner, Inc. is included in Appendix C. by segment, and structure in support of the classifications on page 1. This sheet can be an extremely effective tool in REFERENCES helping the student in a strategic management course, or a business person, to get their “arms around the beast” we Brawley, D. & Desman, R. (2011). Strategy in 3 dimen- call Strategic Management, and can serve as a first step in sions: A blueprint for effective planning, implementa- conducting a strategic analysis of the firm. tion, & control. Revised unpublished manuscript. I have found using the Company Profile Sheet assignment Coca Cola Company.(FYE 12/31:1993).10K, http:// helps the students in their final term www.wiley.com/college/kieso/cokefinancial/cokean- nual.pdf (May 5, 2015) • to be exposed to real companies, with real data, in real time; TO: Coca Cola Company.(FYE 12/31:2015).10K. http:// www.coca-colacompany.com/content/dam/journey/ • to understand how to search out data on real com- us/en/private/fileassets/pdf/investors/2015-annual- panies using documents that are readily available report-on-form-10-k.pdf (September 29,2016) outside of a textbook and outside of the university resources; NAICS codes that constitute high-technology industries. http://www.nsf.gov/statistics/seind14/index.cfm/ • to improve their confidence about what they have chapter-8/c8s6o55.htm (May 5, 2015) really learned in their program of study; Porter, M. (1985). Competitive advantage. New York: Free • to help them understand the integrative nature of Press. the concepts; Rumelt, R. (1974). Strategy, structure, and economic per- • to establish meaningful discussion of strategy and formance. Division of Research, Harvard Business business based on consistent terminology and op- School, Boston, MA. erational metrics versus anecdotal stories; SIC/NAICS Codes. http://siccode.com/en (May 5, 2015) • to collect data on companies they are interviewing or work with-and, 18 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 19 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT APPENDIX A APPENDIX B 3. SIC/NAICS Numbers Company Profile Sheet Company Profile Sheet Instructions The SIC (Standard Industrial Classification) and NAICS Exhibit 1.1 Strategic Audit Rater Name Date_____________________ The Company Profile Sheet, Appendix A, provides a (North American Industry Classification System) codes 3-D COMPANY PROFILE SHEET STRATEGY, STRUCTURE, AND PERFORMANCE “quick and dirty” strategic snap shot of the firm. The provide the key to securing information on the industries GENERAL INFORMATION www________________________________________email__________________________________ 1.Firm Name Address Phone objective in completing the company profile sheet is to within which the firm competes. Developed by the gov- 2.Trading Name/Symbol Trading Markets (AMEX NYSE OTC) 3.SIC Numbers 4.Sector (Manufacturing; Service (includes retail, wholesale, distribution); Mining/Oil/Gas; Combined) 5.Date founded incorporated public briefly describe the firm in terms of its overall strategy, ernment to aid in filing the multitude of information it 6.Industry Type (Science based; Non Science) 7.Distribution areas (Local; regional; national; international ( %) 8.Key Subsidiaries structure, and performance. Data collection is the first collects, the SIC/NAICS have become the standard clas- 9.Number of outlets 10.Number of full-time employees 20XX (n-1) 20XX(n) **(n=current year; n-1=last year) step in the strategic audit process. Begin with docu- sification scheme for individual company, and in its aggre- STRATEGY, STRUCTURE INFORMATION 11.Business Description mentary publications and self-reported firm informa- gate form, industry information. Three or four digit codes 12.Identifiable Businesses (Corporate)(SQ-G-R-L) 13.Strategy of Growth: (Single Business (Single line; Dominant);Multi-business (Related; Unrelated)) tion. If the firm under investigation is traded publicly, in most cases will be the most useful in collecting indus- 13a.ratios Segment 20XX(n-1) 20XX(n) Specialization Ratio=Rev.largest discrete bus./total revenues: begin your research by reviewing the documents filed try information. However, by decreasing the digits we can Relatedness Ratio=Rev.largest group discrete bus./total rev: 13b.strategy of growth classification 20XX(n-1) 20XX(n) with the SEC---the annual report, the 10K, and proxy broaden the industry classification, by increasing the dig- Single Business Single line (SR > .95) 1.1 1.1 Dominant (.7<SR<.95) 1.2 1.2 statements. Original company documents provide the its the researcher can narrow and focus the industry. For M ulti-Business URenlraetleadte d ((RRRR><..77)) 22..34 22..34 cleanest information on the firm, and the pictures, let- example, SIC “20” is a classification for food/kindred prod- 1145..PCroimmapreyt iMtivaerk Settrs a tegy (Bu siness) S egment ( ADRF) C ost leade rship or D ifferentiat ion M arket Fo cus: Narr ow or Bro ad B 2B and/o r B2C ters, and narratives provide some insight into the com- ucts; “208” is Beverages; “2087” is canned and bottled soft 1 6 .PInrtiemgararyti oPnro ducts /Brands/PVateerntitcsa,Cl oapnydr /iogrh tH,Torraizdoenmtaalr k pany character and image. These filings are available drinks. Descriptions of the SIC/NAICS codes and their 1187..PSrtrouccetsusr eo f Growt h I nternal D2e0vXelXop(mn-e1n)t and/ or 2E0xXteXrn(anl) Process (Acquisitions, Mergers, Joint Ventures, Strategic Alliances) upon request from the company, in most university use can be found at http://siccode.com/en Functional 1 1 and public libraries, and can also be retrieved on many Divisional 2 2 Type 20XX(n) (product, geographic, holding, other) Using SIC/NAICS classifications will facilitate your in- Other 3 3 Identify on-line databases PERFORMANCE ($OOOXXX) (Conversion rate: $1USD=___) dustry research. However, it should be undertaken with 20XX(n-1) 20XX(n) 20XX(n-1) 20XX(n) 19. Net Revenues 27. P/E Ratio (date) a grain of salt. Note: multi-business companies are not re- 20. Net Income 28. Net Income/Revenue (profitability) GENERAL INFORMATION: quired to separate data fully by segment. Therefore, much 21. EPS 29. ROC (profitability) data collected under an individual SIC/NAICS number 22. # Shares 30. D/E (leverage) 23. Stock Price 31. Working Capital (liquidity) 1. Firm Name, Website, Email, Address, Tele- will really be an aggregate of company data across all of its 24. Dividends 32. Marketing Expense business units. phone Number 25. Total Assets 33. R&D Expense 26. Long Term 34. Patents Debt As you begin your research it is very important to make 4. Sector: (Manufacturing; Service (Includes I. BUSINESS DESCRIPTION sure you have the correct firm name. Many firms have Retail, Wholesale, Distribution); Mining/Oil & Gas; names that are very similar---for example, Coca Cola Combined) Company, Coca Cola Enterprises, Coca Cola Bottling II. STRATEGY - SEGMENT INFORMATION (Revenue; Operating Income by Segment) Company, Coca Cola USA. However, each represents Sector refers to economic market classification, and is spe- 20XX(n-1) Revenues/Operating Income 20XX(n) a distinctly different company unit. Make sure that you cific to an industry. Therefore, multi-business firms oper- $000XXX Rev %Total Rev $000XXXOp Inc %Op Income (by segment) $000XXX Rev %Total Rev $000XXXOp Inc %Op Income are collecting data on the right system. ating in several industries will require sector classification breakdowns across each business. Sector is used as a basic proxy for economic and market structure at both the in- 100% TOTAL 100% 2. Trading Name/Ticker Symbol/Trading dustry and firm level. It is assumed that manufacturing Information on the trading activity of the firm can be firms, as a group, have certain similar economic/market (Source:________________) III. STRUCTURE - Draw it. Include position, titles and names Year 20XXn useful in your research. Begin by finding the trading properties---properties that differ from service firms and name, ticker symbol and markets. These are not always /or mining/oil and gas. intuitively derived, i.e. the Coca Cola Company ticker symbol is KO. It is important to understand where the Classification by sector is important in understanding both the strategic resource allocation and socio-technical firm stock is traded. Domestic trading markets are usu- issues that will arise within the business unit. It should be (Source: ) ally listed on the front page of the 10K, as well as the IV. FINANCIALS: Include latest Income Statement & Balance Sheet. noted that same sector firms in different industries would Analyze the financials from 20XX(n-1) and 20XX(n) for trends/ significant events-deviations-gaps, forecasts: last page of the Annual Report. International trading be more similar strategically, than different sector firms, markets may be more difficult to track down. However, • (1) Identify financial Trends (year 200Xn-1 to 200Xn) from Income & Balance Sheet Statements; What do they tell you?; same industry. • (2) Consider the key ratios (liquidity, leverage, operating, profitability); What do they tell you? (include formulas you used to calculate ratios) if they are not listed in the Annual Report, call Inves- • (3) Strengths/ Weaknesses of financials: • (4) What do the financials NOT tell you? tor Relations at the company and ask if they are traded •th e(5 c)o mWphaanty e lvsse iwf yoouuld w yeorue nseeleldin tgo tkhneo cwo mtop danoy a? really effective financial due diligence from a strategic perspective? How would your analysis change if you were going to buy on any international exchanges. Brokerage firms can 5. Date Founded/ Incorporated/ (Private/Public) List Primary Sources of Data also be helpful in securing this information, as well as @dbrawley Noting the date founded, incorporated, and public gives providing summary information of firm trading activ- the investigator some insight into the firm’s history, avail- ity, future projections, and industry forecasts. ability and relative reliability of data. Date founded sug- gests the relative age of the enterprise. Date incorporated 20 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 21 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT helps the researcher understand strategic changes in the 7. Distribution Areas (Local; Regional; National; Figure 1 firm structure. It is especially important to note dates International) NAICS codes that constitute high-technology industries of reincorporation under different names and structural http://www.nsf.gov/statistics/seind14/index.cfm/chapter-8/c8s6o55.htm Strategic complexity increases significantly as firms di- forms (i.e. holding company) in order to efficiently be able versify their distribution areas from local to regional to to find information on the firm. The Securities and Ex- national to international. Government, laws, regulations, change Commission requires certain data filings. Once monetary policies, politics, access, economics, business the firm goes public these filings are free and openly systems, structure, markets, social norms, cultural dy- available to all interested parties. Filings include the pro- namics, language, geography, labor, money, transporta- spectus, annual report, 10k, proxy statements, quarterly tion/communication, contracts, market research, ad- reports, as well as numerous other required reports. This vertising, expectations --- among many others--- change availability of data is one of the reasons that public com- from county to county, country to country. As the firm panies are scrutinized in so much detail, while activities strategically increases its differentiation among the mar- of privately held companies, although they comprise the kets where it distributes its output, it must also increase its majority of the firms in the world, are less well document- integration mechanisms within the strategy machine--the ed. As a result of both the filing requirements and this organization--to cope with these different parts. This will increased scrutiny, data available on public companies is impact resource allocations across the system, the neces- perceived to be more reliable than data that is not subject sity to effectively boundary scan, and the requirement of to such extensive external review. efficiently and effectively managing the strategic informa- tion system. 6. Industry Type (Science Based; Non Science) The industry type is a proxy for level of technology at the 8. Key Subsidiaries organization-environment interface. Controlling for sci- A subsidiary is defined as a company in which another ence-based versus non-science based industry type appears corporation called the “parent company” owns more than to be a better predictor of strategy, structure, and perfor- 50% of the voting shares. mance than industry itself as designated by SIC category. Use of industry types as a proxy for level of technology is Understanding the strategy and structure of the firm re- based upon the assumption that firms operating in high quires an understanding of the critical parts of the sys- technology science based industries will exhibit a higher tem, and the key subsidiaries of the firm help define these level and greater variety and magnitude of product and boundaries. The firm subsidiaries will usually be listed process technological change and innovation than firms near the last page of the annual report/10k with the infor- in non-science based industries, product lifecycles will be mation regarding headquarters, key officers, and business different, as well as resource allocations. units. As you list the key subsidiaries, pay particular atten- tion to how they are named and grouped. Also, be sensi- A firm is generally classified as Science based if it oper- tive to whether the subsidiary is wholly owned by the par- ated in the following categories: bio-technology and phar- ent firm. Some subsidiaries may be only partially owned maceuticals, aircraft & spacecraft, medical, precision & by the firm under audit and this will directly influence the optical instruments, radio, television & communication amount of control the firm will have over the subsidiary. equipment office, accounting & computing machinery, For reporting purposes, firms are only required to list as electrical machinery & apparatus, motor vehicles, trailers subsidiaries, those units in which they maintain at least a & semi-trailers, railroad & transport equipment, chemical majority (usually 70%) ownership position. It should also & chemical products, machinery & equipment. NAICS be noted that subsidiaries, if held as autonomous units, codes that constitute high technology industries are iden- of outlets reported historically will be revised to reflect cial contracts, provisions, and unionization. The number might be traded publically independent of the parent firm. tified in Figure 1. However, it is imperative that you use both internal growth and acquisition activity. If you want of employees can give the researcher some measure of your judgment in classifying your segments as segments a true picture of growth, it will be necessary to go back on growth within the firm. It can also be very misleading, if that may not appear to be science based may have a signifi- 9. Number Of Outlets a year-to-year basis to collect the data, segmented by type not evaluated in light of the strategy of the firm overall. cant science based component. For a quick designation, of growth. When looking at the number of employees, it is important In profiling the firm it will be helpful to know the number look at the company’s R&D expenditures- high R&D to note the type and nature of business segments in which of outlets by type, retail distribution and /or manufactur- probably indicates the firm is “science based.” Firms op- the firm operates, and the changes that have taken place ing that the firm has established. The number of outlets 10. Number Of Full-Time Employees erating in all other industries are classified as Non-Science over the period of evaluation. The relationship of “labor can be a good indicator of segment and/or brand growth based. For publically held firms, the number of full-time employ- intensive” to “capital intensive” technological processes within the company. Therefore, longitudinal compari- ees can be found in the 10k document in a special category across segments is critical to understanding the relation- son can prove useful. In looking at growth in number of entitled “employees”. This section also includes additional ship between the number of employees and revenues for outlets over a period of time, be aware that the number human resource management information including spe- 22 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 23 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT instance. Consider also if the firm processes include Fab- data. Both years clearly highlight the differences between STRATEGY & STRUCTURE • the measurements are not precise, nor do they rication versus Assembly components. the two companies strategically. represent an absolute criterion; The second area of evaluation is Strategy, Structure in- As number of employees is a critical variable in evaluating formation, items 11-18. • selection of the SIC/NAICS category and the Figure 2 the economic impact of a company, and in turn its politi- specificity (i.e. 2 digit code versus 6 digit code) will Once you have collected general demographic data on the Resource Intensity and Technology cal and social clout, firms will want to reflect the number directly influence the way you classify the strategic firm, you can begin to dig deeper into the strategy and of employees in the most favorable light. Be careful inter- business units; Resource Intensity Technology structural configurations. preting number of employees based on narratives present- High Labor Customized, Job Shop • as movements toward both vertical and horizontal ed. For example, a company may state in its annual report integration become fully institutionalized into the Batch, Mass that it “employs worldwide, across its brands 250,000”, 11. Business Description corporate level strategy of the firm the perception however, its 10K states number of full-time employees are High Capital Process of the SIC/NAICS category will broaden and a Here you want a brief general description of the organiza- 39,000. This appears to be a significant deviation. How- firm that appeared to have multi-business related tion. You may include a more detailed description on page ever, note the wording---the larger number reflects em- units will now appear to be a fully integrated single 2 of the Profile Sheet (Appendix A). As part of describ- Two companies that appear on the surface to be simi- ployees of the brand, including all employees of franchi- business firm with multiple diversified product/ ing the business, we look at the Corporate, Business, and lar but are quite different in terms of resource intensity sees. These represent indirect, not direct employees of the market lines. Functional Level strategies. and technological processes are the Coca Cola Company company. The number of employees may also be manipu- (1993,2015) and PepsiCo, Inc. (1993,2015). Why is there lated to indicate both full and part-time employees. Make Single Business versus Multi-Business? Remember your such a significant difference in number of employees? sure you are pulling the appropriate number that reflects 12. Identifiable Businesses: (Corporate Level) inductive theory: Take a look at the segment revenues across the two com- your objective with the greatest validity. Also, note that as (Status-Quo, Growth, Retrenchment, Liquidation) If it looks like a duck, walks like a duck, and quacks like a panies. Included is the data from both 1993 when restau- you evaluate changes over time, it is important to reflect duck---even though it may not specifically meet the nor- Part I, first paragraph of the 10k usually gives a concise rants were PepsiCo’s largest segment as well as the 2015 changes in employees relative to changes in strategy. mative definitions presented for a duck, maybe you should description of the firm. This is followed by descriptive evaluate it more fully. Just make sure and substantiate segment information. Segment information can also be your classifications so that when asked how you arrived found in the financial disclosure section of the Annual at your conclusions you have the data available to support Report/10K. Companies operating in more than one your position. business segment are required to report revenues and Figure 3 Coca Cola Company versus PepsiCo 1993/2015 certain operating data by segment. The segments identi- The four basic corporate level strategies are: status quo, fied should be consistent with the SIC/NAICS numbers growth, retrenchment, and liquidation. reported in item 3. Identification of critical business seg- ments is the first step in evaluating corporate level strate- 13. Strategy Of Growth gy: in answering the key corporate question---What busi- ness (es) has (past),does (present), or should (future) the Strategy of Growth is a representative measurement and firm operate? classification of the firm’s overall commitment to growth through diversity at the macro organization level. Several points should be noted: 1993 2015 1993 2015 • as stated, the organization itself and its boundaries Net Revenues $13,963 $44,294 $25,021 $63,056 are merely a conceptual construct; ($000,000) Full time employees 34,000 132,200 423,000 263,000 Figure 4 Soft drinks 88% Concentrate ops 38% Beverages 34% Frito Lay NA 23% Corporate, Business, and Functional Level Strategies Foods 12% Finished prod ops 62% Snack Food 28% Quaker Foods NA 4% Restaurants 38% Latin Am 13% Segments (%) North Am Bev 33% Europe/SubSah/Af 17% Asia/MidE/NAf 10% Gross Profit $ 8,803 $26,812 $13,075 $34,672 Operating income $ 3,108 $ 8,728 $ 2,907 $ 8,353 Net Income $ 2,176 $ 7,351 $ 1,588 $ 5,452 24 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 25 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT Figure 5 Rumelt (1974) developed classifications among the cat- one another. A business is part of a group of “somehow re- Corporate Level Strategies egories using the specialization and relatedness ratio cal- lated businesses” as long as it is tangibly related to at least culations. one other business in the group. The operationalizations of the classifications are shown in Figure 6. Specialization Ratio (SR): The specialization ratio is the Same  primary measure of diversity and is defined as the propor- Size tion of a firm’s revenues attributable to its largest single 14.Competitive Strategy: (Business Level) (At- strategic business unit. A single business unit is the set tack, Defend, Retreat, Flank) of activities associated with the production and market- Same  Business Level strategy addresses the question: How does ing of a single product/service or a line of closely related Markets the company compete? This question is industry segment products/services. Included within a business unit are all Status Quo specific and must be answered for each of the individual products or product lines that require close coordination business segments in which the company operates. It Same  or which share important resources. In deciding whether should be noted that a firm might follow different com- Products two product-market activities are part of the same busi- petitive strategies in each of its different business seg- ness unit or not, it is helpful to ask this question: “Would ments. a major change in pricing, manufacturing processes, tech- Same  nology, materials used, etc., in one of these areas have a As a first step in defining the business level strategy for Process strong effect on the operations in the other area?” If not, the segment, look at the relationship between your inter- the two-product-market activities are separate and not nal strengths & weaknesses, and external opportunities & part of the same business unit. threats (SWOT). There are four basic competitive strate- Concentrated gies: attack, defend, retreat, and flank. Relatedness Ratio (RR): The relatedness ratio is the pro- Market portion of a firm’s revenues that are attributable to the Once the overall business level strategy is determined, largest group of businesses that are related in some way to than you want to look at the generic strategies within the Development segment relative to the product and the market. Size (Simple) Figure 6 Development Single Business- Multi-Business classification system Product Process Classification Definition Innovation 1.Single 1.1 Single line Firms that grow by the expansion of one main product/market line Growth Business so that at least 95% of net revenues lie within this singe product/ Firms with SR between .95 and 1.0 market business area. Forward 70%-100% Vertical 1.2 Dominant Firms which grow primarily by the expansion of one main prod- Concentric Backward uct line but which in addition have added secondary business lines (Related) Firms with SR between .7 and .95 making up to 30% or less of the total sales volume. These secondary Diversification Horizontal activities can be related to the primary activity or can be unrelated. (Multi) Conglomerate (Unrelated) 2.Multi- 2.3 Related Firms which grow by expansion by means of entry into related Turnaround Business product /market businesses, by the use of a related technology, by Firms with SR less than .7, and RR Retrenchment related vertical activities, or by some combination of these so that <70% between .7 and 1.0 no one business segment accounts for 70% of the net revenues. Divestiture These may also be referred to as  Concentric 2.4 Unrelated Firms which grow by expansion into new markets and new tech- nologies unrelated to the original product /market business seg- Firms with SR less than .7, and RR ment such that no one segment accounts for 70% of net revenues. less than .7 These may also be referred to as conglomerate 26 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 27 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT Figure 7 customer type, or some combination. Understanding the Firms which show a propensity to grow and diversify by cation strategy to the structure variable. For this reason, Business Level Strategies and SWOT primary market segments and product/brand compo- process strategies which require going outside the per- the more generic classifications are adopted for use here. nents of strategy helps in understanding relative competi- ceived organizational boundaries including acquisition, Firms defining their major subunits in terms of the busi- tive positioning. mergers, joint ventures, and strategic alliances among ness activities (production and operations, marketing, others are classified as employing an external process of Also important, are the critical registrations that give a finance and accounting or stages in the manufacturing growth. company “proprietary rights” over a technology, product, process) are functionally structured. process or symbol. These can serve as market barriers to In terms of complexity, utilizing a process strategy which Firms which are split into a number of quasi-autonomous potential competitors. It is also important to note the area requires going outside of the organizational boundaries units, each headed by a general manager and supplied with over which these proprietary rights are enforceable. Does to secure resources for survival and growth is much more the resources necessary for it to operate as an independent the company have the local, state, national or internation- complex than a strategy which utilizes a resource base in- economic entity are divisionally structured. Structures in- al rights to use of a name or trademark? ternal to the firm. The level of differentiation introduced cluded under this category include product division, geo- into the firm increases with the degree of external inter- graphic division, and holding company forms. vention. Strategic alliances are relatively limited in impact 16. Integration: Vertical/ Horizontal and usually contractual in nature. Joint ventures require The strategist must understand the degree and nature of more negotiation, but boundaries across the systems are PERFORMANCE vertical and horizontal integration strategies within and usually well defined and limited in project scope, nature, The third area of audit is Performance, items 19-34. Per- across the industry segments and sectors. A commodity is and duration. The waters get much fuzzier and much more formance looks at the outputs. A strategic manager must a product that is purely substitutable with no differentiat- strategically and structurally complex with mergers and look at the financial numbers in order to understand what ing value added components. acquisitions. Negotiated contracts serve to outline how is going on in the company. It is critical that the strategist Porter (1985) defines the generic competitive strategies in the new company or unit will be governed. It is important Vertical integration is defined as extending the value add- learn to appreciate and “love” the numbers in order to de- terms of competitive scope and advantage. Porter defined to know if the firm under evaluation is preconditioned to ed chain from the commodity to the end consumer---get- velop effective strategy. two basic types of competitive advantage a firm can pos- internal or external process of growth as this can impact ting as close to the ultimate customer as possible. Forward sess to establish its distinctive competencies: low cost or the alternatives available. vertical integration is moving the segment from where it differentiation. These combine with the “scope” of a firm’s 19-34. Performance is closer to the consumer. Backward vertical integration is operations (the range of market segments targeted) to pro- moving the firm back towards the commodities required 18. Structure Performance on the Company Profile Sheet (items 19- duce “three generic strategies for achieving above average in fabrication. 34) involves evaluating select numbers from the income performance in an industry: cost leadership, differentia- Structure looks at how the organization integrates the statement, balance sheet, and calculating a few significant tion, and focus” (namely narrow focus). To Porter, firms Horizontal integration is extending the firm’s market parts. The organization represents the strategy machine, ratios. In addition, expenditures on Research and Devel- that wish to gain competitive advantage must “make a share with related or concentric products/ businesses. the corpus that both creates and executes the strategy. The opment, Marketing, and Patents are noted. choice” among these: “being ‘all things to all people’ is This may include buying out key competitors. structural configuration of the organization directly in- a recipe for strategic mediocrity and below-average per- fluences how well these functions are performed. A few key questions to consider when evaluating perfor- formance” A firm that is “stuck in the middle”, engag- mance: 17. Process Of Growth: Internal Development Or The DNA of formal organizations is authority, the right ing in each generic strategy but failing to achieve any of External to command, initiate actions and make decisions. Au- • Identify financial Trends (year 20XXn-1 to them will, in all probability, fail to identify what is fun- thority is built into jobs–jobs that have two dimensions: 20XXn) from Income & Balance Sheet State- damentally distinct about its business in the marketplace From a strategic perspective, interest is not only in how scope and depth. Jobs are groups of combined tasks. Scope ments; What do they tell you? as perceived by its customers. Looking at customer type, businesses grow in terms of the strategic content, but also represents the number and variety of tasks included in a Business to Business/Business to Consumer, can also be the process or method through which firms attain a cer- • Consider the key ratios (liquidity, leverage, operat- specific job; depth–the degree of discretion or authority useful. tain strategy. Firms that grow and diversify through a pro- ing, profitability); What do they tell you? (include an individual worker can exercise over his or her job. Jobs cess of internal investment and re-investment , wherein formulas you used to calculate ratios) are combined into relationships such as chain of com- 15. Primary Markets-Primary Products/ Brands/ outputs of the firm reenter the system as inputs to support mand, and exhibit characteristics- scalar chain, unity of • Strengths/ Weaknesses of financials Patents/ Copyrights/ Trademarks/ Registrations growth, are classified as utilizing an internal development command, span of control. These relationships may also process of growth. • What do the financials NOT tell you? represent line or staff functions, and may be centralized or Following item 14, primary markets and products are seg- decentralized. As the authority relationships are grouped, • What else would you need to know to do a really ment specific questions. Markets may include geographic, structural configurations emerge. effective financial due diligence from a strategic perspective? How would your analysis change if Two major structural types are identified: functional Figure 8 you were going to buy the company versus selling and divisional. These two types represent the “root” or Business Level: Product and Market Strategies the company? generic categories upon which the more complex classi- Competitive Advantage fication systems are based. In evaluating the research on A few tips to interpreting and presenting the financials structural configurations it appears that most of the in- from a strategic perspective: Market/Advantage Low Cost Differentiation ferences drawn using the more complex structural forms Competitive Broad Target Cost Leadership Differentiation • The numbers should presented left-to-right. This is have involved pooling the data back into the two broad how strategists read. Scope Narrow Target Cost Focus Differentiation Focus generic categories in order to relate growth and diversifi- 28 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 29 Dorothy E. Brawley A “QUICK & DIRTY” STRATEGIC AUDIT • Revised versus Unrevised: If there were any major APPENDIX C changes to a company (ex. sold a business unit), the Sample Company Profile Sheet, Time Warner, Inc. numbers need to be revised in order to compare year-to-year performance. If we want to look at the Exhibit 1.1 Strategic Audit Rater Name Brawley Date ___April 2016_____________ company historically, we would look at the origi- COMPANY PROFILE SHEET STRATEGY, STRUCTURE, AND PERFORMANCE nal numbers; if we want to look at the future, we GENERAL INFORMATION www__www.timewarner.com______________________ email [email protected] 1.Firm Name Time Warner, Inc Address One Time Warner Center, NY, NY 10019-8016 Phone 212-484-8000 would look at the revised numbers. 2.Trading Name/Symbol TWX Trading Markets (AMEX NYSE OTC) 3.SIC/NAICS Numbers 51211movie;51321 cable networks;51312 tv ; SIC 7812 motion pic/video 4.Sector (Manufacturing; Service (includes retail, wholesale, distribution); Mining/Oil/Gas; Combined) 5.Date founded1923/1927 incorporated 2001 (AOL-merger)/2003 (TWX) public 2001 6.Industry Type (Science based; Non Science) 7.Distribution areas (Local; regional; national; international) (US/Canada 72%, Europe 16%, Asia/Pacific Rim 6%, Latin America 5%, other 1%) • Basic versus Diluted numbers: Use basic if looking 8.Key Subsidiaries Exh 21 10k14-(lots)Turner, Warner Brothers, Time, HBO, Warner Communications, CNN, TEN, Turner Sports, Castle Rock, New Line cinema, Time Warner, Hanna Barbera,DC Comics 9.Number of outlets NA 10.Number of full-time employees 2013 34,000 2014 25,600 2015 24,800 historically, use fully diluted if you are consider- **(n=current year; n-1=last year) ing buying the company or are a very conservative STRATEGY, STRUCTURE INFORMATION 11.Business Description (Corporate): Leading media and entertainment company investor. 12.Identifiable Businesses (Corporate)(SQ-G-R-L) Warner Brothers (G); Turner (G); HBO (G); Publishing (R/L: Divested) 13.Strategy of Growth: (Single Business (Single line; Dominant);Multi-business (Related; Unrelated)) 13a.ratios Segment 2013 2014 2015 • The numbers should also be questioned constantly Specialization Ratio=Rev.largest discrete bus./total revenues: Warner Brothers 12312/26461=.47 12526/27359=.46 12992/28118=.46 Relatedness Ratio=Rev.largest group discrete bus./total rev: All=WB+Turner+HBO (+Publishing 2013) 29795/29759=1 27359/27359=1 28118/28118=1 as they can be manipulated to show what we want. 13b.strategy of growth classification 2013 2014 2015 Single Business Single line (SR > .95) 1.1 1.1 1.1 For example, the stock price of a company can Dominant (.7<SR<.95) 1.2 1.2 1.2 Multi-Business Related (RR>.7) 2.3 2.3 2.3 change daily. To make the stock appear like it is Unrelated (RR<.7) 2.4 2.4 2.4 14.Competitive Strategy (Business) Segment Warner Brothers (ADRF) Cost leadership or Differentiation Market Focus: Narrow or Broad B2B and/or B2C performing better, the value listed could be the 15.Primary Markets:(geo)US/Canada, Europe, Asia/Pacific Rim, Latin America; (customers-cable us)TW Cable, Comcast, Dish, Direct TV, ATT U-verse, Verizon, Cox, Charter, Cablevision, Bright House, Suddenlink Primary Products/Brands/Patents, Copyright, Trademark Turner, HBO, Warner Brothers, Time; 3 revenue lines common to segments: Subscription/Advertising/Content & Other high value of the year versus what the stock was 16.Integration Vertical and /or Horizontal 17.Process of Growth Internal Development and/ or External Process (Acquisitions, Mergers, Joint Ventures, Strategic Alliances) trading at today or at the end of the fiscal year. 18.Structure 2013 2014 2015 Functional 1 1 1 Another issue is that assets are listed as book value Divisional 2 2 2 Type 2015 (product, geographic, holding, other) Other 3 3 3 Identify versus market value. PERFORMANCE ($million except share data) (Conversion rate: $1USD=) 2013 2014 2015 2013 2014 2015 19. Net Revenues $26,461 $27,359 $28,118 27. P/E Ratio (date-FYE) 69.72/3.99=17.47 85.42/4.42=19.33 64.67/4.69=13.79 • Finally, recognize that different people look at the 20. Net Income $3,691 $3,827 $3,832 28. Net Income/Revenue (profitability) 3691/26461=.14 3827/27359=.14 3832/28118=.14 numbers in different ways. Accountants perceive 21. EPS $3.99 $4.42 $4.69 29. ROC=net inc/(LTD+E)(profitability) 3691/(20061+29904)=.074 3827/(21376+24476)=.083 3832/(23594+23619)=.081 the numbers one way, finance people another way, 22. # Shares 920.0 863.3 814.9 30. D/E (leverage) 38095/29904=1.27 38783/24476=1.58 40229/23619=1.70 and strategists yet another way. Be aware of the dif- 23. Stock Price (close) $69.72 $85.42 $64.67 31. Working Capital CA-CL(liquidity) 12531-8388=4143 13108-9204=3904 12513-8002=4511 24. Dividends $1.15 $1.27 $1.40 32. Marketing/Advertising Expense $2,447 $2,430 $2,586 ferences- this will affect not only what information 25. Total Assets $67,999 $63,259 $63,146 33. R&D Expense NI NI NI you present but how you present it. 26. Long Term Debt $20,061 $21,376 $23,594 34. Patents NI NI NI I. BUSINESS DESCRIPTION Time Warner, Inc, a Delaware corporation, is a leading media and entertainment company. The Company classifies its businesses into the following three reportable segments: • Turner, consisting principally of cable networks and digital media properties; • Home Box Office, consisting principally of premium pay television services domestically and premium pay andbasic tier television services internationally; and • Warner Bros., consisting principally of television, feature film, home video and videogame production and distribution. Note: Prior to 2013 TWX viewed it’s segments as: Filmed Entertainment, Networks, and Publishing. In March 2013,TWX announced the divestiture of its Publishing Division, Time Inc. In June 2014, Time Inc. became a publically traded company. II. STRATEGY - SEGMENT INFORMATION (Revenue; Operating Income by Segment) 2013 ($Millions) Revenues/Operating Income 2014 ($Millions) 2015 ($Millions) Rev % Rev Op Income %Op Income (by segment) Rev %Rev Op Inc %Op I Rev %Rev Op Inc %Op Inc $9,983 38% $3,486 55% Turner $10,396 38% $2,954 49% $10,596 38% $4,087 59% $4,890 18% $1,791 29% Home Box Office $5,398 20% $1786 30% $5,615 20% $1,878 27% $12,312 47% $1,324 21% Warner Bros. $12,526 46% $1,159 19% $12,992 46% $1,416 21% ($394) (6%) Corporate ($73) (1%) ($367) (5%) ($724) (3%) $61 1% Intersegment Eliminations ($961) (4%) $149 3% ($1,085) (4%) ($149) (2%) $26,461 100% $6,268 100% TOTAL $27,359 100% $5,975 100% $28,118 100% $6865 100% $3,354 Publishing, Time Inc. (divested 2014) ($20) Intersegment Eliminations Publishing $29,795 III. STRUCTURE – Year 2015 Draw it. Include position, titles and names http://www.theofficialboard.com/org-chart/time-warner Note: NA=Not Applicable; NI=No Information Sources:TWX 2013/2014/2015 Annual Reports; TWX 10K 2013/2014/2015; TWX 4Q15 Earnings Release 021016 @dbrawley 30 Fall 2016 (Volume 12 Issue 2) Journal of Learning in Higher Education 31