This spreadsheet supports STUDENT analysis of the case “Star River Electronics Ltd.” (UVA-F-1361). This spreadsheet was prepared by Robert F. Bruner, Robert Conroy, and Kenneth M. Eades, Professors of Business Administration. Copyright © 2001 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. Oct. 25, 2016 Exhibit 1 Star River Electronics Ltd. Historical Income Statements Fiscal Year Ended June 30 (SGD 000) Sales Operating expenses: Production costs and expenses Admin. and selling expenses Depreciation Total operating expenses Operating profit Interest expense Earnings before taxes Income taxes* Net earnings Dividends to all common shares Retentions of earnings *The expected corporate tax rate was 24.5%. Data source: Author estimates. 2012 71.924 2013 80.115 2014 92.613 2015 106.042 33.703 16.733 8.076 58.512 38.393 17.787 9.028 65.208 46.492 21.301 10.392 78.185 53.445 24.633 11.360 89.438 13.412 3.487 9.925 2.430 7.495 14.907 3.929 10.978 2.705 8.273 14.428 6.227 8.201 1.925 6.276 16.604 7.614 8.990 2.220 6.770 2.000 5.495 2.000 6.273 2.000 4.276 2.000 4.770 Exhibit 2 Star River Electronics Ltd. Historical Balance Sheets (Fiscal Year Ended June 30) (SGD 000) 2012 2013 2014 2015 Assets: Cash Accounts receivable Inventories 4.816 22.148 23.301 5.670 25.364 27.662 5.090 28.078 53.828 5.795 35.486 63.778 Total current assets Gross property, plant & equipment Accumulated depreciation 50.265 64.611 (4.559) 58.696 80.153 (13.587) 86.996 97.899 (23.979) 105.059 115.153 (35.339) 60.052 110.317 66.566 125.262 73.920 160.916 79.814 184.873 Liabilities and stockholders' equity: Short-term borrowings (bank)1 Accounts payable Other accrued liabilities 29.002 12.315 24.608 35.462 12.806 26.330 69.005 11.890 25.081 82.275 13.370 21.318 Total current liabilities Long-term debt2 Shareholders' equity 65.925 10.000 34.391 74.598 10.000 40.664 105.976 10.000 44.940 116.963 18.200 49.710 110.316 125.262 160.916 184.873 Net property, plant & equipment Total assets Total liabilities and stockholders' equity 1 Short-term debt was borrowed from City Bank at an interest rate equal to Singaporean prime lending rate + 1.5%. Current prime lending rate was 5.35%. The benchmark 10-year Singapore treasury bond currently yielded 2.30%. 2 Two components made up the company's long-term debt. One was a SGD10 million loan that had been issued privately in 2010 to New Era Partners and to Star River Electronics Ltd., UK. This debt was subordinate to any bank debt outstanding. The second component was a SGD8.2 million public bond issuance on July 1, 2014, with a five-year maturity and a coupon of 5.75% paid semiannually. The bond had recently traded at a price of SGD97. Data source: Monetary Authority of Singapore and author estimates. Exhibit 3 Star River Electronics Ltd. Ratio Analyses of Historical Financial Statements Fiscal Year Ended June 30 2012 2013 2014 2015 Profitability Operating margin Tax rate Return on sales Return on equity Return on assets 18,6% 24,5% 10,4% 21,8% 6,8% 18,6% 24,6% 10,3% 20,3% 6,6% 15,6% 23,5% 6,8% 14,0% 3,9% 15,7% 24,7% 6,4% 13,6% 3,7% Leverage Debt/equity ratio Debt/total capital EBIT/interest 1,13 0,53 3,85 1,12 0,53 3,79 1,76 0,64 2,32 2,02 0,67 2,18 65,2% 15,0% 8,0% 112,4 133,4 252,3 64,0% 11,4% 13,5% 115,6 121,7 263,0 57,6% 15,6% 28,5% 110,7 93,3 422,6 57,4% 14,5% 14,9% 122,1 91,3 435,6 0,76 0,41 0,79 0,42 0,82 0,31 0,90 0,35 Asset Utilization Sales/assets Sales growth rate Assets growth rate Days sales outstanding Days payable outstanding Days inventory outstanding Liquidity Current ratio Quick ratio Data source: Author calculations. Exhibit 5 Star River Electronics Ltd. Data on Comparable Companies Percent Sales from Optical Media Name Production Sing Studios, Inc. 20% Wintronics, Inc. 95% STOR-Max Corp. 90% Digital Media Corp. 30% Wymax, Inc. 60% Price/ Earnings Ratio 9,0 NMF 18,2 34,6 NMF Beta 1,10 1,50 1,70 1,20 1,50 Book Book Value Debt/Equity per Share 0,23 1,24 1,72 1,46 1,33 7,06 0,00 17,75 0,42 6,95 Market Price per Share 1,37 6,39 27,48 75,22 22,19 Number of Shares Last Annual Outstanding Dividend (millions) per Share 9,3 1,82 177,2 0,15 8,9 none 48,3 none 371,2 1,57 Note: NMF means not a meaningful figure. This arises when a company's earnings or projected earnings are negative. Singapore's equity market risk premium could be assumed to be close to the global equity market premium of 6 percent, given Singapore's high rate of integration into global markets. Data source: Author estimates. Figure 1. SWOT Graphic (adapted from Pierce and Robinson 2004) Opportunities (External) Turnaround Aggressive Eliminate Weaknesses and acquire the Take advantage of Strengths and Strengths necessary to take advantage of Opportunities. existing Opportunities. Generic strategies Horizontal Integration Vertical Integration Turnaround Corporate Combinations Weaknesses (Internal) Defensive Exit or protect yourself until you can recover. Generic strategies Concentrated Growth Market Development Product Development Innovation Diversification Take advantage of Strengths, acquire Opportunities, move away from Threats. Generic strategies Divesture Liquidation Bankruptcy Generic strategies Concentric Diversification Conglomerate Diversification Corporate Combinations Threats (External) Strengths (Internal) Teaching SWOT Analysis C.R. Marshall University of Wisconsin, Stevens Point Gary Mullins University of Wisconsin, Stevens Point Robert Allen, Lindenwood University Published in Midwest Administration Association International Annual Meeting Proceedings, March, 2005 Abstract: A properly done and complete SWOT Analysis should be more than an exercise in list making. This paper outlines a formal methodology for this analysis once the lists are in hand. Steps include: internal on axis analysis, external on axis analysis, cross axis analysis, quadrant identification, current strategy analysis, new strategy candidate list development and selection of candidate strategy. It is the authors’ hope that this document will be of use to those who teach business strategy, either as a handout or as the basis for in-class presentation. INTRODUCTION In senior level business strategy classes, students performing their first attempt at SWOT analysis tend to make lists of Strengths, Weaknesses, Opportunities, and Threats, and believe that they are done. They also tend to be sorely disappointed in the grade they receive on this assignment. A properly done and complete SWOT Analysis should be more than an exercise in list making. This paper outlines a formal methodology for this analysis once the lists are in hand. TYPICAL MANAGEMENT PRINCIPLES APPROACH Textbooks written for a sophomore or junior level management principles classes tend to take a two-step approach to SWOT analysis: 1. List Strengths, Weaknesses, Opportunities, and Threats. 2. Discuss the list. Tools for discussion range from brainstorming (cite) to formal internal and external tools such as Porter’s Five Competitive Forces model (Porter 1980) recommended by Bartol and Martin (1998). The additional tools still lack a specific goal for the analysis. The authors will agree that this is far better than no analysis at all. An exercise in list making forces managers to explicitly think about organizational weaknesses and environmental threats. This level of analysis is a good first step and is better than blindly proceeding with the status quo or arbitrarily replacing the status quo with whatever strategy seems best at the time. However, we believe that step two is inadequate. Suggesting that a manager think about or discuss a topic does not provide the necessary tools for analysis. The discussion needs a goal. TYPICAL SENIOR LEVEL STRATEGY APPROACH Students in a senior level business strategy class are given a goal for the SWOT analysis. The goal is to select a strategy for the organization. Students now have a three-step approach: 1. List Strengths, Weaknesses, Opportunities, and Threats. 2. Use the list to determine the competitive position. 3. Based on competitive position, select an appropriate strategy. We will elaborate on steps two and three. Determining Competitive Position Strengths and weaknesses can be compared to determine where the company stands internally. Opportunities and threats can be compared to summarize the external environment. SWOT Elements Present Competitive Position Strengths and Opportunities Aggressive Strengths and Threats Diversification Weaknesses and Opportunities Turnaround Weaknesses and Threats Liquidation /Defensive Table 1: Linking SWOT Elements o Competitive Position (adapted from Pierce and Robinson 2004) The rational in each case is straightforward. If you have strengths and opportunities, you can aggressively use your strengths to take advantage of those opportunities. If you are in a strong position, but find yourself in a threatening environment that lacks opportunities, you should diversify into an environment that provides you with opportunities to use your strengths. If you have opportunities but the organization cannot take advantage of them, the company must eliminate the weaknesses and replace them with strengths. This is the general goal of a turnaround. If you have neither strengths nor opportunities, but are burdened with both weaknesses and threats, liquidation may be the appropriate option. With no hope and no chance, you are unlikely to succeed. Selecting the Appropriate Strategy Pierce and Robinson (2004) identify a number of generic strategies ranging from concentrated growth to liquidation. These strategies are detailed in table 2. Generic Strategy Concentrated Growth Market Development Product Development Innovation Horizontal Integration Vertical Integration Concentric Diversification Conglomerate Diversification Turnaround Divesture Liquidation Description Producing more of your current product for distribution in your current markets Offering current products in new markets or through new channels Substantial modification of existing product or new related product offered to current customers Ongoing introduction of new products Growth through acquisition of similar firms operating at the same stage of the production – marketing stage Acquisition of firms that supply inputs or purchase output. Acquisition or internal generation of separate businesses with synergistic possibilities Acquisition of unrelated businesses that represent promising investment opportunities Retrenchment through cost and/or asset reduction Sale of major components of a firm Firm is sold off in whole or in parts (includes liquidation bankruptcy) Bankruptcy In reorganization bankruptcy, the firm seeks protection from creditors under the bankruptcy law and reorganizes in hopes of survival Corporate Joint ventures, strategic alliances and consortia, keiretsus Combinations an chaebols Table 2. Generic Strategies (adapted from Pierce and Robinson 2004) Once a student has determined the company's competitive situation, an appropriate strategy can be selected from the menu. SWOT analysis on this level will help the student avoid inappropriate strategies. This assumes that the competitive position has been correctly identified given the organization's specific strengths, weaknesses, opportunities and threats. Likewise, it assumes that the choice made from the now reduced menu of possibilities is appropriate for the firm's specific situation. While this is a good start, we believe that a more formal and rigorous analysis method will help. A MORE RIGORIOUS APPROACH Our approach to SWOT analysis is detailed below. This approach includes the analysis of interaction and substitution effects among the various Strengths, Weaknesses, Opportunities and Threats. It adds explicit cross axis analysis comparing internal factors to external factors. It also includes a specific method for selecting from among candidate strategies by linking strategies to the related SWOT elements. The steps are as follows: 1. Basic internal on axis analysis 2. Basic external on axis analysis 3. Cross axis analysis 4. Quadrant identification 5. Current strategy analysis 6. New strategy candidate list development 7. Analysis and selection of candidate strategy Steps one and two below are more than the basic list making from the previous first steps for sophomores and seniors. They are listed as separate steps to emphasize the internal / external distinction. In a team project, one student can work on internal analysis while another does external analysis. The students will join together for subsequent steps. 1. Internal on axis analysis Internal analysis deals with company strengths and weaknesses. For the purpose of list making, the two basic questions are: What are the organization’s Strengths? What are the organization’s Weaknesses? These lists are then analyzed to determine the firm’s internal situation. The traditional framing of the question is: Do the strengths outweigh the weaknesses? Just as SWOT analysis is not simply making lists, on axis analysis is not just counting. A counting approach would give us: If the number of Strengths is greater than the number of Weaknesses then we are in a position of Strength. The problem is that not all strengths and weaknesses are equal. If we can effectively assign weights to the factors, we can get a better understanding of which outweighs the other. Do the strengths outweigh the weaknesses? We would like to add another level to the analysis. Interaction and substitution effects may change the importance of any given strength or weakness. For example, an organizational strength, such as the ability to identify changing customer needs, could be completely undermined by the inability to shift production to the newly desired products. On a personal rather than an organizational level, the strength of skill with computers may be a reasonable substitute for a weakness in mathematics. A computer whiz with moderate but less than stellar math skills may still be successful. 2. External on axis analysis In list-making for internal analysis the questions are: What Opportunities does the organization have? With what Threats are the organization burdened? The previous comments on counting versus weighting and on interaction and substitution effects apply to external analysis just as they did to internal analysis in step one. For example, an opportunity to sell in an overseas market could be more than an adequate compensation for a threat from a local competitor. Common mistakes in steps 1 and 2 The words strength, weakness, opportunity and threat are used in a very specific way in this form of analysis. Strengths and weaknesses are internal while opportunities and threats are external. Students tend to use more general definitions: Strengths are anything that is good, Weaknesses are anything that is bad, Opportunities are anything that we can do, Threats are actions that can be taken against us. For the purpose at hand, these definitions are wrong and hide the internal versus external improvement nature of SWOT analysis. The other common mistake is to simply count list items or to weigh the factors without considering interaction and substitution effects. The goal at this point is still the determination of overall company position, Strength versus Weakness and Opportunity versus Threat. We only caution that inadequate analysis may be misleading and yield an ineffective strategy choice. 3. Cross axis analysis Cross axis analysis is comparing internal and external factors and reevaluating your position on each axis. We can think of the competitive position of an organization in terms of a two dimensional graph where one axis is the firm's internal standing, strengths versus weaknesses, and the other dimension represents the external environment. This relationship is shown in figure 1. Opportunities Weaknesses Strengths Threats Figure 1. SWOT Graphic (adapted from Pierce and Robinson 2004) In placing a firm both vertically and horizontally on figure 1, we looked at whether or not weaknesses undermined strengths and threats undermined opportunities. Cross axis analysis compares internal and external. It looks at our organization as it relates to our environment. Consider the situation where increased immigration in the southwest has resulted in a labor surplus, accompanied by unusually low wages in that region. The labor force is external. The ability to hire labor at a lower rate is an opportunity. Now consider a firm that has a state of the art production facility in the industrial northeast. This is obviously a strength. The problem is that the strength is in one location and the opportunity is in another, and neither is particularly mobile. Either the strength is not really a strength or the opportunity is not really an opportunity. Now assume that this firm's major competitor is planning to build a state of the art facility, but has not yet done so. Given the labor market, they can move to the southwest. In this scenario, the state of the art facility that traps you in a high cost labor market can easily be seen as a weakness. 4. Quadrant identification In the previous step we refined our assessment of the competitive position of the firm. With this revised assessment we can properly place the firm in one of the four quadrants in figure 2, which includes the competitive position information from table 1 into the framework of figure 1. Opportunities Weaknesses Turnaround Aggressive Defensive Diversification Strengths Threats Figure 2. SWOT Graphic with Competitive Position 5. Current strategy analysis This step is listed separate from step six because it is often skipped entirely. Before dumping the current strategy, it might be wise to consider how well your current strategy fits your situation. Not considering your current strategy assumes that change in necessarily good. The methodology for analyzing the current strategy is fundamentally the method for analyzing candidate strategies outlined in step seven below. A reasonable approach is to start by placing your current strategy on the list of possible candidates. 6. New strategy candidate list development The generic strategies from table 2 can be organized into four groups based on the four competitive positions listed in table 1 and shown in figure 2. This organization is shown in table 3. Competitive Position Aggressive Rational Take advantage of Strengths and Opportunities Diversification Take advantage of Strengths, acquire Opportunities, move away from Threats Turnaround Defensive Candidate Generic Strategies Concentrated Growth Market Development Product Development Innovation Concentric Diversification Conglomerate Diversification Corporate Combinations Eliminate Weaknesses and acquire the Strengths necessary to take advantage of existing Opportunities Horizontal Integration Vertical Integration Turnaround Corporate Combinations Exit or protect yourself until you can recover Divesture Liquidation Bankruptcy Table 3. Generic Strategies by Competitive Position Based on your firm’s position in figure 2, candidate strategies can be identified from table 3. This step is not new. However, a little judgment should be applied to this relatively mechanistic process. It may be reasonable to consider some strategies from adjacent quadrants. Consider a company in the turnaround quadrant with threats and opportunities. There may be a particular strength that they posses that is well matched to an element in their opportunity set. In the short run, combining the strength and the opportunity may generate enough cash flow to allow the company to properly address the weakness. While an organization’s general competitive position is important, and is an excellent starting point for candidate strategy selection, one must also consider individual SWOT items and their relation to potential strategies. We recommend considering strategies from adjacent quadrants. 7. Analysis and selection of candidate strategy What we are recommending at this point is an analytical feedback loop. The analysis of Strengths, Weaknesses, Opportunities and Threats leads to a competitive position. The competitive position leads to various candidate strategies. Any given strategy requires particular strengths and opportunities to be effective. Any given strategy can assist in the elimination or mitigation of weaknesses and threats. Each strategy, both current and potential, must be examined in relation to existing Strengths, Weaknesses, Opportunities and Threats. Being in the aggressive quadrant suggests an aggressive strategy. Four aggressive strategies are listed. Which choice is best? That depends on the situation of the particular firm. In a fashion similar to the example in step six, each potential candidate must be evaluated relative to the particular strengths, weaknesses, opportunities and threats present in the firm and their environment. CONCLUSION This paper provides a more elaborate and detailed approach to SWOT analysis than any other that the authors have seen. The primary contributions are the specification of interaction and substation effects, the addition of cross-axis analysis and the specific linking of particular SWOT elements to the strategy choice. It is our hope that you will adopt and adapt this information in teaching your seniors and graduate students. We believe that SWOT analysis is applicable, not just on the organizational level, but also on a divisional, departmental and personal level. All of our students should benefit from improved analytical skills in this area. REFERENCES Bartol, Kathryn M. and David C. Martin, (1998) Management, 3rd ed., Irwin – McGraw Hill, New York, NY. Hill, Charles W.L. and Gareth R. Jones, (2001) Strategic Management Theory: An Integrated Approach 5th ed., Houghton Mifflin / MeansBusiness. Pierce, John A, and Richard B Robinson, (2005) Strategic Management: Formulation, Implementation and Control 9th ed., McGraw Hill, New York, NY. Porter Michael E., (1980) Competitive Strategy, The Free Press – Simon & Schuster, New York, NY.
Purchase answer to see full attachment