Geoffrey G. Bell, Ph.D., CA
Acknowledgements. I acknowledge with gratitude students of my Fall 1999 MANA 691 class for their assistance in helping me formalize many of the ideas and elements that led to the creation of this paper, and Rejean Dupre and Bill Taylor, who helped me hone it further.
Geoffrey G. Bell, Ph.D., CA
This paper discusses one approach to case analysis, framed in the context of issues confronted by students in a strategic management class. Consequently, the goal of this approach is to assist students in developing proficient analysis of an organization’s environment, strategy, and structure (including organizational resources and dynamic capabilities), identifying “gaps” between them, and generating alternatives and a plan of action to reduce these gaps and thereby enhance firm performance. In so doing, the student will learn to consider the elements of case analysis jointly rather than in isolation, leading to a more holistic solution to the firm’s problems. This guide leads the student to consider sequentially an analysis of the situation facing the firm, and recommended actions to resolve the critical issues confronting the firm. It presupposes that the student has adequately read and absorbed the case material.
Phase 1: Analysis (see Figure 1)
Critical issue identification and analysis. The goal of the analysis stage of case analysis is to understand the nature and seriousness of the problems confronting the firm. Figure 1 reveals that these problems are generally presented in the case in the guise of “symptoms.” Cases rarely present overtly the true critical issues facing the firm. Rather, the case describes the surface-level symptoms observed by the decision-maker. The task of the case analyst is akin to a physician consulting a patient. The patient brings a list of symptoms and complaints, and the physician uses her knowledge and understanding to ascertain the “real” problem underlying the patient’s symptoms. Symptoms are general indications of malaise at the firm, but are not the cause of the problems. For example, a firm may exhibit decreasing profits. While being problematic, this is not a problem per se. Rather, it merely points to an underlying problem, such as decreasing customer acceptance of the firm’s products. Generally, no more than two to three issues are truly “critical,” partially because most managers are unable to consider more than two to three issues at once.
The next task of the analyst is determining the seriousness of each critical issue and the overall seriousness of the company’s situation. One way to approach this is to ask the question, “If the company does nothing differently, what will be the result?” If the answer is, “The company will be fine,” then the firm needs only fine-tune its existing strategy and organization. If the answer is, “The company will go bankrupt almost immediately,” then the firm needs to undertake quick and drastic action.
The seriousness of the company’s situation is revealed by key indicators of success and failure. These indicators are both financial and strategic in nature. Examining the firm’s financial statements reveals whether it is losing money, for how long it has been losing money, and the depth of the losses. If the company is losing money, the analyst needs to estimate how much time will elapse before the firm runs out of cash and credit. Additionally, in such cases, the analyst must calculate the break even point for the firm, either in units or sales dollars. This helps the analyst determine how much the company needs to increase sales to attain profitability. Can it attain this level of sales given market conditions (market size, growth, competitors)?
Regardless of the severity of the firm’s financial condition, the analyst needs to examine other firm “vital signs.” The analyst should examine whether sales and profits are trending up or down, which indicates whether the market appears to be accepting the firm’s products. Are sales increasing faster or slower than industry sales? If they are increasing faster, this indicates that the market is increasingly preferring the firm’s products. An examination of gross profit margins, and whether they are increasing or decreasing, reveals whether the firm appears to be producing its products with greater or lesser efficiency. Finally, the analyst should examine the rest of the firm’s expenses. Are there any that appear to be out of line? Are they increasing faster or slower than sales? This shows whether the firm is becoming more or less efficient at translating its sales into profits.
Next, the analyst should consider key strategic indicators of serious failure (problems with customer service, quality, etc.). Are there any functional areas that seem to be problematic? (Marketing, production, human resource policies, etc.) Third, the analyst should consider whether the company is attaining its organizational objectives. How far short has it fallen? Has it tried to remedy problems already? Do the remedies appear to be working?
Understanding why the critical issues exist – situation analysis. After the analyst has determined the severity of the situation facing the subject firm, she must discover why the firm finds itself in its current situation. There are three fundamental sources of problems – industry competitive conditions, poor strategy formulation, and poor strategy implementation – as well as the interaction among them. The analyst’s assessment of the causes of the critical issues facing the firm will importantly influence her recommendations to firm management.
Industry competitive conditions. If the industry is fundamentally unattractive – that is, if the probability of any firm earning above-average profits in this industry is low – the subject firm will either have to find ways to prosper in the face of an inclement climate, or it will have to diversify away from the industry. Industry conditions may be examined using the basic tools of industry analysis such as Porter’s 5-force model, industry driving forces, and industry key success factors. When using these tools of industry analysis, remember that strategic groups in the industry mean that not all firms in the industry will necessarily be equally affected by any given factor. For example, large firms in an industry may have much more power over suppliers than small firms, so the strategic group of large firms will tend to face a more attractive industry environment (i.e., they are more likely to make money in the industry) than the strategic group of small firms. Similarly, driving forces may differentially affect strategic groups. Finally, it is useful to examine the strengths and weaknesses of each of the major competitors in the industry with respect to industry key success factors. Doing so enables the analyst to assess the competitive advantage or disadvantage faced by the subject firm.
Also, the analyst should examine key industry characteristics. One important characteristic is the industry’s stage in the product life cycle, which can be assessed by examining past, current, and expected future growth rates. If growth is accelerating, the industry is probably in the growth stage. If growth is decreasing, then the industry is probably maturing. Consider the pitfalls lurking in each stage of industry development
Strategy assessment. If the company’s primary problems result from poor strategy, the analyst must focus on improving the strategy. To do so, she needs to understand the firm’s current strategy. This can be done by considering which of Porter’s “generic strategies” the firm is following, where the firm is positioned along the industry “value chain” and how vertically integrated it is, and what diversification strategy (if any) the firm is pursuing.
First, consider what generic strategy the firm is using. Is it pursuing a low-cost strategy, a differentiation strategy, a best-cost provider strategy, or is it “stuck-in-the-middle?” Is it pursuing a niche strategy or a broad market strategy? Is the firm’s chosen strategy appropriate for the industry conditions? For example, if the industry sells a relatively undifferentiated product (gasoline, airplane seats, etc.), then a firm may find it difficult to add value using a differentiation strategy.
Next, consider where along the value chain the firm has positioned itself. Is this a segment where there are opportunities to make profit? How vertically integrated is the firm? Does it try to manufacturer most of its component parts “in-house,” or has it become a “virtual company” by outsourcing almost all components? Does it pursue a single-source policy, or does it source products from a variety of vendors? Does the choice made appear to be wise in light of industry conditions?
Finally, what type of diversification strategy is the firm pursuing (related, unrelated, none)? What were the reasons for diversifying to the extent it has diversified? Were the reasons sound at the time, and are they still valid? Also, consider geographic diversification. Does the firm serve a single geographic market, or multiple markets? Has the firm effectively modified its strategies to reflect the different needs of different geographic regions?
Strategy implementation. Has the firm implemented its strategy well? This involves consideration of core competencies, organization structure, and corporate culture. In terms of core competencies or organizational capabilities, the critical question is whether the firm possesses the core competencies required to implement its strategy, and whether there are any strategy-critical weaknesses preventing the firm from achieving its goals. The analyst also needs to assess how strong a sustainable competitive advantage the firm’s advantages provide and whether the competitive advantages interrelate in any way. A firm whose competitive advantages integrate into a coherent package may find that the ensuing advantage is much more sustainable than any of the individual components would indicate, because it will be harder for competitors to mimic the advantages.
The analyst also must examine the appropriateness of the firm’s structure and corporate culture for the strategy being pursued. The fundamental dictum is that “structure follows strategy.”
Interaction effects. Not only must the analyst consider the separate influence of industry, strategy, and strategy implementation, but also how they interact to influence firm performance. My experience is that students have more trouble with this than with identifying and analyzing individual components. However, effective analysis of the interaction between the components differentiates an outstanding case analysis from a merely “okay” analysis.
strategy and strategy implementation. In this segment of the analysis, the analyst
considers whether the firm structure, including core
competencies, are strategy-supportive.
That is, does the firm’s internal environment facilitate attaining the
goals of the strategy, or does it inhibit attaining company goals. A crucial question to address is whether the
firm’s core competencies well match the firm’s strategy. A gap here means significantly inhibits the
likelihood that the firm can attain its objectives. For example, if the firm is pursuing a
differentiation strategy based on product quality, but one of its weaknesses is
high defect rates, then it needs to address this problem urgently. Assuming that the firm possesses some, but
not all, of the required competencies, the analyst needs to consider the
pathway or “strategic staircase” of competencies the firm needs to build. How can the firm “layer” its advantages to
maximize its competitive advantage?
Additionally, the analyst must consider whether the firm’s
organizational structure is appropriate for the strategy. For example,
Comparing strategy and the industry environment. In this stage, the goal of the analyst is to assess whether the firm’s strategy is well matched to industry conditions. Firms may be pursuing strategies that are inappropriate in a given industry. For example, a firm may encounter great difficulty in attempting to implement a differentiation strategy in an industry where there are few or no ways to differentiate products in a manner that adds value in the eyes of a customer. The result of such a strategy – industry environment match is likely to be a firm operating with a relatively high cost structure in an industry where cost control is a key success factor.
Comparing strategy implementation and the industry environment. In this stage, the analyst seeks to examine the “fit” between the firm’s core competencies and the industry competitive conditions. For example, are the firm’s competencies valued by customers? Do they provide a source of advantage (that is, they are relatively rare in the industry), or do they merely provide competitive parity (that is, they are relatively common in the industry). If the firm’s competencies do provide advantage, how sustainable is the advantage? How much time and effort must competitors exert to mimic the firm’s competencies? Additionally, does the firm possess any “strategic weaknesses,” defined as the firm lacking a source of value that is common in the industry? If so, can it overcome these?
Once the analyst has completed this stage of assessment, she will be well-positioned to recommend a viable course of action to firm management. She will understand the critical issues the firm faces, the seriousness of these issues, and their underlying causes. Thus, the course of action she recommends will be viable in the sense that successful execution of the recommendations will “solve” the critical issues confronting the firm.
Phase 2: Action (see Figure 2)
The goal of this stage of case analysis is to recommend a course of action to top management which resolves the critical issues confronting the firm. Figure 2 reveals that the critical issues are paramount in the assessment. The plan of action eventually adopted is viable only to the extent that it resolves the firm’s critical issues.
Criteria Identification. “How do I know whether this is a good plan of action; whether it is the best plan of action?” This question highlights the importance of having a clear set of criteria by which to assess the viability of the alternative courses of action available to the firm. The criteria chosen to assess the alternatives should embody the critical issues. For example, if the analyst determines that high firm costs are reducing profit, then one criterion should be that the chosen alternative must “significantly” reduce costs.
One thing to remember is that the criteria should not be simply a list of “pros and cons” for each alternative. Rather, criteria must be a common set of factors used to assess the alternatives jointly. This allows the analyst to compare very different alternatives against a standard set of criteria.
Additionally, it is important to note that criteria may partially conflict with each other. That is, the firm’s set of critical issues may be such that increasing performance along one dimension may reduce performance along another dimension. For example, a firm’s criteria may include both increasing profit and increasing quality. In the short run at least, increasing quality will possibly generate costs that reduce profit. Thus, the analyst must determine the relative importance of the criteria, and determine what alternative best satisfies the overall set of criteria.
Alternative generation. Many cases present a scenario where company management is considering a specific course of action and wants the analyst’s comments about it. In such cases, the analyst should specifically consider these alternatives. In other cases, the analyst must develop her own alternatives. Regardless of the specific circumstances, the following rules should help in generating and examining alternatives. First, the alternatives must be mutually exclusive. In the short term at least, if the company chooses to do A, it must not be able to also do B. Second, the alternatives should be viable in that they reflect technology available to the firm at the time of the case. For example, it is not viable to consider widespread use of the Internet for a case set in the early 1990s. Third, the analyst must generate financial projections of the benefits and costs of each alternative to enable comparison of the financial impact of each of them. Ideally, this entails developing a set of pro-forma financial statements for each alternative, along with an assessment of the risk inherent with each. It is insufficient for the analyst to simply argue that the alternative will increase revenue and profit. She needs to estimate how much each alternative will influence revenue and profit, as well as the assumptions underlying the estimate.
To conclude this section of the case analysis, the analyst compares each alternative against the set of criteria she established, and determines which of the alternatives is “the best.” Superior case analysis would include the establishment of a weighting of the criteria, and a numeric scoring of each alternative along each dimension of the criteria. The remaining task is to implement the chosen alternative.
Recommendations / Plan of Action. The final section of the case analysis is the plan of action. This section outlines specifically the plan to implement the chosen alternative. This section should be as detailed and specific as possible. First, the analyst needs to consider whether the current organizational culture is strategy-supportive. If not, can the culture be modified to reflect the new strategy? If not, what changes to the strategy must be made to accommodate limitations imposed by the culture? If the plan relies on acquiring competencies the firm currently lacks, the analyst must consider how the firm should acquire them. Is there a logical order (a “strategic staircase” or “competence ladder”) in which the firm must acquire the competencies? How will the firm develop the competencies? Will it develop them internally, or seek them outside? Finally, the analyst should consider changes to the organization structure to facilitate strategy success. This involves first determining what “strategy-critical” activities must be performed internally, and then determining whether the firm should outsource any or all support activities. D’Aveni recommended that firms outsource all non-core activities at which the firm cannot be “best in the world.”
Next, the analyst must consider the timeline to implement the plan. It is rare that temporal sequencing does not matter in implementing a new strategy. Thus, the analyst needs to consider the order in which changes must be made. Ideally, this would involve breaking down the tasks into logical time sequences (immediate, within one month, in the next quarter, in the next year, in the next 3 years…). It would be normal for the specificity of the recommendations to decrease as the time horizon increases. That is, implementation plans for the next month should be much more specific than plans for activities five to ten years in the future.
Finally, the analyst needs to consider whether the firm has the necessary resources (financial, managerial, competence) required to implement the plan, and if not, how will it acquire the resources. Thus, the analyst needs to specifically consider the resource requirements of the plan of action. Each action in the time line should have a dollar cost associated with it. How can the plan best be financed? Does the firm have cash on hand? If not, then can it raise cash in either the debt or equity markets? Does the firm have the managerial expertise required to implement the plan? If not, how will it attract such expertise, from where, and how will it be compensated?
The final step in the action plan (and case analysis) is considering whether the chosen action “solves” the critical issues facing the company. If the firm enacts the recommended action plan effectively, then when the actions are completed, the critical issues should either be resolved or significantly mitigated. This is the ultimate test of the validity of the plan of action. Does it solve the issues facing management? If so, there should be no “loose ends” left to tie up. This signals the successful completion of the case analysis. Well done! Go relax!
 Students wanting guidance in reading the case may consider the following suggestion: Skim the case once, then read the first and last paragraphs in detail. Many times, the decision-maker and the major decision s/he faces is identified in these paragraphs. Then, reread the case in detail, contemplating the apparent major decision facing the strategist. Read through the exhibits in detail to understand the financial and operating conditions of the firm.
 The analyst should also differentiate between facts (generally identifiable as prose provided by the case writer) and opinions (identifiable by comments such as, “Bill Smith was worried about the intensifying competition.”). This allows the analyst to differentiate “smokescreens” from real issues.