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Core Competencies Definition

See Also:
How to Turnaround a Company
SWOT Analysis
How to Run an Effective Meeting
How to Train People for Success
Action Plan

Core Competencies Definition

The core competencies definition is a resource or capability that gives a firm competitive advantage. Core competencies are the business functions or operational activities that a company does best. A company’s core competencies are what differentiate it from the other competitors in its industry. They are also the resources and capabilities that allow the company to achieve profitability. A firm should devise its strategy so as to exploit the resources and capabilities that comprise its core competencies.

Resources

A company’s resources are the operational inputs that allow it to perform its business activities. Resources are often divided into three categories, including the following:

Resources can also be classified as either tangible resources or intangible resources. Tangible resources are physical assets, such as equipment or property. Intangible resources are non-physical assets, such as reputation, brand equity, or superior organizational architecture. Resources become core competencies or contribute to core competencies when they meet the criteria outlined below.

Capabilities

A company’s capabilities are the activities and functions it performs to utilize its resources in an integrative fashion. Capabilities are practiced and honed over time. As they become stronger, the company enhances its expertise in a particular functional or operational area. This expertise allows the company to differentiate itself from competitors. Furthermore, capabilities are operational activities that the company has mastered. They are inimitable or difficult for competitors to figure out and replicate. When capabilities meet the criteria outlined below, they contribute to the company’s competitive advantage and profit potential, and are considered core competencies.

When a company determines its core competencies, it may decide to focus on these activities only, and to outsource other peripheral or non-core activities. Provided that non-core activities can be performed more efficiently and economically by an outside organization that has expertise in that activity, it may benefit the company to outsource all possible peripheral business activities in order to devote itself to core business activities and competencies.

Core Competencies Criteria

When a company’s resources or capabilities meet certain criteria they can be called core competencies. If a resource or capability meets the following criteria it contributes to a firm’s competitive advantage over industry rivals and allows the firm to achieve profitability. A resource or capability is a core competency if it is valuable, rare, costly to imitate, and non-substitutable.

A capability or resource is valuable when it allows the company to capitalize on opportunities or defend against external threats. It is rare when few or no other industry competitors possess the resource or expert capability. A resource or capability is costly to imitate when competitors must incur heavy costs to replicate them or they are altogether inimitable. It is non-substitutable when no other resource or capability can be utilized as an equivalent.

See the following for the core competencies criteria:

1. Valuable
2. Rare
3. Costly to imitate
4. Non-substitutable

If you want to learn what your core competencies are, then click here to access our free Internal Analysis whitepaper.

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core competencies definition

Source:

Harrison, Jeffrey S., Michael A. Hitt, Robert E. Hoskisson, R. Duane Ireland. (2008) “Competing for Advantage”, Thomson South-Western, United States, 2008.

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Basis Definition

See Also:
Basis Points
Make or Buy Business Decision
Collateralized Debt Obligations
Carried Interests
Letter of Credit

Basis Definition

In accounting, the basis definition is the value of an asset for tax purposes. The basis of an asset is the cost of the asset reported to the Internal Revenue Service (IRS). It includes the original purchase price of the asset plus any acquisition expenses. The basis may increase by the value of any subsequent capital improvement in the asset. Or itt may decrease due to depreciation. Also, refer to basis as cost basis or tax basis.

The basis is also the amount used to calculate gains or losses if and when the asset is sold or scrapped.

Basis Examples

For example, if shares of common stock are purchased for $1,000 and sold three years later for $1,500, then the basis is still $1,000. As a result, the taxpayer would recordcapital gain of $500.

Likewise, if you purchase equipment for $1,000 with installation and shipping fees of $500, then the basis for that asset would be $1,500. If the equipment is depreciated down to $500 and then sell it for $300, then the taxpayer would record a loss of $200.

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Bankruptcy Costs

See Also:
Chapter 7 Bankruptcy
Chapter 13 Bankruptcy
Bankruptcy Courts
Chapter 11 Bankruptcy
Bankruptcy Code
Bankruptcy Information
Chapter 12 Bankruptcy

Bankruptcy Costs

The more debt a company takes on, the more it risks being unable to meet its financial obligations to creditors. A highly leveraged firm is more vulnerable to a decrease in profitability. Therefore a highly levered firm has a higher risk of bankruptcy.

Bankruptcy costs vary for different types of firms, but they typically include the following:

  • Legal fees
  • Losses incurred from selling assets at distressed fire-sale prices
  • Increased borrowing costs due to poorer credit
  • The departure of valuable human capital

Bankruptcy costs can also affect intangible assets and include indirect costs. For example, bankruptcy could tarnish a company’s reputation and brand equity, causing it to lose market share and competitive positioning. It can also cause suppliers to tighten trade credit terms and cause the loss of customers.

The way to measure bankruptcy cost is to multiply the probability of bankruptcy by the expected cost of bankruptcy. A company should consider the expected cost of bankruptcy when deciding how much debt to take on.

Debt can destroy a company, but it can be managed. If you’re looking at bankruptcy, then click here to download the Top 10 Destroyers of Value to maximize the value of your company.

bankruptcy costs

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Capital Structure Management

See Also:
Balance Sheet
Cost of Capital
Capital Asset Pricing Model
Capital Budgeting Methods
Net Present Value Method
Capital Expenditures
Organizational Structure

Capital Structure Management

A company’s capital structure refers to the combination of its various sources of funding. Most companies are funded by a mix of debt and equity, including some short-term debt, some long-term debt, a number of shares of common stock, and perhaps shares of preferred stock.

When determining a company’s cost of capital, weight the costs of each component of the capital structure in relation to the overall total amount. This calculates the company’s weighted average cost of capital (WACC). Then use the weighted average cost of capital to calculate the net present value (NPV) of capital budgeting for corporate projects. A lower WACC will yield a higher NPV, so achieving a lower WACC is always optimal. Refer to overseeing the capital structure as capital structure management.

Capital Structure Strategy

Under stable market conditions, a company can compute its optimal mix of capital. A company’s optimal mix of capital is the combination of sources of capital that yields the lowest weighted average cost of capital.

For example, if a company is financed by a combination of low-cost debt and higher-cost equity, then the optimal mix of capital would be some combination involving less of the higher-cost equity and more of the low-cost debt. In conclusion, you can employ capital structure policy and capital structure strategy to achieve the optimal capital mix.

Capital Structure – Optimal Mix Example

Let’s say, for example, a company could raise between 40% and 60% of its needed funds with debt costing 8%. It could raise up to 10% of its needed funds with preferred stock issuance that costs 7.8%. Then it can raise between 30% and 50% of its funds by issuing common stock equity at 12.33%. What capital structure policy should the company employ to achieve its optimal capital mix?

After analyzing the numbers, and due to certain limitations and restrictions outside the scope of this simple example, the company came up with three choices:

           Debt      Preferred Stock     Common Stock      WACC
Mix 1:      40%            10%                50%         10.145%
Mix 2:      59%            10%                31%          9.322%
Mix 3:      60%            10%                30%         11.679%

As you can see, the company would be better off choosing Mix 2, which has the lowest WACC: 9.322%.

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Capital Project

See Also:
Cash Flow Projections
Return on Capital Employed (ROCE)
Return on Invested Capital (ROIC)
Paid in Capital (APIC)

Capital Project Definition

A capital project, defined as any project which requires capital flows for completion, usually refers to a project which requires large sums of capital. It is generally any project which requires consistent flow and management of capital to ensure successful completion. Due to this fact, an example of a project would be the building of a sky scraper, creation of an oil pipeline, or in the context of government, the building of a highway system. Capital project analysis is a constant struggle in works or large scale.

Capital Project Explanation

A capital project, explained sometimes as a function of “big” government or business, requires excellent skills of project management. If a sky scraper were to be built, a management team would have to be put in place. Materials, subcontractors, government permits, and many other issues would have to be solved for everything to receive a finishing touch. For this reason, capital project management must be executed to a “T”. There must be a team of human resources for every sub project, say permits and compliance. In this way, a capital project justification starts from an initial opportunity and flows from the initial founder to the detail oriented specialist. Obviously, this would require large amounts of capital.

Capital Project Example

Vince is the owner of a large commercial real estate firm. He has grown his success, over time, and now owns buildings in many major cities. Vince wants to see where his luck will take him. Essentially, Vince works on capital project planning all day long.

Vince starts by creating a plan. Once he has decided how he will finance, build, and market the building he steps into action. He begins by speaking with an investment banker. To keep it all in place, he begins the process of capital project accounting now by hiring an accounting team as soon as possible.

Vince has used the connection he has with an investment banker to receive funds from the investment branch of a major corporation. Only a company of massive size will be able to assist in an operation this large. He will need to control his capital project fund carefully to ensure a smooth process.

Vince begins the next project by speaking with an architect. The company he finds eventually provides blueprints and referrals to quality contracting companies.

Vince knows he has his work cut out for him. Still, he appreciates growing the scale of his work. Vince wants to challenge his boundaries and sees this as an excellent opportunity. Though Vince has a lot of stress at work, he leaves every day with a smile.

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Capital Impairment Rule

See Also:
Dividends
Dividend Payout Ratio
Dividend Yield
Capital Structure Management
Balance Sheet

Capital Impairment Rule

The capital impairment rule is a state-level legal restriction on corporate dividend policy. The rule applies in most U.S. states. It basically limits the amount of dividends a company can pay out to shareholders. The limit is described as either a limit per capital stock or per the par value of the firm. Essentially, for a given amount of capital stock or a given firm value, there is a maximum limit to the value of dividends that a company can distribute to stockholders.

The purpose of the rule is to protect claims of creditors who have lent money to the firm in question. The idea is that a troubled firm, one that is in default or on the brink of bankruptcy, must not be able to unload cash to owners and shareholders before going out of business. Doing so would leave debt holders and creditors high and dry, or at least diminish the amount of value they could recoup from their loans. The capital impairment rule, by limiting the dividend payout, ensures that creditors will be able to reclaim a larger portion of their loans in the event of default or liquidation.

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Capital Expenditures

Capital Expenditures Definition

What are capital expenditures? What is CAPEX? Capital expenditures, or CAPEX, refer to spending used to purchase or improve long-term assets, such as buildings or equipment. CAPEX are in contrast to current expenditures, which refer to spending on short-term assets. Capitalize and amortize capital expenditures over their useful life. Whereas, you expense current expenditures in the period when incurred. Also refer to CAPEX as capital outlays or capital investments.

Capital Expenditures – Accounting Treatment

In accounting, treat CAPEX differently than other types of expenses. Because a capital expenditure represents a future benefit to the company – by way of acquiring or improving a long-term asset – these expenses are capitalized, or recorded as assets on the balance sheet, and then amortized over their useful life. Basically, if a capital outlay is invested in an asset that will last longer than one year, it is considered CAPEX, and if it is invested in an asset that will last less than one year, it is considered a current expenditure. The U.S. IRS Code 263 and 263A has outlined the rules and procedures for reporting CAPEX.

capital expenditures

See Also:
Depreciation
Balance Sheet
Capital Budgeting Methods
Capital Lease Agreement
Capitalization
Cash Flow After Tax
Cash Flow Statement
Cost of Capital

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