1. Week3: Getting it together

2. Situation & Swot Analysis
Draft Mission & Vision Statements & Select Growth & Competitive Strategies
Formulate “functionally aligned” strategic & tactical decisions…

3. Process of Planning & Evaluating Strategy
Corp. & SBU
Strategy:
Mission & Vision
Growth &
Competitive Strategy
Market Research:
Situation & SWOT
Analysis
Performance
Assessment:
Success Measures
& Financial Ratios
Functional Planning:
Marketing
Production
R&D, HR
Finance

4. Evaluating Strategy- Step #4:
Performance Assessment
“SHOW ME THE MONEY”

5. Let’s Examine: Ways to plan & evaluate your financial performance
Some Financial Planning guidelines

6. Financial Proformas & Reports
Cash
Flow
Income
Statement
Balance
Sheet
Financial
Ratios

7. Shows cash movement in & out of organization
& how much cash is available

8. Compares revenues & expenses for the period
Indicates profitability

9. What Co. Owns What Co. Owes Who Owns Co.

10. Financial Ratios Provide insights into company’s operations & strategy
Used internally to evaluate performance & set goals
Used externally to make investment decisions
ROE
ROA
ROS
Asset T/O
P:E

11. Financial Ratios Answer 5 key Questions
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your assets ?
4) How are you financing your assets?
5) Are you providing your owners an adequate return on their investment ?

12. Your Company’s ratios as reported annually in the Capstone Courier

13. Financial Guidelines Re: Liquidity

14. IF Then You Produce a crappy product
&/or Your Competitors produce a better product
&/or You produce too much product IF
You’ll be left w/less revenue than anticipated PLUS production & inventory carrying costs that must be paid..
Then

15. You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs.... IF
Then
Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment

16. Maintain Adequate working capital & cash reserves
In order to:
Need to:
Avoid a Liquidity Crisis & “Big AL”
Maintain Adequate working capital & cash reserves
Have realistic/ accurate sales forecasts

17. Basic Steps of Sales Forecasting1 2 3 4
BEST CASE
WORST CASE
Your Product/Total Customer survey scores = Demand

18. Enter WORSE case- in “your sales forecast” on marketing spreadsheet
Enter BEST case- in “production schedule” on production spreadsheet
Spread show up as inventory on proforma BALANCE SHEET

19. In WORSE CASE: You should observe lots of Inventory
& little or no Cash.
$0.00

20. Return to Marketing Spreadsheet. Enter your best case forecast.
Observe that your Balance Sheet will now reflect:
lots of Cash
and no Inventory
000

21. Important Considerations re: BEST-WORST Scenario Analyses
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid …

22. In WORSE CASE: You will have lots of Inventory
& thus need to drive your cash position to the black…
$0.00

23. Liquidity Guidelines
To adjust your cash position --
If you are cash poor, issue Stock /Bonds ; or if necessary consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.

24. Important Considerations re: BEST-WORST Scenario Analyses
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest or depreciation) already covered
Thus, any additional sales would only incur variable (production) costs

25. For example,
If your annual sales were $120M, in one month you’d sell $10M.
If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.
This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.

26. Financial Ratios 2nd Key Question
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your assets ?
4) How are you financing your assets?
5) Are you providing your owners an adequate return on their investment ?

27. ROS---Return on Sales ROA—Return on Assets ROE-- Return on Equity
Profitability Ratios
Show how profitable company is
ROS---Return on Sales
ROA—Return on Assets
ROE-- Return on Equity

28. Main ratio of Profitability Return on Sales
“ROS indicates the percentage of each sales dollar that results in net income.”
net profit
net sales
Return on Sales =

29. Financial Guidelines:
Profitability

30. 2) How Profitable is your Firm?
ROS
Contribution Margin

31. If your Contribution Margin is below 30%, …
If your Contribution Margin is below 30%, …..the problem = combination of Marketing (customers hate your products), Production (your labor and material costs are too high), or Pricing (you cut the price too much).
If your ROS is below 5%, but your Net Margin Percentage is above 20%, ….you either experienced some extraordinary "Other" expense like a write-off on plant you sold, or you are paying too much Interest (If TQM is enabled, you may also have spent heavily on TQM initiatives).
If your Net Margin Percentage is below 20%, but Contribution Margin is above 30%,… the problem is heavy expenditures on Depreciation (perhaps you have idle plant) or on SGA (perhaps you are pushing into diminishing returns on your Promo and Sales Budgets).

32. Financial Ratios 3rd Key Question
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your assets ?
4) How are you financing your assets?
5) Are you providing your owners an adequate return on their investment ?

33. Drive Asset Turnover sales assets Asset Turnover =
Reveals how effective assets are at generating sales revenue.
The higher the better= more efficient use of assets
sales
assets
Asset Turnover =
$103,777/ $96,043 = 1.08
Firm can generate $1.08 in sales for every $1 assets

34. Drive- Return on Assets
“ROA measures company’s ability to use all its assets to generate earnings.”
net profit
assets
Return on Assets =

35. Financial Ratios 4th Key Question
1) How liquid is your firm?
2) How profitable is your Firm?
3) How effectively are you utilizing your assets ?
4) How are you financing your assets?
5) Are you providing your owners an adequate return on their investment ?

36. Assets/Equity – simulation takes owner's perspective.
LEVERAGE:
Assets/Equity – simulation takes owner's perspective.
Corp assets fin.w/ debt
Optimal
Leverage
   
Assets
Debt
Equity
1.0 $1 $0
2.0 $2
3.0 $3
4.0 $4
A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity
1.8 to 2.8

37. As your debt-to-assets ratio increases…
Leverage from lenders’ perspective impacts bond ratings:
AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default
As your debt-to-assets ratio increases…
Your short term interest rate increases…
For each additional .5% increase in interest
You drop one category

38. Last Key Question
Are you providing your owners an adequate return on their investment

39. Owners evaluate profits w/ two stat’s:
ROE (Return On Equity)
ROE = Profits/Equity = Profits/Assets * Assets/Equity = ROA * Leverage.
EPS (Earnings Per Share)
EPS = Profits/Shares Outstanding

40. STOCK PRICE Function of:
Book Value
Equity/ # shares issued
Earnings per Share (wgtg 2-3?)
Net Profit/ Shares
Dividend Policy (wgtg 5-8?)

41. Profitability * Asset Mgt * Leverage
ROE
Encompasses the 3 main levers used by mgt to generate return on investors equity
Profitability * Asset Mgt * Leverage

42. Profitability * Asset Mgt * Leverage
DuPont Formula
Return on Equity =
net profit
equity
sales
assets x
Profitability * Asset Mgt * Leverage

43. Return on Equity = Improve ROE by: net profit equity
Increase sales w/out increase costs & expenses
2) Reduce COG or operating expenses
3) Increase sales relative to asset base- either by increasing sales or by reducing company assets
4) Increase use of debt relative to equity but only to extent it does not jeopardize firm’s financial position

44. Success Measures Cumulative Profits Ending Market Share ROS
Asset Turnovers
ROA
ROE
Ending Stock Price
Market Capitalization (Ave # Shares) * (Closing Price)
Performance Measures- Defined
Performance Measures-Dynamics

45. Select Success Measures & Determine Relative Weightings
Need to enter weightings – prior to round-1

46. Diff Strategies Play into Different Success Measures
Cost Strategy = higher leverage/more investment/ more assets/more debt/ less equity
Focused Strategies should operate more effectively & have overall less sales
Profit MS
SP & MC
ROE
pf/e
ROS
pf/s AT
s/a
ROA
pf/a
BCL
L=2-3 X
Cost- Niche & PLC
B-Diff L=1.5-2
Niche-PLCDiff
All Segments= more sales & thus enable greater Cum. profit & overall market share
Differentiation Strategy =lower leverage/less investment/ less assets

47. It is important to look at the means used to achieve outcomes …
It is important to look at the means used to achieve outcomes …. not just focus on the outcomes themselves
To only focus on traditional financial accounting measures (such as ROA, ROE, EPS) …..does not give mgt the whole picture….

48. Performance needs to be judged thru mix of both financial & non-financial measures….
As some non-financial measures are drivers of financial outcomes

49. Management benefits from a multi-dimensional perspective which includes not only financial– but customer, internal & organizational learning/improvement perspectives as well…

50. The Logic STRATEGY Financial Perspective Customer Perspective
"If we succeed, how will we look to our shareholders?”
Financial Perspective
"To achieve my vision, how must I look to my customers?”
Customer Perspective
"To satisfy my customers, at which processes must excel?”
Internal Perspective
"To achieve my vision, how must my organization learn and improve?”
Organization Learning
STRATEGY
The Logic

51. What is measured gets noticed
What is noticed gets acted on
What is acted on gets improved
Today …
~ 70% of Fortune 1,000 companies utilize a Balanced Scorecard to help manage performance—
because…..

52. Basic Scorecard Terminology (Southwest Airlines Example)
Strategy Map
Strategic Theme: Operating Efficiency
Measures
How performance is measured against objectives
Targets
The level of performance or rate of improvement needed
InitiativesKey action programs required to achieve targets
Objectives:
What the strategy is trying to achieve
Profits and
RONA
Financial
Grow
Revenues
Fewer planes
Attract & Retain More Customers
Customer
On-time
Service
Lowest
prices
Objectives
Fast ground turnaround
Measures
Targets
Initiatives
Internal
Fast ground
turnaround
On Ground Time
On-Time Departure
30 Minutes
90%
Cycle time optimization
Learning
Ground crew
alignment 17

53. A Complete Scorecard is a Program for Action
Strategic Theme: Operations Excellence
Objectives
Measures
Targets
Initiatives
Strategic Theme: Operating Efficiency
Profits and
RONA
Financial
Profitability
Grow Revenues
Fewer planes
30% +/yr
20% 5%
Grow
Revenues
Fewer planes
Attract & Retain More Customers
More Customers
Flight is on -time
Lowest prices
# Customers
FAA On Time Arrival Rating
Market Survey
12% growth
Ranked #1
Customer loyalty program
Quality management
Customer
On-time
Service
Lowest
prices
Internal
Fast ground turnaround
On Ground Time
On-Time Departure
30 Minutes
90%
Cycle time optimization
Fast ground
turnaround
Ground crew alignment
% Ground crew trained
% Ground crew stockholders
yr % yr % yr %
Ground crew training
ESOP
Learning
Ground crew
alignment 17

54. Capstone's Balanced Scorecard

55. Your Business Plan

56. BizPlan: Format & Contents- Guide