Where are we?

C ompanyC ompany C onsumersC onsumers C ompetitorsC ompetitors C onditionsC onditions PEST PEST Growth & Competitive Strategies Finance HR Production R&D Marketing Functional Integration  Profits  Mrkt Share  ROA  ROS  ROE  Asset T/O  Stock  Mrkt Cap Step#1 Situation/SWOT Analysis Strategic Planning Functional Integration Performance Assessment

BUSINESS PLAN GUIDELINE 1.Where are we now? 2.Where do we want to go 3.How do we get there? = Situation Analysis

You are finding answers re:  How the market is segmented & the relevant criteria that influence consumers use in their purchasing decisions  The nature & magnitude of the competition  Existing & emerging Economic & Technological trends that will impact demand, pricing, product design & positioning Consumers Competitors Conditions

5 SEGMENTS

Cheaper too-$.50 drop in price/year

SENSOR INDUSTRY ONGOING GROWTH..the entire market growing at around % per year.

EXTERNAL Consumer, Competitive & Macro- Environment UNCONTROLLABLE Social Technological Political Legal Economic Corp./Business STRATEGY Corp./Business STRATEGY Financial Management Financial Management Marketing Management Marketing Management Production & HR Management Production & HR Management INTERNAL INTERNAL Environment CONTROLLABLE Competitive Demographic Psychographic trends Forces Regulatory Next ….

C onsumer C ompany C ompetitors C onditions Situation-Analysis EXTERNAL ENVIRONMENT Opportunities & Threats INTERNAL ENVIRONMENT Your Company's Strengths & Weaknesses:

1 st KEY Q: 1. Is what you are making any good?

Strategic Thinking- the ten big ideas Strategic Thinking- the ten big ideas Strategic Thinking Strategic Thinking Strategic Thinking- the ten big ideas Strategic Thinking- the ten big ideas Strategic Thinking Strategic Thinking 4. Portfolio theory- GE- (three-by-three matrix, using business strength & market attractiveness as variables). The Boston Consulting Group (BCG) introduced its two-by-two matrix- (invest in the stars, divest the dogs, milk the cows, and solve the question marks)

Portfolio Analysis Which Brands should receive more/ less/ no investment- based on :  Product Position/ Potential  Profitability/ Margins  Market-Growth/Market- Share Matrix  Competitive Strategy Which Brands should receive more/ less/ no investment- based on :  Product Position/ Potential  Profitability/ Margins  Market-Growth/Market- Share Matrix  Competitive Strategy

G.E Strategic Planning Model Strong Average Weak Business Strength Business Strength IndustryAttractiveness High Low Business Strength Index Industry Attractiveness Index * Market Share * Market size * Price Competitiveness * Market Growth * Product Quality * Industry Profit Margin * Customer Knowledge * Amount of Competition * Sales Force and Effectiveness * Seasonality * Geographic Advantage * Cost Structure

Boston Consulting Group’s Growth-Share Matrix High Relative Market Share HighLow LowDOGS CASH COWS Product-Market Growth (%) STARS PROBLEMCHILD 10x 4x 2x 1.5x 1x.5x.2x.1x

Strengths & Weaknesses: · Marketing & R&DMarketing & R&D

Evaluating Your Company’s Marketing Marketing

2 nd Big Q 1. Is what you are making any good? 2. Is “how you are making it”—any good? 1. Is what you are making any good? 2. Is “how you are making it”—any good?

“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

Evaluating Your Company’s Production & HR Production & HR

S I M U L A T I O N M A N A G E M E N T Last but not Least-

Various Measures of Your PROFITABILITY Profitability Ratios: ROS ---Return on Sales ROA —Return on Assets ROE -- Return on Equity  Net Profits  Cum Profits

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

How Profitable is your Firm? ROS Contribution Margin

Financial Guidelines: Profitability- ROS & Margins

Contribution Margin below 30%, Contribution Margin below 30%, Problem = Marketing (customers hate your products), Production (your labor & material costs too high), or Pricing (you cut price too much). Contribution Margin is above 30%…but Net Margin Percentage is below 20% … Contribution Margin is above 30%… but Net Margin Percentage is below 20% … Problem = heavy expenditures on Depreciation (perhaps you have idle plant) or on SGA (perhaps you’re pushing into diminishing returns on Promo & Sales Budgets ). Net Margin above 20%,ROS below 5%.. -- Net Margin above 20%, but ROS below 5%.. -- you either experienced some extraordinary "Other" expense like a write- off on plant you sold, or you are paying too much Interest IF:

“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

How effective/aggressive R-U in building your Co’s asset base… It takes $$ to Make $$ &-why not make it using somebody else's…. To help you make even more…

How effective/aggressive R-U in building your Co’s asset base… At outset should be spending ~$10- 25M / round on plant improvement By end should expand asset base to min $140M to $160M +

Assets/Equity – simulation takes owner's perspective. A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity Leverage Assets Debt Equity 1.0 $1 $0 $1 2.0 $2 $1 3.0 $3 $2 $1 4.0 $4 $3 $1 LEVERAGE: 1.8to2.8 Optimal Corp assets fin.w/ debt

“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

Return on Assets = Return on Assets = net profit assets net profit assets “ “ROA measures company’s ability to use all its assets to generate earnings.” ROA 100%+ 50%+~10%<10% Ratio World Class Top 10 cut MeanPoor

Asset Turnover Reveals how effective assets are at generating sales revenue. The higher the better = more efficient use of assets Asset Turnover = sales assets sales assets You are generating $1.05 in sales for every $1 assets

ERGO: …if you effectively build your asset base & efficiency work those assets Stocks Market Share Profit $

Return on Equity = net profit equity Profitability * Asset Mgt * Leverage As measured by ROE Encompasses the 3 main levers used by mgt to generate return on investors equity

net profit salessalesassetsassetsequityxxxx Value Chain Profitability * Asset Mgt * Leverage Return on Equity = net profit equity

Du Pont Formula Return on Equity = net profit equity salessalesassetsassetsequity xxxx Value Chain

Du Pont Formula Return on Equity = net profit equity salessalesassetsassetsequity xxxx Value Chain

Ratio World C lass Top 10 cut MeanPoor ROE* 600%+100%+ ~20%<15%

net profit salessalesassetsassetsequityxxxx Value Chain Profitability * Asset Mgt * Leverage Improve ROE by: Increase sales &/or reduce &/or eff. work assets Improving Margins Increasing Leverage

ERGO: …if you effectively build your asset base & efficiency work those assets Stocks Market Share Profit $

STOCK PRICE Function of: 1. Earnings per Share Net Profit / # Shares 2. Book Value Equity / # Shares 3. Dividend Policy Good Dividend Policy Good Dividend Policy

Financial Guidelines Re: Liquidity

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

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

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

EVALUATE the Strengths & Weaknesses of your Financial Situation Financial Situation

Situation SWOT Analysis C onsumer C ompany C ompetitors C onditions