Transcript MgtSim-3 - University of Alaska system

M A N A G E M E N T
Performance Assessment
S I M U LA T I ON
M A N A G E M E N T
Situation/SWOT
Analysis
S I M U LA T I ON
The Big Picture
Strategic
Planning
•Company
•Consumers
•Competitors
•Conditions
• PEST
Growth
&
Competitive
Strategies
Functional
Integration
Functional
Integration
Marketing
Performance
Assessment
 Profits
 Mrkt Share
 ROA
R&D
 ROS
Production  ROE
 Asset T/O
 Stock
HR
 Mrkt Cap
Finance
M A N A G E M E N T
Success Measures
S I M U LA T I ON
•
•
•
•
•
•
•
•
Cumulative Profits
Ending Market Share
ROS
Asset Turnover
ROA
ROE
Ending Stock Price
Market Cap.
Performance Measures- Defined
Performance Measures-Dynamics
M A N A G E M E N T
Usually First & Foremost
S I M U LA T I ON
PROFITS
Net Profits
Cum Profits




Profitability Ratios:
ROS---Return on Sales
ROA—Return on Assets
ROE-- Return on Equity
NET PROFITS $$
•Year 1 $6 million
•Year 2 $8 million
•Year 3 $10 million
•Year 4 $12 million
•Year 5 $16 million
•Year 6 $21 million
•Year 7 $27 million
•Year 8 $35 million

CUM PROFIT
Typical Range: $20
to $100 M
Main ratio of Profitability
Return on Sales
Return on Sales =
net profit
net sales
“ROS indicates percentage of each sales
dollar that results in net income.”
Financial
Guidelines:
ProfitabilityROS & Margins
How Profitable is your Firm?
ROS
Contribution Margin
IF:
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% …
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%, but ROS below 5%..
--you either experienced some
extraordinary "Other" expense like a writeoff on plant you sold, or you are paying too
much Interest (If TQM is enabled, you may also
have spent heavily on TQM initiatives).
“Generically, profits are
driven by the company’s
asset base
and by its efficiency working
those assets”
How effective/aggressive are you in
building your Co’s asset base?
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


Use leverage: 1.8 -2.8 optimal / <1.5 >3=poor
Fully fund plant purchase thru depreciation +
stock + long term debt
At outset should be spending ~$10-25M / round
on plant improvement
By end should expand asset base to min $140M
to $160M+
LEVERAGE:
Assets/Equity – simulation takes
owner's perspective.
Corp assets fin.w/ debt
Optimal
Leverage
A Leverage of 3.0
says, "For every
$3 of Assets there
is $1 of Equity
Assets
Debt
Equity
$1
$0
$1
$2
$1
$1
3.0
$3
$2
$1
4.0
$4
$3
$1
1.0
2.0
1.8
to
2.8
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
“Generically, profits are
driven by the company’s
asset base
and by its efficiency working
those assets”
Return on Assets
“ROA measures company’s ability to use all
its assets to generate earnings.”
net
profit
Return on Assets =
assets
Ratio
ROA
World
Class
Top
Mean
10 cut
100%+ 50%+
~10%
Poor
<10%
Asset Turnover
Reveals how effective assets are at generating sales revenue.
The higher the better = more efficient use of assets
Asset Turnover =
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
Profit$
Market Share
As measured by ROE
Return on Equity =
net profit
equity
Encompasses the 3 main levers used by mgt to
generate return on investors equity
Profitability * Asset Mgt * Leverage
net profit
Return on Equity =
Value Chain
equity
Profitability * Asset Mgt * Leverage
net profit
sales
sales
x
assets
assets
x
equity
Du Pont Formula
Value Chain
net profit
Return on Equity =
net profit
sales
x
sales
assets
equity
x
assets
equity
Du Pont Formula
Value Chain
net profit
Return on Equity =
net profit
sales
x
sales
assets
equity
x
assets
equity
Ratio
World C Top
lass
10 cut
Mean
ROE* 600%+ 100%+ ~20%
Poor
<15%
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
Improving
Margins
sales
x
assets
assets
x
Increase sales
&/or
reduce &/or
eff. work
assets
equity
Increasing
Leverage
ERGO:
…if you
effectively
build your
asset base
& efficiency
work those
assets
Stocks
Profit$
Market Share
1. Earnings per Share
STOCK PRICE
Function of:
Net Profit / # Shares
2. Book Value

Equity / # Shares

3. Dividend Policy
Good Dividend Policy
Let’s Examine:
1. Ways to plan &
evaluate your
financial
performance
2. Some Financial
Planning guidelines
Financial Proformas &
Reports
Cash
Flow
Income
Statement
Balance
Sheet
Financial
Ratios
 Shows cash movement in &
out of organization
 & how much cash is available
Shows revenues &
expenses for the period
Indicates profitability
What Co. Owns
What Co. Owes
Who Owns Co.
http://www.fool.com/school/valuation/howtoreadabalancesheet.htm
Financial
Guidelines
Re: Liquidity
You Produce a crappy product
 &/or Your Competitors produce a
better product
 &/or You produce too much
product

IF
Then
You’ll be left w/less
revenue than anticipated
PLUS production &
inventory carrying costs
that must be paid..
IF
You’re left w/less revenue than
anticipated and did not plan &
allocate enough cash to cover your
production & inventory carrying
costs....
Then
Big Al arrives -pays your bills,
and leaves you
with a loan & a
stiff interest
payment
In order to:
• Avoid “Big
AL” & a
Liquidity
Crisis-
Need to:
•Maintain
Adequate
working capital
& cash reserves
•Have realistic/
accurate sales
forecasts
Sales Forecasting
1. Quick N’ Dirty
2. Consumer Pref’s
3. Best / Worst Case
Estimate Your
FAIR SHARE
Answer 2 Q’s:
1.What will average
product sell in this
segment next round?
2.To what degree is your
product above or below
average- on consumers'’
buying criteria?
Fair Share - Sales Forecast
1
2
3
4
Determine industry demand next round.
Take last year’s total demand -- multiply by (1 + Growth Rate).
Estimate # products that will be in segment.
Divide total industry demand by the number of products.
Your product’s demand will typically be between one half
and twice the average product’s demand.
Compare your product with competing products.
Factors include design, awareness, accessibility, and
planned mid-year revisions.
Examine industry capacities, and the capacities of
the “best” products.
Can products meet the demand they generate?
#2 Forecast by Consumer
Pref’s
Forecast off Customer
Survey Scores

Opening rounds crucial- can
establish competitive advantage
(that can be sustained for many yearseven thru-out entire sim.)


Initial round demand can vary
+/- 25%
Later rounds best case/worst
case vary ~~~~ 10-15%
For Example-in Traditional
segment everyone begins w/ 13%
market share
After 1st Year/RoundCan see demand spread
R#1 Dec
Survey score
Baker
43
19%
Predicted
sales R#2
1827 units
Able
40
18%
1731
1598
Fast
36
16%
1339
1560
Eat
36
16%
1539
1492
Cake
42
19%
1827
1339
Daze
26
12%
1154
1045
Total=223
% of 223
Actual
Sales R#2
1758 units
R#2
2
1
R#1
Survey
score
43
40
36
36
42
26

Worst Case:

BIG INVENTORY/
little cash

Best case:

Lots of CASH /
little Inventory
•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
In WORSE
CASE: You
have lots of
Inventory
& little or no
Cash.
$0.00
In WORSE
CASE: You
have lots of
Inventory
& thus need to
drive your cash
position to the
black…
$0.00
To adjust your cash
position -
If you are cash poor,
issue Stock /Bonds - or
consider a short term
loan
 If you are cash rich,
pay dividends and/or
buy back stock.
Important Considerations
re: BEST-WORST Scenario Analyses
By adjusting your CASH
POSITION according to your
WORST CASE estimate– will avoid
… BiG AL
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
For example,
1.
2.
3.
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.
How Big is your
Slinky?

Worst Case:

BIG INVENTORY/ no
cash– risk seeing Big Al

Best case:

Lots of CASH / no
Inventory -you risk stockout
Determining A
Reasonable Spread


Want to avoid generating an ultra
Conservative Worst case scenario
…matched w/ an ultra Optimistic Best case
scenario
Should be able to sell excess inventory in
~betw. 6 & 16 weeks
Any less or less:
 risk a visit from Big Al
 would require major screw-up from competition
How to measure your slinky slack--
Take your
total
inventory
costs
$23,900M
& Divide by total
variable costs of
inventory sold:
$23,900M/$131,119M
=.18
52weeks *.18 = 9
Risk ~9weeks of
Inventory to avoid
stockout
Two more things to think about:
1. The Relationship
between Your
Strategy & Success
Measures
2. Other
measures of
successbesides
$$$$
Diff Strategies Play into
Different Success Measures
Profit
BCL
L=2-3
X
MS
X
SP & MC ROE
pf/e
X
Cost- Niche
NichePLCDiff
X
X
AT
s/a
X
X
X
ROA
pf/a
X
All
Segments= more sales & thus
X enable X
& PLC
greater Cum. profit & overall market share
B-Diff
L=1.5-2
ROS
pf/s
X
X
X
X
It is important to look at the
means used to achieve
outcomes …. not just focus on
the outcomes themselves

To only focus on
traditional financial
accounting measures
(such as ROI, ROE, EPS)
…..does not give
mgt the whole
picture….
Performance
needs to be
judged thru
mix of both
financial &
non-financial
measures….
M A R KE T I N G
Will Make $$$ - if sell
product
M A N A G E M E N T
As - nonfinancial
measures are
drivers of
financial
outcomes
Will sell product if consumer
wants, knows about , can get, &
LIKES product
To achieve “above’ everyone must
effectively do their job
To effectively do job must
know what to do
M A R KE T I N G
• Management benefits from a
M A N A G E M E N T
multi-dimensional perspective
Includes not only financial
but customer, internal & organizational
learning/improvement perspectives as well…
Balanced Scorecard
Puts Strategy At Top
Of Measurement Systems
M A R KE T I N G
STRATEGY
M A N A G E M E N T
Financial Perspective
"If we succeed, how will
we look to our
shareholders?”
Customer Perspective
The
Logic
"To achieve my vision,
how must I look to my
customers?”
Internal Perspective
"To satisfy my customers,
at which processes must
excel?”
Organization Learning
"To achieve my vision, how
must my organization learn
and improve?”
M A R KE T I N G
For Each Perspective:
M A N A G E M E N T
Financial
Objectives Measures Targets Initiatives Responsibility Budget
1.
2.
3.
Customer… Business processes… Learning
Objectives Measures Targets Initiatives Responsibility Budget
1.
2.
3.
M A R KE T I N G
M A N A G E M E N T
M A R KE T I N G
M A N A G E M E N T
Today …
~ 70% of Fortune
1,000 companies
utilize a Balanced
Scorecard to help
manage
performance—
because…..
What is measured
gets noticed
What is noticed
gets acted on
What
is acted on
gets improved
M A R KE T I N G
Basic Scorecard Terminology
(Southwest Airlines Example)
M A N A G E M E N T
Strategy Map
Strategic Theme:
Operating Efficiency
Profits and
RONA
Financial
Grow
Revenues
Customer
Fewer planes
Objectives:
What the
strategy is
trying to
achieve
Measures
Targets
Initiatives
How
performance
is measured
against
objectives
The level of
performance
or rate of
improvemen
t needed
Key action
programs
required to
achieve
targets
Attract &
Retain More
Customers
On-time
Service
Lowest
prices
Internal
Fast ground
turnaround
Learning
Ground crew
alignment
Objectives
Measures
• Fast ground
• On Ground
turnaround
Time
• On-Time
Departure
Targets
Initiatives
• 30 Minutes • Cycle time
• 90%
optimization
M A R KE T I N G
A Complete Scorecard
is a Program for Action
M A N A G E M E N T
Strategic
Theme:
Strategic Theme:
Operations
OperatingExcellence
Efficiency
Profits and
RONA
Financial
Grow
Revenues
Customer
Fewer planes
Attract &
Retain More
Customers
On-time
Service
Lowest
prices
Internal
Fast ground
turnaround
Objectives
• Profitability
• Grow
Revenues
turnaround
alignment
Ground crew
alignment
Targets
Initiatives
• 30% +/yr
• 20%
• 5%
• Fewer planes
• # Customers
• More
Customers
• FAA On Time
Arrival Rating
• Flight is on time
• Market Survey
• Lowest prices
• Fast ground • On Ground
• Ground crew
Learning
Measures
•
Time
On-Time
Departure
• 12% growth •Customer
• Ranked #1 loyalty
• Ranked #1 program
• Quality
management
• 30 Minutes • Cycle time
• 90%
optimization
• % Ground crew • yr. 1
trained
• % Ground crew
stockholders
70%
yr. 3 90%
yr. 5 100%
• Ground crew
training
• ESOP
M A R KE T I N G
Capstone's Balanced Scorecard
M A N A G E M E N T
M A R KE T I N G
M A N A G E M E N T
• Select Success Measures
& Determine Relative
Weightings
• Need to enter weightings –
prior to round-1