copyright 2005 prentice hall1 bus 411 day 15. copyright 2007 prentice hall ch 7-2 agenda assignment...
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Copyright 2005 Prentice Hall 1
Bus 411
Day 15
Copyright 2007 Prentice Hall Ch 7-2
Agenda
Assignment 5 Corrected 2 A’s, 3 B’s, 2 C’s and 3 F’s Everyone that submitted all the work on time got an A or B
Mid-term exam Sent to you on WebCT Fill out the answers and send it back using WebCT e-
ail Due on March 16
Finish Discussion on Finance/Accounting, R&D, & MIS Issues
Discussion on Strategy review, evaluation and control
Copyright 2007 Prentice Hall Ch 7-3
Midterm
The following 20 short essays comprise the midterm exam for this class. This is a take home exam and you may use any resource other than another person. With the exception of Question 18, you should be able to complete the exam using the text as your only resource. Any evidence of collaboration with any other person on this exam will result in a score of zero and a formal charge of cheating to the Student Conduct Officer. If you have questions about the exam, please contact your instructor. The completed exam is due no later than Friday, March 16, 2007 at the beginning of class (9:30AM). Please e-mail your completed exams using WebCT e-mail to Tony Gauvin. Exams submitted beyond the due date will receive a twenty-point reduction per day. Exams submitted on the correct day but beyond the required time will receive a ten-point deduction. There will be no exceptions.
Copyright 2007 Prentice Hall Ch 7-4
teams Team 1
J. Harbison N. Lozier M. Martin
Team 2 C. Brusig C. Pennine T. Nhundu J. Jalbert
Team 3 K. Beaulieu M. Doucette D. Lemon
Copyright 2007 Prentice Hall Ch 7-5
Timeline
March 13 Finish Chapter 8 Chapter 9 Mid-term assigned
March 16 How to present a case study Mid-term due Case study team work
March 20 Tony Case study One Apple
Computer Case study team work
March 23 Team 1 Case Study Two Dell
Computer Case study team work
March 26-30 Spring Break
April 3 Team 2 Case Study Three PepsiCo Case study team work
April 6 Team 3 Case Study Four Molson
Coors Brewing Company Case study team work
April 10 Team 1 Case Study Five Hershey
Foods Corporation Case study team work
April 13 (Friday the 13th)
Team 2 Case Study Six Kellogg Company
Case study team work
Copyright 2007 Prentice Hall Ch 7-6
Assignment 5 Swot MatrixLeave Blank Strengths – S
1. Strong brand recognition and recall2. Brand equity 3. Talented employee base4. Access to Google available to anyone with
Internet 5. Good cash reserves6. Strong revenues and profit margins7. Relationships with major corporations like
AOL8. Culture of innovation and accountability9. Products based on solving consumer needs
Weaknesses – W1. Corporate governance2. Lack of independence of board3. Unclear vision4. Fast growth5. Potential for inappropriate positioning of client
brands on Web sites6. Small relative to competitors7. Little physical presence in some global markets
Opportunities – O1. Internet-based technologies and businesses
continue to develop2. Worldwide growth in Internet coverage and use3. Asia makes up most of world’s population, but
has low Internet penetration4. Increasing demand for Web-based business and
consumer solutions5. Advertising spending increasing online6. Potential to expand into other media
SO Strategies1. Continue to develop new offerings that build
upon brand and increase unique visitors to sites (e.g., Google Video, Froogle, Gmail) – S4, S9, O4, O5
2. Expand Google into additional countries (particularly in Asia) and languages (especially Mandarin) – S4, O2, O3
3. Increase advertising sales (S1, S2, S9, O5, O6)4. Target business solutions in addition to
consumer solutions (S7, S8, O1)
WO Strategies1. Develop clear vision for company (W3, O1,
O4)2. Partner when possible with organizations to
develop new applications (W6, W7, O2, O3, O4)
3. Target growth in specific areas (W6, W7, O2, O3, O4)
4. Develop presence in Asia (especially in China) and South America (W7, O2, O5)
Threats – T1. Competition, especially Microsoft and Yahoo!2. Potential for click fraud3. Potential for attack on servers4. Legal constraints in the are of intellectual
property rights5. Consumer attitudes toward online advertising
ST Strategies1. Defend against competitors by ensuring people
are satisfied with Google services and developing new services (S5, S6, T1)
2. Build excellence in areas of importance to consumers in order to encourage Yahoo! users to switch to Google (S9, T1)
3. Harness innovation to develop preventative measures to protect against attacks from hackers (S8, T2, T3)
4. Be proactive in the interpretation of intellectual property rights laws and regulations (S3, S8, T4)
5. Develop new streams of revenue that are not based on advertising models (S5, S3, S8, T5)
WT Strategies1. Establish a plan for addressing threats from
Microsoft and other competitors (W1, W2, W3, W6, T1)
Copyright 2007 Prentice Hall Ch 7-7
Space matrix
Goog_Space_matrix1.xls
Copyright 2007 Prentice Hall Ch 7-8
QSPM Weight Option 1 AS TAS Option 2 AS TAS
Strengths
Brand recognition and recall .05 2 .10 4 .20
Brand equity (#1 among online brands) .05 3 .15 4 .20
Talented employee base .10 3 .30 2 .20
Free to consumers with Internet access .10 4 .40 2 .20
Cash resources ($426 million) .10 4 .40 3 .30
Strong profits and revenues (up over 100% since previous year) .05 4 .20 3 .15
No reliance on specific software/hardware .05 4 .20 2 .10
Culture of innovation .10 2 .20 3 .30
Powerful business relationships .05 3 .15 4 .20
Weaknesses
Lack of presence in key international markets (especially Asia) .05 4 .20 1 .05
Lack of clear visionary leadership .10 3 .30 2 .20
Issues with corporate governance .10 2 .20 1 .10
Vulnerability in product applications .05 - - - -
Weak profitability compared to competition .05 4 .20 2 .10
Total 1.0
In this example, option 1 is market development in China and option 2 is product development of an online payment system like PayPal (e.g., new Internet-based business solutions). Both options are suggested by Google’s aggressive position in the Grand Strategy Matrix.
Copyright 2007 Prentice Hall Ch 7-9
Opportunities
Internet-based technologies and businesses continue to develop .10 1 .10 4 .40
Worldwide growth in Internet coverage and use .05 4 .20 2 .10
Large market still to be tapped (currently only 15.7% of the world has Internet access). Asia, in particular, is a valuable potential market. It makes up 56.4% of the world’s population, but only 9.9% of its population are online (according to www.internetworldstats.com
.05 4 .20 1 .05
Increasing demand for Web-based business and consumer solutions .15 2 .30 3 .45
Advertising spending declining in other media but increasing online .15 3 .45 4 .60
Potential to expand into other media .05 2 .10 3 .15
Threats
Microsoft has stated its plans to threaten Google’s future .10 2 .20 3 .30
Other competitors (Yahoo!, eBay, MSN, and others) .10 4 .40 2 .20
Potential for click fraud .05 2 .10 - -
Potential for attacks on Google’s servers .05 - - 1 .05
Legal constraints in the area of intellectual property rights .10 1 .10 3 .30
Consumer attitudes toward online advertising .05 - - 4 .20
Total 1.0
Sum Total Attractiveness Score 5.15 5.10
In this example, option 1 is market development in China and option 2 is product development of an online payment system like PayPal (e.g., new Internet-based business solutions). Both options are suggested by Google’s aggressive position in the SPACE Matrix.
Copyright 2007 Prentice Hall Ch 7-10
BCG data
Revenues Profits Market Share% Industry Growth
Rate
Google websites Advertising 1589032 198629 1 31.5 high
Google Network Web Site Advertising 1554256 194282 0.5 31.5 high
Licensing (and other revenues) 45935 5741.875 > 0.1 20 high
3189223 398652.875
399199
MSFT 8128000 1000's in 2004
Copyright 2007 Prentice Hall Ch 7-11
Google BCG Matrix
Dogs
IV
Cash Cows
III
Question Marks
I
Stars
II
Relative Market Share PositionHigh1.0
Medium.50
Low0.0
Ind
us
try
Sa
les
Gro
wth
Ra
te
High+40
Low-40
Medium0
Copyright 2007 Prentice Hall Ch 7-12
Steps in Preparing Case Studies Identify Existing Mission, Vision,
Objectives, Strategies Develop New Vision and Mission
Most are poor Identify external opportunities and
threats CPM EFE
Identify internal strengths and weaknesses IFE Financial ratios
Analyze SWOT Matrix SPACE BCG IE matrix Grand Strategy Matrix QSPM
Give advantage and disadvantages of alternative strategies
Recommend Strategies and long range
objectives Show cost
Specify how strategies are to be implemented and what results to expect
Recommend specific annual objectives (goal) and polices
Recommend procedures for evaluation
Be Original – Take chances Remember business rewards risk taking
Copyright 2007 Prentice Hall Ch 7-13
Debt
Equity
Finance/Accounting Issues
Capital acquisition to implement strategies
Copyright 2007 Prentice Hall Ch 7-14
EPS/EBIT analysis Earnings per share/Earnings before interest and
taxes
Finance/Accounting Issues
Debt vs. Equity Decisions
Copyright 2007 Prentice Hall Ch 7-15
$Amount Needed: $500 Stock Price $40 EBIT Range $1000 to $2000 Tax Rate 175/673 = .26 = 26% Interest Rate 5% # Shares Outstanding 350 (million)
EPS-EBIT Analysis(in $millions)
Heinz Company – Year End 2001
Copyright 2007 Prentice Hall Ch 7-16
EPS-EBIT Analysis (in $millions) – Heinz Company
Stock Financing FinancingCombination
60/40
High Low High Low High Low
EBIT ($982.4 in 2001) $2000 $1000 $2000 $1000 $2000 $1000
Interest (5%) 0 0 25 25 10 10
EBT 2000 1000 1975 975 1990 990
Taxes 26% 520 260 514 254 517 257
EAT 1480 740 1461 721 1473 733
# Shares outstanding 362.5 362.5 350 350 357.5 357.5
EPS 4.08 2.04 4.17 2.06 4.12 2.05
Copyright 2007 Prentice Hall Ch 7-17
Conclusion:
Heinz should use debt to raise the $500 million
Finance/Accounting Issues
EPS-EBIT Analysis Heinz
Copyright 2007 Prentice Hall Ch 7-18
Copyright 2007 Prentice Hall Ch 7-19
Copyright 2007 Prentice Hall Ch 7-20
Allow an organization to examine the expected results of various actions and approaches
Finance/Accounting Issues
Projected Financial Statements
Copyright 2007 Prentice Hall Ch 7-21
1. Prepare income statement before balance sheet (forecast sales)
2. Use percentage of sales method to project CoGS & expenses
3. Calculate projected net income
Finance/Accounting Issues
Steps in Preparing Projected Financial Statements
Copyright 2007 Prentice Hall Ch 7-22
4. Subtract dividends to be paid from Net Income and add remaining to Retained Earnings
5. Project balance sheet times beginning with retained earnings
6. List comments (remarks) on projected statements
Finance/Accounting Issues
Steps in Preparing Projected Financial Statements (cont’d)
Copyright 2007 Prentice Hall Ch 7-23
Projected Income Statement for Litten Company (in millions)
Prior Year 2005Projected Year
2006 Remarks
Projected Income Statement
Sales 100 150.00 50% increase
Cost of Goods Sold 70 105.00 70% of sales
Gross Margin 30 45.00
Selling Expense 10 15.00 10% of sales
Administrative Expense 5 7.50 5% of sales
EBIT 15 22.50
Interest 3 3.00
EBT 12 19.50
Taxes 6 9.75 50% rate
Net Income 6 9.75
Dividends 2 5.00
Retained Earnings 4 4.75
Copyright 2007 Prentice Hall Ch 7-24
-- Details how funds will be obtained and spent for a specified period of time.
Finance/Accounting Issues
Financial Budget
Copyright 2007 Prentice Hall Ch 7-25
Cash budgets Operating budgets Sales budgets Profit budgets Factory Budgets Expense Budgets
Finance/Accounting Issues
Types of Budgets
Copyright 2007 Prentice Hall Ch 7-26
Divisional budgets Variable budgets Flexible budgets Fixed budgets
Finance/Accounting Issues
Types of Budgets
Copyright 2007 Prentice Hall Ch 7-27
Central to strategy implementation – integrative, intensive, & diversification strategies often implemented through acquisitions of other firms
Finance/Accounting Issues
Evaluating Worth of a Business
Copyright 2007 Prentice Hall Ch 7-28
1. What a firm owns1. Total assets – liabilities (discount overvalued assets)
2. Stockholders equity
2. What a firm earns1. 5 X times annual earnings (tax consequences)
3. What a firm will bring in the market1. Outstanding shares
Finance/Accounting Issues
Evaluating Worth of a Business:
3 Basic Approaches
Copyright 2007 Prentice Hall Ch 7-29
Worth of a Business Analysis (see 8-8)
Southwest AirlinesStockholders’ Equity: $ 5,524Net Income: 313Stock Price: 15.70EPS: .45Shares Outstanding 784
Company Worth AnalysisStockholders Equity $ 5,524Net Income x 5 1,565Share Price/EPS x NI 10,920# Shares x Share Price 12,309
Copyright 2007 Prentice Hall Ch 7-30
Research & Development Issues
-- New products and improvement of existing products that allow for effective strategy implementation
Copyright 2007 Prentice Hall Ch 7-31
Level of support constrained by resource availability
Technological improvements shorten product life cycles
Research & Development Issues
Constraints
Copyright 2007 Prentice Hall Ch 7-32
1. 1st firm to market new technological products2. Innovative imitator of successful products3. Low-cost producer of similar but less
expensive products
Research & Development Issues
3 Major R&D approaches to implementing strategies
Copyright 2007 Prentice Hall Ch 7-33
Management Information Systems (MIS) Issues
-- Information is the basis for understanding the firm. One of the most important factors differentiating successful from unsuccessful firms
Copyright 2007 Prentice Hall Ch 7-34
Information collection, retrieval, & storage Keeping managers informed Coordination of activities among divisions Allow firm to reduce costs
MIS Issues
Functions of MIS
Copyright 2007 Prentice Hall Ch 7-35
Chapter 9Strategy Review, Evaluation, & Control
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice Hall Ch 7-36
Strategic Management Process Model
Develop Mission and Mission Statements
Chap 2
Measure and Evaluate
PerformanceChap 9
Implement StrategiesManagement Issues
Chap 7
Generate, Evaluate and Select Strageies
Chap 3
Implement StrategiesMarketing, Finance, accounting, R&D,
MIS issuesChap 8
Perfrom External Audit
Chap 3
Establish Long-termObjectives
Chap 4
Perform Internal Audit
Chap 4
Copyright 2007 Prentice Hall Ch 7-37
Organizations are most vulnerable when they are at the peak of their success --
R.T. Lenz
Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-38
-- Strategies become obsolete
-- Internal environments are dynamic
-- External environments are dynamic
Strategy Review, Evaluation, & Control
Copyright 2007 Prentice Hall Ch 7-39
Vital to the organization’s well-being Alert management to potential/actual problems
in a timely fashion Erroneous strategic decisions can have severe
negative impact on organizations
Strategy Review, Evaluation, & Control
Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-40
1. Examine the underlying bases of a firm’s strategy1. Did we do a careful analysis?2. Did things change?
2. Compare expected to actual results3. Identify corrective actions to ensure that
performance conforms to plans
Strategy Review, Evaluation, & Control
3 Basic Activities
Copyright 2007 Prentice Hall Ch 7-41
Complex & sensitive undertaking
Overemphasis can be costly & counterproductive Too much time spent measuring rather than doing
Strategy Review, Evaluation, & Control
Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-42
Strategy Review, Evaluation, & Control
Have assets increased Increase in profitability Increase in sales Increase in productivity Profit margins, ROI, & EPS ratios increased
Appraisal of Strategic Performance
Copyright 2007 Prentice Hall Ch 7-43
Strategy Evaluation, Review & Control
Consonance
Consistency
Feasibility
Advantage
Rumelt’s4 Criteria
Copyright 2007 Prentice Hall Ch 7-44
Strategy Evaluation, Review & Control
Strategy should not present inconsistent goals & policies Issue and not “people” problems Success for one department means failure for another Policy problems rise to the top
Consistency
Copyright 2007 Prentice Hall Ch 7-45
Strategy Evaluation, Review & Control
Consonance
Consistency
Feasibility
Advantage
Rumelt’s4 Criteria
Copyright 2007 Prentice Hall Ch 7-46
Strategy Evaluation, Review & Control
Need for strategies to examine sets of trends Need a Holistic view (internal and external)
Consonance
Copyright 2007 Prentice Hall Ch 7-47
Strategy Evaluation, Review & Control
Consonance
Consistency
Feasibility
Advantage
Rumelt’s4 Criteria
Copyright 2007 Prentice Hall Ch 7-48
Strategy Evaluation, Review & Control
Neither overtax resources or create unsolvable sub-problems Can it be done with the given or available
resources?
Feasibility
Copyright 2007 Prentice Hall Ch 7-49
Strategy Evaluation, Review & Control
Consonance
Consistency
Feasibility
Advantage
Rumelt’s4 Criteria
Copyright 2007 Prentice Hall Ch 7-50
Strategy Evaluation, Review & Control
Creation or maintenance of competitive advantage If it doesn't create a competitive advantage
then what’s the point?
Advantage
Copyright 2007 Prentice Hall Ch 7-51
Process of strategic evaluation Management should be continually aware of
progress Management by wandering around
Don't wait for information get to you, go out and get the information
Things Change
Copyright 2007 Prentice Hall Ch 7-52
Strategy Review, Evaluation, & Control
1. Increase in environment’s complexity
2. Difficulty predicting future with accuracy
3. Increasing number of variables
Difficulties in Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-53
Strategy Review, Evaluation, & Control
4. Rate of obsolescence of plans
5. Domestic and global events
6. Decreasing time span for planning certainty
Difficulties in Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-54
Strategy Review, Evaluation, & Control
Initiate managerial questioning Trigger review of objectives & values Stimulate creativity in generating
alternatives
Strategy Evaluation Should --
Copyright 2007 Prentice Hall Ch 7-55
Strategy Review, Evaluation, & Control
Develop revised EFE Matrix
Develop revised IFE Matrix
Review of Underlying Bases of Strategy --
Copyright 2007 Prentice Hall Ch 7-56
Strategy Review, Evaluation, & Control
1. Competitors’ reaction to strategy
2. Competitors’ change in strategy
3. Competitors’ changes in strengths & weaknesses
4. Reasons for competitors’ strategic change
Review Effectiveness of Strategy --
Copyright 2007 Prentice Hall Ch 7-57
Strategy Review, Evaluation, & Control
5. Reasons for competitors’ successful strategies
6. Competitors’ present market positions & profitability
7. Potential for competitor retaliation
8. Potential for cooperation with competitors
Review Effectiveness of Strategy --
Copyright 2007 Prentice Hall Ch 7-58
Strategy Review, Evaluation, & Control
Are strengths still strengths? Have we added additional strengths? Are weaknesses still weaknesses? Have we developed other weaknesses?
Monitor Strengths & Weaknesses; Opportunities & Threats
Copyright 2007 Prentice Hall Ch 7-59
Strategy Review, Evaluation, & Control
Are opportunities still opportunities? Other opportunities develop? Are threats still threats Other threats emerged? Are we vulnerable to hostile takeover?
Monitor Strengths & Weaknesses; Opportunities & Threats
Copyright 2007 Prentice Hall Ch 7-60
Copyright 2007 Prentice Hall Ch 7-61
Evaluation FrameworkReview Underlying Bases
New IFE & EFE
Continue present course
Measure Firm Performance
Take Corrective Actions
Differences?
Differences?
Yes
NO
Yes
NO
Copyright 2007 Prentice Hall Ch 7-62
Strategy Review, Evaluation, & Control
Compare expected to actual results Investigate deviations from plan Evaluate individual performance Progress toward stated objectives
Measuring Organizational Performance
Copyright 2007 Prentice Hall Ch 7-63
Strategy Review, Evaluation, & Control
Financial Ratios Compare performance over different periods Compare performance to competitors Compare performance to industry averages
Quantitative Criteria for Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-64
Strategy Review, Evaluation, & Control
Return on investment (ROI) Return on equity (ROE) Profit margin Market Share
Key Financial Ratios
Copyright 2007 Prentice Hall Ch 7-65
Strategy Review, Evaluation, & Control
Debt to equity Earnings per share (EPS) Sales growth Asset growth
Key Financial Ratios
Copyright 2007 Prentice Hall Ch 7-66
Strategy Review, Evaluation, & Control
Internal consistency of strategy Consistency with environment Appropriateness in view of resources
Qualitative Evaluation of Strategy
Copyright 2007 Prentice Hall Ch 7-67
Strategy Review, Evaluation, & Control
Acceptable degree of risk Appropriate time frame Workability of the strategy
Qualitative Evaluation of Strategy
Copyright 2007 Prentice Hall Ch 7-68
Strategy Review, Evaluation, & Control
-- Evaluate strategies from 4 perspectives:
1. Financial performance
2. Customer knowledge
3. Internal business processes
4. Learning & growth
Balanced Scorecard
Copyright 2007 Prentice Hall Ch 7-69
Balanced Scorecard
Area of Objectives Measure or Target Time Expectation Primary Responsibility
Customers
1
2
Managers/Employees
1
2
Operations/Processes
1
2
Community/Social Responsibility
1
2
Business Ethics/Natural Environment
1
2
Financial
1
2
Copyright 2007 Prentice Hall Ch 7-70
Copyright 2007 Prentice Hall Ch 7-71
Strategy Review, Evaluation, & Control
Economical Meaningful Generates useful information Timely information Provides accurate picture of events
Characteristics of Strategy Evaluation
Copyright 2007 Prentice Hall Ch 7-72
Strategy Review, Evaluation, & Control
Alternative plans that can be put into effect if certain key events do not occur as expected
Contingency Planning
Copyright 2007 Prentice Hall Ch 7-73
Strategy Review, Evaluation, & Control
Financial audits determine correspondence between assertions based on strategic plan & established criteria
Environmental audits insure sound and safe practices
Auditing
Copyright 2007 Prentice Hall Ch 7-74
Strategy Evaluation, Review & Control
Process is more an “art” than “science” You can learn the “science”, the “art” part requires
experiences and practice Should strategies be visible or hidden from
stakeholders Only when secrecy gives some competitive advantage
Should process be more top-down or bottom up Current research suggests bottom-up
21st Century Challenges in Strategic Management