s i m u l a t i o n m a n a g e m e n t performance assessment
TRANSCRIPT
S I M U L A T I O N
M A N A G E M E N T
Performance AssessmentPerformance Assessment
S I M U L A T I O N
M A N A G E M E N T The Big Picture
•CCompanyompany
•CConsumersonsumers
•CCompetitorsompetitors
•CConditionsonditions• PESTPEST
GrowthGrowth &&
Competitive Competitive StrategiesStrategies
Finance
HR
Production
R&D
Marketing
Functional Functional IntegrationIntegration
Profits Mrkt Share ROA ROS ROE Asset T/O Stock Mrkt Cap
Situation/SWOT Situation/SWOT AnalysisAnalysis
Strategic Strategic PlanningPlanning
Functional Functional IntegrationIntegration
Performance Performance AssessmentAssessment
S I M U L A T I O N
M A N A G E M E N T
• Cumulative Profits• Ending Market Share• ROS• Asset Turnover • ROA• ROE• Ending Stock Price• Market Cap.
Success Measures
Performance Measures- Defined Performance Measures-Dynamics
S I M U L A T I O N
M A N A G E M E N T
Usually First & Foremost
Usually First & Foremost
PROFITS
Profitability Ratios: ROS---Return on Sales ROA—Return on Assets ROE-- Return on Equity
Net Profits
Cum Profits
NET PROFITS $$NET PROFITS $$
•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
NET PROFITS $$NET PROFITS $$
•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 PROFITCUM PROFIT Typical Range: $20
to $100 M
CUM PROFITCUM PROFIT Typical Range: $20
to $100 M
““ROS indicates percentage of each ROS indicates percentage of each sales dollar that results in net income.”sales dollar that results in net income.”
Main ratio of ProfitabilityReturn on Sales
Return on Sales =Return on Sales =net profitnet profit
net salesnet sales
Financial Guidelines: Profitability-ROS & Margins
How Profitable is your Firm?
ROSROS
Contribution MarginContribution Margin
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%…Contribution Margin is above 30%… but but Net Margin Percentage is below 20% … 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%,Net Margin above 20%, but ROS below 5%.. 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 TQM is enabled, you may also have spent heavily on TQM initiatives).
IF:
“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?
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+
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 $1
3.0 $3 $2 $1
4.0 $4 $3 $1
LEVERAGE:
1.8 to 2.8
OptimalOptimal
Corp assets fin.w/ debt
AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default
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
Leverage from lenders’ perspective impacts bond ratings:
“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%
RatioWorld Class
Top 10 cut
Mean Poor
Asset TurnoverReveals 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 EquityReturn on Equity = =net profitnet profit
equityequity
Profitability * Asset Mgt * Leverage
As measured by ROE
Encompasses the 3 main levers used by mgt to generate return on investors equity
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Value Chain
Profitability * Asset Mgt * Leverage
Return on EquityReturn on Equity = =net profitnet profit
equityequity
Du Pont Formula
Return on Equity =Return on Equity =net profitnet profit
equityequity
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Value Chain
Du Pont Formula
Return on Equity =Return on Equity =net profitnet profit
equityequity
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Value Chain
RatioWorld Class
Top 10 cut
Mean Poor
ROE* 600%+ 100%+ ~20% <15%
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Value Chain
Profitability * Asset Mgt * Leverage
Improve ROE by: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
Let’s Examine:
1.Ways to plan & evaluate your financial performance
2.Some Financial Planning guidelines
Financial Proformas & Reports
BalanceBalanceSheetSheet
Financial Financial RatiosRatios
CashCashFlowFlow IncomeIncome
StatementStatement
Shows cash movement in & out of organization
& how much cash is available
Shows cash movement in & out of organization
& how much cash is available
Shows revenues & expenses for the period
Shows revenues & expenses for the period
Indicates profitabilityIndicates profitability
http://www.fool.com/school/valuation/howtoreadabalancesheet.htm
What Co. Owns
What Co. Owns
What Co. Owes
What Co. Owes
Who Owns Co.
Who Owns Co.
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:
In order to:
•Have realistic/ accurate
sales forecasts
•Avoid “Big AL” & a Liquidity Crisis-
Need to:Need to:
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?
1
2
3
4
Fair Share - Sales Forecast Fair Share - Sales Forecast 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
For Example-in Traditional segment everyone begins w/ 13% market share
Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.)
Initial round demand can vary +/- 25%
Later rounds best case/worst case vary ~~~~ 10-15%
After 1st Year/Round-Can see demand spread
Total=223
R#1 Dec Survey score
% of 223 Predicted sales R#2
Actual Sales R#2
Baker 43 19% 1827 units 1758 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
R#1 Survey score
43
40
36
36
42
26
R#2
12
CASE
CASE
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
$0.00
In WORSE CASE: You have lots of Inventory
& little or no Cash.
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…
In WORSE CASE: You have lots of Inventory
& thus need to drive your cash position to the black…
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.
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.
To adjust your cash position --
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL
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
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. If your annual sales
were $120M, in one month you’d sell $10M.
2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.
3. This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.
Worst Case:BIG INVENTORY/ no
cash– risk seeing Big Al Best case:
Lots of CASH / no Inventory -you risk stockout
How Big is your Slinky?
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
Take your total inventory costs
$23,900M
Take your total inventory costs
$23,900M
How to measure your slinky slack--
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid
stockout
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid
stockout
1. The Relationship between Your
Strategy & Success Measures
Two more things to think about:
2. Other measures
of success-
besides $$
$$
Diff Strategies Play into Different Success Measures
Profit MS SP & MC ROE
pf/e
ROS
pf/s
AT
s/a
ROA
pf/a
BCL
L=2-3X X X X
Cost- Niche & PLC X X X
B-Diff L=1.5-2
X X X X
Niche-PLCDiff
X X X X
Cost Strategy = higher leverage/more
investment/ more assets/more debt/ le
ss
equity
Cost Strategy = higher leverage/more
investment/ more assets/more debt/ le
ss
equity
Differentiation Strategy =lower
leverage/less investment/ less assets
Differentiation Strategy =lower
leverage/less investment/ less assets All Segments= more sales & thus enable
greater Cum. profit & overall market share
All Segments= more sales & thus enable greater Cum. profit & overall market share
Focused
Strategies should
operate more
effectively &
have overall less
sales
Focused
Strategies should
operate more
effectively &
have overall less
sales
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….
M A R K E T I N G
M A N A G E M E N T
Performance needs to be judged thru mix of both financial & non-financial measures….
As - nonnon--financialfinancial measures are driversdrivers of financial outcomes
Performance needs to be judged thru mix of both financial & non-financial measures….
As - nonnon--financialfinancial measures are driversdrivers of financial outcomes
Will Make $$$ - if sell product
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 K E T I N G
M A N A G E M E N T
Balanced ScorecardPuts Strategy At Top
Of Measurement Systems
• Management benefits from a multi-dimensional perspective Includes not only financial but customer, internal & organizational learning/improvement perspectives as well…
• Management benefits from a multi-dimensional perspective Includes not only financial but customer, internal & organizational learning/improvement perspectives as well…
M A R K E T I N G
M A N A G E M E N T
The Logic
"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
M A R K E T I N G
M A N A G E M E N T
For Each Perspective:
FinancialObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
Customer… Business processes… LearningObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
FinancialObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
Customer… Business processes… LearningObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
M A R K E T I N G
M A N A G E M E N T
M A R K E T I N G
M A N A G E M E N T
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 Balanced ScorecardScorecard to help manage performance—
because…..
Today …
~ 70% of Fortune 1,000 companies utilize a Balanced Balanced ScorecardScorecard to help manage performance—
because…..
M A R K E T I N G
M A N A G E M E N T
Basic Scorecard Terminology(Southwest Airlines Example)
Objectives
• Fast ground turnaround
Objectives:What the
strategy is trying to achieve
Targets
• 30 Minutes• 90%
TargetsThe level of
performance or rate of
improvement needed
• Cycle time optimization
InitiativesKey action programs
required to achieve targets
InitiativesMeasures
• On Ground Time
• On-Time Departure
MeasuresHow
performance is measured
against objectives
Strategic Theme: Operating Efficiency
Profits and RONAFinancial
Learning
Ground crew alignment
Lowest prices
Fewer planes
Customer
Internal
Fast ground turnaround
Strategy Map
On-time Service
Attract & Retain More Customers
Grow Revenues
M A R K E T I N G
M A N A G E M E N T
• % Ground crew trained
• % Ground crew stockholders
A Complete Scorecard is a Program for Action
Objectives Measures
• # Customers• FAA On Time
Arrival Rating• Market Survey
• On Ground Time
• On-Time Departure
Strategic Theme:Operating Efficiency
Initiatives
• Cycle time optimization
• Ground crew training
• ESOP
•Customer loyalty program• Quality management
Targets
•30% +/yr
•20%
•5% • 12% growth• Ranked #1• Ranked #1
• 30 Minutes• 90%
• yr. 1 70%yr. 3 90%yr. 5 100%
• Profitability
• Grow Revenues
• Fewer planes
• More Customers
• Flight is on -time
• Lowest prices
• Fast ground turnaround
• Ground crew alignment
Strategic Theme:
Operations ExcellenceProfits and
RONAFinancial
Learning
Ground crew alignment
Fewer planes
Customer
Internal
Fast ground turnaround
Attract & Retain More Customers
Grow Revenues
Lowest prices
On-time Service
M A R K E T I N G
M A N A G E M E N T
Capstone's Balanced Scorecard Capstone's Balanced Scorecard
M A R K E 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
• Select Success Measures & Determine Relative Weightings
• Need to enter weightings – prior to round-1