Bus 411
Day 15
Copyright 2005 Prentice Hall
1
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 eail
 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 7-2
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 7-3
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 7-4
Timeline

March 13







Tony Case study One Apple
Computer
Case study team work
March 23







Team 1 Case Study Two Dell
Computer
Case study team work
Team 3 Case Study Four Molson
Coors Brewing Company
Case study team work
April 10



Team 2 Case Study Three PepsiCo
Case study team work
April 6

March 20


How to present a case study
Mid-term due
Case study team work
April 3

March 16


Finish Chapter 8
Chapter 9
Mid-term assigned

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
March 26-30 Spring Break
Copyright 2007 Prentice Hall
Ch 7-5
Assignment 5 Swot Matrix
Leave Blank
Strengths – S
1.
Strong brand recognition and recall
2.
Brand equity
3.
Talented employee base
4.
Access to Google available to anyone with
Internet
5.
Good cash reserves
6.
Strong revenues and profit margins
7.
Relationships with major corporations like AOL
8.
Culture of innovation and accountability
9.
Products based on solving consumer needs
Weaknesses – W
1.
Corporate governance
2.
Lack of independence of board
3.
Unclear vision
4.
Fast growth
5.
Potential for inappropriate positioning of client
brands on Web sites
6.
Small relative to competitors
7.
Little physical presence in some global markets
Opportunities – O
1.
Internet-based technologies and businesses
continue to develop
2.
Worldwide growth in Internet coverage and use
3.
Asia makes up most of world’s population, but
has low Internet penetration
4.
Increasing demand for Web-based business and
consumer solutions
5.
Advertising spending increasing online
6.
Potential to expand into other media
SO Strategies
1.
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 Strategies
1.
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 – T
1.
Competition, especially Microsoft and Yahoo!
2.
Potential for click fraud
3.
Potential for attack on servers
4.
Legal constraints in the are of intellectual
property rights
5.
Consumer attitudes toward online advertising
ST Strategies
1.
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 Strategies
1.
Establish a plan for addressing threats from
Microsoft and other competitors (W1, W2, W3,
W6, T1)
Copyright 2007 Prentice Hall
Ch 7-6
Space matrix
Goog_Space_matrix1.xls
Copyright 2007 Prentice Hall
Ch 7-7
QSPM
In this example, option 1 is market development in China and option 2 is product development of an online paym
Both options are suggested by Google’s aggressive position in the Grand Strategy Matrix.
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
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
Weaknesses
Copyright 2007 Prentice Hall
Ch 7-8
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.
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
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
Threats
Sum Total Attractiveness Score
Copyright 2007 Prentice Hall
5.15
5.10
Ch 7-9
BCG data
Revenues
Profits
% Industry Growth
Rate
Market Share
Google websites Advertising
1589032
198629
1
31.5
high
Google Network Web Site
Advertising
1554256
194282
0.5
31.5
high
45935
5741.875
20
high
3189223
398652.875
Licensing (and other revenues)
> 0.1
399199
MSFT
Copyright 2007 Prentice Hall
8128000
1000's in 2004
Ch 7-10
Google BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate
High
1.0
Medium
.50
Low
0.0
High
+40
Stars
II
Question Marks
I
Cash Cows
III
Dogs
IV
Medium
0
Low
-40
Copyright 2007 Prentice Hall
Ch 7-11
Steps in Preparing Case Studies


Identify Existing Mission, Vision,
Objectives, Strategies
Develop New Vision and Mission



Most are poor
CPM
EFE
Identify internal strengths and
weaknesses




IFE
Financial ratios




Analyze






SWOT Matrix
SPACE
BCG
IE matrix
Grand Strategy Matrix
QSPM
Copyright 2007 Prentice Hall
Give advantage and disadvantages
of alternative strategies
Recommend

Identify external opportunities and
threats




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
Ch 7-12
Finance/Accounting Issues
Capital acquisition to implement strategies

Debt

Equity
Copyright 2007 Prentice Hall
Ch 7-13
Finance/Accounting Issues
Debt vs. Equity Decisions

EPS/EBIT analysis

Earnings per share/Earnings before interest and
taxes
Copyright 2007 Prentice Hall
Ch 7-14
EPS-EBIT Analysis
(in $millions)
Heinz Company – Year End 2001






$Amount Needed: $500
Stock Price $40
EBIT Range $1000 to $2000
Tax Rate 175/673 = .26 = 26%
Interest Rate 5%
# Shares Outstanding 350 (million)
Copyright 2007 Prentice Hall
Ch 7-15
EPS-EBIT Analysis (in $millions) – Heinz
Company
Stock Financing
Financing
Combination
60/40
High
Low
High
Low
High
Low
$2000
$1000
$2000
$1000
$2000
$1000
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
EBIT ($982.4 in 2001)
Interest (5%)
Copyright 2007 Prentice Hall
Ch 7-16
Finance/Accounting Issues
EPS-EBIT Analysis Heinz

Conclusion:

Heinz should use debt to raise the $500 million
Copyright 2007 Prentice Hall
Ch 7-17
Copyright 2007 Prentice Hall
Ch 7-18
Copyright 2007 Prentice Hall
Ch 7-19
Finance/Accounting Issues
Projected Financial Statements

Allow an organization to examine the expected
results of various actions and approaches
Copyright 2007 Prentice Hall
Ch 7-20
Finance/Accounting Issues
Steps in Preparing Projected Financial
Statements
1.
Prepare income statement before balance
sheet (forecast sales)
2.
Use percentage of sales method to project
CoGS & expenses
3.
Calculate projected net income
Copyright 2007 Prentice Hall
Ch 7-21
Finance/Accounting Issues
Steps in Preparing Projected Financial
Statements (cont’d)
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
Copyright 2007 Prentice Hall
Ch 7-22
Projected Income Statement for Litten Company (in millions)
Prior Year 2005
Projected Year
2006
Remarks
Projected Income Statement
Sales
100
150.00
50% increase
70
105.00
70% of sales
30
45.00
10
15.00
10% of sales
5
7.50
5% of sales
15
22.50
3
3.00
12
19.50
Taxes
6
9.75
Net Income
6
9.75
2
5.00
4
4.75
Cost of Goods Sold
Gross Margin
Selling Expense
Administrative Expense
EBIT
Interest
EBT
Dividends
Retained Earnings
Copyright 2007 Prentice Hall
50% rate
Ch 7-23
Finance/Accounting Issues
Financial Budget
-- Details how funds will be obtained and spent for
a specified period of time.
Copyright 2007 Prentice Hall
Ch 7-24
Finance/Accounting Issues
Types of Budgets






Cash budgets
Operating budgets
Sales budgets
Profit budgets
Factory Budgets
Expense Budgets
Copyright 2007 Prentice Hall
Ch 7-25
Finance/Accounting Issues
Types of Budgets




Divisional budgets
Variable budgets
Flexible budgets
Fixed budgets
Copyright 2007 Prentice Hall
Ch 7-26
Finance/Accounting Issues
Evaluating Worth of a Business

Central to strategy implementation – integrative,
intensive, & diversification strategies often
implemented through acquisitions of other firms
Copyright 2007 Prentice Hall
Ch 7-27
Finance/Accounting Issues
Evaluating Worth of a Business:
3 Basic Approaches
1.
What a firm owns
1.
2.
2.
What a firm earns
1.
3.
Total assets – liabilities (discount overvalued assets)
Stockholders equity
5 X times annual earnings (tax consequences)
What a firm will bring in the market
1.
Outstanding shares
Copyright 2007 Prentice Hall
Ch 7-28
Worth of a Business Analysis (see 8-8)
Southwest Airlines
Stockholders’ Equity:
Net Income:
Stock Price:
EPS:
Shares Outstanding
Company Worth Analysis
Stockholders Equity
Net Income x 5
Share Price/EPS x NI
# Shares x Share Price
Copyright 2007 Prentice Hall
$ 5,524
313
15.70
.45
784
$ 5,524
1,565
10,920
12,309
Ch 7-29
Research & Development
Issues
-- New products and improvement of
existing products that allow for effective
strategy implementation
Copyright 2007 Prentice Hall
Ch 7-30
Research & Development
Issues
Constraints


Level of support constrained by resource
availability
Technological improvements shorten product
life cycles
Copyright 2007 Prentice Hall
Ch 7-31
Research & Development
Issues
3 Major R&D approaches to implementing
strategies
1.
2.
3.
1st firm to market new technological products
Innovative imitator of successful products
Low-cost producer of similar but less
expensive products
Copyright 2007 Prentice Hall
Ch 7-32
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 7-33
MIS Issues
Functions of MIS




Information collection, retrieval, & storage
Keeping managers informed
Coordination of activities among divisions
Allow firm to reduce costs
Copyright 2007 Prentice Hall
Ch 7-34
Chapter 9
Strategy Review, Evaluation, & Control
Strategic
Management:
Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice Hall
Ch 7-35
Strategic Management Process Model
Perfrom External
Audit
Chap 3
Develop Mission and
Mission Statements
Chap 2
Establish Long-term
Objectives
Chap 4
Generate, Evaluate
and Select Strageies
Chap 3
Implement Strategies
Management Issues
Chap 7
Implement Strategies
Marketing, Finance,
accounting, R&D,
MIS issues
Chap 8
Measure and
Evaluate
Performance
Chap 9
Perform Internal
Audit
Chap 4
Copyright 2007 Prentice Hall
Ch 7-36
Strategy Evaluation
Organizations are most vulnerable when
they are at the peak of their success -R.T. Lenz
Copyright 2007 Prentice Hall
Ch 7-37
Strategy Review, Evaluation,
& Control
-- Strategies become obsolete
-- Internal environments are dynamic
-- External environments are dynamic
Copyright 2007 Prentice Hall
Ch 7-38
Strategy Review, Evaluation,
& Control
Strategy Evaluation



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
Copyright 2007 Prentice Hall
Ch 7-39
Strategy Review, Evaluation,
& Control
3 Basic Activities
1.
Examine the underlying bases of a firm’s
strategy
1.
2.
2.
3.
Did we do a careful analysis?
Did things change?
Compare expected to actual results
Identify corrective actions to ensure that
performance conforms to plans
Copyright 2007 Prentice Hall
Ch 7-40
Strategy Review, Evaluation,
& Control
Strategy Evaluation

Complex & sensitive undertaking

Overemphasis can be costly &
counterproductive

Too much time spent measuring rather than doing
Copyright 2007 Prentice Hall
Ch 7-41
Strategy Review, Evaluation,
& Control
Appraisal of Strategic Performance





Have assets increased
Increase in profitability
Increase in sales
Increase in productivity
Profit margins, ROI, & EPS ratios increased
Copyright 2007 Prentice Hall
Ch 7-42
Strategy Evaluation, Review &
Control
Consistency
Rumelt’s
4 Criteria
Consonance
Feasibility
Advantage
Copyright 2007 Prentice Hall
Ch 7-43
Strategy Evaluation, Review &
Control
Consistency

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
Copyright 2007 Prentice Hall
Ch 7-44
Strategy Evaluation, Review &
Control
Consistency
Rumelt’s
4 Criteria
Consonance
Feasibility
Advantage
Copyright 2007 Prentice Hall
Ch 7-45
Strategy Evaluation, Review &
Control
Consonance

Need for strategies to examine sets of trends

Need a Holistic view (internal and external)
Copyright 2007 Prentice Hall
Ch 7-46
Strategy Evaluation, Review &
Control
Consistency
Rumelt’s
4 Criteria
Consonance
Feasibility
Advantage
Copyright 2007 Prentice Hall
Ch 7-47
Strategy Evaluation, Review &
Control
Feasibility

Neither overtax resources or create unsolvable
sub-problems
 Can it be done with the given or available
resources?
Copyright 2007 Prentice Hall
Ch 7-48
Strategy Evaluation, Review &
Control
Consistency
Rumelt’s
4 Criteria
Consonance
Feasibility
Advantage
Copyright 2007 Prentice Hall
Ch 7-49
Strategy Evaluation, Review &
Control
Advantage

Creation or maintenance of competitive
advantage
 If it doesn't create a competitive advantage
then what’s the point?
Copyright 2007 Prentice Hall
Ch 7-50
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 7-51
Strategy Review, Evaluation,
& Control
Difficulties in Strategy Evaluation
1.
2.
3.
Increase in environment’s complexity
Difficulty predicting future with accuracy
Increasing number of variables
Copyright 2007 Prentice Hall
Ch 7-52
Strategy Review, Evaluation,
& Control
Difficulties in Strategy Evaluation
4.
5.
6.
Rate of obsolescence of plans
Domestic and global events
Decreasing time span for planning certainty
Copyright 2007 Prentice Hall
Ch 7-53
Strategy Review, Evaluation,
& Control
Strategy Evaluation Should -


Initiate managerial questioning
Trigger review of objectives & values
Stimulate creativity in generating
alternatives
Copyright 2007 Prentice Hall
Ch 7-54
Strategy Review, Evaluation,
& Control
Review of Underlying Bases of Strategy -
Develop revised EFE Matrix

Develop revised IFE Matrix
Copyright 2007 Prentice Hall
Ch 7-55
Strategy Review, Evaluation,
& Control
Review Effectiveness of Strategy -1.
2.
3.
4.
Competitors’ reaction to strategy
Competitors’ change in strategy
Competitors’ changes in strengths &
weaknesses
Reasons for competitors’ strategic change
Copyright 2007 Prentice Hall
Ch 7-56
Strategy Review, Evaluation,
& Control
Review Effectiveness of Strategy -5.
6.
7.
8.
Reasons for competitors’ successful
strategies
Competitors’ present market positions &
profitability
Potential for competitor retaliation
Potential for cooperation with competitors
Copyright 2007 Prentice Hall
Ch 7-57
Strategy Review, Evaluation,
& Control
Monitor Strengths & Weaknesses;
Opportunities & Threats




Are strengths still strengths?
Have we added additional strengths?
Are weaknesses still weaknesses?
Have we developed other weaknesses?
Copyright 2007 Prentice Hall
Ch 7-58
Strategy Review, Evaluation,
& Control
Monitor Strengths & Weaknesses;
Opportunities & Threats





Are opportunities still opportunities?
Other opportunities develop?
Are threats still threats
Other threats emerged?
Are we vulnerable to hostile takeover?
Copyright 2007 Prentice Hall
Ch 7-59
Copyright 2007 Prentice Hall
Ch 7-60
Review Underlying Bases
New IFE & EFE
Differences?
Evaluation Framework
Yes
NO
Measure Firm Performance
Differences?
Take
Corrective
Actions
Yes
NO
Continue
present
course
Copyright 2007
Prentice
Hall
Ch 7-61
Strategy Review, Evaluation,
& Control
Measuring Organizational Performance




Compare expected to actual results
Investigate deviations from plan
Evaluate individual performance
Progress toward stated objectives
Copyright 2007 Prentice Hall
Ch 7-62
Strategy Review, Evaluation,
& Control
Quantitative Criteria for Strategy Evaluation
Financial Ratios




Compare performance over different periods
Compare performance to competitors
Compare performance to industry averages
Copyright 2007 Prentice Hall
Ch 7-63
Strategy Review, Evaluation,
& Control
Key Financial Ratios




Return on investment (ROI)
Return on equity (ROE)
Profit margin
Market Share
Copyright 2007 Prentice Hall
Ch 7-64
Strategy Review, Evaluation,
& Control
Key Financial Ratios




Debt to equity
Earnings per share (EPS)
Sales growth
Asset growth
Copyright 2007 Prentice Hall
Ch 7-65
Strategy Review, Evaluation,
& Control
Qualitative Evaluation of Strategy



Internal consistency of strategy
Consistency with environment
Appropriateness in view of resources
Copyright 2007 Prentice Hall
Ch 7-66
Strategy Review, Evaluation,
& Control
Qualitative Evaluation of Strategy



Acceptable degree of risk
Appropriate time frame
Workability of the strategy
Copyright 2007 Prentice Hall
Ch 7-67
Strategy Review, Evaluation,
& Control
Balanced Scorecard
-- Evaluate strategies from 4 perspectives:
1. Financial performance
2. Customer knowledge
3. Internal business processes
4. Learning & growth
Copyright 2007 Prentice Hall
Ch 7-68
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 7-69
Copyright 2007 Prentice Hall
Ch 7-70
Strategy Review, Evaluation,
& Control
Characteristics of Strategy Evaluation





Economical
Meaningful
Generates useful information
Timely information
Provides accurate picture of events
Copyright 2007 Prentice Hall
Ch 7-71
Strategy Review, Evaluation,
& Control
Contingency Planning
Alternative plans that can be put into effect if
certain key events do not occur as expected
Copyright 2007 Prentice Hall
Ch 7-72
Strategy Review, Evaluation,
& Control
Auditing

Financial audits determine correspondence
between assertions based on strategic plan
& established criteria

Environmental audits insure sound and safe
practices
Copyright 2007 Prentice Hall
Ch 7-73
Strategy Evaluation, Review & Control
21st Century Challenges in
Strategic Management
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
Copyright 2007 Prentice Hall
Ch 7-74