Today: Evaluation and Control

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Today Evaluation and Control

• Current Events
• Company Profile Presentations
• Evaluation and Control
• Airborne Express Case
• WEBSITE www.sba.pdx.edu/faculty/stephens/ss.html

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Company Profile Presentations

• Team presentation
• 20 minutes of prepared content
• 10 minutes Q A
• Submit written profile at beginning of class
• Strategic analysis of industry and company
• Eight page write-up (plus exhibits)

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Presentations -- March 7th

• Hollywood Video
• Team 3
• Herman Miller
• Team 5

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Presentations -- March 14th

• Krispy Kreme
• Team 2
• Vivendi/Universal
• Team 4
• Nike
• Team 1

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Stages in Strategic Development

• Understanding Strategy
• Environmental Scanning / Industry Analysis
• Internal Scanning / Organizational Analysis
• Strategy Formulation
• Strategy Implementation
• Evaluation and Control

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Evaluation and Control Process
Determine what to measure
Establish standards
Measure performance
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2
1
Does performance match stand- ards?
Take corrective action
NO
4
5
YES
STOP !
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Behavior vs. Output Controls

• Behavior Controls
• Policies
• Rules
• SOPs (standard operating procedures)
• Directives
• Output controls
• Objectives
• Performance targets
• Milestones

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Non-financial Measures

• Should the company include non-financial measures
  to determine overall performance?
• Market-based market share, brand identity, etc.
• Society-based environmental policies and
  reporting, human resource policies
• How important are these factors to the companys
  long term viability?

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Financial Measures (p.175)

• Margin Ratios
• Gross margin gross profit/sales x 100
• Operating margin operating income/sales x 100
• Profit margin net income/sales x 100
• NOTE Changes can be early warning of serious
  problems (down 1-2 can be the difference between
  healthy profits or a loss in many industries)

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Financial Measures

• Return on Investment Ratios
• Return on Assets Net Income/Total Assets
• NOTE Good for evaluating divisional managers
  (how well did they utilize the assets entrusted
  to them) but not so good for evaluating overall
  firm performance
• Return on Equity Net Income/Stockholders
  Equity
• NOTE Good for evaluating overall firm
  performance (how well did the firms top
  management use the resources provided by owners)
  but not for evaluating divisional managers

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Financial Measures

• Efficiency Ratios
• Inventory costs
• cost of goods sold/average inventory balance
• Inventory turns 365/inventory turnover
• NOTE High inventory incurs excessive interest,
  warehousing, property tax and spoilage costs. Low
  inventory risks lost sales or production line
  stoppage due to stock outs of finished goods or
  raw materials, respectively

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Financial Measures

• Liquidity Ratios
• Current ratio current assets/current
  liabilities
• NOTE Varies by industry -- airline industry
  (receivables inventory are low), manufacturing
  industry (receivables inventory fairly high)

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Financial Measures

• Corporate Performance
• ROI net income / total assets
• ROE net income / total equity
• EPS net earnings / total outstanding stock
• Shareholder Value
• EVA after-tax ops profit / cost of capital
• MVA NPV of past and expected projects

before interest and taxes
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Responsibility Centers

• Standard Cost Centers primarily manufacturing
  efficiency costs per unit produced compare
  expected and actual production costs
• Revenue Centers generally sales effectiveness
  sales generated compare previous
  years/projected to actual sales.
• Expense Centers generally administration,
  service research indirect contribution to
  revenues.
• Profit Centers SBU or division controls expenses
  and revenues, perhaps based on product line.
• Investment Centers generally facility-based
  return on investment revenue generated compared
  to value of facility

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Benchmarking

1. Identify process
2. Determine behavioral and output measures
3. Select accessible set of competitors
4. Calculate differences
5. Develop tactics to close performance gaps
6. Implement and compare results

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Guidelines for Control

1. Involve minimum amount of information
2. Monitor only meaningful activities
3. Timeliness
4. Included long-term and short-term
5. Pinpoint exceptions
6. Reward meeting and exceeding standards, not punish

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Airborne Express

• How and why has the express mail industry
  structure evolved?
• How has Airborne survived, and recently
  prospered, in its industry?
• Quantify Airbornes sources of advantage. (see
  hints on next slide)
• What must Robert Brazier, Airbornes President
  and COO, do in order to strengthen the companys
  position?
• SEE AIRBORNE HANDOUT

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Hints on Quantitative Analysis

• It is often useful to analyze a companys cost
  position relative to is rivals and to examine the
  willingness of customers to pay for the companys
  products relative to competitors. Compare the
  costs of an overnight letter shipped by Airborne
  Express to one shipped by Federal Express. Also,
  use qualitative analysis to compare customers
  willingness to pay.
• To examine relative costs, start with the cost
  structure of a Federal Express overnight letter,
  given Ex. 3. Using information in the case and
  your understanding of what influences each cost
  item, estimate each of the items for Airborne
  Express.

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Next Time Company Profiles

• Company Profile Presentations
• Guest Speaker
• Steffen Nelson, COO
• Objective Medical Assessments Corp
• www.omacime.com
• Discuss Final Exam
• WEBSITE www.sba.pdx.edu/faculty/stephens/ss.html