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

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)

Presentations -- March 7th Hollywood Video Team 3 Herman Miller Team 5

Presentations -- March 14th Krispy Kreme Team 2 Vivendi/Universal Team 4 Nike Team 1

Stages in Strategic Development Understanding Strategy Environmental Scanning / Industry Analysis Internal Scanning / Organizational Analysis Strategy Formulation Strategy Implementation Evaluation and Control

Evaluation and Control Process Determine what to measure Establish standards Measure performance 3 2 1 Does performance match stand- ards? Take corrective action NO 4 5 YES STOP !

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

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 company’s long term viability?

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)

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 firm’s top management use the resources provided by owners) but not for evaluating divisional managers

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

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)

Financial Measures ROI = net income* / total assets 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

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 year’s/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

Benchmarking Identify process Determine behavioral and output measures Select accessible set of competitors Calculate differences Develop tactics to close performance gaps Implement and compare results

Guidelines for Control Involve minimum amount of information Monitor only meaningful activities Timeliness Included long-term and short-term Pinpoint exceptions Reward meeting and exceeding standards, not punish

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

Hints on Quantitative Analysis It is often useful to analyze a company’s cost position relative to is rivals and to examine the willingness of customers to pay for the company’s 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.

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