1. M A N A G E M E N T S I M U L A T I O N The Big Picture C ompanyC ompany C onsumersC onsumers C ompetitorsC ompetitors C onditionsC onditions PEST PEST Growth & Competitive Strategies Finance HR Production R&D Marketing Functional Integration  Profits  Mrkt Share  ROA  ROS  ROE  Asset T/O  Stock  Mrkt Cap Situation/SWOT Analysis Strategic Planning Functional Integration Performance Assessment

2. M A N A G E M E N T S I M U L A T I O N

3. M A N A G E M E N T S I M U L A T I O N Ascertain Financial Health of Your Company

4. M A N A G E M E N T S I M U L A T I O N Key Financial Q’s: 1.Are You Making Enough Profit ? 2.Liquidity ? Enough Money on hand to run/grow your co. 3.Leverage? ideally proportioned betw. Debt & Equity? 4.How effectively are you utilizing your assets? A/T 5.R U providing your investors an Adequate Level of Return? 6.How close are you to Bankruptcy? 7.How’s those Bond Ratings ? 8.Do you have Adequate Levels of Investment in your Company's Plant, People & Processes ?

5. The Capstone Courier

6. M A N A G E M E N T S I M U L A T I O N

7. Various Measures of Your PROFITABILITY Profitability Ratios: ROS --- Profit/ Sales ROA — Profit/ Assets ROE – Profit/ Equity  Net Profits  Cum Profits

8. M A N A G E M E N T S I M U L A T I O N

9. NET PROFITS $$ Year 1 $6 million Year 2 $8 million Year 3 $10 million Year 4 $12 million Year 5 $16 million Year 6 $21 million Year 7 $27 million Year 8 $35 million NET PROFITS $$ 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 PROFIT General Range: $20 to $100 M CUM PROFIT General Range: $20 to $100 M

10. “ROS indicates percentage of each sales dollar that results in net income.” Main ratio of Profitability Return on Sales Return on Sales = net profit net sales

11. Return on Assets = Return on Assets = net profit assets net profit assets “ “ROA measures company’s ability to use its assets to generate earnings.”

12. Return on Equity = net profit equity Profitability * Asset Mgt * Leverage As measured by ROE Encompasses the 3 main levers used by mgt to generate return on investors equity

13. Du Pont Formula Return on Equity = net profit equity salessalesassetsassetsequity xxxx Value Chain

14. Du Pont Formula Return on Equity = net profit equity salessalesassetsassetsequity xxxx Value Chain

15. net profit salessalesassetsassetsequityxxxx Value Chain Profitability * Asset Mgt * Leverage Improve ROE by: Increase sales &/or reduce &/or eff. work assets Improving Margins Increasing Leverage

16. Ratio World Class Top 10 cut MeanPoor ROE* 600%+100%+ ~20%<15%

17. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

18. How effective will you be in building your Co’s asset base? At outset should be spending ~$10-25M / round on plant improvement By end should expand asset base to min $140M to $160M +

19. How effective/aggressive R-U in building your Co’s asset base… It takes $$ to Make $$ &-why not make it using somebody else's…. To help you make even more…

20. 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 3.0 $3 $2 $1 4.0 $4 $3 $1 LEVERAGE: 1.8to2.8 Optimal Corp assets fin.w/ debt

21. 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 The More Assets you have the better your Bond Ratings

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23. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

24. Asset Turnover Reveals how effective assets are at generating sales revenue. The higher the better = more efficient use of assets Asset Turnover = sales assets sales assets Currently you are generating $1.05 in sales for every $1 assets

25. Financial Guidelines: Profitability- SGA/sales & Margins

26. 7-17%

27. ……. below 30%, Problem = Marketing (customers hate your products) Production (your labor & material costs too high), &or Pricing (you cut price too much). Contribution Margin IF: Contribution Margin (Sales- variable costs) / sales

28. Contribution Margin is above 30%…but Net Margin is below 20% … Contribution Margin is above 30%… but Net Margin is below 20% … Net Margin = Sales - (Variable Costs + Period (Fixed) Costs) / Sales Problem = heavy expenditures on Depreciation (perhaps you have idle plant) & or heavy expenditures on SGA (perhaps you’re pushing into diminishing returns on Promo & Sales Budgets). IF:

29. Net Margin above 20%, ROS (net profit) below 5%.. -- Net Margin above 20%, but ROS (net profit) below 5%.. -- you either experienced some extraordinary "Other" expense like a write-off on plant you sold or you are paying too much Interest (…you may also have spent heavily on TQM initiatives ). IF:

30. Stock Price Profit$

31. STOCK PRICE Function of: 1. Earnings per Share Net Profit / # Shares 2. Book Value Equity / # Shares 3. Dividend Policy Good Dividend Policy Good Dividend Policy

32. S I M U L A T I O N M A R K E T I N G M G T. Pay off Debt Invest in growth Buy-back stock Pay dividends Pay off Debt Invest in growth Buy-back stock Pay dividends Things you can do w/ your $$$: Which most often selected … but least preferable to do?

33. S I M U L A T I O N M A R K E T I N G M G T. Reducing Leverage Says to stockholders— “ We can think of nothing better to do w/ $$ than save you interest payments ” –More debt eliminated the greater target you become for a takeover.. No reason not to maintain Co. Financial Structure that got you to position of high profitability…

36. S I M U L A T I O N M A N A G E M E N T One more thing to think about What is the Relationship between My Strategy & Success Measures

37. Diff Strategies Play into Different Success Measures ProfitMSSP & MCROE pf/e ROS pf/s AT s/a ROA pf/a BCL L=2-3 XXXX Cost- Niche & PLC XXX B-Diff L=1.5-2 XXXX Niche- PLCDiff XXXX Cost Strategy = higher leverage/more investment/ more assets/more debt/ less equity Differentiation Strategy =lower leverage/less investment/ less assets All Segments= more sales & thus enable greater Cum. profit & overall market share Focused Strategies should operate more effectively & have overall less sales

38. 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