Hatfield Medical Supplies’s stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Adam Lee. Lee asked for the company’s long-run strategic plan; when he learned that no formal plan existed, he decided to develop one himself. Lee had brought in Rick Novak, a finance MBA who had been working for a consulting company, to replace the old CFO, and he asked Rick to develop the financial planning section of the strategic plan. In his previous job, Novak’s primary task had been to help clients develop financial forecasts, and that was one reason Lee hired him.

Novak began as he always did, by comparing Hatfield’s financial ratios to the industry averages. If any ratio was substandard, he discussed it with the responsible manager to see what could be done to improve the situation. Figure MC-1 provides Hatfield’s latest financial statements plus some ratios and other data that Novak plans to use in his analysis. Notice that the figure is extracted from an Excel spreadsheet. Novak learned back in his university days that, because of interactions among variables, any realistic financial forecast must be based on a computer model. (The model is available to your instructor on the textbook’s Web site.) Of course, he is also aware of the well-known computer axiom—garbage in, garbage out (GIGO).

Novak therefore plans to discuss the model’s inputs carefully with Hatfield’s operating managers, individually and also collectively in the company’s financial planning conference.

a. Do you think Adam Lee should develop a strategic plan for the company? Why? What are the central elements of such a plan? What is the role of finance in a strategic plan?