List three specific parts of the Case Guide, Objectives and Strategy Section (See below) that you had the most difficulty understanding. Describe your current understanding of these parts. Provide specific fictitious answers or analyses for part that you are describing.

INTRODUCTORY INFORMATION – This Guide to Case Analysis and Strategy Development, or Case Guide as we’ll refer to it throughout the course, is intended to provide you with both preliminary information about the strategy topics we’ll explore within this course and to provide you with some guidelines for one of the course’s major assignments, the team/group case analysis. While this Case Guide cannot replace a traditional textbook, it contains information about topics you might find in multiple texts in an abbreviated fashion. In addition to this Guide and case reading, we will supplement the information contained in this document with case readings, articles and, perhaps, podcasts or videos where appropriate. You will purchase a packet of case readings which form the basis of our study for most weeks of this course. Should you wish the option to purchase a text, please ask the course instructor for an appropriate title (and edition number) if not supplied to you already. What’s the difference between a case and an article? While we’re on the topic of reading, we should discuss the difference between an article and a case. We’ll use both forms of readings in this course and their content and purpose is quite different. An article is a full text document or literary work about a particular subject(s), such as what one might read in a journal or magazine. An article may contain clarifying information about a topic. A business case (or case study) is an account of what has happened within a business (or industry) over a number of years. Essentially, a business case is a story that may include facts, graphics, and quantitative measures as support. The story presents a problem(s), good or bad, for contemplation, analysis, and potential resolution. Let’s begin by addressing a few topics, the first, a definition of strategy, followed by a brief explanation of different types of strategy. What is Strategy? Here are a few different takes on a definition. Strategy is: • A cluster of related managerial decisions and actions to help an organization attain one of its goals • Management’s action plan for running the business and conducting operations • Plan for achieving or sustaining competitive advantage that consists of broad explanation of competitive moves and business approaches Some confusion exists about levels of strategy - Corporate Strategy vs. Business Strategy vs. Functional Strategy – Corporate strategy asks you (senior management) to make decisions about in what industries and businesses you should participate, e.g. I’m on a river and doing ok, should I stay on this river or find new one to navigate? GE, the corporation, for 4 example, makes decisions about overall corporate strategy including in which industries it will participate through its multiple businesses or business level units. It also decides what mix of businesses it should own in order for its portfolio to maximize profits, to provide diversity of risk within that portfolio, and (possibly) to provide the vertical and horizontal diversity necessary for the most efficient value chains of the businesses under the corporate umbrella. Most decisions about acquisitions, mergers, and start-ups for the corporation happen at this level where senior mgmt. would view the corporation’s multiple businesses as parts of a whole. Business strategy asks you (senior management) to make decisions about what is the best way (approach) to complete in an industry, e.g. I’m on this river, how can I navigate and paddle best? We concern ourselves about how a business under the corporate umbrella operates as a singular unit and its strategy in doing so. Business strategy is the focus of our course. Functional Strategy (aka Operational Strategy or Departmental Strategy) centers around the day-to-day functions, activities, and operations of the business. We create weekly, daily, or hourly goals. To return to the river example, managers at the functional level might ask, when will need new paddle or canoe? How much lead time will we have for ordering? How will these get to the river? Would changing paddle design create more efficiency? Of course, in a singular business or one without multiple holdings, we may have fewer concerns about a corporate strategy, BUT we should be able to distinguish between the functions and requirements of each level of strategy. As a small business owner thinking about buying a small competitor, one would make corporate strategy decisions. The same small business owner, thinking about finding the best suppliers with whom to partner in a JIT inventory arrangement, one would make business level strategy decisions. The same business owner might spend part of the day creating a production schedule or employee work schedule. Although, not a part of our course, students asked questions about what happens beyond the strategy we propose. So, I’ll address this here in simplified form. Once strategy is completed and approved within a business, we develop operational plans for the day-to-day function of the business. Along the way, we concurrently develop business level and departmental (or some other grouping scheme) levels, but we finalize these only after business strategy is approved. Once approved, management, at functional or product level: a. Begins to communicate the strategy at all levels b. Assigns responsibilities for strategy components c. Allocates resources to complete assigned components (critical to success) d. Implements strategy 5 e. Monitors and assesses feedback, usually through one or more cybernetic loops. f. Adjusts (both tactics and overall strategy) for changing conditions and corrects course as necessary. Once we have conducted an analysis of where we stand within the task environment, in business-level strategy, as managers, we determine two major types of strategy under which to operate at the business level: i. Type of Overall Strategy to Follow, in which we choose whether to grow or maintain our market share (Offensive, Defensive, or End-Run strategies) – more below; and, ii. Generic Strategy, in which through what means or how we intend to grow or maintain our market share (Broad Low Cost, Broad Differentiation, Focused Low Cost, or Focused Differentiation). Some refer to this as a strategic approach. Note that often students confuse business-level generic strategy with marketing (functional level) or product level strategies that use similar terminology. While a company may have low cost and differentiated product lines, the generic strategy of a company as a whole remains one consistent choice among the four stated above. More information about generic strategy follows in this Guide. Levels of Analysis For each organization we study (and especially the group case analysis), we’ll perform analyses at three different levels, Industry, Segment, and Company. Each level depends on the development of a usable Industry Definition. For our purposes, we develop the industry definition using case data or some other given information with little to no reference to external sources like insurance industry categories or NAIC codes. More detailed information about each of these analyses follows in this document and others to which you will have access as we move through the course. b. Industry level analyses include and examination of the general and task environments within which an industry exists, Industry Characteristics, a measurement of the Five Forces of Competition within an industry, and Driving Forces within an industry. c. Segment level analyses include the creation of an industry Strategic Group Map framed by the industry level definition, determination of the Minimum Success Factors for the segment in which the company examined competes, and the identification and examination of Primary (Direct) Competitors within the segment. d. Company level analyses include an examination of five year historical financial trends in graph form, Value Chain analysis, SWOT analysis, identification of Core Competences and Distinctive Competence, VIRO analysis, 6 determination of Sustainable Competitive Advantage status, determination of Sustainability Issues and Stakeholder Analysis. As a result of, or along with these analyses, you will determine a strategic course that includes and Overall Type of Strategy to Follow and a Generic Strategy approach. What follows in this Case Guide are notes an information that will assist and inform you as you prepare your weekly discussion answers or case examinations. Simplicity - In order to reduce the complexity of the case analysis and for you to complete your team assignment within the allotted timeframe, we have simplified some aspects, including the number of competitors. Ordinarily, one would perform ongoing analyses for all competitors in your defined industry (or at a minimum all competitors within your industry segment). For purposes of the group case analysis, you should analyze one to three competitors (depending on the assignment section). Don’t make things harder for yourself by doing more. The same principle applies to outside research. Research – You will need to complete a minimum level of research to prepare the group case analysis and case discussions. That’s right, a minimum. Your assignments are not a 25-page research papers that require seventy-five sources. Instead, assignments ask you to incorporate what you know from your business education in this Program and elsewhere, your managerial experience, your business vocabulary of properly used terminology, and the analyses and process you will learn in this course to construct a strategy for a business case assigned to your group members and you (and to some aspect of weekly case discussions prior to the group case completion). Your assigned group case will contain much of the information you need to complete your analyses and make decisions about your group’s choice of strategic direction. You’ll need to research some items like historical and updated financial information and a few other items, but you should not spend hours on research. References/Citations – Despite the minimization of research for this assignment, you should have a slide (or two) of references included in the final submission of your team case analysis. If the works you wish to cite are relevant to one or two slides, you can post the reference in the footer (not the notes) of the slide. If the works you wish to cite cover the whole project or multiple slides, you should include these on the slide with your references at the end. Experience and integration from other classes do not require referencing unless the information you include comes from a text or other formal source (which you would cite in any other course). At a minimum, please don’t forget the reference for your case from the case packet. 7 1. OBJECTIVES AND STRATEGY SECTION General Advice and Information You will probably document less than half of what you prepare. You should keep your case write-up very clear and concise. Do not include a lot of detail beyond what is outlined in this package. Your case assignment is like telling a story. Keep it as simple as possible. Remember this report should be considered to be for the board of directors. Your team is the new top management of the company. The board wants the big picture, not day-to-day operating plans. Although you might break up the work among team members, each person should be familiar with all parts of the case submission. This is particularly important since, as you will see, the case guide calls for integration across case sections. All team members should work on at least a part of Section 1. If your corporation has more than one business, you should concentrate only on the largest business. The industry definition should include only this major business and not all of the businesses within the corporation. Thus, strategy development, industry analysis, and industry segment analysis should relate only to the major business. For example, if you were preparing the Nike case, only the shoe division and not the clothing division should be included. Company analysis, on the other hand, should include all aspects of the corporation. This will be addressed in more detail later. Developing major objectives for multi-business companies is a little tricky. Set the objectives for your case under the assumption that all other divisions will have the same goals as your business. Thus, state your business objectives as if they were for the entire company. We will make many similar simplifications to make the case more manageable. The following list outlines the recommended steps for completing you case: 1. Each member of your team should read the case and perhaps an article or two, in order to bring the case up to date. 2. The team should develop an industry definition (See Section 3A for a description.) 3. Each member should then develop future five-year strategic objectives and a general strategic plan for achieving those objectives. This general strategic plan must stay within the industry as you have defined it. 4. At this point, all team members should discuss their individual ideas with each other. You should agree upon a specific set of major objectives and a general strategy. If the team cannot initially agree, do not do additional research. More research generally will not help the team come to consensus. Instead, flip a coin or vote to determine the exact objectives and strategy. Once a strategy is selected, dissenters should strongly support the choice. 8 5. For the objectives and all other forecasts, use specific numbers, not ranges. For example, forecast Return on Sales should be 4%, not 3% to 5%. 6. Once you have agreed upon a strategic plan, conduct the industry, industry segment, and company analysis. This may seem backwards (goals and strategy before various analyses), but it works the best and generally is what top managers do. In preparing a strategy for a company there is no right answer, although there are wrong answers. Wrong answers generally involve analyses not supporting the strategy. In doing these analyses, I recommend that you start with industry definition and then develop your strategic group map (in the Industry Segment Section). 7. After this has been completed, revise your strategy, objectives, and business model, as necessary, to align with your analyses. Generally, there are no changes, and if there are, these are not major. 8. Although your team will need to do research, again, this is not a course in research. Many items in your case document will require guesses or assumptions. State them as such, but make them consistent with the overall story (strategy) you are going to submit. For example, if you are really not sure how important advertising is in your industry, make an assumption that supports your strategic plans (story). If one of your aspects of strategy is to gain market share via advertising, then obviously advertising must be effective in your industry or industry segment. More about the whys of such assumptions will come in a separate document later. 9. Refer back to the case analysis package to make sure that all parts of the report/presentation “fit” together. Integration of strategy and analyses is important. 10. Check your overall package. I will primarily be looking to see if your strategy “fits” together and conveys a simple and concise story without too much additional detail. Whether or not I agree with you story is of little consequence. The founder of Federal Express wrote his Federal Express business plan in his strategy course in college and received a “C.” His professor told him that it was not a viable business plan. Well, the professor was obviously wrong. Federal Express found a large untapped market. 11. Also check for typographical errors, proper grammar, and proper formatting of all numbers. Make sure that all spreadsheets add up. Eliminate all inconsistencies due to rounding. You are the top management team. You are not constrained by current actual company actions or strategies. You can change the direction of your company. I am looking for something new, not just an extrapolation of what is currently happening. A caution, many teams make their objectives too optimistic. For example, if the industry analysis suggests that the industry is very competitive and the company analysis suggests that your company has no specific advantages, then a dramatic increase in market share is probably not credible. Also be aware that in many industries (particularly mature industries) even small increases in market share are difficult to achieve. Consider the common trade-off between sales increases and profit increases. Although it is not always the case, increasing sales and market share may require either increasing 9 expenses or cutting prices. These actions will tend to decrease profits. On the other hand, increasing profits may require cutting expenses or increasing prices, which may negatively affect sales growth. Reports should be submitted as a single, 2010 PowerPoint file. Slide numbers should be included for easy reference. Slide titles should conform to those outlined in this package. You may use the notes section of a slide, but the readability of your work might be improved by including a separate slide titled “notes” behind the related slide. The course reading materials include a sample report for Toyota (referred to as the Toyota Case Example). A. General Case Information and Assumptions Provide the following case information at the beginning of the report in order to provide context for your strategy. The first two items are a part of industry analysis and the third item is a part of company analysis. 1. The industry definition (which is also included as Section 3A) 2. The industry growth rate consistent with item 1 above, including its source (which is also included as Section 3B) 3. The company average five-year historical revenue growth rate (which is also inferred in the financial trends, Section 5A) State the major assumptions that you have made in your report. Examples include the length and breadth of the current recession or a five-year estimated inflation rate. B. Major Company Objectives This section should include a brief statement of the company's long-term objectives. Long-term objectives for this course are five years into the future. Objectives should be specific and quantified. Ranges should not be used. The time frame for completion (five years) should also be explicitly identified. Short-term objectives are not included in the report. The exact formats outlined in the examples shown below should be used. The following long-term objectives (at a minimum) should be included: 1. A sales growth objective (This should be compounded.) 2. A return on sales objective (There are a couple of different formulas for this depending upon the source you use. For purposes here, use Net Income after Taxes divided by Total Revenue.) 3. A return on equity objective (Then show and label the calculation.) 4. A return on assets objective 10 5. A market share objective for the primary business (Show and label the calculation of the current year company market share.) Examples of major company objectives (The numbers are for illustrative purposes only): The sales growth objective for Ford Motor Company is to grow at an average of 2.0% per year for each of the next five years from the current 2008 sales of $176.4 Billion to $194.8 Billion by 2013. The return on sales objective for Ford Motor Company is to attain a level of 0.5% ROS by 2013 up from our current 2008 level of –3.4%. The return on equity objective for Ford Motor Company is to attain a 10.1% ROE by 2013 up from the current 2008 level of –60.0% ROE. (Note: a small equity base accounts for the large swing in this objective.) A return on equity objective for General Motors is not meaningful because current equity is negative. This is not forecast to change over the next five years. The return on assets objective for the Ford Motor Company is to attain a 4.0% ROA by 2013 up from our current 2008 level of – 32.1% ROA. The objective for the Ford Motor Company is to limit our decrease in market share from our current 2008 market share of 22.1% to 19.7% market share in 2013. The market share objective for the Boeing Corporation is to increase our current 2008 market share of 49.3% to 51.2% by 2013. C. Vision and Type of Strategy to Follow Part 1: Briefly describe your vision for the company. What kind of company would you like to have in twenty-five years? This will be a qualitative rather than a quantitative statement. You will create this and should not research or use the company’s current information. You are the company’s new top managers and are making a report to the board of directors. You are in charge of the company and should not follow the current vision or strategy identified in the latest actual annual report or from other sources. Part 2: Select one primary strategy from the following list. Also identify “one” major competitor that you will focus upon for this case report. Selecting one competitor is intended to make the analyses for this course less complex. In real life, you would need to perform a separate assessment and plan for each major competitor. Do not confuse “Type 11 of Strategy to Follow” with “Generic Strategy” which will be discussed under company analysis. Types of strategy to follow include: – Offensive against a stronger rival (Include the name of the selected competitor here.) - Attack competitor strengths (list them) and/or - Attack competitor weaknesses (list them.) (Attacking a stronger competitor’s strengths is very difficult and if selected, your supporting analyses should be compelling.) – Offensive against a weaker rival (Include the name of the selected competitor here.) - Attack strengths (list them) and/or - Attack weaknesses (list them.) – End-run offensive (Describe the new area of the industry you will be moving into and where no companies are currently competing. If applicable, list the competitor that you are most concerned will follow you.) Briefly explain how you will either: - Move to new area of the industry where nobody is competing or - Preempt rival moves into a newly emerging attractive area of the industry. – Defensive strategy (Include the name of the selected competitor here.) - Against stronger rival (Very briefly justify why you consider them stronger.) Suggest the competitor’s single strength or weakness that you are most concerned with. - Against weaker rival (Very briefly justify why you consider them weaker.) Suggest the competitor’s single strength or weakness that you are most concerned with. Notes to Section 1C Part 2 1. For purposes of this course, when determining offensive versus defensive strategies, assume that a planned increase in your market share (i. e., revenues growing faster than the industry) indicates an offensive strategy. Maintaining or losing market share would be a defensive strategy. End-runs could be either. 2. If your industry contains a large number of very small companies and you feel that collectively these small companies are your major competition, then you can aggregate these as “generic small competitors” as your primary competitive focus. However, when listing a strength or weakness, do so for a single small competitor and not for the small competitors combined. 12 D. Strategy Overview and Key Aspects of Strategy Part 1: Briefly (1 slide) describe your overall strategy. This is in essence your “story” and should set the stage for understanding the key aspects of strategy shown below. For example: We intend to be the global leader in producing low-cost small appliances. Part 2: List two to three key aspects which will make up your strategy. Assign a percent of total effort (based upon money to be spent) that will be devoted to each of these key aspects of strategy. These major key strategic efforts must equal 100% and must not overlap. For example if one key aspect is to expand overseas and another is to introduce new products into the marketplace, then you must clearly separate new products to be sold overseas (in order to resolve an apparent overlap of your two key strategic thrusts). A sample of this is shown in Section 1D Part 3 below. Possible key strategic aspects include: – Pruning marginal products and models – Creating value chain innovation – Implementing cost reductions – Increasing sales to current customers – Developing additional new customer bases (Be specific.) – Making acquisitions – Expanding internationally (But stay within your industry definition.) – Employing flexible manufacturing – Retrenching or using a turn-around strategy – Attaining market-share leadership (This often uses a low-cost strategy.) – Negotiating strategic alliances – Develop new products (R&D) – Other(s) (Be specific.) Notes to Section 1D Part 2 1. For simplicity, all strategic thrusts must remain in the industry as you have defined it. 2. Later in the case preparation you will develop pro-forma income statements and strategic capital expenditures reports. These detailed statements of costs must align with the percentages developed here. Being an iterative process, the initial percentages that you come up with in this section might change. Generally any changes will not be large. 3. This part will only include percentages, not monetary amounts. Part 3: Provide detailed aspects for each of the strategic initiatives listed in Section D1 Part 2 above, if appropriate. That is, list the first Part 2 initiative and then follow it by related Part 3 details. Then repeat this format for the other strategic initiatives from Part 2. 13 Assign a percent of total effort (based upon money to be spent) that will be devoted to each of the detailed Part 3 aspects for each major initiative (again, 100% total and no overlap). An example is shown below. Some possibilities of detailed aspects of strategy include: Technology Human resource management Legal/government relations Organization & information management Manufacturing Distribution Marketing Other(s) Provide actual actions (even more detailed) for each item selected above (that is, for each of detailed aspects of strategy). For example, if you chose marketing that is related to introducing new products into the domestic market (Part 2), then identify the target group(s), the type of marketing (for example, advertising), and a specific advertising effort down to basic advertising themes and/or advertisements. Strategy for Company A – Expand internationally by selling new and existing products: 50% (brief description) - Distribution (60%): detailed description - Marketing (40%): detailed description – Increase domestic sales by introducing new products: 50% (brief description) - Marketing (20%): detailed description - Human resources management (10%): detailed description - Distribution (10%): detailed description - R&D (15%): detailed description - Manufacturing (45%): detailed description (Worldwide R&D and Manufacturing are allocated to this strategic initiative in this example.) Note: Do not use “financial” as a key or detailed aspect of strategy. An example of this would be a leverage strategy. Financial aspects it will be covered separately in Sections 1E and 1F. E. Cost of Implementing Strategy The cost of the items from Section 1D above should be estimated and shown in two spreadsheets; a “Pro-Forma Income Statement” (Part 1 below) and a “Pro-Forma Strategic Capital and Non-Expensed Payments Statement” (Part 2 below). An example, unrelated to the previous examples of major objectives and key aspects of strategy is shown below. 14 Part 1: Tax strategies for the pro-forma income statement should not be used and the tax dollar amount should be calculated based upon net profit before taxes rather than from sales (use 30% for convenience). Once you have calculated taxes, show taxes as a percentage of net sales on the spreadsheet. Actual expenses from the base year should be used as the first column of the pro-forma income statement. Use data from the latest company financial statement as the base year. Most company financial statements include a significant number of detailed line items. Two examples would be “Deferred Taxes” and “Other Income.” On the other hand, financial statements often do not break information down into the detail needed for your case. An example of this would be “Marketing Expense.” On most financial statements this number is included in “Marketing, General, and Administrative Expense.” In order to understand the financial aspects of your strategy we will simplify the presentation of actual financial information. The number of expense items should only highlight your strategy and will not reflect the number of items in the company’s financial statement. The actual revenue, cost of goods sold, and net income after taxes from the company’s financial statement should exactly match these items in the first column of your spreadsheet. Looking at the sample “Pro-Forma Income Spreadsheet” below, you can see that the strategy will involve R&D and marketing expenses. R&D will most likely be listed separately on the financial statements and can be used directly on your spreadsheet. All of the other items on the financial statement, except for interest expense, can be put in “administrative” on the Pro-Forma Income Statement. Since the financial statement does not list marketing separately, estimate a number for marketing. Subtract this number from administrative expense and list it separately. It is often easier to calculate this marketing number by using a percentage of sales. This is a number that you will estimate or guess. Also add actual taxes paid into administrative expense and recalculate taxes as 30% of net income before taxes. The other (forecast) columns contain numbers that you make up. I strongly suggest that you formulate the last year of your income statement forecasts first and then complete the other columns. In the example below, this would be 2013, the two columns (dollars and percentages) on the far right of the spreadsheet. Although you will make up many of the numbers, certain numbers must match other parts of your report. Base year (2008) and the out-year (2013) revenue numbers must match those that you stated in your major company objectives (Section 1B above). Also your pro-forma return on sales percentages must match your related major company objectives. The connections for ROA and ROE will be discussed in Section 1E Part 2. The reader should be able to infer your basic strategy from your pro-forma income statement. In the example below, the strategy would include a major marketing, as well as 15 R&D effort. One explanation for the drop in COGS percentage of sales over time is that the R&D is process R&D that will lead to significant increases in productivity. Since you have already detailed your strategy in Section 1C and 1D above, no explanation is needed here. However your detail in Sections1C and 1D must be consistent with and clearly identifiable in your pro-forma statements. Do not use “other” or “miscellaneous” expense. People will just ask what it is. Calculate interest expense in the forecast years to include any additional planned debt that you accrue or pay off. Like taxes, this is a separate calculation based upon total debt. State the percentage that you used to determine interest expense. For example, weighted average interest on all debt might be 7%. Again, create these numbers up based upon what you feel is reasonable. Do not conduct research. Total debt in the out -year forecast is a number that you construct. Although we will discuss it under company analysis, you might want to take a look at your current leverage position in determining how much debt to have in you out-year forecast. This debt level will also be listed in Sources of Funds for Implementing Strategy shown in Section 1E below. It is not unusual to have difficulty making your out-year expense percentages equal 100% of sales. With your strategic initiatives, the initial number often comes out higher than 100%. Do not just reduce administrative expense to make the numbers work. For example if administrative expense drop from 20% of sales to 10% of sales you must have a credible explanation of why. A 20% to 10% seems very difficult to explain. Notes to Section 1E Part 1 1. If your company has more than one business and you are focusing upon the largest business, then this analysis is somewhat distorted because it uses company data. This is acceptable. Although some company financial statements may have segment information in the notes, not all segment information will match the major business as you define it. Therefore, everyone should use company information and not segment information. 2. As you prepare very detailed forecasts, it is important not to spend too much time reaching consensus within your group as much as consistency with the strategic story. 3. Be careful not to do too much research. Our intent is to learn the process of developing a strategy and providing supporting analyses. In a real work situation you would need to do more research, but at this high level of reporting you might be surprised at the number assumptions that you would still have to make. Often these assumptions would have more of an effect than the research in real world settings. 4. You may notice some inconsistencies presented in the financial information here in this Guide and the Toyota Case Example. Most (but not all) are intended to provoke questions about the connections among the parts of Pro-Forma financials you need to prepare and the connections to the Key Aspects of Strategy. 16 Part 1: ________ Corporation Pro-Forma Income Statement (Dollars in Millions) Annual Average Revenue Growth = 20.0% ($200.0 Million to $497.7 Million) 2008 Actual 2008 Actual 2009 Forecast 2009 Calc. 2010 Forecast 2010 Calc. 2011 Forecast 2011 Calc. 2012 Forecast 2012 Calc. 2013 Forecast 2013 Calc. Revenue $200.0 100.0% $240.0 100.0% $288.0 100.0% $345.6 100.0% $414.7 100.0% $497.7 100.0% Cost of Goods Sold (COGS) $120.0 60.0% $144.0 60.0% $167.0 58.0% $200.4 58.0% $232.1 56.0% $273.7 55.0% Gross Profit Margin $80.0 40.0% $96.0 40.0% $121.0 42.0% $145.2 42.0% $182.6 44.0% $224.0 45.0% Operating Expenses: Administrative $20.0 10.0% $24.0 10.0% $30.2 10.5% $36.3 10.5% $47.7 11.5% $57.2 11.5% Marketing $10.0 5.0% $12.0 5.0% $17.3 6.0% $25.9 7.5% $35.3 8.5% $42.3 8.5% R&D $10.0 5.0% $14.4 6.0% $20.2 7.0% $24.2 7.0% $33.2 8.0% $39.8 8.0% Do not use Other or Misc. Interest Expense at 8.5% $5.0 2.5% $5.0 2.1% $5.0 1.6% $4.5 1.3% $4.1 1.0% $4.0 0.8% Net Income before Taxes $35.0 17.5% $40.6 16.9% $48.3 16.9% $54.3 15.7% $62.3 15.0% $80.7 16.2% Income Taxes at 30% $10.5 5.3% $12.2 5.1% $14.5 5.0% $16.3 4.7% $18.7 4.5% $24.2 4.9% Net Income after taxes $24.5 12.2% $28.4 11.8% $33.8 11.9% $38.0 11.0% $43.6 10.5% $56.5 11.3% 17 Part 2: Corporation Pro-Forma Strategic Capital Expenditures and Other Non-Expensed Payments Statement (Dollars in Millions) 2009 2010 2011 2012 2013 Total Plant 100.0 50.0 150.0 Equipment 24.0 11.0 35.0 Trucks 1.0 1.0 1.0 1.0 1.0 5.0 Stores 10.0 10.0 10.0 20.0 20.0 70.0 R&D lab 50.0 50.0 Total 61.0 11.0 135.0 21.0 82.0 310.0 Notice that the actual base year (2008) is not included in this analysis. The key number that must be calculated first is the Total, Total (310.0 above). In calculating this number we will make a major assumption that the relationship between sales and assets reflected in the base year will remain the same. That is, if it takes one dollar of assets to generate two dollars of sales, then this ratio will not change. In calculating the “total, total,” both the base year assets and the base year revenues should be actual numbers taken from the latest financial statements. Forecast year sales should match your Revenue Objective in Section1B. Use the following formula to calculate the Total. Base year sales/Base year assets = Forecast year sales/X X = Total New Assets (ending Forecast year) X – Base year assets = New strategic assets needed Solve for X which would be the forecast year assets. Then subtract the base year assets from X to get the “new” strategic assets needed. This will be the Total, Total strategic capital needed ($310.0 M above). To recalculate for your own understanding, assume the Base year assets are $124.6M. Having outlined the basic formula, you might make one of several modifications. First, you must decide whether it is more appropriate to use total assets, fixed assets, or some other combination in the formulas above. For example, if the company has a great deal of cash on hand, it would probably be better to exclude cash from the calculation. In this situation if your goal was to double sales, you would not need to double cash. Thus, total assets minus cash may be a better number (for the base year) to use in the calculation above. Justify and document your selection. You can also apply a fudge factor to this calculation, but again explain it. For example, 18 underutilization of current plant capacity could be a fudge factor altering the $310.0 M above. Be specific in describing the fudge factor and show the fudge factor as a percentage. For example $310.0 M X 80% (current capacity utilization) = a Total, Total of $248.0 M. Show the detailed calculation and state any reasoning as part of your report. This is a very rough estimate, but suitable for this course. Select appropriate categories (e. g., plant, trucks, and equipment from the example above) that match your strategy. Do not conduct research to find the cost of specific items. For example, you do not need to find out the actual cost of a truck. Make assumptions or guesses. The evaluation will be primarily based on the calculation and logic of the Total, Total figure. One last set of circumstances can affect the calculation of the crosschecked Total. There may be cash payments (or needs) that you anticipate occurring during your five-year strategic period. For example, if you are planning to reduce debt by $5.0 M, the Total, Total would need to be increased from $310.0 M to $315.0 M. Another example would be if your company is showing a loss rather than a profit. This would also require break-even funding, i.e. you would need to obtain money to pay off your losses. This does not apply to gains, selling stock, or acquiring debt. These are sources of funds, not expenditures. Under the Total, Total ($310.0 M) you should list each of these items (if any) as separate rows and then show a Grand Total of funds needed. The sample General Motors Case reflects this situation. After you have presented the information which supports your “Pro-Forma Strategic Capital Expenditures and Other Non-Expensed Payments,” show the following information for both the base year and the out-year forecast. Assets = Liabilities + Shareholders’ Equity. From this information calculate ROA and ROE. These calculations must match your major company objectives in Section 1B above. F. Source of Funds for Implementing Strategy The source of funds analysis Total-Total (or Crosschecked-Total, if it is used) must match the pro-forma number from Section 1E Part 2 above. The source of funds to cover the capital and non-expense costs must be specifically identified and reasonable. Potential sources of strategic funds include: – Using excess cash on hand (This comes from actual base year financials.) – Using pro-forma profits (Cutting expenses are already reflected here, not new expenses.) 19 – Offering new stock – Offering new debt – Reducing dividends – Selling major asset groups or businesses – Other (Be specific. An example would be franchising.) Corporation Pro-Forma Sources of Strategic Funds Statement (Dollars in Millions) Total Cash Pro-Forma Profit Stock Debt 2009 70.0 40.0 10.0 20.0 2010 19.0 10.0 9.0 2011 118.0 15.0 103.0 2012 27.0 15.0 12.0 2013 76.0 16.0 60.0 Total 310.0 40.0 66.0 *175.0 29.0 * New stock sales ($175.0 M) represent a 10% increase in total shares outstanding. This percentage was calculated by dividing the $175.0 M by the current stock price to determine the number of shares needed to be sold. Again, this is merely a rough approximation of actual shares needed. This should be compared with the total shares currently outstanding (from the financial statements) to calculate the percentage increase in shares from this source of funds. A general statement of whether or not this source of funds is dilutive should be made. Cash of $40.0 M shown above refers to the amount of excess cash on the actual balance sheet. Normally you will not use this category since most companies have a quick ratio near 1.0; meaning they will need all of their cash, cash equivalents, and accounts receivable to cover current liabilities. Several years ago Toyota Corporation had $25 Billion dollars in excess cash which could have easily funded the strategy that one group of students prepared. So, although you will most likely not use this source, check it anyway. Pro-forma income is perhaps the most common source of strategic funds. Referring back to the “Pro-Forma Income Statement” in Section 1E Part 1, you can see that estimated net income after taxes for 2009 was $28.4 M. We only allocated $10.0 M of that in the sources of funds statement above. Perhaps we were being too conservative and should have used more of our pro-forma income as a source of funds rather than incurring debt in 2009. However, one must also consider that dividends are paid out of pro-forma income, reducing the funds available for funding strategy. It is extremely rare for a strategy to be funded solely from pro-forma profits. 20 Cutting dividends, particularly for companies in mature industries, tend to significantly reduce the company’s stock price. If funding strategy from this source, a clear justification must be provided. Cost of capital finance calculations can suggest when to sell stock rather than acquire debt. We will not be using these formulas. To keep things simple, merely examine such things as the current degree of leverage or the current stock price compared with historical trends (part of company analysis in Section 5A below). For example, if we are running a high-tech company and the stock price has recently increased dramatically we would be able to fund our strategy by selling fewer shares than if our stock price had dropped over the last five years. You will find that no analysis beyond this is necessary to tell your strategic story. Notice that we only have to fund our “Pro-Forma Strategic Capital Expenditures and Non-Expensed Payments.” Our strategic expenses, such as payroll costs for R&D scientists are already covered by our “Pro-Forma Income Statement.” However, cash flow should be considered. On a year-to-year basis there must be enough strategic funding to cover that year’s strategic cash needs. G. Total Strategic Expenditures In this part of the report you will prepare an assessment of the total expenditures on strategy, including selected operating expenses and capital expenditures. Non-Expensed Non-Capital payments will not be included. Nor will COGS or Interest Expense. Administrative Expense will only be included if it is strategically relevant. This part of the report will be another rough approximation. We will assume that the actual operating expenses in the base year reflect normal operations and that any increases or decreases in subsequent years are due to strategic plans. Again, this is a big assumption, but it gives us an idea of the total strategic effort. For example, consider marketing expense (on the next page) from the spreadsheet in Section 1E Part 1. The following table shows these marketing expenses for each forecast year, the expenses for the base year, and the difference between them, which we will consider to be the amount related to our strategic efforts. 21 Marketing Year Pro-Forma Expense Base Year Expense Strategic Expense 2009 12.0 10.0 2.0 2010 17.3 10.0 7.3 2011 25.9 10.0 15.9 2012 35.3 10.0 25.3 2013 42.3 10.0 32.3 Total 132.8 50.0 82.8 Having completed this calculation for each strategic operating expense we can now combine strategic expenses with capital expenses (Section 1E Part 2) to get the total effort (money) of our strategy. Total Strategic Effort * Normal maintenance expense for this item is considered non-strategy and is included (dumped) into administrative expense. You may list it as strategic, if it is significant. The presentation of the total strategic effort percentage should be “roughly” consistent with the key aspects of strategy percentages presented in Section 1D Parts 2 and 3. Notes to Section 1G 1. If you are employing a retrenchment strategy as one of your Key Aspects, only the effort related to the retrenchment should be shown in G. For example, if you are laying people off to reduce costs, only the severance expenses should be included (if these are strategically significant). The actual expense savings will show up in the “Pro-Forma Income Statement.” 2. Non-expensed non-capital payments (paying down debt) and money needed to cover losses are reflected in Sections 1E Parts 1 and 2 as well as in Section 1F. These do not need to be shown here. Expensed ($ Million) Capital Total Percent Total Plant *0.0 150.0 150.0 31.6 Equipment *0.0 35.0 35.0 7.4 Trucks *0.0 5.0 5.0 1.1 Stores *0.0 70.0 70.0 14.8 Marketing 82.8 0.0 82.8 17.3 R&D 81.2 50.0 131.2 27.8 Total 164.0 310.0 474.0 100.0 22 2. ANALYSIS OVERVIEW SECTION Case analysis, which supports strategy, takes place at three levels: 1. Industry Level, 2. Segment Level (Logical parts of the industry, clearly identified), and 3. Company Level. The objectives and strategy section must be consistent with the rest of the analyses (Industry, Segment, and Company). Keep your strategic story simple. Recommended approach for preparing these case analyses sections: 1. Conduct preliminary research to understand the company and industry. 2. Do not fall into the trap that more research is needed to resolve difficult parts of the case analysis. Make assumptions and document them as such. No amount of additional research will provide clear and definitive answers to many of these items. Make definitive decisions at this point. Dissenters within the group must change and support any decisions. 3. If a particular analysis could be decided in more than one way, then select the answer that is consistent with your strategy (story). Keep it simple. 4. Although you may assign different parts to different team members, each person must be aware of the analyses and decisions of other team members. To do otherwise usually results in a case report that is not integrated. 5. Contact me immediately if you have problems. It is important to keep in mind which analyses are industry level, segment level, or company level. This is important for either in my review of your case or in case discussion with other members of the course, I will probably say “what level of analysis are you at” several times. For example, Section 3B is the industry characteristics. In reviewing your report, someone in the class might disagree with your assessment and defend her disagreement by discussing the products of your company (rather than the companies in the industry). She makes her challenge at the company level of analysis and not at the industry level, where the challenge should lie. Mistaking the company for the industry level of analysis is an easy trap to fall into. You should not try to defend you answer based on an argument from a different level of analysis. Just point out the error in the level of analysis. The “Strategic Group Map” will be explained and included under Segment Analysis. However, for case reporting purposes, it should also be included after the Objectives and Strategy Section and before Industry Analysis. Placing a copy of it here will help 23 everyone to better understand the logic behind your proposed strategic direction. The strategic group map should only be explained in detail in Section 4A. At the beginning of each analysis section (industry, industry segment, and company) you should include a brief summary of the combined subsequent analyses. For example, at the industry level, is it basically a good or bad industry to be in. Why? 3. INDUSTRY ANALYSIS SECTION A. Definition of Industry The industry definition for our purposes is a tool that frames the analysis of the case. The definition should make clear what product or service markets define your industry. Definitions should clearly distinguish rivals from substitutes. (Substitutes will be defined in the five competitive forces analysis in Section 3C below). Be very precise. If your definition can include products or services that you do not consider to be part of your industry definition, then your definition is not precise enough. Define industries narrowly rather than broadly, but not so narrowly that you cannot identify three to six industry segments in the industry. (Segments will be explained in Section 4, Industry Segment Analysis, below and in the reading notes for Week One.) The three to six segments minimum is a guideline, but there are a few rare exceptions. Your industry definition does not need to (and often should not) cover all of the businesses of your company if more than one division exists. It should include the main business of your company on which you focus. Your industry definition will very rarely match the industry definitions of published sources, such as Value Line, Fortune, or U.S. SIC codes, so researching these will do more harm than good, most likely. Make sure that the industry’s geographic boundaries (separately for sales and manufacturing) are identified, in order to make the definition clear. For example consider the beer industry in the United States. Your case only addresses the United States, but when you walk into a beer distributor you find Heineken and Tsingtao that are direct competitors with Boston Brewing, although the former are foreign beers. To resolve this dilemma in your industry definition, you could state: The industry consists of beer manufacturers who brew anywhere in the world, but sell at least some of their product in the United States.