This Document Contains Cases 5 to 8 Netflix – 2011 Forest David A. Case Abstract Netflix is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Los Gatos, California, Netflix’s common stock is publicly traded under the ticker symbol NFLX. Netflix founded in 1997, Netflix provides DVDs and Blu-ray discs to Internet based subscribers in the United States, Canada, Mexico and Latin America and DVDs and Blu-ray discs delivered to the homes of customers in the United States. Customers, who receive DVDs by mail, keep the media for as long as they wish with no late fees and return the DVD in a prepaid shipping envelope and then are eligible to select their next DVD. Subscription plans start as low as $7.99 per month. The company had 25 million subscribers as of Summer 2011. B. Vision Statement (proposed) To become the number one mail order and live streaming movie company in the world. C. Mission Statement (proposed) At Netflix we seek to be the highest quality subscription business that offers Internet streaming and DVD by mail content (2). We believe in offering the best customer service possible by teaching our employees to be honest, respectful and ethical (6) while also valuing every customer’s individual needs. Our employees (9) are provided with the latest technologies, excellent benefits, and the safest working conditions in the industry. We provide outstanding customer service and in return, our customers (1) in our North American and Mexican markets (3) recommend their friends to Netflix (5). Our vast library of DVD’s and streaming service (4) provides a competitive advantage (7) as compared to offering only streaming. At Netflix, we strive to be a good corporate citizen (8). 1. Customers 2. Products or services 3. Markets 4. Technology 5. Concern for survival, growth, and profitability 6. Philosophy 7. Self-concept 8. Concern for public image 9. Concern for employees D. External Audit Opportunities 1. 147 million people in the United States watch online videos. 2. Digital distribution of media is growing at a rate of 30% a year. 3. International markets account for over 50% of spending in US filmed entertainment. 4. US TV market accounts for less than 15% of the world's TV households. 5. China's box office annual growth rate continues to grow over 10% a year. 6. Rivals such as Blockbuster are struggling with their business models. 7. Consumers spent over $20 billion on home video purchases in 2010. 8. More people know English now than ever before. 9. High price of an outing at the movie theater. 10. Weak US Dollar makes global markets more attractive. Threats 1. Poor global economy has reduced personal spending. 2. YouTube owns over 75% of the multimedia web market share. 3. Time Warner Cable's movies on demand. 4. Hulu, an ad based streamer, provides TV shows and movies for free. 5. DVRs are in 40% of US homes as of 2011. 6. Barriers to entry are low as startups can be launched for relatively low costs. 7. By law, Netflix cannot release new DVDs until 28 days after retail release. 8. Increase in US postal fees would reduce profit margins. 9. Infringements on Netflix patents and other proprietary assets. 10. Netflix is the object of complaints regarding collusion with Wal-Mart. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Revenues increased 29% from 2009 to 2010. 2. 90% of surveyed subscribers would recommend Netflix to their friends. 3. Library of choices grew 30% in 2010. 4. Currently have over 100,000 DVDs available for customers. 5. Netflix expanded into Canada, Mexico and Latin America in 2011. 6. Netflix is the largest streaming movie company with over 25 million subscribers as of Fall 2011. 7. Recent customer satisfaction ASCI score was 85 out of 100. 8. Unlimited access to internet movies and mail in DVDs for $7.99. 9. Net income doubled from $83B to $161B from 2008 to 2010. 10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and iPad. Weaknesses 1. Reliance on the US Mail System for delivering of DVDs in US Markets. 2. Relies upon Amazon for a majority of its cloud computing services and cannot easily switch to another cloud provider. 3. Only 2 of the top 8 executives are women. 4. Netflix has no publically available vision or mission statement. 5. Netflix deal with Disney and Sony expires in 2011. 6. In 2010, Netflix did not rank in the Top 10 among online video content providers. 7. Netflix charges $95 to Amazon's $79 for unlimited streaming without DVDs. 8. Netflix collects data from subscribers and some firms have received criticism for this practice. 9. Netflix is the object of patent infringement regarding client-server communications. 10. Stock price fell 60% between July 2011 and October 2011. Financial Ratio Analysis Growth Rate Percent Netflix Industry S&P 500 Sales (Qtr vs year ago qtr) 48.60 47.70 14.90 Net Income (YTD vs YTD) - - - Net Income (Qtr vs year ago qtr) 64.50 51.70 65.70 Sales (5-Year Annual Avg.) 25.95 25.47 8.28 Net Income (5-Year Annual Avg.) 30.79 30.32 8.77 Dividends (5-Year Annual Avg.) - - 5.67 Profit Margin Percent Gross Margin 36.6 36.5 39.5 Pre-Tax Margin 12.9 12.7 18.0 Net Profit Margin 8.1 8.0 13.1 5Yr Gross Margin (5-Year Avg.) 35.7 35.7 39.4 Liquidity Ratios Debt/Equity Ratio 0.60 0.59 1.00 Current Ratio 1.2 1.2 1.4 Quick Ratio - - 0.9 Profitability Ratios Return On Equity 82.0 80.8 28.1 Return On Assets 17.4 17.1 8.8 Return On Capital 32.8 32.3 11.7 Return On Equity (5-Year Avg.) 28.8 28.2 23.8 Return On Assets (5-Year Avg.) 14.6 14.3 8.0 Return On Capital (5-Year Avg.) 22.1 21.7 10.8 Efficiency Ratios Income/Employee 109,175 107,624 118,037 Receivable Turnover - 1.4 15.2 Inventory Turnover - 0.0 12.3 Asset Turnover 2.1 2.1 0.8 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Increase advertising expenses by 15% in 2012 and 2013. (S1, S4, S5, O1, O2) 2. Offer first 3 months at reduced price to take advantage of at home movie customers (S8, O7). 3. Aggressively enter the Chinese market. (S9, O5, O8, O10). 4. Provide free month service to any customer who recommends 5 friends. (S2, O1, O2). WO Strategies 1. Extend expansion into Canada, Mexico, Latin America and China by 15% per year (W6, W10, O3, O4, O5, O8, O10). 2. Renew deals with Disney and Sony (W5, O2). ST Strategies 1. Provide a free month of service for anyone who recommends 5 friends (S2, T1). 2. Increase R&D by 25% for marketing of online streaming movies (S6, S8, T6, T8). WT Strategies 1. Form a partnership with UPS to deliver all DVDs (W1, T8). 2. Develop a clear mission (W4, T1, T6). G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Division Profits DVD Division $627 M Streaming Division $441 M J. QSPM K. Recommendations 1. Increase advertising budgets by 15 percent. 2. Expand by 15 percent into Latin America, Mexico, and China. L. EPS/EBIT Analysis (in millions) Amount Needed: $1,000 Stock Price: $120 Shares Outstanding: 52 Interest Rate: 5% Tax Rate: 36% M. Epilogue Netflix is downplaying problems with its U.S. operations by focusing on its plans to expand into the U.K. and Ireland in early 2012. But the company lost about 590,000 U.S. subscribers in the third quarter of 2011 as a result of a rate increase on customers that get both DVDs by mail and streaming video. In October 2011, the company scrapped its plans to split into two separate businesses: 1) Netflix for streaming video and 2) Qwikster for DVDs by mail. That move would have forced customers getting both services to manage two accounts, passwords, rental queues and websites. Enraged customers flooded Netflix's site with tens of thousands of comments, as well as a barrage of tweets under the hashtag #DearNetflix. Netflix had a wave of cancellations in July 2011 as the company raised rates, and a second wave of cancellations hit the company throughout September and October as the price hikes took effect. Netflix scrapped that idea after facing a major backlash from customers and ridicule from analysts and comedians. Netflix is focused now on growing its streaming video service, especially outside the U.S. Netflix added Canada in 2010 and 43 countries in Latin America and the Caribbean in September 2011. Netflix’s CEO Reed Hastings recently spoke bluntly about the recent problems in its third-quarter 2011 earnings letter: "The last few months have been difficult for shareholders, employees, and most unfortunately, many members of Netflix. We've hurt our hard-earned reputation and stalled our domestic growth." Netflix said it was focusing on the future, promising customers that "we are done with pricing changes." But the subscriber hemorrhaging may not be over. Netflix had 23.8 million total U.S. subscribers as of September 30, 2011 - down from 24.6 million three months earlier. About 21.5 million customers had streaming subscriptions, and just under 14 million had DVD subscriptions, with most customers mixing the two. Netflix expects those numbers to drop further by year-end 2011 with the total being 20 to 21 million streaming customers and 11.3 million DVD subscribers in the U.S. In late October 2011, Netflix shares plunged 27 percent in after-hours trading, though the company reported earnings that beat analysts' expectations. Netflix earned $62 million, or $1.16 a share, on a record $822 million in revenue in the third quarter of 2011. Netflix has warned shareholders that it will be unprofitable in coming quarters. Netflix’s expansion into Europe will make the company's overall business unprofitable "for a few quarters" starting at the beginning of 2012. The company plans to halt its international expansion after its U.K. and Ireland launches "until we return to global profitability." Netflix begins its fiscal fourth quarter 2011 under a dark cloud. In a conference call with analysts, CEO Hastings said Qwikster was a product of "Netflix not listening.” He predicted the next few years will bring "a slow decline" for Netflix's DVD business. The company needs a clear strategic plan for the future since rival firms are large and aggressive, and seizing on the misstep of Netflix. Gap – 2011 Forest David A. Case Abstract Gap is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in San Francisco, California, Gap’s common stock is publicly traded under the ticker symbol GPS. The huge clothing retailer Gap has been filling closets with jeans and khakis, T-shirts, and poplin more than three decades. The firm, which operates about 3,100 stores worldwide, owns and operates the urban chic chain Banana Republic, budgeteer Old Navy, online-only retailer Piperlime, and Athleta, a purveyor of activewear via catalog. Other brand extensions include GapBody, GapKids, and babyGap; each also has its own online incarnation. All Gap clothing is private-label merchandise made exclusively for the company. From the design board to store displays, Gap controls all aspects of its trademark casual look. B. Vision Statement (proposed) To become the number one specialty apparel company in the world. C. Mission Statement (proposed) Gap strives to be recognized as the top choice in speciality retail clothing (2) worldwide by staying ahead of the competition on the latest trends and fashion (7). At Gap, we use the latest technology (4) to produce the best and most cost effective products (5) for our customers (1) around the world (3). We also work diligently to make a positive impression in the communities in which we operate, believe that good ethics is good business and treat our employees with respect and provide fair compensation and benefits for them (6, 8, 9). 10. Customers 11. Products or services 12. Markets 13. Technology 14. Concern for survival, growth, and profitability 15. Philosophy 16. Self-concept 17. Concern for public image 18. Concern for employees 19. D. External Audit Opportunities 1. Eastern Europe is a fast growing market with Ukraine leading the way. 2. Baby Boomers are the largest per capita consumers of apparel. 3. 71 million teens in the US are maturing into young adults. 4. Consumers age 20-34 account for 24% of the appeal spending in the US. 5. Consumers make choices at the last second and styles must be adaptable. 6. Social media enables retailers to listen to customers in real time. 7. US consumers spent $192 billion in 2010 on apparel. 8. Southeast Asia has many skilled workers trained in apparel. 9. There continues to be reduced trade regulations and elimination of tariffs. Threats 1. US is still suffering from high unemployment around 9% and low home prices. 2. High oil prices increase transportation costs. 3. Volatile nature of world currency rates. 4. Cotton prices are up over 100% from 2009. 5. Many consumers are obsessed with promotional pricing. 6. Strong competition from Abercrombie & Fitch, American Eagle, VF Corp. and others. 7. S&P lowered the job outlook several times in 2011. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Has stores in 29 countries in Asia, Europe, Latin America, Middle East, Australia, and the US. 2. Has 180 franchise stores and plans to increase that to 400 by 2015. 3. Employs 134,000 people with 3,321 stores worldwide. 4. Diverse brands including Gap, Banana Republic, Old Navy, Piperlime and Athleta. 5. Is working with Visa to deliver real-time discounts via SMS text messages. 6. Well represented with women in upper management. 7. Excellent liquidity ratios. 8. Expects to have 45 stores in China by year end 2012. 9. Is the largest US clothing seller. 10. Only 1.5% of Gap’s total assets come from Goodwill. Weaknesses 1. By the end of 2013, Gap plans to close over 100 more of its namesake stores in the U.S. 2. Has no formal vision or mission statement. 3. Has a hybrid divisional structure and would be best suited with a SBU structure. 4. Offshore production does not allow Gap to adjust to quickly changing customer preferences. 5. Gap’s PE Ratio is 10 compared to the industry average of 17. Poor position for equity financing. 6. Paid $99M over book value for Athleta. 7. Focused only in the casual clothing market for customers generally under 34 years old. Financial Ratio Analysis Growth Rate Percent Gap Industry S&P 500 Sales (Qtr vs year ago qtr) 2.10 10.00 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) -19.20 25.50 48.60 Sales (5-Year Annual Avg.) -1.75 4.93 8.30 Net Income (5-Year Annual Avg.) 1.26 4.34 8.72 Dividends (5-Year Annual Avg.) 17.32 9.57 5.61 Profit Margin Percent Gross Margin 39.0 40.0 39.5 Pre-Tax Margin 12.2 10.7 18.2 Net Profit Margin 7.4 6.9 13.2 5Yr Gross Margin (5-Year Avg.) 37.8 36.3 39.7 Liquidity Ratios Debt/Equity Ratio 0.53 1.04 0.98 Current Ratio 2.2 2.4 1.3 Quick Ratio 1.4 1.4 0.9 Profitability Ratios Return On Equity 29.3 30.2 26.0 Return On Assets 14.4 12.0 8.8 Return On Capital 20.0 16.0 11.8 Return On Equity (5-Year Avg.) 21.1 19.5 23.8 Return On Assets (5-Year Avg.) 12.4 9.3 8.0 Return On Capital (5-Year Avg.) 17.1 12.7 10.8 Efficiency Ratios Income/Employee 8,134 24,619 126,792 Revenue/Employee 109,694 342,949 1 Mil Receivable Turnover 82.6 78.4 15.2 Inventory Turnover 5.3 5.0 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Build 200 new stores in Eastern Europe (S1, S2, O1). 2. Build 50 stores in China (S4, S8, O8). WO Strategies 1. Develop a formal Vision and Mission Statement (W2, O7). 2. Develop a SBU structure (W3, O7, O9). 3. ST Strategies 1. Build 50 stores in China (S1, S4, S8, T1). 2. Form alliance with cell phone providers to notify customers of discounted items via text messages (S5, T5). WT Strategies 1. Develop a SBU structure (W3, T6). 2. Develop a new formal strategic plan to determine direction of the company (W1, W7, T1, T5, T6). G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Fiscal Year 2010 ($ in Millions) Brand: GAP Old Navy Banana Republic Other Total Percentage of Net Sales Region: US $3,454 $4,945 $2,084 -0- $10,483 71% Canada 341 427 190 -0- 958 7 Europe 703 -0- 36 47 786.5 5 Asia 872 -0- 118 59 1,049 7 Other Regions -0- -0- -0- 89 89 1 Total Stores reportable segment 5,370 5,372 2,428 195 13,365 91 Direct reportable segment 365 533 155 246 1,299 9 Total $5,735 $5,905 $2,583 $441 $14,664 100% J. QSPM K. Recommendations 1. Add 300 new stores over next 3 years. $750M 2. Develop new strategic plan $50M 3. Restructure the company into a SBU $10M 4. Form alliance with Verizon to notify customers via text messages new appeal arrivals. L. EPS/EBIT Analysis (in millions) Amount Needed: $810M Stock Price: $19.46 Shares Outstanding: 510 Interest Rate: 5% Tax Rate: 39% M. Epilogue Gap plans to close over 100 more of its namesake stores in the U.S. by the end of 2013, part of a company strategy to reduce its total square footage across all brands, and Gap in particular. By the end of 2012, Gap Inc. will have reduced its total real estate square footage in North America by 10 percent compared to 2007 levels. Gap brand will cut its square footage 34 percent overall (compared to 2007 levels), resulting in 700 U.S. and Canada Gap stores and 250 Gap Outlet stores at the end of 2013. The company has 78 stores in and around Los Angeles. International sales and emerging Gap brands such as Athleta and Piperlime remain Gap's primary growth vehicles as well as e-commerce. Athleta and Piperlime appear to be the only brands who will add North American square footage in coming years. Gap plans to test a bricks-and-mortar Piperlime store concept next year. A similar test of Athleta led to the activewear brand opening its first flagship in Fillmore Street in San Francisco in January 2011. In contrast to Gap’s USA strategy, the company plans to triple the number of its namesake stores in China by the end of 2012. The company will have opened 15 Gap stores by year-end 2011 in China and plans to have a total of 45 by the end of 2012. In addition, Gap entered the South American market by opening its first store in Chile in October 2011, and will open stores in Panama and Colombia in 2012. That first Gap store in Chile is located at the Parque Arauco Mall in Santiago. Gap will open another store in Concepcion in November. The company plans to open Gap and Banana Republic stores in Panama starting with locations in Panama City in January 2012, and it will open stores in Bogota, Colombia, in late 2012. All of these new stores will have Gap, GapKids, babyGap and Banana Republic products. Gap has expanded to 29 countries in Asia, Europe, Latin America and the Middle East in the past five years, opening franchise locations in 10 new countries in fiscal 2011 alone. Gap remains the largest U.S. clothing seller. The Walt Disney Company – 2013 Forest R. David A. Case Abstract The Walt Disney Company is an entertainment company with worldwide operations. Disney’s two largest segments are Media Networks and Parks and Recreation. Media Networks consists of ABC, ESPN, Disney films, newly acquired Lucusfilms, 35 radio stations, among others. Parks and Recreation includes the world famous Disney theme parks and the more recent Disney cruise line. Disney has theme parks in the USA, France, China, and Hong Kong. In addition, Disney operates three other divisions: Studio Entertainment, Consumer Products, and Interactive Media. The Interactive Media segment (aimed around smartphone game apps) has been struggling, recently reporting a net loss for calendar 2012. Headquartered in Burbank, California, Disney reported revenues of over $42 billion in 2012, up 3 percent from the previous year. B. Vision Statement (actual) To make people happy (proposed) To offer the best family entertainment in the world through theme parks, cruises, movies, and radio and television coverage of news and sporting events globally. C. Mission Statement (actual) To be one of the world’s (3) leading producers and providers of entertainment and information (2). Using our portfolio of brands to differentiate our content, services and consumer products we seek to develop the most creative, innovative and profitable entertainment experiences and related products in the world (5). (proposed) We are on a mission everyday to serve customers young and old (1) with outstanding family entertainment. By offering popular theme parks and Disney TV programming to our newly acquired ABC, ESPN, and cruise lines (2), we provide well-diversified family entertainment (5) worldwide (3). We utilize many Disney characters such as Mickey Mouse and Donald Duck (7) to excite customers globally. We produce apps for smartphones throughout Interactive Media division (4). We give back generously to our communities (6) and offer many internships for deserving college students (8). Everything we do at Disney could is possible because of our great employees (9) and fans worldwide. 20. Customers 21. Products or services 22. Markets 23. Technology 24. Concern for survival, growth, and profitability 25. Philosophy 26. Self-concept 27. Concern for public image 28. Concern for employees 29. D. External Audit Opportunities 1. There has been a 5.8% increase in amusement park attendance worldwide. 2. The USA is expected to see a 10% increase in population growth over the next 10 years. 3. Recent issues with Carnival Cruise ships mechanical malfunctions are leaving many customers looking for a new cruise line. 4. Texas has a population of over 26 million, is half way between Disney parks in California and Florida and an easy drive from Mexico. 5. 3D Box Office films are up 40% from 4 years ago 6. Mobile app market games have seen over 3 billion downloads and games can be brought to market in half the time it takes to provide for a console system. 7. Online movie rentals are up 41% in 2012. 8. People are increasingly spending more time at home watching larger screen TVs. 9. Increasing use of smartphones with over 50% of the population in Europe and the USA owning a smartphone. 10. The new college football playoff TV rights are available for bidding. Threats 1. College conference realignments allow conferences to exit TV contracts and sign new more lucrative TV contracts. 2. Disney competes directly with NBC Universal, Paramount Pictures, and CBS for TV entertainment and sports. 3. Carnival Cruise Line reported revenues of $15.38 billion compared to Disney Parks and Resorts revenue of $12.9 billion in 2012. 4. There are many competing theme parks across the USA and world with most having lower prices than Disney. 5. Piracy in the Film and Music Industry. 6. Strikes in professional sports could severely impact revenues for ABC and ESPN. 7. U.S. consumer spending on DVDs was down about 20% in 2010 from 2009, to $7.8 billion. That was 43% below a 2006 peak of $13.7 billion 8. Unemployment and gas prices both remain high around the world. 9. Universal Studios, Island of Adventure, and Wizarding World of Harry Potter has reported an increase of 1.725 million in attendance over the past year. 10. People in the developed world are having fewer children and waiting later in life to have kids. Competitive Profile Matrix Disney is substantially better than either CBS or Carnival, being more diversified and having substantially more revenues. EFE Matrix Disney has an above average EFE score of 2.72. E. Internal Audit Strengths 1. Disney owns ABC, ESPN, Walt Disney Studios, and Pixar among other media outlets. 2. Disney owns theme parks in the USA, Japan, France, and Hong Kong. The firm also owns Disney Cruise Line. 3. Net income rose 18% in fiscal 2012. 4. Media Networks segment accounted for 45% of 2012 revenues and 67% of income. 5. Parks and Resorts segment accounted for 31% of 2012 revenues and 15% of income. 6. Studio Entertainment produces Spider-man, The Fantastic Four, X-Men. This segment experienced revenues declining 8% and income increasing 17% in 2012. 7. Disney channels worldwide consist of 94 kids channels; Disney’s profit margin ratio (12.40) is almost half the industry’s (22.40). Family entertainment channels available in 169 nations and 33 languages. 8. Out of the top 25 amusement/theme parks worldwide, Disney holds 11 of the spots with 8 of them being in the top 10. 9. Debt to Equity ratio of 0.4 suggests Disney is using debt to finance at an appropriate level while revenues have increased for 9 of the last 10 years. 10. ESPN agreed to $15.2 billion, 8-year contract, with NFL “Monday Night Football.” 11. Weaknesses 1. Interactive Media, which delivers games to smartphones, has reported negative net income for each of the last three years. 2. The firm has over $25 billion in goodwill accounting for 1/3 of total assets. 3. The firm has $2.5 billion of works-in-progress and is attempting to manage the building of the new park in Shanghai, and integrating the new acquisition of Lucasfilm. 4. The firm’s revenue/employee is roughly half that of the industry average. 5. Theme park attendance increased only 3% in 2012, and 1% in 2011; revenues generated from international theme parks are lagging substantially behind domestic theme parks. 6. Walt Disney currently only has 4 cruise ships. 7. Disney’s gross margin is 21% with the industry average being 31%. 8. Disneyland Paris saw operating income decrease by 25%. 9. Disney DVD market down 25% in unit sales. 10. Many of Disney’s parks traditional attractions have not received meaningful upgrades in decades. Financial Ratio Analysis Profit Margin Percent Disney Industry S&P 500 Gross Margin 21.18 30.99 38.38 Pre-Tax Margin 21.58 19.86 16.81 Net Profit Margin 14.82 14.37 12.45 Liquidity Ratios Debt/Equity Ratio 0.4 0.56 1.11 Current Ratio 1.1 1.4 1.4 Quick Ratio 1 1.2 1 Profitability Ratios Return On Equity 14.9 14.98 22.69 Return On Assets 8.3 7.6 7.6 Return On Capital 10.3 9.4 10 Efficiency Ratios Income/Employee 39,066 77,063 125,200 Revenue/Employee 263,645 553,013 1.04 Mil Receivable Turnover 6.5 5.7 13.9 Inventory Turnover 23.7 15.5 13.3 Asset Turnover 0.6 0.5 0.8 Disney is doing well financially on all the ratios presented above. The only area where Disney lags the industry average is on revenue/employee which is half that of the industry average. Net Worth Analysis (in millions) Using methods 3 and 4, Disney is worth nearly four times CBS. However, using method one which takes into account goodwill and intangibles, CBS is worth over twice Disney. IFE Matrix Disney is performing better than average on internal issues with an IFE score of 2.85. Disney is capitalizing well on their strengths; however, several weaknesses are major in particular the $25 billion in goodwill and the lack of upgrading many of the parks traditional attractions. F. SWOT SO Strategies 1. Build a new theme park in Houston, Texas by 2015 for $1 billion (S2, S3, S5, S9, O2, O4). 2. Sign an exclusive 10-year contract to cover the new college football playoff starting in 2014 for $1 billion (S1, S3, S4, S9, S10, O2, O8, O10). 3. Add an additional 5 cruise ships to the fleet at a cost of $600 million each (S2, S9, O2, O3). WO Strategies 1. Add an additional 5 cruise ships to the fleet at a cost of $600 million each (W6, O2, O3). 2. Partner with Netflix to better provide on demand movies for customers (W7, W9, O7, O8). ST Strategies 1. Sign a 10-year deal with the ACC to broadcast their games on ESPN and ABC for $1 billion (S1, S10, T1). 2. Add an additional 5 cruise ships to the fleet at a cost of $600 million each (S2, S9, T3). WT Strategies 1. Spend $1 billion to upgrade traditional attractions at Disney parks world wide (W5, W10, T3, T4, T9). 2. Spend $1 billion to develop a new parks at existing park locations targeted at people without children living at home (W5, W6, W8, W10,T10) G. SPACE Matrix Disney is well positioned in the Aggressive Quadrant and perhaps should add a theme park in Texas and expand its fleet of cruise boats. H. Grand Strategy Matrix Disney is in a strong competitive position, but the overall market is experiencing modest growth. Taking advantage of the growing trend of people watching sporting events from home, Disney’s ESPN/ABC branch should form further contracts with the SEC, ACC and NFL for the rights to broadcast these events. I. The Internal-External (IE) Matrix 2012 (in millions) Segment Total Sales Total Income % Income (1) Media Networks $19,426 $6,619 66% (2) Parks and Resorts 12,920 1,902 19 (3) Studio Entertainment 5,825 722 7 (4) Consumer Products 3,252 937 9 (4) Interactive Media 845 (216) -2 Totals 42,278 9,964 100 J. QSPM Both strategies of the QPSM are equally attractive for Disney. With the capital resources Disney has at their disposal, building a new Disney park in Houston, Texas, upgrading all existing Disney parks, and working to solidify contracts for both college and pro sports are all equally attractive alternatives – and perhaps could be implemented simultaneously. K. Recommendations 1. Build a new theme park in Houston, Texas by 2015 for $1 billion. 2. Sign an exclusive 10 year contract to cover the new college football playoff starting in 2014 for $1 billion. 3. Add an additional 5 cruise ships to the fleet at a cost of $600 million each. 4. Partner with Netflix to better provide on demand movies for customers for $10 million. 5. Sign a 10 year deal with the ACC to broadcast their games on ESPN and ABC for $1 billion. 6. Spend $1 billion to upgrade traditional attractions at Disney parks worldwide. 7. Spend $1 billion to develop new parks at existing park locations targeted at people without children living at home. L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: $8,000M Stock Price: $64.30 Shares Outstanding: 1,800 Interest Rate: 3% Tax Rate: 33% The EPS/EBIT Analysis reveals that debt financing is more attractive for Disney under all economic conditions. M. Epilogue In mid-2013, Disney raised its one-day theme park ticket prices at both its California and Florida theme parks. A one-day pass to see Disney's Magic Kingdom went from $89 to $95. Tickets to see Disney’s other three Florida parks increased to $90. The increased Disney prices came right after SeaWorld (NYSE: SEAS) and Comcast’s (NASDAQ: CMCSK) Universal Orlando increased their ticket prices. California Adventure recently completed a $1.1 billion expansion and led the world’s largest theme parks with a 23 percent surge in visitors to 7.78 million in 2012. Attendance during 2012 at the top 25 theme parks worldwide increased 5.2 percent to 205.9 million visitors. However, just down the road, Disney’s California Disneyland was the only park among the world’s largest to register fewer visitors in 2012, with attendance shrinking 1.1 percent to 16 million. Disney’s net income increased 32 percent to $1.51 billion in its Q2 of 2013, in part due to higher attendance. For its Q2 of 2013, Disney reported revenue of $10.4 billion, down from $11.3 billion the prior quarter. Disney owns 80 percent of ESPN, and ESPN is the most profitable of all Disney properties. ESPN is available in over 100 million American homes, approximately 1/3 of the USA population. ESPN recently cut 300 to 400 jobs too lower costs, but at the same time acquired the rights to show U.S. Open Tennis matches, and is beginning a new channel for SEC Football. Staples – 2011 Forest David A. Case Abstract Staples is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Framingham, Massachusetts, Staples’s common stock is publicly traded under the ticker symbol SPLS. Staples is the #1 office supply superstore operator in the US. selling office products, furniture, computers, and other supplies through its chain of some 2,280 Staples and Staples Express stores in the Americas, Europe, Asia, and Australia. Most (about 1,900) of its superstores are located in North America. In addition to retail outlets, Staples sells office products via the Internet, its catalog, and its direct sales operations, including subsidiary Quill Corporation. Staples also provides document management and copying services through its retail chain, as well as promotional products. Staples also targets customers worldwide through its Corporate Express business (acquired in 2008). Staples pioneered the office superstore concept in 1986 and now has annual sales of $25 billion, ranking second in the world in eCommerce sales. With 90,000 associates worldwide, Staples operates in 26 countries. B. Vision Statement (proposed) To become the world’s largest office retail store. C. Mission Statement (actual) "Staples Soul reflects our commitment to corporate responsibility (8). It's a holistic approach to business that recognizes the close connection between our financial success (5) and our desire to make a positive impact on our associates (9), communities, and the planet (3) by joining together the following areas: diversity, the environment, our community, and ethics (6). It's how we do business—that's Staples Soul. (proposed) At Staples our mission is to be the total office products and solutions provider (2) for small business, home offices and consumers (1) by providing a broad mix of merchandise and services (4) at everyday low prices in an atmosphere of enthusiastic and knowledgeable sales force (5,7) worldwide (3). By joining together the following areas: sound business, diversity, the environment, our community, and ethics (6,9) we strive to be a good corporate citizen (8) while maximizing shareholder value. 30. Customers 31. Products or services 32. Markets 33. Technology 34. Concern for survival, growth, and profitability 35. Philosophy 36. Self-concept 37. Concern for public image 38. Concern for employee D. External Audit Opportunities 1. Office supply sales to increase 5% as the economy improves. 2. Office products industry sales expected to increase 13%. 3. Many smaller competitors are in weak financial positions. 4. Low borrowing rates and negotiable payback terms. 5. Gift card popularity increase of 7.3% in specialty retail during 2009. 6. Online sales increasing faster than traditional retail sales. 7. World economy is slowly on a rebound. 8. "Emerging economies" have accounted for nearly 70% of world growth in the last five years. 9. Value of the USD decreasing by .07 in long-term over the last five years against the EUR. 10. OfficeMax reported negative net income in 2008 and 2009 with marginally positive net income in 2010. Threats 1. Consumers preference for environmental friendly products and paperless society. 2. Technological problems impacting foreign operations causing production to decrease by 6%. 3. Increase in U.S minimum wage (75% of Staples profit comes from the U.S.). 4. Hesitance of banks to lend affects Staples’ expansion plans. 5. Political and economic turmoil in Europe. 6. 86% of companies plan to spend more on social media in 2011 for marketing and customer service. 7. Unemployment rate continues to be just below 10%. 8. Consumer spending has been flat over the last 2 years. 9. National customer satisfaction has been flat over last 2 years. 10. Office Depot and Office Max are large global competitors. 11. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Staples has an excellent pricing system. 2. Efficient e-commerce system. 3. Integrated supply chain. 4. Uniform adoption of new financial performance indicators which helps identify trends on a more reliable basis and does not give false impressions. 5. Staples brands account for 22% of sales with 10-15% saving to customers. 6. Overall sales growth of 5.2%. 7. Currently operates in 24 different countries. Weaknesses 1. Have many stores close together possibly cannibalizing profits. 2. Over reliance of North American retail market. 3. Low sales per employee ratio compared to the industry average. 4. Non-participation of employees in the decision making process.(top-down management) 5. Own-branded goods will eventually cause problems between Staples and third-party suppliers. 6. Inability to repay long-term debt. 7. High rates of employee turnover in international stores. 8. Debt of $2.54 billion is excessive. 9. North American Delivery’s business unit income rate decreased to 8.2% from 9.0%. Financial Ratio Analysis Growth Rate Percent Staples Industry S&P 500 Sales (Qtr vs year ago qtr) 5.20 7.80 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) 36.00 26.50 48.60 Sales (5-Year Annual Avg.) 8.83 8.45 8.30 Net Income (5-Year Annual Avg.) 2.38 6.86 8.72 Dividends (5-Year Annual Avg.) 16.19 8.80 5.61 Profit Margin Percent Gross Margin 26.9 42.9 39.5 Pre-Tax Margin 5.5 8.9 18.2 Net Profit Margin 3.8 5.9 13.2 5Yr Gross Margin (5-Year Avg.) 27.5 41.6 39.7 Liquidity Ratios Debt/Equity Ratio 0.32 0.49 0.98 Current Ratio 1.6 1.7 1.3 Quick Ratio 0.9 0.9 0.9 Profitability Ratios Return On Equity 13.8 14.4 26.0 Return On Assets 7.0 7.7 8.8 Return On Capital 10.0 10.6 11.8 Return On Equity (5-Year Avg.) 15.3 12.4 23.8 Return On Assets (5-Year Avg.) 8.0 6.4 8.0 Return On Capital (5-Year Avg.) 11.8 8.9 10.8 Efficiency Ratios Income/Employee 17,714 25,229 126,792 Revenue/Employee 471,393 433,187 1 Mil Receivable Turnover 13.3 30.3 15.2 Inventory Turnover 7.0 6.1 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Adopt a new supply chain model abroad (S3, S7, O8). 2. Increase R&D on supply of office services & IT technologies by 10% (S2, O6). WO Strategies 1. Secure external funding with favorable credit rating and excellent payback terms (W6, W8, O4). 2. Add 200 new stores in China and Brazil (W2, O1, O8, O9). ST Strategies 1. Develop strategic alliances with suppliers (S4, S8, S3, T10). WT Strategies 1. Focus on own-brand value pricing strategy (W2, W3, T1). 2. G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Sales (in millions) 2010 North American Delivery $9,849 North American Retail 9,530 International Operations 5,166 Total Sales 24,545 J. QSPM K. Recommendations 1. Add 200 new stores in China and Brazil at $2M each for 400M. 2. Increase financial staff by 20%. L. EPS/EBIT Analysis (in millions) Amount Needed: $400M Stock Price: $15.37 Shares Outstanding: 709 Interest Rate: 5% Tax Rate: 35% M. Epilogue Many analysts believe Staples is gearing up for a takeover of OfficeMax and/or Office Depot. Staples is slowly taking away market share from both rival firms, but the company would improve margins significantly if it could reduce competition. Staples operates in 26 countries but has performed weakly outside the USA. Staples’ China operations is likely going to lose about $20 million in 2011, while Brazil has seen double-digit revenue growth but zero profit. Staples is scaling back on the European printing business. A buyout of either OfficeMax or Office Depot would improve Staples’ brand, add products, and improve the firm’s economies of scale. Europe and Australia stand out in Staples' international operations. Contrasting with operations in other foreign regions, all of Europe for Staples is profitable, with the strongest performance in Germany. Australia follows with improving Staples operations. Staples has a goal to return $300 to $500 million back to shareholders through its share purchasing program but many analysts are bullish that this figure will be exceeded and actually total $750 million. Staples has sufficient resources to stage an exciting takeover of OfficeMax and/or Office Depot if it chooses. Staples actively supports Jumpstart’s Read for the Record®, a national campaign that mobilizes adults and children to close the early education achievement gap by setting a reading world record. For the third consecutive year, Staples in October 2011 hosted events in Framingham and Worcester, Massachusetts to give local youth the opportunity to participate in this unique reading experience. In the last few years, Staples has donated more than $100,000 to Jumpstart in support of Read for the Record, and has helped raise awareness of the early education crisis affecting millions of at-risk children all over the world. Investors and financial analysts believe that Staples’ rising sales and profit can reverse 2011’s 35 percent decline even as demand for office supplies falls. Shares of Staples trade near a record low price-to-earnings ratio and have lost less than rivals Office Depot and Office Max which plunged 60 percent and 71 percent in 2011. “Staples’ stock is relatively cheap, and we’re also having year-on-year earnings growth,” Liam Dalton, chief executive officer of Axiom Capital Management Inc. in New York, which oversees $1.8 billion, said in a telephone interview. “There are other industries where earnings are much more sensitive to the economic cycle, and this one has less sensitivity because they have a fairly predictable business model.” Staples’s annual revenue has increased every year since at least 2001, according to data compiled by Bloomberg. Net income rose 19 percent in fiscal 2011 and will climb 11 percent and 6 percent in the next two years, according to analyst estimates compiled by Bloomberg. Staples’ stock currently trades for 11.3 times reported earnings, 14 percent less than the S&P 500’s valuation. The 22 percent discount on August 10, 2011 was the lowest since December 2000, according to data compiled by Bloomberg. Instructor Manual Case for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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