This Document Contains Cases 9 to 13 Office Depot – 2011 Forest David A. Case Abstract Office Depot 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 Boca Raton, Florida, Office Depot’s common stock is publicly traded under the ticker symbol ODP. The world's #2 office supply company behind Staples, Office Depot sells office supplies through about 1,145 company-owned and licensed locations throughout North America and at another 95 locations overseas. The big-box retail stores sell to both consumers and small- and medium-sized businesses. In addition to typical office supplies (66 percent of sales), Office Depot stores offer computer hardware and software, office furniture, art and school supplies, and printing and copying services. Office Depot also sells office products through catalogs and call centers, the Internet, and a contract sales force. Office Depot of late has been closing stores and exiting markets due to weak economies and stiff competition. B. Vision Statement (proposed) To become the number one office supply store in the world. C. Mission Statement (proposed) Our mission at Office Depot is to be a global (3), leading innovator (7) as a supplier of office products and services (2) for consumers (1) and businesses of all sizes while creating a positive impact on the environment (8). We continually strive to deliver our customers favorably-priced products, beneficial services, and the latest in digital imaging and printing technology (4). We will earn the trust of our stakeholders by being open, honest, and faithful in all that we d0 (6, 8). We will also be responsible for achieving and sustaining unprecedented results (5) that create value to our customers, employees (9), and stakeholders through personal commitment, sensible thrift, collaboration, and shared leadership. 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. Gift card popularity increase of 7.3% in specialty retail during 2009. 2. Online sales increasing faster than traditional retail sales. 3. World economy is slowly on a rebound. 4. "Emerging economies" have accounted for nearly 70% of world growth in the last five years. 5. Value of the USD decreasing by .07 in long-term over the last five years against the EUR. 6. OfficeMax reported negative net income in 2008 and 2009 with marginally positive net income in 2010. 7. Staples has Debt of $2.54 billion. 8. CEA projects a 6.0% increase in electronics sales for 2010 and a 3.5% increase in 2011 (to $186.4 billion). 9. 5 yr. average ROA for OfficeMax is -4.93 compared to -2.93 for Office Depot. 10. 5 yr. average ROE for OfficeMax is -21.61 compared to -7.91 for Office Depot. Threats 1. Staples' EasyTech support service offering. 2. 86% of companies plan to spend more on social media in 2011 for marketing and customer service. 3. Staples has, as of 2009, 954 more retail stores worldwide than Office Depot. 4. 5 yr. average ROA for Staples is 8.89 compared to -2.93 for Office Depot. 5. 5 yr. average ROE for Staples is 16.38 compared to -7.91 for Office Depot. 6. Unemployment rate continues to be just below 10%. 7. Consumer spending has been flat over the last 2 years. 8. National customer satisfaction has been flat over last 2 years. 9. Staples had sales growth of 5% in 2010. 10. Staples has around 20 standalone Copy & Print stores. 11. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Acquired Swedish office supply company Svanströms Gruppen. 2. Most North American retail stores contain a Copy & Print Depot. 3. Total general and administrative expense decreased by 17% from 2008 to 2010. 4. Recognized as America's Greenest Large Retailer in Newsweek Magazine's Annual Green Ranking. 5. One of America's Top Corporations for Women's Business Enterprises by the Women's Business Enterprise National Council (WBENC) for the ninth consecutive year. 6. Became an ENERGY STAR® Commercial Buildings Partner. 7. Sells to customers directly or through affiliates in 53 countries. 8. Operate global sourcing offices in Shenzhen and Hangzhou, China, which allows more direct control of product sourcing, logistics and quality assurance.. 9. Produce a Green Book® catalog, which features products that are recyclable, energy efficient, or otherwise have a reduced impact on the environment. 10. Only 19 million in goodwill on the balance sheet. Weaknesses 1. Being a seasonal business impacts operations and financial position. 2. Total company sales were down 20% from 2008 to 2010. 3. Cash flow from operating activities was $204 million in 2010, compared to $468 million in 2008. 4. Closed 143 stores since 2009. 5. EPS is -$0.22. 6. Of the $253 million of 2009 Charges, approximately $194 million either have or are expected to require cash settlement, including longer-term lease obligations that will require cash over multi-year lease terms. 7. North American Retail Division operates stores in only 46 U.S. states. 8. North American Business Solutions Division sales decreased 16% in 2009 and another 6% in 2010. 9. Recorded significant charges of $253 million and $199 million in 2009 and 2008, respectively from reorganization efforts and asset impairments. 10. ROE ratio of -9.5. Financial Ratio Analysis Growth Rate Percent Office Depot Industry S&P 500 Sales (Qtr vs year ago qtr) -2.20 7.80 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) 148.90 26.50 48.60 Sales (5-Year Annual Avg.) -4.02 8.45 8.30 Net Income (5-Year Annual Avg.) NA 6.86 8.72 Dividends (5-Year Annual Avg.) NA 8.80 5.61 Profit Margin Percent Gross Margin 29.4 42.9 39.5 Pre-Tax Margin -0.5 8.9 18.2 Net Profit Margin -0.2 5.9 13.2 5Yr Gross Margin (5-Year Avg.) 28.9 41.6 39.7 Liquidity Ratios Debt/Equity Ratio 0.62 0.49 0.98 Current Ratio 1.4 1.7 1.3 Quick Ratio 0.8 0.9 0.9 Profitability Ratios Return On Equity -9.5 14.4 26.0 Return On Assets -0.6 7.7 8.8 Return On Capital -1.1 10.6 11.8 Return On Equity (5-Year Avg.) -13.5 12.4 23.8 Return On Assets (5-Year Avg.) -4.2 6.4 8.0 Return On Capital (5-Year Avg.) -7.7 8.9 10.8 Efficiency Ratios Income/Employee -615 25,229 126,792 Revenue/Employee 287,044 433,187 1 Mil Receivable Turnover 12.1 30.3 15.2 Inventory Turnover 7.0 6.1 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Increase advertising by 15% (S2, O1, O3). 2. Build 50 new stores in China (S7, S8, O3, O4). WO Strategies 1. Close the 100 worst performing US based stores (W3, W4, W9, O3, O4). 2. Actively market gift cards for Office Depot in particularly the Copy and Print Depot (W8, O1). ST Strategies 1. Build 20 stand alone copy and print stores in the US (S2, S3, T10). 2. Include the environmentally green philosophy in advertising (S4, S5, S9, T2, T7). WT Strategies 1. Close the 100 worst performing US based stores (W2, W3, W4, T2, T8). 2. Develop a service to better compete with Staples EasyTech support (W2, T1). 3. G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Division 2010 Revenues (in millions) North American Retail $4,962.8 North American Business Solutions $3,290.4 International $3,379.8 J. QSPM K. Recommendations 1. Build 50 new stores in China at $1.5M each. 2. Build 20 stand alone copy and print stores in the US at $250K each. 3. Close the 100 worst performing stores in the US at $10M. 4. Increase total advertising by $20M. L. EPS/EBIT Analysis (in millions) Amount Needed: $110 Stock Price: $2.19 Shares Outstanding: 280 Interest Rate: 5% Tax Rate: 30% M. Epilogue In October 2011, Office Depot was recognized in Newsweek magazine’s annual Green Rankings, as the greenest large retailer in America for the second year in a row. Office Depot not only achieved the highest aggregate green score in the U.S. retail industry, but also led in Environmental Management, and disclosure of performance data. Across all industry sectors, Office Depot was ranked as America’s 8th greenest large company, a move up from 10 place the prior year. Office Depot was the only retailer in the U.S. top 10 list in 2011. “We’re immensely proud to be named the top U.S. retailer in Newsweek’s Green Rankings for the second consecutive year,” said Kevin Peters, President, North America for Office Depot. “We know there is a large and growing set of customers who choose Office Depot in part because of our unique ability to support their environmental goals – and Newsweek’s recognition provides further evidence that Office Depot is the supplier-of-choice for organizations seeking a greener way to get their office products.” Two specific environmental programs at Office Depot is their GreenerOffice Delivery Service which is on track to save over 3,000 tons of wood and approximately $1.5 million a year by delivering goods in paper bags rather than cardboard boxes. Also Office Depot provides its largest customers, including cities, states, and large corporations with effective reporting tools which help explain their greener purchasing and the “environmental and financial tradeoffs” of their greener purchasing decisions. Office Depot recently formed a partnership with Microsoft Corp. to provide digital print solutions through the Bing Business Portal. This new service is available at www.bing.com/businessportal and provides small business customers with the ability to create advertisements, sales collateral, and presentations online through the Bing Business Portal. Materials are then sent to Office Depot retail stores for order completion and customer pickup. “Office Depot is all about helping small business customers succeed, and this new collaboration with Microsoft and the Bing Business Portal is a testament to our dedication,” said Kristin Micalizio, Vice President of Office Depot’s Copy & Print Depot. “Through this unique service, small business customers will have access to professional quality printing at a price that won’t impact their bottom line.” “Bing Business Portal provides great tools and services for a business to market itself — both on and offline,” said Ginny Sandhu, Group Product Marketing Manager, Microsoft. “With the launch of Digital Print Solutions, users will now be able to get high-quality marketing collateral printed at the touch of a button, saving time and money.” Domino’s Pizza, Inc. – 2013 Forest R. David A. Case Abstract Domino’s Pizza, Inc. is the second largest pizza chain in the world with operations in over 70 nations and over 10,200 stores as of March 2013. Domino’s trails only Yum Brand’s Pizza Hut in store numbers and global presence. Domino’s specializes in takeout and delivery of pizza and more recently chicken wings and sub sandwiches, but so far does not offer a dine in experience for customers. Lacking seating inside greatly reduces margins and startup costs for franchisees and allows products to be sold cheaper to more price-conscious buyers. Domino’s operates under three business segments: 1) Domestic Stores, 2) Domestic Supply Chain, and 3) International. The Domestic Supply Chain produces and/or supplies over 99 percent of all franchisee stores and accounts for over half of company- wide revenue. Founded in 1960, Domino’s is headquartered in Ann Arbor, Michigan. B. Vision Statement (taken from stated mission) To be the best pizza delivery company in the world. C. Mission Statement (proposed) At Domino’s, we are committed to providing our customers (1) around the world (3) an affordable, consistently high quality pizza, subs and chicken wings (2), with timely delivery each and every time they order (5,6,7). Our new PULSE computerized system (4) allows orders to be more streamline and accurate. The system also allows for nutritional labels to be printed and provides accurate driving directions for delivery drivers. With our new apps for mobile phones, and website platform, customers can ensure a quick and easy ordering process. We believe good ethics is good business, and strive to sponsor programs within the communities we serve (8). We hire only dedicated employees and selectively screen and train all potential franchisees (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. Domino’s is only serving approximately 50 percent of the international market they could possibly be serving. 2. There is a steadily growing international appetite for American fast food, and an improving global economy. Markets such as China, Russia, India, and Brazil are still relatively untapped. 3. Many customers are looking for healthier fast food options. 4. College campuses and shopping malls are often frequented by young people. 5. Over 16 percent of residents of the USA identify themselves as Hispanic. 6. Many customers in today’s climate are willing to tolerate a degree of inconvenience if they can get a better deal. 7. Small margins in the restaurant business are the reason why so many mom-and-pops fail. 8. The current landscape in the Quick Service Restaurant (QSR) business is a bimodal population distribution with a large population of bargain-minded customers seeking deals on cheap fast food options, and another population of more affluent consumers targeting middle-to-higher end restaurants. 9. Domestic stores voted to increase their advertising revenue contribution to 5.5 percent in 2011. Threats 1. Governments potentially forcing all restaurants to label all nutrition information on the menu at the point of sale. 2. Trademark and patent protection laws are not as sophisticated in developing countries. 3. YUM Brands (parent company of Pizza Hut) revenues are over 60 percent greater than Domino’s. 4. Little Caesars was listed as the fastest growing pizza chain in 2010, with revenues up 13.6 percent over 2009, followed by Pizza Hut’s 8 percent increase and Domino’s 7.2 percent increase. 5. Many restaurants such as Wendy’s, Subway, and even Pizza Hut offer customers low calorie options on the menu. 6. Currently, there are over 925,000 fast food service locations in the USA or one for about every 330 people. 7. Barriers to entry are relatively low for the restaurant industry, but rivalry (competitiveness) among firms is exceptionally high. 8. In the QSR industry, the bargaining power of consumers is quite powerful, availability of restaurant options in most places are abundant, and consequently there is intense price competitiveness among rival firms. 9. Wild fluctuations in commodity prices, especially prices in dairy products since they cannot be locked in for long periods of time, are particularly problematic for the industry. 10. Labor is the second greatest expense in the fast food industry. 11. Competitive Profile Matrix Domino’s score of 2.32 reveals a below average company with respect to Pizza Hut and Papa John’s. Over $1.5 billion in long term debt severely impacts Domino’s stockholders’ equity and financial profit. EFE Matrix Domino’s received an above average EFE score of 2.75 which can be attributed largely to the excellent job Domino’s has done with international expansion. Domino’s still lags competitors by not offering a healthy line of menu items. E. Internal Audit Strengths 1. Domino’s reached $1 billion in USA online sales in 2012 from its website, IPhone and Android apps alone, accounting for over 60% of all sales. 2. Domino’s operates stores in 70 different nations. 3. International stores grew 30% from 2009 to 2012 to total 4,835 at year end 2012. 4. Backward integrated supply chain provides over 99% of supplies for franchisee stores. 5. Domino’s enjoys large economies of scale and great brand recognition. 6. Domino’s is exclusively a delivery/take out business, reducing overhead by not offering dine in space. 7. PULSE touch screen ordering system allows for increased order accuracy and provides driving directions to drivers. 8. Domino’s Pizza markets their pizzas as having gluten-free crust. 9. Domino’s recently introduced new Artisan pizzas, and new recipes (higher quality products) for their crust, sauce and cheeses. 10. Weaknesses 1. While many fast food restaurants have added healthy options, Domino’s offers little with respect to healthy food options such as salads or fruit. 2. Domino’s does not produce a sustainability report or have a sustainability statement on their website. 3. Domino’s reported over $1.3 billion in negative stockholders’ equity at yearend 2012. 4. Domino’s is a relatively large company to operate under a functional type structure. 5. One large slice of hand- tossed, pepperoni pizza contains 300 calories and 12 grams of fat, and there are 8 slices in a pizza. 6. No dine in option. 7. Domino’s suffered a quality image before the launch of the new Artisan pizzas, and there is some belief there remains a residual quality problem. Financial Ratio Analysis Profit Margin Percent Domino’s Industry S&P 500 Gross Margin 29.87 31.98 37.55 Pre-Tax Margin 10.79 17.46 16.89 Net Profit Margin 6.7 11.88 12.42 Liquidity Ratios Debt/Equity Ratio NA 0.7 0.97 Current Ratio 1.3 0.7 1.2 Quick Ratio 1.2 0.6 0.8 Profitability Ratios Return On Equity NA 36.7 20.88 Return On Assets 23.4 13.4 7.7 Return On Capital 42.2 16.3 10.2 Efficiency Ratios Income/Employee 11,239 16,959 129,395 Revenue/Employee 167,844 138,523 1.05 Mil Receivable Turnover 18.5 49.3 14.2 Inventory Turnover 38.1 93 13.5 Asset Turnover 3.5 1.1 0.8 Domino’s is a healthy company based on most of the financial ratios. However, $1.5 billion in long-term debt weighs heavily. Net Worth Analysis (in millions) Methods 3 and 4 are likely the best representation of company worth. Like Domino’s, Papa John’s is also heavily leveraged with long term debt. IFE Matrix With a score of 2.88, Domino’s is doing an above average job based on internal factors. One area of improvement would be to develop a healthy line of menu items. F. SWOT SO Strategies 1. Add 500 new stores over the next 3 years in China, India, and Brazil (S2, S3, O1, O2). 2. Add 500 new stores over the next 3 years in traditional European and Middle Eastern Markets (S2, S3, O1). 3. Increase advertising expenses from $40M to match Pizza Hut’s $75M over the next 3 years to market the new Artisan pizzas and other new products (S9, O9). 4. Offer 15 percent off all takeout orders (S5, S6, O6, O8). WO Strategies 1. Create and market a new Artisan salad (W1, W5, O3). 2. Add 500 new stores over the next 3 years in traditional European and Middle Eastern Markets (W3, O1). 3. Open 10 restaurants with a dining area as a pilot study near college campuses (W6, O4). 4. Restructure by division to further capitalize on any differences in consumption preferences in international markets (W4, O1, O2). ST Strategies 1. Hire a market research firm to determine the value in offering discounts or other marketing strategies to combat against new competitors in select markets (S1, S5, T3, T4, T5, T6, T7, T8). 2. Market to consumers more readily the healthier aspects of Domino’s pizza’s (S8, T1). WT Strategies 1. Create and market a new Artisan salad and pizza with lower-fat cheese (W1, W5, T1, T5). 2. Offer complimentary pizza at events around the world as a means of introducing customers to the new Artisan pizza recipe (W7, T3, T4, T5). G. SPACE Matrix Domino’s lands in the Competitive Quadrant based mostly on 1) $1.5 billion in long term debt, 2) intense competition within the fast food industry and 3) Offering products that are generally not a healthy food choice. Domino’s should consider adding a line of salads to their menu to help move up the Y-Axis on the Space Matrix. H. Grand Strategy Matrix Domino’s is clearly experiencing rapid growth, especially internationally; however, their competitive position is unclear lying somewhere between Quadrant I and II. While the company has many more locations and a much better international presence than Papa John’s, Pizza Inn, and Little Caesars, the overriding debt problem is a concern. Yum Brand’s Pizza Hut still remains supreme among pizza chains. Paying off debt would be a viable strategy for Domino’s management. I. The Internal-External (IE) Matrix Business Segment Revenue 2013 Revenue 2012 Revenue 2011 (1) Domestic Company Owned Stores $324 $336 $345 (2) Domestic Franchise 195 187 173 (3) Domestic Supply Chain 942 928 876 (4) International 218 201 176 TOTAL $1,679 $1,652 $1,571 Domino’s Domestic Supply Chain segment is the true gem of all the segments. Backward integrated and serving 99% of domestic franchisees with their products is a recipe for an enduring revenue stream. While company owned stores have more revenue than either domestic or international franchises, much of Domino’s long term debt problem is associated with these stores. Finding franchisees to place into these stores would be a viable strategy for Domino’s. J. QSPM K. Recommendations 1. Increase advertising expenses by $35M over the next 3 years to market the new Artisan pizzas and other new products. 2. Establish new franchisees for 1000 new stores over the next 3 years; (200 in Russia, 200 in India, 200 in China, and 400 in Europe/Middle East) for a cost of $100M. (many of these connections are already established). 3. Hire a market research firm to assess the feasibility of adding new healthy options to the menu for a cost of $5 million. Total Amount of Funds Needed = $140M L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: $140 Stock Price: $55 Shares Outstanding: 57 Interest Rate: 5% Tax Rate: 37% The EPS/EBIT chart reveals debt financing as the most attractive alternative for all economic conditions. However, it is unclear if Domino’s could acquire debt capital at 5%, given the firm’s current $1.5 billion of long- term debt on the 2013 balance sheet. With the high stock price, and all recommendations (in this note) suggest having franchisees provide the capital for new stores, acquiring $140 million through equity would only increase total shares outstanding from 57 million to 59 million, so dilution of ownership is not a concern. L. Epilogue As of first quarter March 2013, Domino’s continues to carry $1.5 billion in long-term debt on the balance sheet resulting in over $1.3 billion in negative stockholders’ equity. Despite the continued troubles with debt, one interesting strategic change is as of March 2013. Domino’s has changed their principle strategy of delivery speed to taking extra time to produce a top-quality pizza. Down are the advertisements of yester year, promising free pizzas if not at your door in 30 minutes and in is a nation-wide marketing campaign claiming Domino’s pizzas are made fresh from never frozen dough, and it just takes a bit longer to make a better pizza. This campaign comes on the heels of Domino’s starting their Artisan Pizzas and new recipes just a few years earlier. The new buzz word/slogan for Domino’s newest marketing campaign is simply “try our Handmade Pan Pizza.” In addition to the new Handmade Pan Pizza, Domino’s is rolling out a new $5.99 value menu that offers Penne Pastas, Stuffed Cheesy Breads, 8-piece chicken varieties, and Oven Baked Sandwiches. All of these products are in addition to the $5.99 medium two topping pizza pick-up special Domino’s has offered in recent years. With the new products (and change in pizza recipe), Domino’s is claiming through advertisements that 80 percent of their menu items are new since 2008. Royal Caribbean – 2011 Forest David A. Case Abstract Royal Caribbean 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 Miami, Florida, Royal Caribbean’s common stock is publicly traded under the ticker symbol RCL. Royal Caribbean Cruises (RCC) is the world's second-largest cruise line (behind the combined Carnival Corporation and Carnival plc behemoth). RCC operates 40 ships with more than 92,000 berths overall across three main cruise brands -- Royal Caribbean International, Celebrity Cruises, and Pullmantur Cruises. RCC carries about 4 million passengers a year to about 420 ports, including ones in Alaska, Asia, Australia, Canada, the Caribbean, Europe, and Latin America. Other RCC brands include Azamara Club Cruises and CDF Croisières de France. In addition, RCC operates land-based tours and expeditions through Royal Celebrity Tours. RCC’s Allure of the Seas shares the title of the world's largest and most revolutionary cruise ship with sister-ship Oasis of the Seas. Allure of the Seas offers one-of-a-kind entertainment performances, culinary concepts, retail venues and technology innovations. An architectural marvel at sea, Allure's neighborhoods are divided into seven distinct themed areas, which include Central Park, Boardwalk, the Royal Promenade, the Pool and Sports Zone, Vitality at Sea Spa and Fitness Center, Entertainment Place and Youth Zone. She spans 16 decks, encompasses 225,282 gross registered tons, carries 5,400 guests at double occupancy, and features 2,700 staterooms. Allure of the Seas alternates a Western Caribbean with an Eastern Caribbean seven-night itinerary from her home port of Port Everglades in Fort Lauderdale, Florida. B. Vision Statement (actual) Our vision is to empower and enable our employees to deliver the best vacation experience for our guests, thereby generating superior returns for our shareholders and enhancing the well-being of our communities. C. Mission Statement (proposed) Our mission at Royal Caribbean is to provide relaxation, security, class, and freedom in the form of high value cruising options to families and individuals (1). We will provide freedom of choice with water traveling options (3) to customers seeking a range of experiences. We will develop vast market coverage as a company while having focused, segmented ship genres (2). We will utilize available technology (4) for the creation of new ships, as well as implementing new technology to our activities and operations. Our main concern is differentiating Royal Caribbean from being a generic cruise line to one that is ambidextrous in serving different customer types (5, 7). Our philosophy is to deliver what customers want on a segmented basis through comfort, security, and needs (6). We will maintain our clean, polished, and friendly image through calculated and tried methods. Through our global Community Relations Program, we will be responsive to the needs of our communities to make them better places to live and work. Our employees (9) will take ownership of any problem that is brought to our attention, meet our employees needs, and engage in conduct that enhances our corporate reputation and employee morale. 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. The number of overseas tourist arrivals is expected to increase 2.5% in 2011. 2. Disposable income among families expected to increase in 2012. 3. 12.4% compound annual growth rate of passengers in Europe. 4. More frequent cruising for families than in years past (a significant amount are first time cruisers). 5. 45% of revenue in 2010 generated by sales originating in countries outside the United States. 6. Travel and tourism industry is expected to grow by 4% per year over the next decade. 7. 90% of Americans have never been on a cruise. 8. Cruises only represent 2% of the overall vacation market. 9. 63% of cruise passengers are from North America. 10. Young travelers prefer more modern and high-tech cruises. Threats 1. Fears of viruses on ships. 2. Fuel prices may significantly rise in 2012. 3. Competitors have ordered 23 new ships. 4. Fear of pirate or terrorist attacks, war, and other hostilities. 5. Disruption in credit markets has decreased liquidity worldwide. 6. Lowering of credit ratings resulted in increase in cost of financing. 7. Enacting or consideration of new regulations for fuels could drive up costs. 8. Increasing regulations for cruise ships may result in increasing compliance costs. 9. Volatile exchange rates. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. 420 cruise destinations on 7 continents. 2. Operates 42 ships with approximately 92,300 berths as of December 31, 2010 (400,000 berths in whole industry). 3. 12% of North American cruise passengers used Royal Caribbean for cruises. 4. 67% of cruises are international (Non American) destinations. 5. Largest and most innovative cruise ships in the industry “Allure of the Seas” and “Oasis of the Seas”. 6. Incorporated in Liberia, tax exempt for income tax under internal revenue code under section 883. 7. Flexible cruise itineraries ranging from 2 to 18 nights. 8. Celebrity Cruises, a brand of Royal Caribbean, only major cruise line to operate in the Galapagos Islands. 9. Own a 40% interest in the largest dry-dock ship repair facility in the world in the Grand Bahamas. 10. Currently investing in the development of a new pier and port facilities at the Port of Falmouth, Jamaica, which became operational in 2011. Weaknesses 1. North American cruise passengers using Royal Caribbean increased only 2.5% in past 5 years. 2. Global cruise passengers using Royal Caribbean increased less than 1% in 2010. 3. Incorporation in Liberia, subject to regulations leading to uncertainty for American investors. 4. Current atio of 0.4 compared to industry average of 1.5. 5. Quick ratio of 0.3 compared to industry average of 0.8. 6. Public shareholders hesitant to invest because of the uncertainty of protecting their interest with respect to action by management. 7. $759M in goodwill on the balance sheet. 8. Higher prices on average than Carnival. Financial Ratio Analysis Growth Rate Percent RCL Industry S&P 500 Sales (Qtr vs year ago qtr) 12.70 10.40 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) 13.90 435.50 48.60 Sales (5-Year Annual Avg.) 6.61 6.74 8.30 Net Income (5-Year Annual Avg.) -3.77 8.23 8.72 Dividends (5-Year Annual Avg.) NA -2.65 5.61 Profit Margin Percent Gross Margin 49.2 42.9 39.5 Pre-Tax Margin 8.3 15.5 18.2 Net Profit Margin 8.3 12.7 13.2 5Yr Gross Margin (5-Year Avg.) 49.5 45.3 39.7 Liquidity Ratios Debt/Equity Ratio 1.04 1.73 0.98 Current Ratio 0.4 1.5 1.3 Quick Ratio 0.3 0.8 0.9 Profitability Ratios Return On Equity 7.5 21.1 26.0 Return On Assets 3.2 6.4 8.8 Return On Capital 3.8 9.1 11.8 Return On Equity (5-Year Avg.) 7.4 13.2 23.8 Return On Assets (5-Year Avg.) 3.2 4.9 8.0 Return On Capital (5-Year Avg.) 3.8 7.2 10.8 Efficiency Ratios Income/Employee 10,727 15,362 126,792 Revenue/Employee 128,783 136,955 1 Mil Receivable Turnover 25.3 16.9 15.2 Inventory Turnover 28.2 30.3 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Obtain a 51% interest in the Grand Bahamas Shipyard (S 9, 0 9). 2. Purchase 2 new ships to be used in Europe (S1, S2, O3, O9). WO Strategies 1. Purchase 2 new ships to be used in Europe (W2, O3, O9). ST Strategies 1. Purchase 4 new ships for North American markets (S1, S2, S3, T3). 2. Sell older ships (S5, T3). WT Strategies 1. Form alliance with Continental Airlines to provide cheaper packages for Americans traveling to Europe for cruises (W1, T7, T8). G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix J. QSPM K. Recommendations 1. Purchase 6 new ships for a total cost of $2.4 billion. 2. Sell 10 older ships for revenue of $1 billion. L. EPS/EBIT Analysis (in millions) Amount Needed: $1,400M Stock Price: $24.14 Shares Outstanding: 217 Interest Rate: 5% Tax Rate: 0% M. Epilogue RCC reported that its earnings for Q3 2011 rose 14 percent to $399 million, or $1.82 a share, up from $350.2 million, or $1.61 a share, in the same year-ago period. "The strength of our brands, combined with the value of our product, provides us with a high degree of economic resilience, and both our 2011 results and our 2012 booking patterns validate this," Royal Caribbean Cruises Chairman and CEO Richard D. Fain recently said. RCC’s Q3 2011 revenue rose to $2.3 billion from $2.1 billion in Q3 of 2010. For Q4 of 2011, RCC projects net yields to increase 3 percent to 4 percent and net cruise costs, excluding fuel, to rise 2 percent to 3 percent. RCC’s Celebrity Cruises is adding yet another enhancement to its robust onboard activities program, Celebrity Life. In collaboration with Rodale Inc., a world leader on health and wellness, Celebrity is offering a new series of interactive activities themed around healthy eating choices. Singapore, the huge city state in Asia, plans to become the cruise hub of Asia. A record one million cruise passengers passed through the island nation in 2010, and the numbers are poised to grow 30 percent by 2013. "The number of cruise passengers handled by us has increased more than 60 percent in the last five years. And in 2013 Singapore will have approximately 1.3 million cruise passengers," the Singapore Cruise Centre CEO Christina Siaw told CNBC. She added that in 2010 Singapore received calls from 34 cruise lines. In October 2011, RCC announced it would homeport one of its largest ships - the Voyager of the Seas - in Singapore. The 138,000-ton, 15-deck ship that can carry 5,000 people will be making its first trip to Asia in May 2012. The captain of the Voyager, Charles Teige, told CNBC, "We want to explore the area here and we believe in Singapore." The Singapore Cruise Centre estimates the potential market from India and China alone to be 74 million passengers. Strategically located at the crossroads of these potential markets, Singapore provides a huge draw for operators, given its premium infrastructure and established reputation as a tourist destination for regional travelers. "Singapore is an iconic and attractive destination and popular with tourists coming from India and Southeast Asia," Michael Bayley, Royal Caribbean Cruises' Executive Vice President, International, said. Carnival – 2011 Forest David A. Case Abstract Carnival 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 Miami, Florida, Carnival’s common stock is publicly traded under the ticker symbol CCL. The world's laregest cruise operator, Carnival operates a dozen cruise lines and about 100 ships with a total passenger capacity of more than 190,000. Carnival operates in North America primarily through its Princess Cruise Line, Holland America, and Seabourn luxury cruise brand, as well as its flagship Carnival Cruise Lines unit. Brands such as AIDA, P&O Cruises, and Costa Cruises offer services to passengers in Europe, and the Cunard Line runs luxury trans-Atlantic liners. Carnival operates as a dual-listed company with UK-based Carnival plc, forming a single enterprise under a unified executive team. B. Vision Statement (proposed) Our vision is to be the world leader in the vacation industry. C. Mission Statement (proposed) Our mission is to provide our valued customers with an unrivalled cruise vacation experience (1, 2). We believe that “good ethics is good business” and treat our employees like family (6, 9). We strive to provide state of the art cruise ships all over the world (3, 4). We follow all maritime regulations while making sure we are maximizing shareholder’s profit (5, 8). We also believe in giving back to our communities (7). 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. The number of cruise passengers increased by 1 million in 2009. 2. Cruise industry’s primary age group is expected to grow by 20 million people in the U.S. and Canada. 3. Cruise industry’s primary age group is expected to grow 12% in Western European countries. 4. Travel and Tourism industry is expected to grow by 4% per year over the next decade all over the world. 5. North American cruise guests have a 95% satisfaction rate. 6. Major competitor Royal Caribbean’s prices are much higher. 7. 90% of Americans have never been on a cruise. 8. Cruises only represent 2% of the overall vacation market. 9. 63% of cruise passengers are sourced from North America. 10. Young travelers prefer more modern and high-tech cruises. Threats 1. Mideast tension causing oil prices to rise. 2. Currency risk- the U.S. dollar maybe losing it’s worth. 3. Increasing unemployment rate causing people to cut excess spending. 4. Gambling revenues are expected to decline 6%. 5. Unexpected weather conditions. 6. Pirate attacks and civil unrest. 7. Rising costs of ship building. 8. Long-term climate change and rises in sea level may threaten key destinations. 9. Lack of availability of convenient and safe port destinations. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Carnival Corporation owns almost half of the total passenger capacity of the cruise industry in North America. 2. The Holland America line has the highest rate of repeat customers in the cruise industry. 3. Seabourn Yachts have a service ratio of one staff member to one guest. 4. Over the next 3 years in Europe, our net passenger capacity growth rate is expected to be 8.9% compared to the industry average of 5.8%. 5. Carnival owns P&O Cruises which is the largest and best known cruise brand in the UK. 6. Approximately 400,000 Brazilians and Argentineans took a cruise in 2010 and almost half of these guests sailed on a Carnival Corporation and plc ships. 7. Our occupancy rates for all quarters in 2010 were near 100%. 8. Costa, Italy and Europe’s #1 cruise line, passenger capacity will grow by 24% over the next 3 years. 9. The Senior Cruise Director’s blog has attracted over 5.5 million visits which is more than any other cruise brand. 10. Carnival Cruise lines operates from 19 homeports in North America which is more than any other cruise line. Weaknesses 1. No public vision statement. 2. Sales are mainly through travel agents costing a 10% sales fee and additional commissions. 3. Low market penetration levels in Asia and Australia. 4. Non-user friendly website. 5. 33% of operating revenue cannot be reduced because of fixed costs. 6. Total revenues have been flat since 2008. 7. Cash can only be used in the gaming area of the boat. 8. Working environment is difficult due to varying cultural backgrounds and communication styles. 9. $3.3 billion in goodwill on balance sheet. 10. Old ships need renovations. Financial Ratio Analysis Growth Rate Percent Carnival Industry S&P 500 Sales (Qtr vs year ago qtr) 11.70 24.80 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) 2.60 152.20 48.60 Sales (5-Year Annual Avg.) 5.46 31.99 8.30 Net Income (5-Year Annual Avg.) -2.57 1.66 8.72 Dividends (5-Year Annual Avg.) -12.94 -3.38 5.61 Profit Margin Percent Gross Margin 46.6 41.4 39.5 Pre-Tax Margin 12.6 16.2 18.2 Net Profit Margin 12.5 15.7 13.2 5Yr Gross Margin (5-Year Avg.) 50.2 41.0 39.7 Liquidity Ratios Debt/Equity Ratio 0.40 0.33 0.98 Current Ratio 0.2 0.3 1.3 Quick Ratio 0.1 0.3 0.9 Profitability Ratios Return On Equity 8.2 9.7 26.0 Return On Assets 5.1 -0.9 8.8 Return On Capital 6.1 4.0 11.8 Return On Equity (5-Year Avg.) 10.9 4.4 23.8 Return On Assets (5-Year Avg.) 6.4 2.6 8.0 Return On Capital (5-Year Avg.) 7.8 3.0 10.8 Efficiency Ratios Income/Employee 22,805 38,582 126,792 Revenue/Employee 183,028 245,252 1 Mil Receivable Turnover 41.3 26.0 15.2 Inventory Turnover 24.9 80.2 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Purchase 10 new ships for the North American market (S1, S10, O1, O5, O7, O9). WO Strategies 1. Publish a Vision Statement (W1, O7, O,10). 2. Hire marketing research firm to determine profitable customers who have never been on a cruise before (W6, O7). ST Strategies 1. Purchase 5 new ships for European markets (S8, T2). 2. Purchase 5 new ships for South American markets (S6, T2). WT Strategies 1. Increase oil hedge positions to protect against rising oil prices (W6, T1). 2. Renovate old ships (W10, T7). G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix J. QSPM K. Recommendations 1. Publish a Vision Statement. 2. Hire marketing research firm to determine profitable customers who have never been on a cruise before for $100M 3. Purchase 20 new ships for American, South American, and European markets for $300M each. L. EPS/EBIT Analysis (in millions) Amount Needed: $6,100M Stock Price: $31.69 Shares Outstanding: 776 Interest Rate: 5% Tax Rate: 0% M. Epilogue Carnival Corp. operates 101 ships totaling approximately 200,000 lower berths with 10 new ships scheduled to be delivered between April 2012 and March 2016. Carnival Corp. & plc also operates Holland America Princess Alaska Tours, the leading tour company in Alaska and the Canadian Yukon. Traded on both the New York and London Stock Exchanges, Carnival Corporation & plc is the only group in the world to be included in both the S&P 500 and the FTSE 100 indices. In Winter 2012 and Spring 2013, two Holland America Line ships –– ms Oosterdam and ms Volendam –– will sail a series of Australia, New Zealand and South Pacific cruises, visiting more than 50 ports where guests can revel in the cosmopolitan attractions of Sydney, Melbourne and Auckland, and explore the exotic landscapes of Vanuatu and Fiji in the South Pacific. The complete series of sailings ranges from 10- to 58-days and features for the first time one of the line's larger Vista-class ships, ms Oosterdam. This addition represents almost a 25 percent capacity increase in the Australia/ South Pacific region for Holland America Line. Carnival is having a huge, exclusive concert to welcome the line's newest "Fun Ship" to its year-round homeport of Galveston, Texas. On Sunday, November, 13, 2011, set to the backdrop of the spectacular new Carnival Magic from Pier 21, thousands of fans of Maroon 5 and Carnival will be treated to a free, ticketed concert by the multi-platinum group the day before the new vessel sets sail on its inaugural U.S. voyage. Carnival Magic, which entered service in May 2011 in Europe, will make its transatlantic voyage to arrive in Galveston on November 13. Carnival has 23 "Fun Ships" operate three- to 16-day voyages to The Bahamas, Caribbean, Mexican Riviera, Alaska, Hawaii, Panama Canal, Canada, New England, Bermuda, Europe, the Pacific Islands and New Zealand. In addition to the 130,000-ton Carnival Magic, which debuted in Europe May 1, 2011, the new 130,000-ton Carnival Breeze is scheduled to enter service June 3, 2012. In October 2011, Carnival announced partnerships with entertainer George Lopez, who will become Carnival's creative director for comedy and enhance its fleetwide comedy clubs; Food Network star Guy Fieri, who will develop a burger venue called Guy's Burger Joint; leading video game manufacturer EA SPORTS to create the first-ever EA SPORTS Bar at sea, and Hasbro for new larger-than-life game shows featuring iconic games and brands. "Fun Ship 2.0 is the largest and most ambitious initiative that our company has ever undertaken and it will serve to significantly transform the Carnival vacation experience for our guests," said Gerry Cahill, president and CEO of Carnival Cruise Lines. "Through breakthrough partnerships with some of today's biggest talents and most popular entertainment brands, plus our very own new branded experiences and on-board destinations, Carnival fans and those new to our cruises are destined for an incredible vacation experience." The Carnival Liberty will be the first ship to feature many of the new dining and bar venues when it returns from a scheduled refurbishment later this month. Fourteen ships are scheduled to receive many of the Fun Ship 2.0 enhancements through 2015. Shareholders of Carnival Corp. & plc stock will receive a dividend of $0.25 per share, a record date for the quarterly dividend of November 25, 2011, and a payment date of December 16, 2011. JPMorgan Chase & Co. – 2013 Forest R. David E. Case Abstract Headquartered in New York City, JP Morgan Chase & Co. (JPM) is a financial holding company that serves customers in over 60 nations with a workforce over 240,000. Considered my many to be the largest bank in the USA, JPM reported total assets in 2012 of over $2.3 trillion and is a Dow Jones Industrial Average 30 member. JPM operates in two broad segments, 1) JP Morgan and 2) Chase. JP Morgan brand focuses on large corporations, governments and institutional investors; the Chase brand focuses on consumers and smaller businesses. About 80% of the JPM’s $100 billion in revenues is derived from businesses in the USA, leaving only $20+ billion being derived from foreign markets, with Europe/Middle East & Africa accounting for around 67% of foreign revenue. JPM enjoyed modest growth in 2012 especially in its Consumer & Community Banking in overseas markets. This segment reported a 71% increase in sales to $10.6 billion in 2012. However, JPM’s Corporate and Private Equity segments in both USA and foreign markets reported decreases in sales of 128% and 353% respectively in 2012 – so the company does need a clear strategic plan for the future. F. Vision Statement (actual) At JPMorgan Chase, we want to be the best financial services company in the world. Because of our great heritage and excellent platform, we believe this is within our reach. G. Mission Statement (proposed) JP Morgan Chase strives to be the number one choice for governments, institutions, small businesses and consumers (1) for all of their banking needs (2). At JPM, we pride ourselves on our Consumer & Community Banking (7) where we feel we are the best in the world (3). We are consistently redeveloping ourselves and moving resources around to provide the maximum return for our shareholders (5). Our mobile platforms (4) are used extensively by customers globally. At JMP, we hire only the most experienced financial advisors (9) and believe good ethics is good business (6). We strive to be great community citizens everywhere we operate (8). 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 employees 39. H. External Audit Opportunities 1. Growing customer base for asset management and investment bank services in Asia, Latin America, Africa and the Middle East. 2. USA small businesses are continuing to grow and recover. 3. Many customers still prefer to do banking business face to face when it comes to applying for a credit card, seeking financial advice, and getting a loan. 4. Bank of America is laying off 36,000 people. 5. The USA government filed a civil lawsuit seeking $1 billion in damages for misrepresenting the quality of home loans sold to Fannie Mae and Freddie Mac. 6. Smart phone providers such as Apple and Android may wish to form an alliance with banks to help facilitate the usage of mobile phone payments. 7. Unemployment rate is improving, as a result qualifying more people for home loans. 8. More and more consumers prefer online banking and smartphone banking. 9. Threats 1. Banks are viewed like commodities to many potential customers. 2. Bank of America and Citigroup are two large domestic competitors. 3. Foreign banks have yet to enter the USA market on a wide scale. 4. Increase in online banks such as Ally and ING Direct are advertising heavily and marketing no fees on many products where brick and mortar banks are increasing fees. 5. Low interest rates have helped to squeeze profits from banks. 6. The Dodd Frank Wall Street Reform and Customer Protection Act signed by President Obama, is expected to greatly increase the fees all financial intuitions pay. 7. Mobile payments over smartphones and Near Field Communications (NFC) are expected to greatly erode into credit card usage. 8. In 2012, around 25% of homes are in a delinquent state, 4.7 million homes. 9. Percent of Americans owning checking accounts dropped from 92 to 88% between 2010 and 2011 and the number owning a credit card dropped from 74 to 67%. 10. The Federal Reserve Board established the Consumer Financial Protection Bureau, which has placed restrictions for lenders on credit cards, mortgage loans, student loans, and auto loans. 11. Competitive Profile Matrix Based on the factors in the CPM, JPM is out performing both major rivals Citigroup and Bank of America. An area where JMP lags significantly behind is on geographic range of markets serviced. One factor not considered because all their firms above are relatively the same was fees. Many online banks such as Ally and E-Trade can offer services with much lower fees or no fees at all to customers. EFE Matrix JPM is addressing external issues slightly above average with a score of 2.58. A key area JPM needs to focus on is entering more foreign markets. Currently JPM only serves 60 international markets, while rivals Citigroup and Bank of America serve over 150 each. The threat of foreign banks increasingly doing business in the USA is also a risk factor moving forward. E. Internal Audit Strengths 1. Largest bank in the USA with $2.3 trillion in assets and operations in over 60 countries. 2. Increased clients in Brazil, China, and India from 200 to 800 between 2008 and 2012 and expected to increase to 2,000 by 2017. 3. Significant focus on USA small businesses providing $17 billion of credit in 2011 alone; added 1,200 relationship mangers and business bankers from 2009 to 2012. 4. Acquired Sempra in 2011 to become one of the top three firms in the world in commodity dealings. 5. Continue to add physical branches across the country while competitors are removing branches. 6. Provides detailed segment data for 7 different businesses. 7. Controls 12.3% of bonds in the USA, making JPM the largest holder among all banks. 8. JPM focuses heavily doing business with small businesses. 9. International Consumer & Community Banking segment reported a 71% increase in revenues in 2012. 10. Weaknesses 1. Many in upper management have dual titles. 2. Heavy reliance on the USA with over 80% of 2012 revenues derived from the USA up from 75% in 2011. 3. Less than 4% of Investment Bank revenues derived from Latin America. 4. Poor judgment in lending has resulted in JPM continued mortgage losses expected. 5. $48 billion in goodwill on the balance sheet. 6. Domestic Corporate/Private Equity reported $4 billion in revenues in 2011 and -$1 billion in 2012 for a net change of -128%. 7. International Corporate/Private Equity experienced a -353% decrease in revenues from 2011 to 2012. 8. Domestic Consumer & community Banking segment reported only a 9% increase in revenues in 2012. 9. London Whale ethical issues plague JPM. Financial Ratio Analysis Profit Margin Percent JPM Industry S&P 500 Gross Margin NA NA 38.39 Pre-Tax Margin 32.28 -2.38 16.95 Net Profit Margin 23.82 -6.23 12.49 Liquidity Ratios Debt/Equity Ratio 3.49 2.39 1.12 Current Ratio 0.31 NA 1.4 Quick Ratio 0.31 NA 1 Profitability Ratios Return On Equity 11.32 8.13 22.17 Return On Assets 1 0.6 7.6 Return On Capital NA 0 10.1 Efficiency Ratios Income/Employee 82,000 34,667 126,271 Revenue/Employee 373,827 285,591 1.04 Mil Receivable Turnover NA 0 13.9 Inventory Turnover NA NA 13.3 Asset Turnover NA 0 0.8 JPM is a highly leveraged firm with over twice the current liabilities as current assets. Due to the high levels of debt, JPM’s ROE is not as good as the number indicates. Net Worth Analysis (in billions) JPM is worth slightly more than Citi, yet has substantially higher net income in 2012. Both JPM and Citigroup are actually valued at a discount as stockholders’ equity is higher than shares outstanding x share price. IFE Matrix JPM is doing slightly above average on addressing internal issues as indicated by the 2.68 score. A major weakness of the firm is that they only have operations in 60 nations while competitors Citigroup and Bank of America have business operations in over 150 nations. However, the company remains the largest in the USA based on assets and net worth. JPM should expand further into Latin America and Europe. F. SWOT SO Strategies 5. Continue with plans to increase customer base in Latin America to 2,000 by 2017 (S2, S9, O1). 6. Form an alliance with Apple or Samsung to help facilitate mobile phone payments (S1, S8, S9, O6, O8). 7. Allocate $200 million through 2015 to develop new relationships with small businesses in the USA (S5, S8, O2, O4, O7). WO Strategies 5. Spend $300 million in Europe for customer acquisitions (W2, O1). 6. Spend $100 million in Latin America to acquire new customers, especially in the investment bank segment (W2, W3, O1). 7. Divest both the domestic and international Corporate/Private Equity segments (W6, O1, O2, O6). ST Strategies 3. Spend $200 million on advertising in the USA to attract more small business customers (S1, S3, S5, S8, T1, T2, T9). 4. Increase free checking and feeless products for customers who have a checking account with Chase (S1, S5, T1, T2, T3, T4,T9). 5. Spend $2 billion by 2015 to increase stake in bonds and commodity financial instruments (S4, S7, T4, T7, T9, T10). WT Strategies 1. Divest both the domestic and international Corporate/Private Equity segments (W6, T5, T8, T10). 2. Spend $500 million to develop a better statistical model for predicting whom (and whom not) to lend to and at what interest rate (W4, W6, W7, T5, T8, T10). 3. G. SPACE Matrix JPM lands in the aggressive quadrant of the SPACE Matrix buoyed by a strong internal financial position and a favorable position vs their top competitors. External issues are a bit more problematic as the industry is less stable than other industries and online competitors and community banks are easily able to enter. In addition, smartphones with mobile payments may eventually replace credit card usage in the future. Nevertheless, JPM should add more operations in Latin America, Europe, and Asia. In addition, more devotion to commodities and bonds would be a better strategy than focusing on individual mortgages. H. Grand Strategy Matrix JPM is located in Quadrant IV of the Grand Strategy Matrix based on its strong competitive position and slow market growth of the industry. The banking industry is facing more governmental regulation, ease of entry of online competitors, and a climate of low interest rates. As a result, banks are forcing higher fees on consumers to make up for lost revenues, and overall the industry has experienced negative sales growth over the last 5 years of around 3% compared to the SP 500 average of positive 3%. JPM should divest areas of their business that deal with private and corporate equity, rethink its strategy of adding more branch offices, and focus more on commodities and bonds. I. The Internal-External (IE) Matrix Services Offered 2012 Revenues (in millions) Percent Revenues (1) Consumer &Community Banking $60,556 50% (2) Corporate & Investment Banking 42,732 35 (3) Commercial Banking 9,471 8 (4) Asset Management 11,649 10 (5) Corporate/Private Equity (3,234) (3) Totals $121,174 100% JPM overall is in the hold and maintain cell of the IE Matrix. Corporate/Private Equity should be divested and an expansion of the bonds and commodities found in the Corporate & Investment Banking division should be expanded. While Consumer & Community Banking has the largest total revenues, it is unclear what margins are obtained from this division. Increased competition from online banks may soon weight heavily on this division. J. QSPM The QSPM reveals that increasing global presence, especially in Latin America, Europe, and Asia, is a more attractive strategy than marketing further to small businesses in the USA. This makes intuitive sense, since 80% of all revenues in 2012 were derived from the USA. K. Recommendations 1. Continue with plans to increase customer base in Latin America to 2,000 by 2017. 2. Form an alliance with Apple or Samsung to help facilitate mobile phone payments. 3. Spend $300 million in Europe for customer acquisitions. 4. Spend $100 million in Latin America to acquire new customers, especially in the investment bank segment. 5. Divest both the domestic and international Corporate/Private Equity segments. 6. Increase free checking and feeless products for customers who have a checking account with Chase. 7. Spend $2 billion by 2015 to increase stake in bonds and commodity financial instruments. 8. Spend $500 million to develop a better statistical model for predicting whom and whom not to lend to and at what interest rate. 9. L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: $4,000 Stock Price: $53 Shares Outstanding: 3,780 Interest Rate: 5% Tax Rate: 26% The EPS/EBIT Analysis reveals debt financing is the most attractive option for JPM under all economic situations presented. However, the analysis assumes JPM can obtain financing at 5% and with their leverage this may or may not be feasible. M. Epilogue According to the Center for Responsive Politics, JPM spent more than $3 million in Q4 of 2012 on special interest lobbying, the most for JPM since 2008. These expenditures were aimed at minimizing JPM’s “London Whale” scandal, which led (unsuccessfully) to shareholder pressure to strip CEO Jamie Dimon of his Chairman title. JPM’s spending on lobbying in Q4 dwarfed that of all other banks. For calendar 2012, JPM spent more than $8 million on lobbying, compared to Citigroup spending $5.52 million, Goldman Sachs $3.54 million, Morgan Stanley $3.35 million, and Bank of America $2.95 million.or Q1 of 2013, USA banks collectively as well as JPM did exceptionally well. Collectively, USA banks reported earnings of $40.3 billion, according to the FDIC. This Q1 2013 number was up from $34.7 billion in Q4 of 2012, and up from $34.8 in Q1 2012. The FDIC also reported that "only 8.4 percent of USA banks reported negative net income in Q1 2013, the lowest proportion of unprofitable banks since Q3 of 2006. The FDIC said that banks’ loan loss provisions fell to a six-year low during Q1 of 2013 to $11 billion, compared to $14.3 billion during Q1 of 2012. Citibank’s loan loss reserves declined by $1.4 billion during Q1 2013, whereas JPM’s declined by $792 million. JPM’s reserves covered 2.63 percent of their total loans in Q1 2013, while the bank’s net charge-off ratio was 0.54 percent. Instructor Manual Case for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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