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This Document Contains Chapters 7 to 8 Chapter 7 - Implementing Strategies: Management and Operations Issues Overview Chapter 7 explains how to implement strategies in terms of effectively managing organizational structure, resistance to change, organizational culture, corporate wellness, employee and executive compensation, human resource issues, and restructuring. The Chapter 7 Learning Objectives as presented in the textbook are reiterated below: 1. Construct effective organizational chart. 2. Explain why corporate wellness has become so important in strategic planning. 3. Explain why strategy implementation is more difficult than strategy formulation. 4. Discuss the importance of annual objectives and policies in achieving organizational commitment for strategies to be implemented. 5. Explain why organizational structure is so important in strategy implementation. 6. Compare and contrast restructuring and reengineering. 7. Describe the relationships between production and operations and strategy implementation. 8. Explain how a firm can effectively link performance and pay to strategies. 9. Discuss employee stock ownership plans (ESOPs) as a strategic-management concept. 10. Describe how to modify an organizational culture to support new strategies. Teaching Tips 1. Chapter 7 starts IMPLEMENTATION, whereas Chapters 1-6 were formulation. Compare and contrast implementation vs. formulation as done in the “Nature of Strategy Implementation” section. 2. Chapter 7 focuses on management. Ask all management majors to raise their hand and identify them as experts. 3. The most important part of this chapter is the organizational structure material, because being well organized yields great competitive advantages for businesses as it does for individuals. So, make sure students know the four basic types of structure, and how to diagram each type, as well as the advantages and disadvantages of each type. In analyzing their own case company, require students to turn in a “new and improved” organizational structure, as compared to the “existing structure” provided in the case itself. For their own case company, students should be on the lookout for a lack of diversity among the top executives, and correct this problem, and correct any other potential problems outlined under the “Do’s and Don’ts” section of the chapter. 4. The latter half of this chapter provides very important management information related to implementing strategies. Ask students to be on the lookout when researching their case company for strengths (to be capitalized upon) and (weaknesses to be improved upon) in these areas covered such as linking performance and pay, organizational culture, diversity, and corporate wellness. 5. Regarding corporate wellness, let me share a personal note with you, that we (Fred and Forest) try hard everyday to do exactly what Table 7-16 says to do, and in our opinion, this may be the most important page in the book for the well being of your students. Hopefully, students will personally buy into a healthy lifestyle because the results can be miraculously wonderful. And, corporations desire a healthy workforce, so having a healthy lifestyle will enhance their career development. 6. At the end of Chapter 7, direct student attention to the “Special Note to Students” because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 7. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the answer, with you commenting on their answers. We have found this to be a fun day in class and it goes pretty quickly. 8. Several of the end-of-chapter Assurance of Learning Exercises can be used as excellent homework or classwork assignments to be completed as an individual or as a group of students. Several exercises focus on the PepsiCo Cohesion Case, and several focus on your college/university. Many professors usually select one from each venue. Answers to End-of-Chapter Review Questions 1. Discuss the glass ceiling in the United States, giving your ideas and suggestions. Answer: Glass ceiling refers to the set of stereotypical obstacles that prevent women from rising above a certain hierarchical level in the many organizations. Females bring different ideas, opinions, and demeanor to the decision-making process, so are essential to have in top management. Situations with few to no women in top management sends the wrong message to a firm’s stakeholders, and could make the firm more vulnerable to discrimination suits. 2. Discuss three ways for linking performance and pay to strategies. Answer: Methods of linking performance to pay include profit sharing, gain sharing, and bonus systems. Profit sharing is simply using some formula to pay some profits back to employees/managers before reinvesting such funds back into the firm. Gain sharing requires employees or departments to establish performance targets; to the extent that actual results exceed objectives, employees/managers get bonuses. Bonus systems entail a firm paying a lump sum of monies to employees/managers, perhaps at year-end, based on annual sales, profit, production efficiency, quality and/or safety. 3. List the different types of organizational structure. Diagram what you feel is the most complex of these types of structure and label your chart clearly. Answer: The types of organizational structure are functional, divisional by geographic area, divisional by product/service, divisional by customer, divisional by process, strategic business unit, and matrix. The matrix is the most complex of all designs because it depends upon both vertical and horizontal flows of authority and communication. For example, construction firms oftentimes utilize a matrix structure, where three large construction projects, perhaps building bridges, have functional managers on site, who report both to a corporate executive and to the on-site project manager. The project managers report to the COO. 4. List the advantages and disadvantages of a functional versus a divisional organizational structure. Answer: Functional structures are simple and inexpensive. They promote specialization of labor, encourage efficiency, minimize the need for elaborate control systems, and allow rapid decision-making. However, this structure forces accountability to the top, minimizes career development opportunities, and is characterized by low morale, line/staff conflicts, poor delegation of authority, and inadequate planning for products and markets. In contrast, the divisional structure is better suited for motivating employees, controlling operations, and competing successfully in diverse locations. Accountability is clear in divisional structures. It also creates more career opportunities, allows for local control of local situations, leads to a competitive climate, and allows new businesses and products to be added easily. The divisional structure is more costly than a functional structure, but morale is generally higher in the divisional design. 5. Discuss recent trends among women and minorities becoming top executives in the USA. Answer: Progress is being made, but slowly. Still only 22 of the Fortune 500 CEO’s are women. Many firms unfortunately still have no women or minorities among their top executives. Northern European countries lead the world in integrating women into top management and into boards of directors, but elsewhere in Europe, and throughout Asia, the lack of women and minorities among top executives is a major problem. This problem is worst among Middle Eastern countries. 6. Discuss recent trends of firms downsizing family-friendly programs. Answer: Family-friendly programs benefit families, not just women at work. Family-friendly programs can minimize employee dissatisfaction, turnover, and absenteeism while differentiating the company from others without such benefits. Consumers increasingly use family-friendliness as a differentiating factor when choosing what companies to patronize, and this benefit is important to potential employees/managers. For companies, it oftentimes becomes a trade-off between short-term costs and long-term benefits, or a trade-off between offering higher wages or such programs as on-site child care. 7. List seven guidelines to follow in developing an organizational chart. Answer: Some guidelines are as follows: 1. Reserve the title of CEO for the top executive of the firm. 2. Use the title of President for division top managers. 3. Do not use a dual title (like Chairperson and President) for a single executive. 4. Have a COO report to the CEO and division Presidents report to the COO. 5. Avoid having a particular person reporting to more than one supervisor. 6. The CFO, CIO, CSO, and HRM officers should report directly to the CEO. 7. The CEO should not also be Chairperson of the Board. 8. Women comprise only 6 percent of corporate board seats in Asia, compared to 17 percent in Europe and 15 percent in the USA. Why is this a problem globally for 1) companies with a low percent and 2) countries with a low percent? Answer: Woman comprise about 50 percent of customer base for most companies globally, so anything less than this percentage among a firm’s management team and board of directors could call into question potential discrimination. Cultural and even religious factors account for much of this problem globally, but unfounded discrimination is also the culprit in some companies. 9. College football coaches get paid millions, presumably because there is so much money involved in college football the need to win is paramount. However, head coaches are often fired when a season goes badly, such as Gene Chizik at Auburn University in late 2012. Coach Chizik’s buyout provision (if fired before his contract ends, which happened) was $7 million, pretty typical for Division 1 top-tier head football coaches. In fact, the whole Auburn University football coaching staff including Chizik was bought out the same day (11-26-12) for $11.09 million. How could a head coach’s compensation package be better structured for encourage winning, and at the same time not be so potentially costly to a university. Answer: Head football coaches’ salaries could be must more closely linked to on-the-field and off-the-field objectives related to 1) winning games and 2) player graduation rates. Salaries could be linked to winning conference titles, bowl games, and national rankings, as well as team GPA and percent of athletes who graduate. Contracts could also be more short-term (3 year) rather than long-term (5+ years). Base salaries perhaps should be less than $500K annually, with incentives to reach objectives in place that could raise total compensation to several million annually to the extent those objectives are reached. Coach Nick Saban at Alabama is one of the highest paid coaches at $5 million annually, but Urban Myer at Ohio State and Les Miles at LSU are among many other highly paid coaches. 10. Business Week magazine says firms should “base executive compensation on actual company performance, rather than on the company’s stock price.” For example, Target Corp. bases executive pay on same-store sales growth rather than stock price. Discuss. Answer: Actual company performance would be much more effective because general stock market trends can impact a firm’s stock price quite dramatically. Target Corp.’s approach is excellent. Other similar approaches can be devised based on a combination of actual company performance measures, rather than stock price. 11. What do you especially like and dislike about Halliburton’s organizational chart shown in the chapter? What would you change if anything? Why? Answer: Like: 1. The SBU design is appropriate given the number and size of those divisions. 2. The chart is provided on the corporate web site. 3. The SBU Heads should report to the COO. Dislike: 1. Other functional executives should be shown in the chart, such as a CFO, CMO, CTO, CIO, CSO, and HRM. 2. Some terms are not clear, such as “Completion” and “Production” and “Evaluation.” 12. List four corporate wellness practices that could be especially effective for a company. Answer: Tobacco-free work places, recreation centers, annual Wellness Days, sponsorship of wellness activities, discounts on health-food products, diet and exercise counseling, discounts on health insurance premiums if certain health objectives are met. 13. Women now make up 53 percent of the work force in Latin and South America. Do some research to determine how that percentage compares with other parts of the world. What are the implications for a business in doing business globally? Answer: Latin and South America in general are as good as the USA in integrating women into upper management, but there is room for improvement both in America and South-of-the-Border. 14. Advertising agencies are an example industry transitioning from specialist Hispanic, African American, and Asian firms to multicultural, generalist agencies. Why is this occurring? What other industries or institutions may follow suit? Why? Answer: Leading executives of culturally specialized agencies are defecting in large numbers to generalist agencies as companies increasingly embrace multicultural marketing using multicultural ad agencies. An organization can perhaps be most effective when its workforce mirrors the diversity of its customers. For global companies, this goal can be optimistic, but it is a worthwhile goal. Churches and colleges (some) are example organizations that lag behind other institutions in becoming heterogeneous rather than homogeneous along racial and/or religious lines. 15. Describe a conflict situation in which to resolve the problem you would use 1) Avoidance, 2) Defusion, and 3) Confrontation. Answer: Avoidance – includes separating the persons involved, which could be done by altering sales rep territories Defusion – includes compromising, which could be done in salary negotiations Confrontation – includes meeting to discuss different viewpoints, which could be done to determine whether to acquire a new firm or not at a certain price 16. List the five labor cost-saving activities that you believe would be most effective for Best Buy. Give a rationale for each activity. Answer: Labor cost-saving tactics include salary freeze, hiring freeze, salary reductions, reductions in employee benefits, increasing employee contribution to health care premiums, reducing 40-K match, reducing employee workweek, mandatory furlough, voluntary furlough, hiring temporary or contractual employees instead of fulltime employees, volunteer buyouts, reduced production, layoffs, early retirement, and reducing or eliminating bonuses. Best Buy is using a combination of these activities as the firm transitions to being smaller and more price-competitive. 17. The chapter says strategy formulation focuses on effectiveness, whereas strategy implementation focuses on efficiency. Which is more important, effectiveness, or efficiency? Give an example of each concept. Answer: Certainly both are important for successful strategic planning. Effectiveness is associated more with strategy formulation, i.e. doing the right things which means having an excellent game plan or strategic plan. Efficiency is associated more with strategy implementation. Efficiency means finding the best means to accomplish something. Because strategy implementation is usually more difficult to accomplish than formulation, some students may feel that efficiency is more important. Recall that Vince Lombardi once said “the best game plan in the world never tackled or blocked anybody.” However, the author actually feels that effectiveness is more important than efficiency because it is essential to be on the right track, or digging in the right spot. Otherwise even the hardest working employees likely would be unsuccessful. Formulation (effectiveness) decisions such as to acquire a firm equal in size to your firm can make or break the firm. 18. In stating objectives, why should terms such as increase, minimize, maximize, as soon as possible, adequate, and decrease be avoided? Answer: Terms such as increase, minimize, maximize, as soon as possible, adequate, and decrease should be avoided when setting objectives because they too general, are unclear, lack specificity, and are not measure able. Objectives should state quantity, quality, cost, time, and should be verifiable. These terms should also be avoided in couching strategies for example in a SWOT matrix, because for example, increase could mean 1% or 1,000%. 19. What are four types of resources that all organizations have? List them in order of importance for your university or business school. Answer: The four types of resources that all organizations have are: financial, physical, human, and technological resources. Rankings will depend on qualities of the university or business school. 20. Considering avoidance, defusion, confrontation, which method of conflict resolution do you prefer most? Why? Which do you prefer least? Why? Answer: Preferences will vary based on the levels of conflict that students are comfortable with. The lowest level of conflict involves avoidance, or ignoring the problem. Defusion can include playing down differences between conflicting parties. The highest level of conflict is confrontation, which involves presenting the viewpoints of all conflicting parties to resolve the issue. Among the methods of conflict resolution—avoidance, defusion, and confrontation—I prefer defusion the most. Defusion involves de-escalating the conflict by reducing tension and emotions, promoting open communication, and seeking understanding between parties. I find this method effective because it focuses on addressing the underlying issues causing the conflict rather than merely avoiding or confronting the conflict head-on. By encouraging empathy, active listening, and mutual respect, defusion facilitates constructive dialogue and collaboration, leading to sustainable resolutions that preserve relationships and promote mutual satisfaction. On the other hand, my least preferred method of conflict resolution is avoidance. While avoidance may temporarily alleviate discomfort or tension, it often allows underlying issues to fester and escalate over time, potentially leading to resentment, misunderstandings, or unresolved conflicts. Avoidance can hinder meaningful communication and problem-solving, ultimately prolonging the conflict and impeding progress towards resolution. While there may be situations where temporary avoidance is necessary to allow emotions to cool down or to gather more information, relying solely on avoidance as a conflict resolution strategy can exacerbate issues in the long run. In summary, I prefer defusion as it fosters constructive dialogue and understanding, leading to mutually beneficial outcomes while preserving relationships. Conversely, I least prefer avoidance due to its tendency to prolong conflicts and hinder effective communication and resolution. 21. Explain why Chandler’s strategy-structure relationship commonly exists among firms. Answer: In Chandler’s strategy-structure relationship, organizations tend to follow a cycle. Once a new strategy is formulated, new administrative problems emerge and organizational performance declines. A new organizational structure is established as a result, and organizational performance improves. Eventually, the cycle repeats itself. This relationship commonly exists among firms because structure is designed to facilitate the strategic pursuit of a firm, and therefore, follow strategy. 22. If you owned and opened three restaurants after you graduated, would you operate from a functional or divisional structure? Why? Answer: A divisional structure by location would be preferred. This structure will enable local control of local issues, and enable higher morale, improved delegation of authority, clear accountability, and a competitive or at least comparative climate among the three restaurants. 23. Explain how to choose between a divisional-by-product and a divisional-by-region organizational structure. Answer: A divisional structure by product is most effective for implementing strategies when specific products need special emphasis. This type of structure is also widely used when an organization offers only a few products or when there are major differences among products. A divisional-by-region structure is appropriate for organizations whose strategies need to be tailored to fit the particular needs and characteristics of customers in different geographic areas. 24. Think of a company that would operate best in your opinion in a division-by-services organizational structure. Explain your reasoning. Answer: The divisional by services structure is most effective for implementing strategies when specific services are offered that independently generate revenue. This type of structure is widely used when an organization offers only a few services or when an organization’s services differ substantially. A firm that provides painting, electrical, and plumbing services utilizes this type design. 25. What are the two major disadvantages of an SBU-type organizational structure? What are the two major advantages? At what point in a firm’s growth do you feel the advantages offset the disadvantages? Explain. Answer: The two major disadvantages of an SBU-type organizational structure are that it requires an additional layer of management, which increases salary expenses. Also, the role of the group vice president is often ambiguous. However, these limitations often do not outweigh the advantages of improved coordination and accountability. Another advantage is that it makes the tasks of planning and control by the corporate office more manageable. As the number, size, diversity, and complexity of divisions in a firm increases, an SBU-type structure becomes more advantageous. 26. In order of importance in your opinion, list six advantages of a matrix organizational structure. Answer: Six advantages of a matrix organizational structure include: (1) objectives are clear, (2) employees can see results of their work, (3) shutting down a project is easily accomplished, (4) facilitates the use of personnel, (5) facilitates the use of physical resources, and (6) functional resources are shared instead of duplicated. Rankings of importance will vary among students. 27. Why should division head persons have the title president rather than vice president? Answer: The title “vice president” simply does not do justice for the level of accountability and responsibility that a division head person’s job entails. Division top managers should have the title “president.” Vice presidents are lower level managers than division head persons. 28. Compare and contrast profit sharing with gain sharing as employee performance incentives. Answer: Profit sharing provides an incentive for employees to help the company succeed financially, because they get a return on profit. Critics of profit sharing emphasize that too many factors affect profits for this to be a good criterion. Gain sharing requires employees or departments to establish performance targets; if actual results exceed objectives, all members get bonuses. 29. List three resistance to change strategies. Give an example when you would use each method or approach. Answer: Three resistance to change strategies are: force change strategy, educative change strategy, and rational or self-interest change strategy. • Force change strategy involves giving orders and enforcing those orders, such as when a manager tells a subordinate to perform a task differently. • Educative change strategy presents information to present people of the need for change. Examples include posters used to communicate reasoning for implementing a new company policy. • Rational or self-interest change strategy attempts to convince individuals that the change is to their personal advantage. For example, strategies involving employee wellness have tremendous benefits to all parties involved. 30. In order of importance in your opinion, list six techniques or activities widely used to alter an organization’s culture. Answer: Techniques used to alter an organization’s culture include recruitment, training, transfer, promotion, restructuring, reengineering, role modeling, positive reinforcement, mentoring, revising vision and/or mission, redesigning physical spaces/facades, altering reward system, and altering organizational policies/procedures/practices. Ranking of these activities will vary among students. 31. What are the benefits of establishing an ESOP in a company? Answer: An employee stock ownership plans (ESOP) is a tax-qualified, defined-contribution, employee-benefit plan whereby employees purchase stock of the company through borrowed money or cash contributions. ESOPs empower employees to work as owners. Besides reducing worker alienation and stimulating productivity, ESOPs also allow for substantial tax savings. 32. List reasons why it is important for an organization not to have a “glass ceiling”. Answer: It is important for an organization not to have a “glass ceiling” because according to recent studies, companies with more female executives and directors outperform other firms. A mix of thinking styles is key to management effectiveness. In addition, not have females (and minorities) in upper management makes the firm vulnerable to discrimination suits, and sends the wrong message to the firm’s customer base and other stakeholders. 33. Allocating resources can be a political and an ad hoc activity in firms that do not use strategic management. Why is this true? Does adopting strategic management ensure easy resource allocation? Why? Answer: Allocating resources can be ad hoc and political in the absence of strategic management because intuition, halo error, subjectivity, and emotions can then play too great a role. Strategic management does not assure easy resource allocation, but it generally results in more effective resource allocation. 34. Compare strategy formulation with strategy implementation in terms of each being an art or a science. Answer: The strategy-formulation process is more of a science, whereas strategy implementation is more of an art. Strategy implementation involves motivating employees. However, neither strategy formulation nor strategy implementation is a pure science or art because, for example, intuition and good subjective judgment are always essential in strategy formulation. Formulation focuses on effectiveness whereas implementation focuses on efficiency. 35. Describe the relationship between annual objectives and policies. Answer: Interrelationships among organizational objectives, strategies, and policies are revealed in the strategic-management model. Note that long-term objectives and strategies are part of the strategy-formulation process, whereas annual objectives and policies are part of strategy implementation. Clear policies are necessary for attainment of annual objectives. 36. Identify a long-term objective and two supporting annual objectives for a familiar organization. Answer: An example might be for a business school: Schools without AACSB accreditation might seek it as a long-term objective with increased scholarly output and increased outcome measures (job placement or field test scores) as supporting annual objectives. 37. Identify and discuss three policies that apply to your present strategic-management class. Answer: Policies that may be discussed include grading policies, attendance policies, and honor code policies. 38. Explain the following statement: Horizontal consistency of goals is as important as vertical consistency. Answer: This is a true statement. Horizontal consistency of objectives is as important as vertical consistency. An example of horizontal consistency could be that “there is no need for the marketing department to plan on doubling sales if the production department cannot produce the additional units.” An example of vertical consistency could be for the firm to have an ROI objective of 15%, with each business segment also then having a 15% ROI goal. 39. Describe several reasons why conflict may occur during objective-setting activities. Answer: The objective-setting process can lead to conflict due to competition over scarce resources, different expectations among individuals, different perceptions among individuals, miscommunication, time pressure, personality incompatibility, and line and staff misunderstandings. 40. In your opinion, what approaches to conflict resolution would be best for resolving a disagreement between a personnel manager and a sales manager over the firing of a particular salesperson? Why? Answer: Various approaches for minimizing and resolving conflict can be classified in three ways: avoidance, defusion, and confrontation. Depending on the situation, any of these three alternative approaches could justifiably be most effective in solving a dispute between a personnel manager and sales manager. 41. Describe the organizational culture of your college or university. Answer: Every institution has different rituals, values, stories, legends, heroes, ceremonies, and the like. Some institutions are mostly dorm based whereas some are mostly commuter based, some are more academic based than others, some are more professional school based rather than liberal arts based, etc. 42. Explain why organizational structure is so important in strategy implementation. Answer: Organizational structure is important in strategy implementation because a firm’s design dictates how resources will be allocated and how objectives will be established. In a geographically structured organization, for example, objectives are stated in geographic terms and resources are allocated by region. The structure reveals how the firm is organized, and being well organized can represent a great competitive advantage/disadvantage for firms. 43. In your opinion, how many separate divisions could an organization reasonably have without using an SBU-type organizational structure? Why? Answer: The answer to this question depends on the size, location, and type of divisions, but, generally speaking, a firm that has ten or more divisions could benefit from an SBU-type of organizational structure. 44. Would you recommend a divisional structure by geographic area, product, customer, or process for a medium-sized bank in your local area? Why? Answer: A divisional structure by geographic area is appropriate for organizations whose strategies need to fit the particular needs and characteristics of customers in different geographic areas. A divisional structure by geographic area is most commonly used by medium-sized banks. 45. What are the advantages and disadvantages of decentralizing the wage and salary function of an organization? How could this be accomplished? Answer: Decentralizing the wage and salary function of an organization could allow a firm’s reward system to be more closely linked to strategic performance. It also could allow decisions on salary increases, promotions, merit pay, and bonuses to be more closely aligned to support the long-term strategic objectives of an organization. 46. Do you believe expenditures for childcare or fitness facilities are warranted from a cost/benefit perspective? Why or why not? Answer: Many reports suggest that these expenditures are warranted. Managers and employees become more committed to the firm when childcare and fitness facilities are provided, or at least when some resources are allocated to these areas. 47. Explain why successful strategy implementation often hinges on whether the strategy-formulation process empowers managers and employees. Answer: Managers and employees make or break a firm. More and more, firms are empowering managers and employees through involvement in the strategic-management process. Lack of involvement or “empowering” often results in a lack of commitment to see the firm do well. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 7A: CRITIQUE CORPORATE ORGANIZATIONAL CHARTS Answer: Four shortcomings for each of three organizational charts are provided below: Southwest Airlines 1. Southwest is too large to operate using a functional structure. 2. Divisions of Southwest could be hubs of the company, or even USA vs. International, or Passenger vs. Freight/Other. 3. Southwest needs a Chief HRM (Human Resource Manager). 4. The CEO should not also be the Chairman, nor should he also have the title President. Hershey Foods 1. The CEO should not also carry the title President. Reserve the title President for division/segment head persons. 2. The CFO should not also be the Chief Administrative Officer (CAO), which essentially is a COO. 3. The division heads should not be SVP’s; the title President is sufficient. 4. A division-by-product (Chocolate vs. Non-Chocolate vs. Microwave Foods) would be more effective than division-by-region. Microsoft 1. The divisions could be “named better,” so that customers and investors will be clear what is what. For example, what is Interactive Entertainment vs. Microsoft Corp, vs. Online Services, vs. Server & Tools. 2. Microsoft should consider going to an SBU type structure, with the two SBU’s being perhaps Software and Hardware. 3. There are too few women among Microsoft’s top executives. 4. The phone division top executive should have the title President, rather than VP. ASSURANCE OF LEARNING EXERCISE 7B: DRAW AN ORGANIZATIONAL CHART FOR PEPSICO USING A FREE, ONLINE TEMPLATE Answer: This exercise mentions five web sites that may be used to develop a new and improved organizational chart for PepsiCo. Let’s here use http://www.smartdraw.com/specials/orgchart.asp Smart draw is free and easy to use. PepsiCo’s organizational chart is given in the case, but that organizational structure can be improved, particularly since PepsiCo’s four divisions do not match the company’s six reportable segments. PepsiCo should go to six divisions, and perhaps even eight reportable segments, since their ASEA and Europe segments should each be separated based on beverages vs. snacks. So, for a new and improved organizational chart for PepsiCo, show eight reportable segments – the six current plus the split of ASEA and Europe. With Smart draw, you simply enter your organization's information and the company’s software does the rest, aligning positions and connecting them automatically. There are options to add photos and information to personalize your new and improved organizational chart. ASSURANCE OF LEARNING EXERCISE 7C: DO ORGANIZATIONS REALLY ESTABLISH OBJECTIVES? Answer: This type of exercise is excellent to offer to students for extra credit. Research shows clearly that having clear objectives greatly enhances performance. In fact, ask students to find a couple of research articles that focus on objectives and include a summary of those in their report to the class. Even on an individual basis, to have an objective to lose 20 lbs, or to obtain a BBA Degree, or to increase sales of a family business by 10% annually would immensely help in achievement of that objective. Objectives provide direction, serve to motivate, and often serve as a basis incentive compensation to be received if and when the objectives are met. Employees and managers expect a firm to have clear objectives, so they know what is expected, and ideally how they can expect to benefit if the objectives are reached. ASSURANCE OF LEARNING EXERCISE 7D: UNDERSTANDING YOUR UNIVERSITY’S CULTURE Answer: This exercise makes a good homework assignment, though the examples identified should be discussed in class. This will enable students to compare their responses and identify the unifying culture at your institution. An example is provided below for Virginia Commonwealth University (VCU). Cultural form Example Hero/Heroine Grace Harris is a heroine at VCU. She served as President of the institution twice and also as Provost. She was instrumental in guiding the institution and is known now as the example by which all leaders are measured. Belief VCU believes that football is detrimental to the learning environment and, for this reason, does not have a football team. Metaphor VCU is like a friend of the community. It seeks to be seen as a friend and support system in all community affairs. Language There are several words that are heavily used in the VCU language. They are interdisciplinary, entrepreneurial, international, diversity, and growth. Value VCU values those things that are represented by its language. These include interdisciplinary programs, programs that generate revenues, international experiences, a commitment to diversity, and growth. Symbol The symbol of VCU is the ram. Story VCU evolved from two other small institutions just three decades ago. The president likes to tell this story to illustrate the youthfulness and vigor of the institution. Legend The work of Dr. John Fenn, a Nobel prize winning scientist, is legendary at VCU. Saga VCU develops an annual report each year that details its many accomplishments. Folktale Upper classmen often warn freshmen about the “Freshmen 15” – the 15 pounds that freshmen tend to gain during the first year of college. Myth Music students believe that the building which houses the School of Music is haunted by a pianist who died in the Civil War. The School is housed in an old church. Ceremony Graduation is a ceremony that marks the end of each student’s formal relationship with the institution. Rite A rite of passage at graduation is the throwing of caps at the conclusion of the service. Ritual Students have a ritual of going out on Thursday nights. Chapter 8 - Implementing Strategies: Marketing, Finance/Acct., R&D, & MIS Issues Overview Chapter 8 explains how to implement strategies by effectively managing market segmentation, perceptual mapping/product positioning, financial forecasting, debt vs. equity to obtain capital, data analysis (mining), R&D, and MIS issues. The Chapter 8 Learning Objectives as stated in the textbook are given below: 1. Develop effective perceptual maps to position rival firms. 2. Develop effective perceptual maps to identify market segments and demand voids. 3. Determine the cash worth of any business. 4. Explain market segmentation and product positioning as strategy-implementation tools. 5. Discuss procedures for determining the worth of a business. 6. Develop project financial statements to reveal the impact of strategy recommendations. 7. Perform EPS-EBIT analysis to evaluate the attractiveness of debt versus stock as a source of capital to implement strategies. 8. Discuss the nature and role of research and development in strategy implementation. 9. Explain how management information systems can determine the success of strategy-implementation efforts. 10. Explain business analytics and data mining. Teaching Tips 1. This is arguably the second most important chapter in the book, behind Chapter 6, because it focuses on marketing and financial aspects of implementing strategies. We usually spend 3 to 4 days on Chapter 8 because, for whatever reason, many students come to the capstone course weak in finance. Yet, value of the firm analysis, and EPS-EBIT analysis, and projected financial statement analysis, are essential for inclusion in a strategic planning case analysis. Ask all the finance/accounting majors to raise their hand and identify them as experts. 2. In the first few pages of this chapter, emphasize that Marketing is an important business major because marketing expenses can be gigantic yet marketing is essential, so expertise is needed to identify and reach target markets. Ask all the marketing majors to raise their hand and identify them as experts. 3. Perceptual maps, or product/market positioning maps, are especially helpful in implementing strategies. Ask students to develop one or more of these for their case company. Including a before-and-after perceptual map for their firm (before and after their recommendations are implemented) can be effective slides in an oral presentation. 4. EPS-EBIT analysis is essential for students to include in their case analysis, because any set of recommendations costs money, and the team needs to show the class where the firm should get the money – stock or debt or some combination. So, go over the EPS-EBIT material slow and easy, and utilize class exercises, perhaps the end-of-chapter review questions and assurance of learning exercises. Any quantitative tools such as this sometimes gives students trouble, but this one is easy, and important – because raising capital is an important strategic issue for all for-profit firms. 5. Projected financial statement analysis is an essential strategy implementation tool for students to learn, so go slow and easy over this material. Many professors require students, as part of their case analysis, to provide 3-year projected financial statements, so the class will know what impact their recommendations would likely have on the firm. Students will want to simply use an average historical percentage change approach for these statements, but emphasize that the projected statements must be based on their recommendations for the firm, which may be dramatically different than the historical percentage increase or decrease. For example, the team might recommend their case company acquire a rival firm that would nearly double their firm’s revenues, rather than go up the 6% historical average. 6. The section “Evaluating the Worth of a Business” is important because a strategic plan often includes acquiring another firm, so the question arises how much is the firm worth. And, it is just good business to know the cash value of your firm, in case a prospective buyer emerges. So, use several class exercises to go over this topic. We oftentimes have students prepare this analysis, and others in this chapter, in class for their assigned case company. This works really well. Many class days in my class are strategic planning workshops, where instead of just one teacher (me), everyone in class becomes a teacher helping others. This is a great pedagogical practice that AACSB recommends. 8. At the end of Chapter 8, direct student attention to the “Special Note to Students” because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 9. Regarding the end-of-chapter review questions, consider assigning one half of them one day in class giving each student a question, and letting them tell the class the answer, with you commenting on their answers. Do the other half another day. We have found this to be a fun day in class and it goes pretty quickly. 10. Several of the end-of-chapter Assurance of Learning Exercises can be used as excellent homework or classwork assignments to be completed as an individual or as a group of students. Several exercises focus on the PepsiCo Cohesion Case, and several focus on your college/university. We usually utilize at least from each venue. Answers to End-of-Chapter Review Questions 1. Do you agree with privacy advocates who contend that Facebook should provide ways for users to opt out of the mobile ad targeting? Why or why not? Answer: No. Consumers could simply not use Facebook. Facebook is a business, and to stay in business, Facebook needs to make money from advertisers. Facebook customers could opt out of Facebook all together. There are reasons for Facebook to be allowed to utilize mobile ad targeting. This practice needs to be disclosed to customers, who could decide for themselves whether to opt out of Facebook all together. If sufficient #’s of customers opt out, Facebook too would opt out of utilizing mobile ad targeting. 2. Develop a perceptual map for the six colleges and universities closest to your institution. Illustrate a market segment and a demand void in your map. What are the strategic implications of your map? Answer: Perceptual maps may display consumers’ ideal points. These points reflect ideal combinations of the two dimensions as seen by a consumer. Each dot can represent one respondent's ideal combination of the two dimensions. Areas where there is a cluster of ideal points (such as A) indicates a market segment. Areas without ideal points are sometimes referred to as demand voids. A company considering introducing a new product will look for areas with a high density of ideal points. In a university setting, an ideal point could be low tuition and low class size, if these were the two axes of the perceptual map. Another ideal point could be Highly Regarded Faculty and Great Physical Facilities. 3. Bristol-Myers Squibb, a company with single-A investment credit ratings, recently sold $2 billion of bonds that paid 3.35 percent interest. What are the pro’s and con’s of this activity, compared to issuing stock or borrowing money from a bank in terms of raising capital? Answer: A popular way for a company to raise capital is to issue corporate bonds, which is analogous to going to the bank and borrowing money, except that with bonds the company obtains the funds from investors rather than banks. Pros could be that 1) issuing bonds avoids dilution of ownership of the firm since shares of stock are not issues and 2) if the firm has a good credit rating bonds may enable the firm to acquire more funds than a bank would offer. Cons could be that 1) investors are receiving a higher rate of interest on their investment than a bank would receive, and 2) there is a fixed, long-term obligation to pay the funds back to investors, unlike issuance of stock, which carries no fixed obligation. 4. Lowe’s Companies is aggressively buying its own stock. What are situations when this practice is recommended or especially beneficial? Answer: A firm would want to buy back its own stock, called Treasury Stock, whenever it 1) believes its own corporate ROI and ROE will exceed alternative ways to invest that money, and/or whenever it 2) desires to protect itself from a hostile takeover, and/or 3) whenever the price of its own stock is arguably very inexpensive given the outlook for the firm. 5. The chapter says HP has more $goodwill than the $book value of the firm. Explain what this means, how it could occur, and what can be done about this situation? Answer: If a firm, such as HP, has historically paid a premium for one or more acquired firms, then the sum of those premiums (called goodwill) could easily exceed the $book value of the firm, defined as # of shares outstanding x the firm’s stock price. The best thing to do in this situation is to do some excellent strategic planning and strive to increase the firm’s stock price and performance through superior strategy formulation and implementation. 6. Define and give an example of business analytics. Why is this technique becoming so widely used in organizations today? Answer: Business analytics (data mining) is a management information systems technique that involves using software to mine huge volumes of data to help executives make decisions. As more and more products become commoditized (so similar as to be indistinguishable), competitive advantage more and more hinges on improvements to business processes. Business analytics can provide a firm with proprietary business intelligence and can reveal where competitors are weak, so that marketing and sales activities can be directly targeted to take advantage of resultant opportunities (knowledge). In addition to understanding consumer behavior better, business analytics also is being used to slash expenses. 7. Give a hypothetical example where Company A buys Company B for a 15.0% premium. Answer: If the purchase price is more than the stock price times number of shares outstanding, the additional dollars are called a premium. The premium is a per-share dollar amount that a person or firm is willing to pay beyond the book value of the firm to control (acquire) the other company. Thus, if a firm acquires another firm for $1.15B when the stock price times # shares out = $1.0 B, then that would be a 15% premium. 8. Give a hypothetical example where Company A buys Company B for a 15.0% discount. Answer: If the purchase price is less than the stock price times # of shares outstanding, that difference is called a discount. Thus, if a firm acquires another firm for $0.85 B when the stock price times # shares out = $1.0 B, then that would be a 15% premium. 9. What is Treasury Stock? When should a company purchase Treasury Stock? Answer: Treasury stock refers to shares of a firm that were once a part of shares outstanding but were subsequently repurchased by the company and decommissioned. Treasury stock shares do not have voting rights and do not pay any dividend distributions. A company can decide to hold onto treasury stocks indefinitely, add to its treasury stock, reissue those shares to the public, or even cancel them. A firm would want to buy back its own stock whenever it 1) believes its own corporate ROI and ROE will exceed alternative ways to invest that money, and/or whenever it 2) desires to protect itself from a hostile takeover, and/or 3) whenever the price of its own stock is arguably very inexpensive given the outlook for the firm. 10. What is an initial public offering (IPO)? When is an IPO good for a company? Why did Facebook recently utilize an IPO? Was that a wise strategic move? Why? Answer: An initial public offering (IPOs) occurs when a company moves from being private to being public. Going public means selling off a percentage of your company to others in order to raise capital; consequently, it dilutes the owners’ control of the firm. The most likely reason for Facebook going public was to raise additional capital. The need to raise capital to finance growth is a good time to issue an IPO. 11. Discuss the new principles of marketing according to Parise, Guinan, and Weinberg. Answer: According to Parise, Guinan, and Weinberg, the principles of marketing include the following: ● Don’t just talk at consumers—work with them throughout the marketing process. ● Give consumers a reason to participate. ● Listen to—and join—the conversation outside your company’s website. ● Resist the temptation to sell, sell, sell. Instead attract, attract, attract. ● Don’t control online conversations; let it flow freely. ● Find a “marketing technologist,” a person who has three excellent skill sets (marketing, technology, and social interaction). ● Embrace instant messaging and chatting. 12. For companies in general, identify and discuss three opportunities and three threats associated with social networking activities on the Internet. Answer: Social networking is a reliable method for allowing consumers to share product and service needs, wants, and opinions with other consumers and with companies. Second, social networking activities foster communication of the company message to more potential consumers. Third, social networking may lead to increased revenue from online advertising. Perhaps the greatest threat is that any kind of negative publicity travels fast online. Other threats include increased competition from other firms that are more savvy in the areas of social networking, and lower exposure in global areas with limited Internet service. 13. Do you agree or disagree with the following statement? “Television viewers are passive viewers of ads, whereas Internet users take an active role in choosing what to look at – so customers on the Internet are tougher for marketers to reach.” Explain your reasoning. Answer: The Internet consists of customers self-selected into certain groups doing certain things, so in this sense customers on the Internet are easier for marketers to reach. In addition, business analytics also enables tracking of Internet usage, also making customers on the Internet easier for marketers to reach. Most marketers do not know if you are watching television, but they many do know what web sites you are visiting. Tracking you online is easier than tracking you on the sofa watching TV. 14. How important or relevant do you believe “purpose-based marketing” is for organizations today? Answer: Purpose-based marketing, or “showing customers how they can improve their lives” with a product or service, is an effective marketing approach. When consumers are interested in buying cheaper brands, ads must promote price, but they must also show the intrinsic value of the product or service to be cost effective. 15. Why is it essential for organizations to segment markets and target particular groups of consumers? Answer: Market segmentation is the subdividing of a market into distinct subsets of customers according to needs and buying habits. As a means for reducing marketing expenses, it is especially useful for small and specialized firms. Market segmentation is an important variable in strategy implementation because it 1) allows a firm to operate with less resources because mass production, mass distribution, and mass advertising are not required, 2) enables a small firm to compete successfully with a large firm by maximizing per-unit profits and per-segment sales, 3) directly affects the marketing mix variables: product, place, promotion, and price. 16. Explain how and why the Internet makes market segmentation easier. Answer: The Internet makes market segmentation easier because the segments of people whom marketers want to reach online are much more precisely defined than the segments of people reached through traditional forms of media such as television. Marketers can reach persons interested in specific topics, such as travel or fishing, by placing banners on related Web sites. The Internet consists of customers self-selected into certain groups doing certain things, so in this sense, customers on the Internet are easier for marketers to reach. In addition, business analytics also enables tracking of Internet usage, also making customers on the Internet easier for marketers to reach. Most marketers do not know if you are watching television, but they many do know what web sites you are visiting. Tracking you online is easier than tracking you on the sofa watching TV. 17. A product-positioning rule given in the chapter is that “when there are only two competitors, the middle becomes the preferred strategic position.” Illustrate this for the cruise ship industry, where two firms, Carnival and Royal Caribbean, dominate. Illustrate this for the commercial airliner building industry, where Boeing and Airbus dominate. Answer: Firms should avoid positioning themselves in the middle of a perceptual map; the middle usually means a strategy that is not clearly perceived to have any distinguishing characteristics. However, when there are only two competitors, the middle becomes the preferred strategic position. This means that both firms will adopt conservative strategies that are similar to one another. To position the firm in say the upper left in a two firm industry would forgo three quadrants, so the middle becomes an attractive area. Students may give specific examples of this phenomenon for Carnival and Royal Caribbean, and Boeing and Airbus. 18. How could/would dividends affect an EPS/EBIT analysis? Would it be correct to refer to “earnings after taxes, interest, and dividends” as retained earnings for a given year? Answer: Using equity to raise capital oftentimes carries an additional expense of paying dividends. For dividend-paying firms, this could make equity a bit less attractive vs. debt. Considering dividends in the EPS/EBIT analysis would make the analysis more robust. To consider dividends in an EPS/EBIT analysis, a row should be inserted for “Dividends” below the “EAT” row, and then an “Earnings after taxes and dividends” should be inserted below this. 19. In performing an EPS/EBIT analysis, where does the first row of (EBIT) numbers come from? Answer: In an EPS/EBIT analysis, the first row (EBIT) numbers come from earnings before interest and taxes off the existing income statement. The first row is an estimate for EBIT next year, based on what the EBIT was the prior year, and given what the firm’s strategies entail. 20. In performing an EPS/EBIT analysis, where does the tax rate percentage come from? Answer: Tax rates for companies vary considerably and should be computed from the respective income statements by dividing taxes paid by income before taxes. Then utilize this percentage in performing EPS/EBIT analysis. 21. For the Litten Company in Table 8-7, what would the Retained Earnings value have to have been in 2013 on the balance sheet, given that the 2014 NI-DIV value was $4? Answer: negative $2 is the answer because the 2014 NI – DIV value is $4. The process is that you add the +4 to something to get the +2, so the 2013 RE had to be -2. 22. Show algebraically that the price earnings ratio formula is identical to the number of shares outstanding times stock price formula. Why are the values obtained from these two methods sometimes different? Answer: Formula 1: The price earnings ratio is calculated by dividing the market price of the firm’s common stock (S) by the annual earnings per share (EPS) and multiplying this number by the firm’s average net income for the past five years (or the most recent net income) (NI). Formula 2: Number of shares outstanding (#SO) x common stock price (SP). Since EPS = NI / #SO, algebraically these two formulas are identical. Sometimes there are slight differences between the two formulas since #O is sometimes a year-end figure and sometimes and average figure for the year. 23. In accounting terms, distinguish between intangibles and goodwill on a balance sheet. Why do these two items generally stay the same on projected financial statements? Answer: Whereas intangibles include copyrights, patents, and trademarks, goodwill arises only if a firm acquires another firm and pays more than the book value for that firm. Oftentimes these two items stay the same on projected balance sheets, unless strategies to be implemented impact those two rows. 24. Explain how you would estimate the total worth of a business. Answer: There are three approaches described in the chapter: 1) what a firm owns, 2) what a firm earns, or 3) what a firm will bring in the market. The first approach in evaluating the worth of a business is determining its net worth or stockholders’ equity. This number can be extracted from the balance sheet as Total Equity or Owners Equity (less goodwill). The second approach to measuring the value of a firm grows out of the belief that the worth of any business should be based largely on the future benefits its owners may derive through net profits. A rough rule of thumb is 5 times the 5 year annual net income. The third approach is to let the market determine a business’s worth. First, base the firm’s worth on the selling price of a similar company. Second, calculate a price-earnings ratio. To use this method, divide the market price of the firm’s common stock by the annual earnings per share and multiply this number by the firm’s average net income for the past five years. The third approach can be called the outstanding share method. To use this method, simply multiply the number of shares outstanding by the market price per share and add a premium. A recommended procedure is to determine the firm’s value using all approaches. Then decide which amount is most reasonable or use an average of the computed amounts. 25. Diagram and label clearly a product-positioning map that includes six fast-food restaurant chains. Answer: The answer to the question will vary by companies chosen. An example is provided. 26. Explain why EPS/EBIT analysis is a central strategy-implementation technique. Answer: EPS/EBIT analysis is a key strategy-implementation technique because additional capital is often needed to implement strategies. EPS/EBIT analysis provides information regarding whether (1) stock should be issued, (2) funds should be borrowed, or (3) a combination of stock and debt is the best method to raise the capital. 27. Discuss the limitations of EPS/EBIT analysis. Answer: An EPS/EBIT analysis is the most widely used technique for determining whether debt, stock, or a combination of debt and stock is the best alternative for raising capital to implement strategies. Several limitations of this analysis include the following. The firm may be highly leveraged and the analysis does not reveal this. Dilution of ownership may be a problem and the analysis does not reveal this. Interest rates and/or stock prices may be rising or falling, and the analysis does not reveal this. Basically the analysis is a snapshot in time. The analysis oftentimes does not consider whether dividends are being paid, which could make the equity option a bit less attractive. In addition, a limitation is that the stock price, tax rate, and interest rate and considered to stay the same over varied economic conditions that impact EBIT. 28. Explain how marketing, finance/accounting, R&D, and computer information systems managers’ involvement in strategy formulation can enhance strategy implementation. Answer: For implementation to be successful, commitment is needed from managers. The best way to get commitment is to get managers involved in the formulation process. Marketing, finance/accounting, R&D, and computer information systems managers play a vital role in implementing strategies, so their active involvement in formulating strategies is needed to gain support and commitment for actions to come. Their expertise should weigh heavily in prioritizing internal strengths/weaknesses, external opportunities/threats, and in generating and selecting from among alternative strategies. 29. Consider the following statement: “Retained earnings on the balance sheet are not monies available to finance strategy implementation.” Is it true or false? Explain. Answer: This is a true statement. Retained earnings on the balance sheet represent historical earnings that have been reinvested in the firm in the form of plants, equipment, inventory, and the like. 30. Explain why projected financial statement analysis is considered both a strategy-formulation and a strategy-implementation tool. Answer: Projected analysis is a strategy-formulation tool in the sense that it enables the financial impact of alternative strategies to be forecasted and scrutinized. This information can be instrumental in selecting from among feasible alternative strategies. In addition, the analysis allows various approaches for implementing strategies to be examined/scrutinized, as well as to forecast the financial impact of strategies selected for implementation. 31. Describe some marketing, finance/accounting, R&D, and management information systems activities that a small restaurant chain might undertake to expand into a neighboring state. Answer: Marketing— Assess the consumer demand for that type of establishment. Determine the competitive environment. Obtain information regarding advertising rates for major newspapers and television stations in the neighboring state; identify suppliers in the neighboring state; and undertake site selection analyses for potential locations in the neighboring state. Finance/Accounting—Obtain information regarding potential creditors in the neighboring state; and identify different tax, legal, and accounting practices in the neighboring state. Research and Development—Obtain information regarding preferences for different types of food in the neighboring state. Management Information Systems—Purchase a computer networking system whereby inventory, accounts receivable, accounts payable, and similar information can be entered immediately and easily. Integrate system with existing one. 32. What effect is e-commerce having on firms’ efforts to segment markets? Answer: E-commerce is making it possible for firms to further segment their markets at low cost due to the inherent cost advantages of selling via the Internet. The Internet makes market segmentation easier because consumers naturally form “communities” on the Web as explained in the section in the chapter titled “Does the Internet Make Market Segmentation Easier?” 33. Complete the following EPS/EBIT analysis for a company whose stock price is $20, interest rate on funds is 5%, tax rate is 20%, # of shares outstanding is 500 million, and EBIT range is $100 to $300 million. The firm needs to raise $200 million in capital. 100% Stock 100% Debt 20% Debt/ 80% Stock Low High Low High Low High EBIT $100 $300 $100 $300 $100 300 Interest (5%) 0 0 10 10 2 2 EBT $100 $300 $90 $290 $98 $298 Taxes (20%) $20 $60 $18 $58 $19.6 $ 59.6 EAT $80 $240 $72 $232 $78.4 $238.4 # Shares 510 510 500 500 508 508 EPS .157 .470 .144 .464 .154 .469 Answer: The all stock option is best since the EPS values are highest. 34. Under what conditions would Retained Earnings on the Balance Sheet decrease from one year the next? Answer: The only way for RE to decrease from one year to the next on the balance sheet is 1) if the firm incurred an earnings loss that year or 2) the firm has positive (or zero) net income for the year but paid out dividends more than the net income. 35. In your own words, list all the steps in developing projected financial statements. Answer: The six steps required to perform a projected financial analysis: ● Prepare the projected income statement before the balance sheet. Start by forecasting sales as accurately as possible. ● Use the percentage of sales method to project the cost of goods sold (CGS) and the expense items in the income statement. For example, if CGS is 70 percent of sales in the prior year (as it is in Table 8-5) then use that same percentage to calculate CGS in the future year. Items such as interest, dividends, and taxes must be treated independently and cannot be forecasted using the percentage-of-sales method. ● Calculate the projected net income. ● Subtract from the net income any dividends to be paid for that year. This remaining net income is Retained Earnings. Reflect the Retained Earnings total on both the income statement and balance sheet because this item is the key link between the two projected statements. Bring this retained earnings amount for that year (NI-DIV = RE) over to the balance sheet by adding it to the prior year’s RE shown on the balance sheet. The RE on the balance sheet is a cumulative number rather than money available for strategy implementation. ● Project the balance sheet items, beginning with retained earnings and then forecasting stockholder’s equity, long-term liabilities, current liabilities, total liabilities, total assets, fixed assets, and current assets (in that order). Use the cash account as the plug figure; that is use the cash account to make the assets total the liabilities and net worth. Then, make appropriate adjustments. ● List comments on the projected statements. Any time a significant change is made in an item from a prior year to the projected year, a remark should be provided. 36. Based on the financial statements provided for PepsiCo (see pages xxxx), how much dividends in dollars did PepsiCo pay in 2011? In 2012? Answer: Based on the financial statements provided for PepsiCo, the dividends paid in 2011 and 2012 can be found in the respective years' financial reports, typically in the "Statement of Cash Flows" or in the notes to the financial statements. In 2011, PepsiCo paid $X million in dividends to its shareholders. This figure reflects the company's commitment to returning value to its investors while maintaining a balanced capital allocation strategy. Similarly, in 2012, PepsiCo distributed $Y million in dividends, demonstrating its continued focus on rewarding shareholders and possibly reflecting changes in the company's financial performance and dividend policy over time. These dividend payments are crucial indicators of PepsiCo's financial health and its ability to generate consistent returns for its shareholders, contributing to its overall strategy of delivering long-term value. Please replace "X" and "Y" with the actual dividend amounts as per the financial statements provided in the book. 37. Based on the financial statements provided in this chapter for the Litten Company, calculate the value of this company, if you know that their stock price is $20 and they have 1 million shares outstanding. Calculate 4 different ways and average. Answer: There are three approaches to evaluating the value of a business: 1) stockholders’ equity minus goodwill, 2) net income times 5, 3) price-earnings ratio method, and 3) outstanding shares method. ● Common stock (20,000,000) plus paid-in capital (20,000,000) plus retained earnings (2,000,000) = SE = 42,000,000 ● Current annual profit * 5 = 6,000,000 * 5 = 30,000,000 ● Outstanding shares method = $20 * 1,000,000 outstanding shares = $20,000,000 ● Price-earnings ratio method = ($20/ EPS of $2) * average net income = $10 * 7.875 = 78.75 million. ●Average of all four methods: $42,680,000 38. Why should you be careful not to use historical percentages blindly in developing projected financial statements? Answer: One must be aware of what the firm did to achieve past sales increases, which may not be appropriate for the future unless the firm pursues the same or similar strategies. Similarly, for manufacturing firms, if the firm is already operating at 100% capacity in all three 8 hour shifts, then new manufacturing facilities would presumably be necessary to increase sales further. 39. In developing projected financial statements, what should you do if the $ amount you must put in the cash account (to make the statement balance) is far more (or less) than desired? Answer: If the cash needed to balance the statements is too small or too large, make appropriate, offsetting changes on the balance sheet. For example, borrow more (or less) money than originally planned, or pay off some long-term debt. The cash account is like a checking account that draws little to no interest, so firms should not leave an excessive amount in cash. 40. Why is it both important and necessary to segment markets and target groups of customers, rather than marketing to all possible consumers? Answer: Marketing is too expensive to try to reach everybody. Firms need to identify target groups and aggressively market to those customers. Segmentation is the subdividing of a market into distinct subsets of customers according to needs and buying habits. If all consumers are marketed to in the same way, it will be difficult to please all the different needs. Segmentation is required to tailor offerings to distinct subsets in an efficient and effective manner. 41. In full detail, explain the following EPS/EBIT chart. Answer: In this diagram, the combination financing option offers the most consistent performance in EPS. Stock financing results in a low EPS when EBIT is low, but the highest EPS if EBIT is high. Debt offers a higher EPS than stock in recessionary times, but in boom times will result in a lower EPS. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 8A: DEVELOP DIVISIONAL PRODUCT-POSITIONING MAP FOR PEPSICO Answer: This exercise asks for students to select and develop one among six perceptual maps that compare PepsiCo vs. Coca-Cola in 1) sports/energy drinks, 2) bottled water, 3) juices, 4) carbonated beverages, 5) sparkling beverages, and 6) teas/coffee. Low Price ASSURANCE OF LEARNING EXERCISE 8B: GAIN PRACTICE DEVELOPING PERCEPTUAL MAPS Answer: The exercise asks students to develop a perceptual map for either beer or shampoo. Perhaps ask the guys to develop the beer map and the gals to develop the shampoo map. An example beer map might be Lite vs. Not-Lite and Craft vs. Not-Craft. An example shampoo map might be High Price vs. Low Price and Dandruff Control vs. Not-Dandruff Control. ASSURANCE OF LEARNING EXERCISE 8C: PERFORM AN EPS/EBIT ANALYSIS FOR PEPSICO Answer: Amount needed: $1B = to acquire Monster Beverage Interest rate: 3% Tax rate: 2,090/8,304 = 25.2% is PepsiCo’s tax rate in 2012 Stock price: $83 in May 2013 Number of shares outstanding: 1.544B Conclusion: PepsiCo should use all stock to raise the needed $1B to finance the acquisition since the EPS values are highest for that alternative. ASSURANCE OF LEARNING EXERCISE 8D: PREPARE PROJECTED FINANCIAL STATEMENTS FOR PEPSICO Answer: Prepared May 2013 Recommendation: Acquire Mondelez International (stock symbol: MDLZ) Stock Price of MDLZ: $ 30 # of shares out of MDLZ: 1.78B Value of MDLZ: $ 53.4B Condensed proformas are provided below based on year-end 2012 financial information (in millions $) for both firms. Basically when acquiring another firm, the two firms’ financial statements are merged, although there are some accounting issues involved beyond the scope of this course. Note below that PepsiCo generates almost twice the revenue as Mondelez, with nearly the same total assets, which speaks highly of PepsiCo. Mondelez dominates the salty snack market outside the USA, whereas PepsiCo dominates within the USA with its Frito-Lay and Quaker segments. Thus, from an economies of scale and pricing perspective, the merger would make a lot of sense, especially given the slow-to-no growth carbonated beverage market in developed countries. If PepsiCo could acquire for significantly less that the $ 53.4B calculated above, that too would be a plus. ASSURANCE OF LEARNING EXERCISE 8E: DETERMINE THE CASH VALUE OF PEPSICO Answer: PEPSICO Company Worth Analysis (in millions) Shareholders’ Equity – Goodwill – Intangibles $ - 11,202 Net Income x 5 30,890 (Stock Price/EPS) x NI 128,193 # of Shares Outstanding x Stock Price 128,152 Four Method Average 69,008 $ Goodwill/ $ Total Assets 22.7% 1. Equity Method: Total (or Owners’) Equity - Goodwill (Intangibles) 2. Net Income Method: Net Income x 5 3. P/E Method: Stock Price / EPS x avg. net income (3 years) 4. Shares x Price Method: Number of shares outstanding x stock price Note: The Net Income method is only useful for small businesses and in select situations. The Shares x Price method much more accurately portrays the true value of a firm. Note that 22.7 % of PepsiCo’s total assets being goodwill is high. ASSURANCE OF LEARNING EXERCISE 8F: DEVELOP A PRODUCT-POSITIONING MAP FOR YOUR UNIVERSITY Answer: Be sure to focus on the implications of each map illustrated on the board. Steps for developing a product-positioning map include: 1. Select key criteria that effectively differentiate institutions of higher education. 2. Diagram a two-dimensional product-positioning map with specified criteria on each axis. 3. Plot major competitors in the resultant four-quadrant matrix. 4. Identify areas in the positioning map where the university could be most competitive in the given target market. ASSURANCE OF LEARNING EXERCISE 8G: DO BANKS REQUIRE PROJECTED FINANCIAL STATEMENTS? Answer: Banks are not in the business of owning homes, buildings, or inventory. Banks do not want to own homes, buildings, or inventory. Before making business loans, banks generally do require projected financial statements, especially if collateral, sufficient to cover the loan amount, is not offered by the customer. Projected financial statements give the bank some basis for determining whether the bank will get paid back, rather than it having to place a lien on a home, or building, or inventory. The banker will ask the customer questions about the proformas to assess whether the statements are realistic. Sometimes, if substantial collateral is offered as a basis for the loan, projected financial statements may not be required, but more often than not, they are required so the bank can be reasonably assured of getting paid back, rather than having to go after a home, building, or inventory. Solution Manual for Strategic Management: A Competitive Advantage Approach, Concepts and Cases Fred R. David, Forest R. David 9780133444797, 9780135173947, 9780134167848, 9780135199978
