Report



Acme Co.

Strategic Planning Report

Table of Contents

Executive Summary 2

Internal Analysis 4

Liquidity analysis 5

Solvency analysis (Cash Flows) 8

Operating Efficiency analysis 12

Capital Structure & Leverage analysis 16

Breakeven analysis 21

Economic Profit calculation breakdown 22

Value of the Firm calculation breakdown 23

Financial statement data 24

Industry comparison data 27

External Analysis 28

Industry Segment Analysis: Competitive Attributes Matrix 29

Image Map of the Top 2 Most Important Demand Attribute data 30

Image Map of the 3rd and 4th Most Important Demand Attribute data 31

Image Map of the 5th and 6th Most Important Demand Attribute data 32

Industry 5 Forces Analysis 33

Strategic Plan 37

QFD Quality Function Deployment (House of Quality) 37

Business Strategy Analysis: Differentiation Competitive Advantage 38

Sales Growth Plan & Product Market Matrix strategies 41

Sales Growth Simulations: Customer Pipeline System Dynamics Model 43

Financial Goals Plan in DuPont Analysis format 48

Economic Value Added (Economic Profit) Resulting From This Plan 49

Value of the Firm if plan targets are achieved 50

Appendix

Appendix A Presentation Slides 51

Appendix B Customer Survey #1 & Results Summary Table x

Appendix C Customer Survey #2 & Results Summary Table x

Appendix D Financial Statements (10-k Annual Report to Shareholders) x

Appendix E Team Evaluation Forms x

(In the Header (above) replace “Acme Co.” with your client firm. Also, replace with the client company logo.)

Acme Co.

(Replace “Acme Co.” with your client firm. Delete all BLUE text when you have finished writing the report.)

Strategic Planning Report

Executive Summary

In paragraph 1, describe the history of the company.

In paragraph 2, describe a brief overview of what is covered in this report; internal & external analysis, and the strategic plan.

In paragraph 3, State your overall conclusions on Solvency, Operating Efficiency, and capital structure. Then describe what you believe to be the top 2 most important, or interesting, insights from your entire internal analysis.

In paragraph 4, State your overall conclusions on the competitive environment strengths, based on the image map data. Next state your conclusions on the greatest threat identified in your 5-forces analysis. Then, describe what you believe to be the 2 most important, or interesting, conclusions from your entire external analyses.

In paragraph 5, identify then describe what you recommend to be the 2 most important strategic initiatives (internal processes from the HoQ). Next, describe the customer attributes that each of these processes is intended to improve. Justify your recommendations by discussing the HoQ Imputed Importance scores.

In paragraph 6, state your sales growth goal for next year, and mention how this was calculated using the Growth Corridor method in order to identify a sustainable growth rate. Then briefly explain how the target growth rate will be achieved; as the sum of multiple, simultaneous growth strategies of market penetration, product development, and market development. Include in this discussion, your overall growth targets for each of the product-market growth strategies.

In paragraph 7, briefly explain how your strategic plan justifies your financial targets for next year (ROA, ROS, Sales/Assets, Leverage Ratio), referencing the FSA planning sheet, and indicate the expected economic profit and value of the firm resulting from achieving these targets.

(Total page length of the Executive summary should be more than 1 page but no more than 2 pages)

(Executive Summary continues on this page covering the topics listed above...)

INTERNAL ANALYSIS

The internal environment of an organization is made up of a firm's "in-house" activities that relate to its financial and business strategies. The purpose of the internal environment section is to identify strengths and weaknesses of the Company.

STRATEGIC FINANCIAL ANALYSIS

The purpose of this section is to diagnose the financial statements of the company so as to understand, explain, and enhance the performance of the firm. This section examines liquidity & solvency, operating efficiency, and capital structure.

Throughout this section, ratios are used to show efficiency in the use of the firm's resources. Ratios provide reference points to compare different management styles and their strategies, regardless of the size of the firm. Each of these performance measures will typically be assessed using two baselines of comparison: trend and industry comparison. Use of both baselines on each measure is important in that they produce quite different information on the Company's performance.

Liquidity and Solvency

Liquidity is the ability of an organization to convert its assets to cash both quickly and with a low cost of conversion. Measuring a firm's liquidity assesses whether or not survival is threatened, in the short run. If survival is at stake, then long term strategy must yield its priority in favor of a short-term survival strategy.

Current Ratio

This shows a company's ability to pay its current obligations from current assets: current assets per $1.00 in current liabilities. Generally, a company that has a small inventory and readily collectable accounts receivable can operate safely with a lower current ratio than a company whose cash flow is less reliable. Values of 1.0 or greater are preferred; values less than 1.0 indicate the firm is not liquid.

[pic]

(Write your conclusions here...)

Quick Ratio

This is a more conservative measure of liquidity than the Current Ratio because this ratio focuses on the firm's more liquid assets (i.e. by excluding inventory): cash equivalents per $1.00 in current liabilities. This helps answer the question; if inventory fails to turnover, could this firm meet its current obligations with the readily convertible assets on hand? A value of less than 1.0 indicates a dependency on inventory or other non-cash current assets to liquidate short term debt. Values of 0.5 or greater are preferred. (Also known as acid-test, and quick asset ratio).

[pic]

(Write your conclusions here...)

Inventory Turnover

Cost of goods sold divided by inventory. This shows how many times the inventory of a firm is sold and replaced during an accounting period. Larger values are preferred. When compared to an industry average, a low turnover tends to indicate that the company is carrying excess inventory, an unhealthy sign because excess inventory represents an investment with a low rate of return. Over time, a consistent drop in inventory turnover indicates the lack of an effective sales strategy or poor selections in buying. Decreasing values have a negative effect on cash flow. (This ratio is calculated as sales divided by inventory by financial analysts such as Dunn & Bradstreet. Thus, the formula should be identified before comparing performance across firms (Also known as Inventory Utilization Ratio). The COGS-based calculation is preferable.

[pic]

(Write your conclusions here...)

Accounts Receivable Collection

Accounts Receivable divided by average daily sales. This indicates the average number of days it takes the company to convert receivables into cash. Large values indicate generous credit terms (which may increase sales), or lack of control over collections. Increasing values have a negative effect on cash flow. (Also known as Collection Ratio and Average Collection Period).

[pic]

(Write your conclusions here...)

Conclusion on overall liquidity of the firm

(Write your conclusions here...)

Solvency

Solvency is a firm's ability to pay debt and obligations by using its cash flows. A firm is solvent if it generates more cash than it consumes; it has a zero or positive net cash flow.

Cash flow represents the cash outlays and receipts over a given period of time. A positive total cash flow is generally necessary for the survival of the firm; the alternative is to draw down any cash reserve in the bank, sell additional equity in the business, or borrow additional cash.

The three sources of cash are analyzed next.

Cash flow from Operations

Cash flows from operations are cash amounts expended and received in the normal operations of the business. Thus, these cash flows correspond primarily to the income statement accounts, but also reflect changes in current asset accounts. When net cash flow from operations is positive, it indicates that the business operations are generating cash.

[pic]

(Write your conclusions here...)

Cash flow from Investing

Cash flows from investing are cash amounts expended and received from the purchasing and selling of the firm's long-term assets. Thus, when the firm is growing, cash flow from investing activity is negative, indicating that the firm is purchasing plant and equipment, or other such items, required to support sales growth. These cash flows correspond primarily to the changes in non-current asset accounts on the balance sheet. When net cash flow from investing is positive, it indicates that the business is generating cash by selling its assets; downsizing.

[pic]

(Write your conclusions here...)

Cash flow from Financing

Cash flows from financing are cash amounts expended and received from the purchasing and selling of the firm's shares of stock (equity) or borrowed funds received from lenders and payments on loans (debt). Thus, these cash flows correspond primarily to the changes in liabilities and equity accounts on the balance sheet. When cash flow from financing activity is negative, this indicates that the firm is repurchasing its shares, or repaying debt. When net cash flow from financing is positive, it indicates that the firm is generating cash by selling shares of stock, or borrowing.

[pic]

(Write your conclusions here...)

Net Cash Flow

Net cash flow is the sum of the three sources of cash: operations, investing, and financing. In the short run, one source may off-set negative cash flow from another source. However, the long-run solvency of the business requires positive cash flow from operations because investing and financing activities, alone, cannot generate cash indefinitely.

[pic]

(Write your conclusions here...)

Operating Efficiency

Operating efficiency is the productivity achieved by management in employing the resources of the firm. The primary measures are: return on assets, return on sales, and asset turnover. These ratios will be analyzed according to both their efficiency trend and comparison to industry average efficiency. The first ratio that will be discussed is return on assets.

Return on Assets (ROA)

This shows the overall efficiency of management in generating earnings given the total amount of assets in the company: earnings per $1.00 in assets. Thus, this is a very broad measure of the operating efficiency of management. Large (positive) values are preferred. (Also known as 'ROA' and often misnamed Return on Investment 'ROI').

[pic]

(Write your conclusions here...)

Return on assets is caused by the product of Return on Sales and Asset Turnover ratios (see Performance Structure diagram). Thus, we may use these ratios to diagnose the strengths and weaknesses of the overall ROA efficiency. Accordingly, these ratios are assessed next.

Return on Sales (ROS)

This is a measure of the efficiency in generating profit on each dollar of sales. Positive values indicate the extent to which strategies of low cost, differentiation, or both, have been successful in generating revenues that exceed the cost of service or production: earnings earned per $1.00 in sales. A positive value is necessary to conclude the firm has achieved a competitive advantage; typically it must not only be positive but exceed 5%, due to "ordinary profit" requirements. Larger positive values increase the rate at which the firm may grow; more cash is available to finance the operating cash cycle. (Also known as Net Profit Margin).

[pic]

(Write your conclusions here...)

Asset Turnover (AT)

This indicates the extent to which management is efficient in its use of all the company's assets to produce sales (effective sales volume expansion strategies): sales per $1.00 in assets. Large (increasing) values are preferred. (Also known as Rate of Asset Turnover, RoAT, or Sales to Assets Ratio).

[pic]

(Write your conclusions here...)

Operating Efficiency performance structure in the Du Pont Analysis framework:

(Introduce the method of Dupont Analysis, referring to the diagram on the next page, and use that as a framework to describe your concluding summary diagnosis of Operating Efficiency strengths and weaknesses, both in terms of trend and industry comparison)

[pic]

Capital Structure and Leverage

Capital structure is the mixture of debt and equity maintained by a firm. It is also described as the proportion of debt financing to equity financing. A firm can choose any capital structure it wants as long as it safely manages the concept of financial leverage. Financial leverage refers to the extent to which a firm relies on debt. The more debt financing a firm uses in its capital structure, the more financial leverage it employs. Increasing financial leverage has both positive and negative effects on the performance of the firm. The positive effect involves potential improvements in Return on Equity, due to the smaller proportion of equity in total assets. The negative effect involves increased financial risk, due to the increase in interest expense which is a fixed expense. These effects on performance tend to be off-setting, and thus the value of the firm is not affected by a, safe, change in the capital structure.

[pic]

[pic]

The capital structure will be analyzed using four measures; leverage ratio, positive leverage, Times Interest Earned (TIE) ratio, and Return on Equity (ROE). If the firm is leveraged, and the leverage is both positive and interest payments can be safely made, then the financial leverage is not hurting the firm. The ROE will be measured to assess the impact of the capital structure on the financial performance of the firm.

Leverage Ratio

The Leverage Ratio indicates the extent to which total assets are composed of owner's equity: total assets per $1.00 in equity. A value of 1.0 indicates a non-leveraged firm, and thus, values above 1.0 indicate the firm is leveraged. Larger values magnify (lever) gains or losses (levers ROA to increase ROE), implying a greater Return on Equity, but also implying greater financial risk.

The implications of the magnitude of this ratio depend upon the situation. Generally, firms with a high proportion of tangible assets and stable profitability benefit the most from high leverage; these firms can more safely use debt to finance projects when operating cash flow fails to provide sufficient additional funding. Firms with a Leverage Ratio value between 3.0 and 4.0 will likely pay a higher rate of interest on their borrowing due to high financial leverage risk in their capital structure. Lenders tend to resist lending to firms with values greater than 4.0, as this level of leverage is generally considered unsafe (unless the firm has a strong record of consistent positive cash flow from operations, or the funds are secured with the firm’s equipment or other assets). (Known as The Leverage Ratio because this ratio multiplied by ROA produces ROE).

[pic]

(Write your conclusions here...)

Positive leverage

Leverage is a double-edged sword. It can magnify gains, or magnify losses. Positive leverage occurs only when the return on borrowed funds is greater than the cost of the debt (debt yield). Negative leverage occurs when the return is less than the cost of debt. In this analysis we do not know, exactly, the return on borrowed funds, so the average return for all assets will be used. Thus, if the Return on Assets is greater than the cost of debt, then the leverage is considered positive. This would mean Return on Assets is being leveraged to improve Return on Equity. Conversely, if ROA is less than the cost of debt, then the leverage is considered to be negative. In this case, ROA is being leveraged, but it is reducing ROE.

[pic]

(Write your conclusions here...)

Times interest earned

Times interest earned (TIE) indicates the number of times the company can cover its interest expense, with earnings. Thus, a value of 2.0 means the company can pay its interest expense twice over from earnings. Specifically, TIE is the earnings before payment of interest and income taxes divided by interest expense. Since failure to meet interest payments would be a default under the terms of lending agreements, TIE measures the leverage safety. The exact amount of desired safety depends on the firm's cash flow and the stability of company earnings, however, values of 2.0 or greater tend to indicate safe leverage. Values less than 1.0 indicate pending insolvency because the firm's earnings are not sufficient to cover their interest expense. Values between 1 and 2 indicate solvency, but also indicate an unsafe ability meet interest payments.

[pic]

(Write your conclusions here...)

Return on Equity

This indicates how effectively the owners (shareholders) investment is being employed; the efficiency with which managers use the owners’ equity investment to produce earnings: net income generated per $1.00 in equity. Larger (positive) values are preferred. ROE and ROA differ only by the extent to which the firm is leveraged. Thus, any difference between ROE and ROA is a measure of the effect of the capital structure on the firm’s performance. Alas, there is no free lunch: any increase in ROE performance due to leverage is off-set by the risk associated with leverage and thus, changes in capital structure tend to have no effect on the value of the firm. (Also known as 'ROE' and Return on Net Worth).

[pic]

(Write your conclusions here...)

Overall assessment of Capital Structure

(Write your conclusions here...)

Breakeven Analysis

[pic]

(Write your conclusions here...)

Economic Profit

[pic]

(Describe why Economic Profit is important, then discuss whether or not the firm earned a positive economic profit; briefly describe the implication(s) of this situation.)

Value of the Firm

[pic]

(Write your conclusions here...on the value of the firm)

[pic]

[pic]

[pic]

[pic]

EXTERNAL ANALYSIS

The external analysis is conducted using two different frameworks for analyzing the competitive environment. First we present the results of our image mapping on the competitive attributes determining our immediate task environment. Second we present the results of Porter's 5-Forces Analysis of our industry structure.

Customer Image Maps of Rankings in Primary Competitive Attributes

The following are the results of our primary data collection to map the competitive environment. Two surveys were conducted on a consumer target group that we defined as follows:

AGE: between 20 and 35

GENDER: 50% Male, 50% Female

TARGET MARKET SEGMENT: College Students, CSUC

NUMBER OF RESPONDENTS: Survey #1 = 30, Survey #2 = 30.

Survey #1 (see appendix B) was used to determine the top six demand attributes, other than price. Also, respondents identified the primary competitors; their choices for substitutes.

Survey #2 (see appendix C) was used to assess the relative rankings of the demand attributes within the competition as identified in survey #1. Also, respondents indicated the importance of each attribute in their decision to purchase.

The results of survey 2, and the corresponding customer perception Image Maps, are presented on the next pages.

Results of Survey 2: competitive rankings

[pic]

[pic]

(Write your conclusions here...who is strongest? Who is weakest? What are the strengths and weaknesses for the client? What are the implications of price - size of the bubble?.)

[pic]

(Write your conclusions here...who is strongest? Who is weakest? What are the strengths and weaknesses for the client? What are the implications of price - size of the bubble?.)

[pic]

(Write your conclusions here...who is strongest? Who is weakest? What are the strengths and weaknesses for the client? What are the implications of price - size of the bubble?.)

Overall conclusion on competitive position

(Write your conclusions here... Overall, what are the perceived competitive strengths and weaknesses. What is the overall strongest competitive advantage for the client? What is the greatest weakness?)

Industry Structure Analysis: The Five Forces Framework

Michael Porter’s Five Forces of Competition Framework views the profitability of an industry as determined by five sources of competitive pressure. These five forces of competition include three sources of ‘horizontal’ competition: competition from substitutes, competition from entrants, and competition from established rivals; and two sources of ‘vertical’ competition: the bargaining power of suppliers and buyers (Grant, 1998: p55-57).

[pic]

[pic]

(Write your conclusions here... )

[pic]

(Write your conclusions here... )

[pic]

(Write your conclusions here... )

[pic]

(Write your conclusions here... )

[pic]

(Write your conclusions here... )

Overall Threat Assessment

(Write your conclusions here... greatest threat, least threat)

STRATEGIC PLAN

The House of Quality is presented here to show how our recommended strategic initiatives (under Internal Processes) map against the top six demand attributes.

[pic]

(Discuss your conclusion here, on which internal process initiatives you recommend to be adopted first, based on the imputed importance scores. )

Business Strategy

The overall contribution of this section is to understand, explain, and enhance the value of the firm by analyzing the Company's business strategy. Business strategy is concerned with how the firm competes within a particular industry or market. Business strategy encompasses two fundamental strategic issues: 1. how to develop and sustainan competitive advantage, and 2. how to maximize the sales volume of the product(s) and service(s).

Earnings = Sales Volume X Profit Margin. Thus, to increase earnings, sales must increase and/or the profit margin must increase. Sales increase through volume expansion strategies, and profit margins improve through competitive advantage strategies. Thus, the Company's business strategies for competitive advantage will be analyzed in order to plan improvements in profit margin, then volume expansion strategies will be analyzed, to plan improvements in sales volume.

Competitive Advantage

A company is generally assumed to possess a competitive advantage when its profit margin is positive. That is, assuming that efficient market forces drive prices to their producers' cost, then we would only expect to see a positive margin when the product's market is not perfectly efficient. The market is not efficient when there exist "meaningful" differences between competing firms; advantages between firms. When one or more firms has an advantage, then the market may not drive price to cost and therefore the competitive advantage allows the firm to earn a positive profit margin. Accordingly, a large advantage creates a large margin. There are two basic sources of competitive advantage; low cost advantages and differentiation advantages.

Although firms may achieve both low cost and differentiation advantages, the best results seem to accrue to firms that clearly, and consistently, prioritize one over the other. In this analysis, the Company's priority is assumed to be differentiation advantage. Thus, the purpose of this section is to analyze differentiation-based competitive advantages, with the goal of increasing the profit margin.

Differentiation Advantage

Differentiation advantage occurs when a firm is able to obtain from its unique product (or service) a price premium in the market that exceeds the cost of providing the differentiation (Grant, 1998). This involves identifying new and unique opportunities and developing innovative approaches to exploit them. The key to successful differentiation is in matching the firm’s knowledge and capacity for creating differentiation with customers’ potential demand for it. Its purpose is to provide unique, perceived value to the customer.

Economists regard the profits associated with industry attractiveness and competitive advantage as distinct types of economic profit. The profits associated with products that are differentiated between competitors, or "limited competition," are referred to as monopoly-type profit.

The profitability produced from differentiation advantages is explained by quasi-monopoly competition. In this situation, competitors offer the buyer choices that are not "close" substitutes. So, each firm has some control and discretion over pricing. The theory of Monopolistic Competition explains how single firms compete against other firms with similar yet non-identical products (Chamberlin, 1933). Each firm faces its own, unique downward-sloping demand curve. The shape of the demand curve is determined by the distribution of consumer income constraints, marginal utilities and the cross-price elasticities between all other products. Each firm produces a slightly unique product, and therefore is a quasi-monopolist (a true “natural monopoly” is a firm with a constantly downward-sloping long-run average cost curve; an extreme case which is not considered here).

[pic]

Being a quasi-monopolist means the firm charges a differentiated price, higher or lower than the indirect competitors, based on the value of the unique bundle of attributes delivered. The Company never has unrestrained control over price, however, because rivals offer superior and inferior substitutes and constantly contest this share of the market.

The key to profitability from differentiation is to develop and provide capabilities that create unique outputs (differentiated services or products) which are valuable to the consumer, rare among the competing producers, and costly to imitate by competitors. Economic profit is only earned when all three of these issues apply to the differentiation advantage. Accordingly, a few of the major, unique ways the Company differentiates themselves from competitors is presented below, along with an estimated assessment of those advantage(s): [pic]

The key to sustaining profitability from differentiation is to prevent the competition from duplicating, or surpassing the differentiation capability. That is, the differentiation capability must be continuously “isolated” from the competition. There are several isolating mechanisms that have proven effective in keeping the competition from replicating rare differentiation capabilities. These isolating mechanisms, and the corresponding rare differentiation capabilities are estimated below:

[pic]

Sales Growth Plan

Earnings are the product of profit margin and sales volume. The goal of the previous section, on competitive advantage, was to improve profit margin. The purpose of this section is to analyze the Company's volume of sales and sales growth. Thus, successful achievement of both competitive advantage and sales volume goals will maximize earnings.

(Discuss here the extent to which the Company's Sales volume strategy was successful; did sales grow, how did the growth compare to last year, how did the sales growth compare to the industry average…?)

Sales Growth Strategies: Product Market Matrix

Volume expansion strategies of the firm can be examined by separating them into the four components of the Product-Market Matrix. These four components include market penetration, market development, product development, and diversification. Each of these components will be discussed below starting with market penetration.

[pic]

(State here your specific recommendations for overall sales growth for next year. Explain how you calculated this target - use the "growth corridor" method. Next specify how much of the overall growth target is assigned to each of the 4 component PMM strategies above)

Market Penetration

Market penetration is an increase in sales of existing products in current markets.

(Discuss here 2-3 specific recommendations for market penetration. After each recommendation, discuss your logic for why it might have good potential for increasing sales)

(New uses for existing customers, such as...?)

(New Channel for Educating Ads, to reach more consumers that are aware, but not informed..?)

(New demographic to reach in the existing market...?)

Market Development

Market development is an increase in sales of existing products in new, geographic markets.

(Discuss here 2-3 specific recommendations. After each recommendation, discuss your logic for why it might have good potential for increasing sales)

Product Development

Product development is an increase in sales of new products in current markets.

(Discuss here 2-3 specific recommendations. After each recommendation, discuss your logic for why it might have good potential for increasing sales)

...just some ideas...

"Womens" version

"Professional" version

"Disposable" version

"Outdoor" version

"Light-weight" version

"Custom" accessories

Diversification

Diversification is an increase in sales of new products in new markets.

(Discuss here that you will not be making recommendations in this area, as diversification does

not appear appropriate at this time)

Sales Growth Simulations: Customer Pipeline Model

[pic]

(Discuss here 1. the general theory of what the diagram above shows; customers moving from unaware to loyal, 2. Mention that your Ad budget is 5% of Net Revenues and state here that calculated amount in dollars, 3. Describe the 3 types of spending “patterns” you have simulated above, 4. End your discussion by pointing out that the three output graphs will be discussed further on the following pages)

Simulation Results: Loyal Customers

[pic]

(Discuss here the relative performance of your three different spending policies. What is causing the differences? Which appears to be the best policy?)

Simulation Results: Ad Spending Rate per Week

[pic]

(Discuss here your reasoning for each of the three spending patterns)

Simulation Results: Cumulative Ad Spending over the 2 years

[pic]

(Discuss here the relative cost of your three different spending policies. What is causing the differences? Overall then, which appears to be the best policy?)

Strategic Financial Targets in the Du Pont Framework:

[pic]

Economic Profit if the plan is achieved:

[pic]

Value of the Firm if the Plan is Achieved:

[pic]

Appendix

Appendix A Presentation Slides x

(All slides, no more than 2 slides per page)

Appendix B Customer Survey #1 & Summary Table x

(All customer surveys, must include at least 30, plus the summary table)

Appendix C Customer Survey #2 & Summary Table x

(All customer surveys, must include at least 30, plus the summary table)

Appendix D Actual Financial Statements or the 10-k Annual Report x

(Income Statement, Balance Sheet & Statement of Cash Flows)

Appendix E Team Evaluation Forms x

(All team evaluation forms)

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download