Framework for Stakeholders’ Report

BU 449 Framework for Stakeholders’ Report Dr. Juma

The stockholders report should cover these

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1. An Outline of the Situation Analysis 2. Company Vision Statement 3. Vision Statement Critique 4. Outline Your Strategy {Include the impact of TQM, Business Ethics and Advance

Marketing}

5. Competencies and Competitive Advantage 6. Competitor Analysis 7. Performance Measures 8. Financial Structure Policy Statement

 

Concluding Section

1) If given four more years to manage, what changes if any would you make? and why?

2) What are some of the lessons you learnt during the eight rounds? Highlight some of the most

crucial problems you encountered as a team.

 

Some Guiding Framework to consider

Situation Analysis Tools

SWOT analysis

• Use data from the Perceptual Map (highlight the weakest of the products at inception)

• Use data on demand analysis (emphasize the industry growth rate to demonstrate opportunity)

• Use the margin analysis coupled with the demand analysis to identify the highest growth segments and slowest growth segments.

 

External Analysis:

• Porter’s Five Forces Model

• Strategic Group Model Internal Analysis

• Value Chain Analysis

 

Vision Statement Here are some questions you can reflect upon to bring your vision into focus.

1. By segment, how many products will appear in the segment? 2. What will our capacity and automation levels be in each segment? 3. How much money will we have invested by the last round? 4. What will our financial structure look like? The financial structure is everything on the right-

hand side of the balance sheet. Fundamentally, it summarizes how much of the assets were

funded by debt holders and equity holders. You can get the financial structure you have today

by looking at your “Annual Report”. On the right-hand side of the Balance Sheet, you will

see your financial structure in percentages. To determine what sort of structure you want, you

can ask several simple questions.

 

 

BU 449 Framework for Stakeholders’ Report Dr. Juma

a) What mix of long-term debt, stock issues, and retained profits do we need to grow the company?

b) Do we want to keep profits or pay them out as dividends? c) Do we want to pay off our debt to avoid interest payments? d) How would we express these in percentages? For example, 5% Accounts Payable, 0%

Short Debt, 35% Long Debt, 20% Stock, 40% Retained Earnings.

 

5. Are we biased towards cost leadership or differentiation?

You will find a short essay on Mission and Vision statements at

http://www.quickmba.com/strategy/vision. In their context, we are marginally interested

in “Core values” and “Core purpose” (which are known and common to all teams), but

we are keenly interested in “Visionary Goals.”

 

Vision Statement Critique Any good vision statement makes choices between alternatives. For example, if your vision

places you in the Traditional and Low End (Niche Cost Leadership), you implicitly plan to give

up High End, Size, and Performance (Niche Differentiation).

 

The Critique looks at what you are giving up, and at the threats you face. You are comparing the

potential of your vision against alternatives. Here are a few questions that might help to develop

your thoughts.

1. How likely is it that competitors will choose a similar vision to the one you have selected?

2. Does our vision require significantly more investment than alternatives? 3. Is our vision difficult to execute? For example, does it require a broad product line?

Heavy investment? Many segments? If it is more difficult to execute than alternatives,

that could be good or bad. You might offer a few words on the trade-offs.

4. How long will it take execute your vision relative to other plans? 5. Consider growth rates. Overall, the market will grow 150% over the next eight years, but

the growth is uneven. Is your vision attractive for, say, the first four years, and less

attractive in the last four years?

 

Strategy Use these resources:

1. Michael Porter’s “Generic Strategies”: http://www.quickmba.com/strategy/generic.shtml A quick search of www.google.com for “Porter Generic Strategies” will turn up hundreds of

alternate references. The QuickMBA’s one-page summary is an excellent overview of the

topic, but feel free to examine others.

 

2. Review Chapter 12 of the Student Guide, “6 Basic Strategies.”

With these as background, state the strategy attempted to execute. Be sure to identify errors

or miscalculation made by your team and attempts made to rectify the errors.

 

3. Here are some questions to consider:

 

 

BU 449 Framework for Stakeholders’ Report Dr. Juma

a. Segments. Which segments matter to you? How much share of those segments must you achieve to be an “average competitor” in the overall industry? For example, if

you choose to play only in Traditional and Low End, you would have to command a

higher share of those segments to achieve “average industry sales”.

b. Profit potential. c. The speed at which you can create a defendable position. For example, new products

typically take two years to bring to market. Significant productivity improvements

could take several years.

d. Priorities. Which products are most important to you? Which are least important?

 

 

 

 

Competencies and Competitive Advantages

What were the long-range priorities around performance capabilities? Assuming your team has

clearly articulated a vision, and you have a strategic direction. For example, you might be saying,

 

“We plan to be a high technology company. We will concentrate our resources upon the High

End, Performance, and Size segments. We will compete based upon differentiation.”

 

Or you might have decided to be in every segment and compete on price, or any of a dozen other

combinations of vision and strategy.

 

But what capabilities do you need to develop to execute your strategy? For example, it is one

thing to say, “We will compete on price”, and another to build a company that can effectively

compete on price and still produce a solid return for stakeholders.

 

Resources:

You will find dozens of references to “Core Competence” (C.K. Prahalad and Gary Hamel) and

“Competitive Advantage” (Michael Porter) on the Internet. (For example, try the QuickMBA.

http://www.quickmba.com/strategy/core-competencies/ and

http://www.quickmba.com/strategy/competitive-advantage/.)

 

You could develop competencies in awareness, accessibility, product redesign, product

invention, automation, plant utilization, human resources, cash flow management, and

forecasting. All of these competencies take several years to develop.

 

You would use these competencies to develop competitive advantages. For example,

competencies in automation and human resources could lead to a competitive advantage in

cost leadership. Competencies in awareness, accessibility, and design could lead to a

competitive advantage built upon differentiation.

 

Guiding Questions

 

 

BU 449 Framework for Stakeholders’ Report Dr. Juma

1. What are the top three competencies you believe your team executed to realize your vision and strategy? You may also mention competencies you may have attempted and failed to

achieve. It is more insightful if you can identify what caused the failure.

2. What decisions or investment led to the development of your core competencies? 3. How did core competencies produce competitive advantage?

 

Competitor Analysis

Detailed analysis of your competitor:

 

1. Give a short description of their current strategic position — products, segments, plants, capital

structure, source of competitive advantage, etc. Consider their product line from a “consumer

reports” standpoint.

 

2. Assess their current opportunities and threats. Given the segments they have settled upon, how

big could their sales volume get? What is the profit potential? Can they maintain a competitive

advantage? This requires that you think beyond the 8 years.

 

Tools:

1. Strategic Group (Section: 2.6)

2. In a competitor analysis, you may highlight the following (Figure 2.3):

• What drives the competitor, as shown by its future objectives.

• What the competitor is doing and can do, as revealed by its current strategy.

• What the competitor believes about the industry, as shown by its assumptions.

• What the competitor’s capabilities are, as shown by its strengths and weaknesses

3. Competitive Dynamics

• A Framework of Competitor Analysis (Figure 5.3): Market Commonality and Resource Similarity.

 

 

Performance Measures

What performance measures your team select to assess your company’s performance? What is

their relative importance? Why did you select those measures?

 

The simulation offers 8 performance measures:

 

1. Cumulative Profit

2. Ending Market Share

3. Average ROS

4. Average Asset Turnover

5. Average ROA

6. Average ROE

 

 

BU 449 Framework for Stakeholders’ Report Dr. Juma

7. Ending Stock Price

8. Ending Market Capitalization

 

You can find a brief explanation for each measure on the website under “III. Simulation”

“Success Measures”.

 

There should be a match between performance measures and selected strategy.

 

Financial Structure Policy Statement

Given the performance measures you selected earlier in the course, and your current strategy and

vision (which may have evolved considerably since your original vision statement in Round 1),

state your current financial structure policy.

 

By this point in the simulation you have probably achieved your most important strategic goals.

Chances are good that you are beginning to spin off significant cash. How will you apply this

towards your capital structure? (You may discuss the possibility of using dividend policy, stock

buyback and even bonds to align the capital structure)

 

As an observation of the real world, when presented with large cash flows, managers prefer to

spend the money rather than give it back to shareholders. They might enter a new market, buy a

promising startup, acquire a competitor, splurge on a corporate jet, or push for higher salaries

and bonuses. Investors generally resist such moves, using performance measures and the

authority of the board of directors to keep management in check.

 

Tools

You may discuss the following:

• Too Much Diversification (Section 7-3e)

• Product Diversification as an Example of an Agency Problem (1 Section 10-1b)

The struggle between management and owners varies from company to company. A major factor

in the outcome is the degree to which ownership is concentrated. Your situation in the simulation

is comparable to a wholly owned subsidiary or to a company with a very large voting block of

conservative stockholders. You cannot do any of the things managers love to do. Instead, you

must maximize the wealth of the owners.

 

Questions to consider

1.) “Financial Structure” is simply the Liabilities and Owner’s Equity side of the Balance Sheet expressed in percentages. Given your performance measures, what should your financial

structure be? Why?

2.) List your performance ratios and the priority weights that you gave to them. 3.) What should your Accounts Payable policy be? Accounts Payable is debt. You are leveraging

your vendor’s money. However, at 30 days they withhold deliveries and production falls by

1%. Your production costs go up as workers stand idle during parts shortages. At a 60-day

policy production falls by 8%. At a zero-day policy there are no shortages. Given your

measures, what should your AP policy be?

 

 

BU 449 Framework for Stakeholders’ Report Dr. Juma

4.) Current Debt is typically used to fund Inventory and Accounts Receivable. However, those accounts could also be backed by Retained Earnings. Given your measures, what should be

your policy towards Current Debt?

5.) Long Term Debt is used to fund Plant and Equipment. However, you could use equity (Common Stock plus Retained Earnings). If you eliminate Long Term Debt, its interest

payment will disappear, and earnings will go up. However, the profits used to pay off the

debt essentially went into the bondholder’s pocket. You could pay dividends to shareholders

instead.

During these last few rounds the market, how did you use Long Term Debt, Stock Issues, or

Retained Earnings for fund the growth?

 

Human Resource (HR) Prepare a policy position that addresses the issue, “Does it make sense to invest in the

productivity improvements offered by the HR module?”

 

Suppose that you applied the maximums to recruiting and training. Here are the costs:

• Recruiting costs per new worker are $5000.

• Each employee trains 80 hours per year at $20 per training hour

• Workforce complement increases by 4.2% to cover the 80 hours people are in training.

For this section you need a spreadsheet and both the Capstone Courier and Annual Report. Use

the Round 0 reports for the analysis. Human Resources statistics like workforce complement and

turnover are on Courier page 12. Use Annual Report Income Statement’s total Labor cost to

estimate payroll costs.

 

Assume the following productivity payoffs:

Round 2 – 102%

Round 3 – 105%

Round 4 – 108%

Round 5- 112%

Round 6 -115%

Round 7 – 118%

 

Therefore, in Round 7 each worker would be 1.18 times as effective as the beginning worker,

and your workforce complement would fall to 1/1.18 or 85% of its round 1 level.

 

For a quick evaluation, assume your total labor expenditure from the Annual Report Income

Statement will stay flat for the next six years.

 

How much of a cost savings might you expect in the sixth year? For example, if the total labor

costs on the Income Statement says $29M, and costs stay the same for six years, then in the last

year your costs would fall to $29/1.18 M.

 

Apply the same approach to years one through five to get a total savings over time.

 

 

 

BU 449 Framework for Stakeholders’ Report Dr. Juma

Would this justify the necessary expenditures in recruiting and training made over time? Assume

a turnover of 10% and no increase in workforce size. Since you are sending workers to train for

80 hours or two weeks each year, you also need to expand the workforce enough to cover the

workers that are in training. I am looking for a ballpark answer, not a precise answer, this

information is just to argue for or against the investment. You need to decide whether a payoff in

HR productivity justified the expense.

 

You may assume that the workforce and labor contracts are constant. In practice the market is

growing at about 14%, and your labor contract has a 5% wage escalator. At what level, if any,

did your company invest in recruiting and training? Are there any factors beyond the simple

numbers that should be considered?

 

Topics worth considering:

• Employees Productivity- ✓ Training increases productivity, motivation and retention (i.e. reduces separation cost

and recruitment costs).

✓ Increased productivity leads to reduced labor cost since less employees will be required to complete the same amount of work.

✓ It is also costly, and the payoff is gradual… ✓ Most importantly it is the only source for sustainable competitive advantage. All

advantages created in the simulation are gradually imitated. Once a competitor gains

competitive advantage in HR, its rivals cannot surpass it.

 

Ethics:

Apply the problem-solving formula {You may use this approach to demonstrate how you

arrived at your decision} — ask yourself:

• What are the facts of the case?

• What is the issue here?

• Who is affected inside of the company and outside of the company?

• What are the choices?

As a team:

• Reach a consensus and make a decision. If you team did not reach a consensus, explain why.

• Follow your company’s financial and operational results over time to observe the results.

• Explain how and why your decision resulted on those outcomes.

Select your preferred option and evaluate the risks and benefits to stakeholders:

• Is it legal?

• Is it fair?

• Can we defend it?