Spring 2010 - Sec. 2/5

BUS 491 — Seminar in Management Strategy & PolicySonoma State University

Spring 2010Section 3: Tuesday/Thursday: 3:00 - 4:50 p.m., Stevenson 3026

Dr. Armand GilinskyProfessor of Business

Stevenson 2026F: 707.664.2709 (Office: TTh 2–3p)Sonoma State University

Rohnert Park, CA 94928 USAEmail: [email protected]

Website: www.sonoma.edu/users/g/gilinsky/

Final version 1/18/2010

http://www.sonoma.edu/users/g/gilinsky/

mailto:[email protected]

BUS 491 – Section 3 Dr. Gilinsky/page 2Spring, 2010

Required text: Hunger, J. D. and Wheelen, T. L. (2007) Essentials of Strategic Management, 4th ed., softcover, Pearson/Prentice-Hall. [Essentials][on sale at the SSU bookstore]

Instructor website: www.sonoma.edu/users/g/gilinsky/Username: gilinskyPassword: Chaminade (case-sensitive)

By accepting this learning contract, I (the student) also agree to abide by and comply with the terms of the University’s Honor Code.

Welcome to our Spring 2010 Strategic Management course! My vision is to help you to generate world-class, cutting-edge business solutions. The

overriding objective of this course is to provide the questions you need to ask to make the right decisions about the future of a business or non-profit organization. Strategic management entails generating choices to be made among competing alternatives to produce a competitive advantage and earn above-average returns. Rapid technological change, mergers and acquisitions, increasing globalization, and changing stakeholder demands on businesses have heightened the urgency to ask the right questions about the future, such as:

1. Which distinctive competencies should we be developing for our businesses?2. Where should we compete?3. How do we communicate our strategy to our stakeholders?

We are fortunate to have your collective wisdom as well as that of several video podcasts of guest speakers from the business community to help guide us through complex strategic issues.

Learning objectives. The primary goal of this course is to teach you how to think and act strategically. By successfully completing BUS 491, you will learn:

1. What are the interrelationships among the functional areas of an enterprise;2. How to develop and use skills in decision-making and oral and written presentation;3. How to analyze, formulate and implement strategies, especially the role of top management

teams in performing these activities.

By the end of the course, you should be able to analyze thoroughly a company, its industry and its competitors and to recommend a well-supported strategy to your Board of Directors.

Course description. This course in business policy focuses on integrative, multifunctional approaches to the solution of organizational issues and unstructured problems. A practical perspective, rather than a merely theoretical one, is stressed via discussion of case studies. Why use a case-study approach? Three levels of learning take place:

1. We share the generalized insights of leading theoreticians;2. We test the applicability and limits of these theories to specific case studies; and3. You develop your own special amalgam of insights based upon empirical observations and

inductive reasoning (from case analyses).

http://www.sonoma.edu/users/g/gilinsky/


How are cases used in BUS 491?• Discussion vehicles for probing the benefits and limits of certain approaches;• Opportunities to apply and test concepts and tools related to dimensions of management

thought (e.g., marketing, accounting, finance);• Aid in understanding the nature of “better” answers, as well as the complexity of reaching

solutions and implanting them in organizations.

What do you—as class member—need to do? First, understand what went on in that situation:

• What has changed? • What are the key questions about the future that need to be answered? • What further information is needed to answer those questions?

Major emphasis is placed on action and implementation, not just on analysis. Each case features a top management team (TMT) facing a specific set of issues and problems. You will have an opportunity to see a wide range of TMTs in action, and think about their specific choices and actions as if your group were the TMT in charge. Effective groups integrate concepts of all other prerequisite business courses, i.e., bring together and apply the learning from core courses to the analysis and solution of strategic management problems. Critical thinking involves:

1. Identifying and diagnosing the major problems and opportunities for business organizations, 2. Using a cross-functional perspective to formulate feasible strategies that solve problems;3. Deciding among alternative action plans and formulating feasible implementation steps, and4. Presenting a position and defending that position.

Study groups. Please form study groups consisting of four members, meeting regularly to discuss the cases and readings before they are discussed in class. Groups may “trade” members until Tuesday, March 30th. The aim of study groups is to share and prepare individual analyses and enhance class participation. Class time is set aside for meetings. As the course progresses, you will find it necessary to spend time meeting outside of class. Please evaluate yourself and your study group members using the Peer Evaluation form on p. 23 – due in class May 18.

Class contributions. You should come prepared for class discussion of cases and supplemental readings, i.e., with an outline or condensation of your case analysis, stating your perception of the underlying problem, some supportive data, and your recommended plan(s) of action. Bear in mind how difficult it is to assess your contributions if you are absent from class! Attendance will be taken. Each student will be permitted one (1) unexcused absence. Your class contribution grade will be updated weekly and based on: 1) evidence of careful preparation of the cases and readings; 2) clarity and conciseness of your analysis; and 3) strong and convincing presentation of your findings and conclusions. Guidance for class contributions is on p. 10.

Performance evaluation. Strategic issues seldom have clear-cut or singularly “right” solutions. So, my evaluation of your performance will be based upon your managerial aptitude in problem diagnosis, generation of solutions, and communication of your position. I will be looking for demonstration of logical argumentation and consistency in your thought processes. Grades will be based on your performance in (a) oral discussion and argument (defense) of your ideas, (b) written communication, and (c) ability to work effectively in teams. Final grades are based on 50% individual effort and 50% team effort, and will be on a curve, with the top 20% of the


section receiving “A or A-,” the middle 70% receiving “B+/B/B-,” and the bottom 10% receiving grades in the “C” or lower ranges. These will be weighted as follows:

Contributions [Individual, p. 10 + BAT “Bonus”+ Peer Eval, p. 23]................................40%Written case analysis [Ten (10) Group “Issue Briefs” [See Course Calendar pp. 5–8 for

due dates, times, and grade weights.....................................................................40%Practice group case presentation [See Course Calendar and pp. 11 & 12]...........................5%Final group case presentations [May 18 & 20 in class].......................................................5%Final individual case write-up [due May 25 @ 11am]......................................................10%

Total..............................................................................................100%

Written case analyses. In order to create opportunities for us to explore more basic strategy issues and discuss methods of formulation and implementation that might otherwise have to be rushed, we will be using an electronic submission format for Issue Briefs. Please submit your group case analyses as an MS Word file (double-spaced, Times New Roman 12 pt font, 1 inch margins) to me via WebCT on days assigned using a file name <CaseAbbrev.team#.doc> (e.g., for Western Union in 2008, WU.Group1.Doc, or for Copperfield’s Books, Inc., CB.Group2.doc, etc.). Please do not merely answer the study questions — use the following format:

1. Indicate your key case decision (what the GM needs to do now and why) in one succinct sentence (17-20 words, maximum);

2. Support your decision by three (3) bullet points – less than one line in length; use dimensions of strategic management gleaned from the assigned chapters in the Essentials text and supporting readings; avoid judgment here; your three bullet points are essentially a table of contents (preview) to the rest of (body) of your analysis;

3. Add any qualitative and/or quantitative comments/discussion which you feel is/are necessary to substantiate your analysis. (1-2 page limit, about 250-500 words, plus exhibits (no page limit), which should be numbered consecutively and referred to in the body of your analysis); and then

4. Conclude by restating the central problem or issue and recommendation for action, noting lessons learned about strategic management, based on the readings that you have absorbed from the assigned chapter(s) in the Essentials textbook.

Each group’s analysis is due on days Issue Briefs are assigned (see Course Calendar, pp. 5–8, for specific deadlines and times, and p. 9 for guidance). Acceptable Briefs are given a “2,” which is equivalent to a “B” grade. Unacceptable or late submissions will be assigned a “1” equivalent to a “C” grade. Issue Briefs not submitted on the date due for any reason will be assigned an “F” or “0” grade. An outstanding effort will receive a “3,” equivalent to an “A” grade. Grading and coaching comments on Issue Briefs will be returned to you via WebCT. NOTE: group written case analysis (issue brief) assignments due in the latter half of this seminar, i.e., # 6-10, will be weighted three times (3x) those due at the beginning.

Final examination. The final examination consists of a group oral presentation and an individual written case analysis (similar in format to the earlier group issue brief assignments). The final examination will provide every student with an opportunity to write a lengthier case analysis — up to five (5) double-spaced pages — and will be assigned a letter grade.



COURSE CALENDAR

Date Topic(s) Assignment(s)

Tuesday, Feb. 2, 2010

Course topics

Building teams

Thinking for yourself

Read/prepare: Syllabus.

Class cards & photos (due 2/9/10 in class).

“Mocktail” party to select study group partners.

Intro Strat 491: course overview “lecturette” (WebCT).

Outro: “Dead Poets' Society” (video).

Thursday, Feb. 5, 2010

Effective case dialoguing

Strategic analysis framework

Critical thinking

Read/prepare: Essentials, Ch. 1.

Case: “Robin Hood (see Syllabus, pp. 13–14).

Discuss “Robin Hood” case in class.

Tuesday, Feb. 9, 2010

Assessing a firm’s financial health

Core purpose and values

Our values

Read/prepare: “A Note on Ratio Analysis” (see Syllabus, pp. 15–20) + Values exercise (see Syllabus, p. 21).

Meet in study groups to prepare/compare ratios + Bring financial calculator and/or laptops with Excel.

Class cards and photos are due today.

Thursday, Feb. 11, 2010Using financial ratio analysis for strategic decision-making

Discuss: “A Note on Ratio Analysis” – Bring spreadsheets/calculators to class!

Turn in spreadsheets with team members’ names on the top right. Grade weight = acceptable or do over.

Tuesday, Feb. 16, 2010Conducting library research for strategy case analysis

Class meets in Shultz 2050 with Rick Robison, Business Librarian!

Thursday, Feb. 18, 2010 The role of the strategist

Read/prepare: Essentials, Chs. 2 & 11

Case: “Western Union in 2008: Send Me the Money!” (AG website)

Meet in study groups to prepare WU case.

Tuesday, Feb. 23, 2010 Strategic plans, leadership, technology change,

Discuss: “Western Union in 2008”



diversity, governance & social responsibility

Group Issue Brief #1 [WU] due by Noon, grade weight = 2%.

Thursday, Feb. 25, 2010 Competitive forces

Read/prepare: Essentials, Ch. 3 (pp. 32-43 only) and M. E. Porter’s (2008) “The Five Competitive Forces That Shape Strategy” (on reserve at Shultz)

Case: “Mendocino Brewing Co.” (AG website)

Meet in study groups to prepare MBC case.

Tuesday, Mar. 2, 2010Industry attractiveness and key success factors

Discuss: “Mendocino Brewing Co.”

Group Issue Brief #3 [MBC] due by Noon, grade weight = 2%.

Thursday, Mar. 4, 2010Situation analysis: environmental scanning & forecasting techniques

Read/prepare: Essentials, Ch. 3 (pp. 43-53 only); and “A Note on Conducting Situation Analysis.” (AG website)

Case: “Copperfield’s Books” (Instructor website - download). See: Video supplement for CB case (linked on WebCT)

Meet in study groups to prepare CB case.

Tuesday, Mar. 9, 2010Using environmental scans to formulate strategy

See: Niche Trap PPT presentation (WebCT)

Discuss: “Copperfield’s Books”

Group Issue Brief #4 [CB] due by Noon, grade weight = 2%.

Thursday, Mar. 11, 2010Situation analysis: internal scanning techniques

Read/prepare Essentials, Ch. 4

Case: “Kimpton Hotel & Restaurant Group” (Instructor website - download).

Meet in study groups to prepare KG case.

Tuesday, Mar. 16, 2010Competing for industry futures

Discuss: “Kimpton Hotel & Restaurant Group”

Group Issue Brief #5 [KG] due by Noon, grade weight = 2%.

Thursday, Mar. 18, 2010Using SWOT analysis for strategy formulation

Read/prepare Essentials, Ch. 5 & 6

Case: “Oliver’s Markets” (AG website). See: Video supplement for OM case (linked on WebCT).

Meet in study groups to prepare OM case.

Tuesday, Mar. 23, 2010 Generic strategies Group Issue Brief #6 [OM] due by Noon, grade



Competitive dynamics and strategy formulation

weight = 6%.

Discuss: “Oliver’s Markets”

Thursday, Mar. 25, 2010 Outcomes assessment Business Assessment Test (“BAT” part I)

Tuesday, Mar. 30, 2010

Outcomes assessment

How firms globalize & diversify

Business Assessment Test (“BAT” part II)

Contribution grade bonus for completing both sections of BAT = 5%.

Read/prepare Essentials, Chs. 7 & 8

Case: “Nike in 2009” (Instructor website - download)

Meet in study groups to prepare NIKE case.

Thursday, Apr. 1, 2010 No class FURLOUGH DAY

Tuesday & Thursday,

Apr. 6 & 8, 2010No class Spring Break

Tuesday, Apr. 13, 2010 No class FURLOUGH DAY

Thursday, Apr. 15, 2010

Benefits & limits of diversification

Strategy implementation: globalization & organization structure

Discuss: “Nike in 2009”

Group Issue Brief #7 [NIKE] due by Noon, grade weight = 6%.

Groups 1 & 2 practice presentations, grade weight = 5%. See pp. 11 & 12 for guidance.

Tuesday, Apr. 20, 2010 Strategies for sustainability

Case: “Villa Maria Estates” (AG website). See: Global Strat PPT presentation (download from WebCT).

Discuss: “Villa Maria Estates”

Group Issue Brief #8 [VME] due by noon, grade weight = 6%


Thursday, Apr. 22, 2010Corporate culture, staffing, social responsibility (CSR) & ethics

Read/prepare: Essentials, Ch. 9

Case: “Abercrombie & Fitch” (AG website)

Meet in study groups to prepare AF case.

Tuesday, Apr. 27, 2010 Implementing change Discuss: “Abercrombie & Fitch”



Group Issue Brief #9 [AF] due by Noon, grade weight = 6%.


Thursday, Apr. 29, 2010Strategy evaluation, control, & sustainability

Read/prepare: Essentials, Ch. 10

Case: “Respironics, Inc. – Take A Deep Breath”

Meet in study groups to prepare RESP case.

Tuesday, May 4, 2010 Competitive strategy

Discuss: “Respironics, Inc.”

Group Issue Brief #10 [RESP] due by Noon, grade weight = 6%.


Thursday, May 6, 2010Course wrap-up and tips for the final exam

Distribute take-home final [TBA] case.

Tuesday & Thursday,

May 11 & 13, 2010“Dead Week” – No classes

Read: “A Note on Strategic Plans” (AG website)

See: Strategic Plan PPT (download from WebCT).

Meet in study groups to prepare final exam case.

Tuesday & Thursday,

May 18 & 20, 2010Effective oral presentations

Groups 1–8, Final Presentations - Grade weight = 5%. See pp. 11 & 12 for guidance.

Peer evaluations (see Syllabus, p. 23) due today!

Student course evaluations – May 18th

Tuesday, May 25, 2010 Putting it all together

Take-home Individual Final Issue Brief due @ 2:00 p.m. via WebCT & in class.

Grade weight = 10%


Ways To Approach A Case

Remember, there is no single, right solution. Each case describes a complex situation and there may be a number of equally valid analyses. Try to put yourself in the place of the person who is facing the problem(s) and who is required to make decisions and act. You may want to consider the following factors in your analysis:

1. What is the problem—or problems? Are the problems short-term, long-term, new to the organization, chronic, etc.? Who is the decision-maker?

2. What is the time framework? How urgent is the situation? What are the priorities?

3. What is the nature of the organization? Who are the key people or stakeholders involved?

4. What industry, competitive, economic factors/trends are significant? How do they influence the current situation? How do they influence future action?

5. What financial information is important (costs, cash flow, ratios, margins, etc.)? Run the numbers! How do these data impact your analysis and recommendation?

6. What are the significant marketing considerations? What is the product or service? Who is your market? How do we price, promote, distribute?

7. What are the significant production/operation considerations? How and where do we produce? Are operations labor- or capital intensive? What lead times are required?

8. What are the key human resource management issues? How do they impact on our course of action, particularly in its implementation?

9. What business are we in? What is the organization’s strategy? Is it consistent across functions? What are the risk of/potential rewards from retaining this strategy?

After analyzing the case, generate as many solutions as appropriate. Consider the risks/tradeoffs involved in each alternative and then decide what you would do in the situation and why. What is your plan of action? How are you going to implement it? Support your recommendations, but remain open to different, possibly better ideas.

http://www.cartoonbank.com/product_details.asp?sid=131125&affiliate=ny-slideshow


Class Contribution

Woody Allen once quipped, “80% of life is just showing up!” and Ed Valenti, creator of the Ginsu knife reportedly coined the phrase, “But wait…there’s more!” Your contributions will be evaluated on the basis of the following: (1) understanding and appreciation of case facts; (2) analysis of case data via strategic management concepts from the textbook and assigned readings; and (3) recommendations for management decision and action. Below is a checklist to help you improve your effectiveness in contributing to on-line and in-class discussions:

___ Are you a good (active) listener? Are the points that you are making relevant to the discussion? Are they linked to the comments of others? Are you willing to interact with other class members?

___ Have you demonstrated an ability to suspend judgment?___ Do you show an ability to ask good questions (inquire and reflect)?___ Are you willing to challenge assumptions?___ Do your comments add to our understanding of the situation?___ Do your comments show evidence of analysis of the case (case preparation)?___ Do you distinguish among different kinds of data such as facts, opinions, beliefs, concepts?___ Do you demonstrate a willingness to share knowledge?___ Are you willing to test new ideas, or are all comments made “safe”? (An example of a “safe”

comment is repetition of case facts with no analysis or conclusions.)___ Do your comments clarify and highlight the important aspects of earlier comments and lead to a

clearer statement of the concepts being covered?


Team Presentations

Teams should prepare a 20-minute presentation of the assigned case covering the topics below. Each team should prepare for an additional 10 minutes of Q&A.

1. Identify the decision facing this organization; clearly state your recommended solution and why.

2. Perform an analysis of the company’s internal situation and external environment, including industry & competitors. Caution: some analytical tools may be more appropriate than others.

3. Substantiate your analysis with facts and data from the case. Answer the “So what?” question.

4. Develop alternative solutions, in the context of the competitive pressures the organization faces.

5. Prepare an action plan for this organization.

6. Generate, list, and evaluate short- and long-range strategic alternatives.

7. Show clearly why your recommendation is superior to other alternatives.

8. Discuss how the chosen alternative should be implemented and if it is feasible.

9. Create a timeline and implementation plan.

10. Show evidence of professionalism, polish, teamwork, and clarity.

11. Prepare appealing visual aids, handouts and vocal techniques that support your presentation. NOTE: put your team number, team members’ names, and the presentation date in the upper-right hand corner of any handouts you create.

12. Involve each member of the team in the presentation and Q&A session.

NOTE: TEAMS MUST BE PUNCTUAL.


BUS 491— Seminar in Strategic Management Team Presentation Score Sheet

REVIEWER’S NAME__________________________________

TEAM NUMBER______________________________________ DATE: ______________________

[Key: 0 = Marginal; 1 = Satisfactory; 2= Superior] [Comments]

PROBLEM IDENTIFICATIONSpecified problem and solution 0 1 2

Depth of understanding of issues 0 1 2

Logical call to action 0 1 2Total (0-6) --------------------------------

ANALYSISInternal assessment & financial analysis 0 1 2

External and competitive assessment 0 1 2

Factual support and relevance 0 1 2Total (0-6) --------------------------------

RECOMMENDATIONSReasonable range of alternatives 0 1 2

Appropriateness of alternatives 0 1 2

Risks & contingencies clearly identified 0 1 2

Implementation timeline 0 1 2

Feasibility in terms of know-how, time, cost 0 1 2Total (0-10) --------------------------------

TEAMWORK & PRESENTATIONVisual aids, sharing of workload, clarity,

effectiveness in Q&A

Marginal = 0Satisfactory = 1

Superior = 2Total (0-2)

--------------------------------

TOTAL POINTS--------------------------------


NOTE: Total possible points = 24 points. A = 20–24 pts., B = 16–19 pts., C = 12–15 pts., D = 9–11 pts., F = < 9 pts.


Robin Hood - A Mini Case StudyJoseph Lampel, New York University

It was the spring of the second year of his insurrection against the High Sheriff of Nottingham that Robin Hood took a walk in Sherwood Forest. As he walked he pondered the progress of the campaign, the disposition of his forces, the Sheriff's recent moves, and the options that confronted him.

The revolt against the Sheriff had begun as a personal crusade. It erupted out of Robin's conflict with the Sheriff and his administration. However, alone Robin Hood could do little. He therefore sought allies, men with grievances and a deep sense of justice. Later he welcomed all who came, asking few questions, and demanding only a willingness to serve. Strength, he believed, lay in numbers.

He spent the first year forging the group into a disciplined band, united in enmity against the Sheriff, and willing to live outside the law. The band's organization was simple. Robin ruled supreme, making all-important decisions. He delegated specific tasks to his lieutenants. Will Scarlett was in charge of intelligence and scouting. His main job was to shadow the Sheriff and his men, always alert to their next move. He also collected information on the travel plans of rich merchants and tax collectors. Little John kept discipline among the men, and saw to it that their archery was at the high peak that their profession demanded. Scarlock took care of the finances, converting loot to cash, paying shares of the take, and finding suitable hiding places for the surplus. Finally, Much the Miller's son had the difficult task of provisioning the ever-increasing band of Merrymen.

The increasing size of the band was a source of satisfaction for Robin, but also a source of concern. The fame of his Merrymen was spreading, and new recruits poured in from every corner of England. As the band grew larger, their small bivouac became a major encampment. Between raids the men milled about, talking and playing games. Vigilance was in decline, and discipline was becoming harder to enforce. 'Why', Robin reflected, 'I don't know half the men I run into these days.'

The growing band was also beginning to exceed the food capacity of the forest. Game was becoming scarce, and supplies had to be obtained from outlying villages. The cost of buying food was beginning to drain the band's financial reserves at the very moment when revenues were in decline. Travellers, especially those with the most to lose, were now giving the forest a wide berth. This was costly and inconvenient to them, but it was preferable to having all their goods confiscated.

Robin believed that the time had come for the Merrymen to change their policy of outright confiscation of goods to one of a fixed transit tax. His lieutenants strongly resisted this idea. They were proud of the Merrymen's famous motto: 'Rob from the rich and give to the poor.' 'The farmers and the townspeople,' they argued, 'are our most important allies. How can we tax them, and still hope for their help in our fight against the Sheriff?'

Robin wondered how long the Merrymen could keep to the ways and methods of their early days. The Sheriff was growing stronger and becoming better organized. He now had the money and the men, and was beginning to harass the band, probing for its weaknesses. The tide of events was beginning to turn against the Merrymen. Robin felt that the campaign must be


decisively concluded before the Sheriff had a chance to deliver a mortal blow. 'But how,' he wondered, 'could this be done?'

Robin had often entertained the possibility of killing the Sheriff, but the chances for this seemed increasingly remote. Besides, killing the Sheriff might satisfy his personal thirst for revenge, but it would not improve the situation. Robin had hoped that the perpetual state of unrest, and the Sheriff's failure to collect taxes, would lead to his removal from office. Instead, the Sheriff used his political connections to obtain reinforcement. He had powerful friends at court, and was well regarded by the regent, Prince John.

Prince John was vicious and volatile. He was consumed by his unpopularity among the people, who wanted the imprisoned King Richard back. He also lived in constant fear of the barons, who had first given him the regency, but were now beginning to dispute his claim to the throne. Several of these barons had set out to collect the ransom that would release King Richard the Lionheart from his jail in Austria. Robin was invited to join the conspiracy in return for future amnesty. It was a dangerous proposition. Provincial banditry was one thing, court intrigue another. Prince John had spies everywhere and he was know for his vindictiveness. If the conspirators' plan failed, the pursuit would be relentless, and retribution swift.

The sound of the supper horn startled Robin from his thoughts. There was the smell of roasting venison in the air. Nothing was resolved or settled. Robin headed for camp promising himself that he would give these problems his utmost attention after tomorrow's raid.

© Joseph Lampel 1991

Study Questions1. What is the key decision that Robin has to make now?2. What is he trying to accomplish?3. How would you rate his performance as entrepreneur/strategist? What is he doing well?

Not so well?4. What options are available to him now?5. What do we learn from this case study about strategy?

BUS 491 – Section2 Dr. Gilinsky/page 17Fall, 2009

A NOTE ON ASSESSING THE FINANCIAL HEALTH OF THE FIRM –THE CASE OF KALARI BURNS, INC.

How do we assess the financial health of the firm? Let’s take a look at Kalari Burns, a company that makes diet plans, as an example. Kalari Burns competes with Jenny Craig and Weight Watchers.

• Key issue in assessing the long-term financial health of a firm is whether or not the corporate system of goals, product-market strategies, investment requirements, and financing capabilities are in balance.

• Also depends on the perspective of the person asking the question.• Has the condition of the company changed over the four-year period? How?• What changes are most significant, as indicated by financial ratios?• What is the context in which these changes took place?

A. Steps: 1. Look at Kalari Burns’ financial statements [see Exhibit 1]2. Calculate ratios:

—Profitability—Activity—Leverage—Liquidity

B. Profitability ratios—How profitable is the company? • Profit after tax as a % of sales (ROS)• Operating profits as a % of total assets (ROA or ROI)• Profit after tax as a % of equity (ROE)

One measure of a business’s profitability is its “profit as a percentage of sales” as determined by the profitability ratio equation:

profit after taxesnet sales

The information necessary to determine a company’s profits as a percentage of sales can be found in the company’s .

1. Kalari Burns’ profit as a percentage of sales for 2004 (see Exhibit 1) was $ divided by $ or %.

2. This represented an ( ) increase or ( ) decrease from % in 2000.

3. The improvement in profitability resulted from an ( ) increase or ( ) decrease in cost of goods sold as a percentage of sales and from an ( ) increase or ( ) decrease in operating expenses as a percentage of sales. The only adverse factor(s) was/were the increase(s) in the .

4. Management and investors often are more interested in the return earned on the funds invested than in the level of profits as a percentage of sales. Companies operating in businesses (e.g, computer software, service bureaus, employment agencies) requiring very little investment in assets often have low profit margins but earn very attractive returns on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that earn miserably low returns on invested funds,

Final version 1/18/2010


despite seemingly attractive profit margins (e.g., public utilities, telecommunications companies).

Therefore, it is useful to examine both the level and the trend of the company’s operating profits as a percentage of total assets (ROA aka ROI). To increase the comparability across companies within the same industry, it is useful to use profits before taxes and before any interest charges (earnings before interest and taxes or EBIT). This allows the analyst to focus on the profitability of operations without any distortion due to tax factors and/or the method by which the company has financed itself.

Kalari Burns had a total of $ invested in assets at year-end 2004 and earned (before interest and taxes)$ during 2000. Its operating profit (as a percentage of total assets) is calculated as follows:

profit before taxes + interest chargestotal assets

In 2004 this figure was %, which represented an ( ) increase or ( ) decrease from % in 2000.

5. From the viewpoint of the shareholders, as equally important figure is the company’s return on equity (ROE). Return on equity is calculated by dividing profit after tax by the owner’s equity:

profit after taxesowners’ equity

It indicates how profitably the company is utilizing shareholders’ invested funds.

Kalari Burns had a total of $ of owners’ equity at year-end 2004 and earned (after taxes)$ during 2004. Its ROE was %, which represented an ( ) improvement or ( ) deterioration from % earned in 2000.

C. Activity ratios—Are there any hidden problems?The second basic type of financial ratio is the activity ratio. Activity ratios indicate how

well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios and/or a deterioration in the activity ratios may indicate uncollectible accounts receivable or obsolete inventory and equipment.

“Total asset turnover” measures the company's effectiveness in utilizing its total assets and is calculated by dividing total assets into sales:

net salestotal assets

As with any other ratio, caution must be exercised due to timing and basis of sales (cash v credit) and valuation of assets (e.g., age and collectability of accounts receivable, LIFO v FIFO inventories, method of depreciation used to value net fixed assets, etc.).

1. Total asset turnover for Kalari Burns in 2004 can be calculated by dividing $ into $ . The turnover ( ) improved or ( ) deteriorated from times in 2000.


2. Since the use of total assets may mask important changes in one of the specific asset categories, it may be useful to examine the turnover ratios for each type of asset. Exhibit 2 gives some examples:

• average collection period (days)• inventory turnover (times)• fixed asset turnover (times)

3. So far, we have discussed three measures of profitability: they are (1) (2) and (3) .

We have also discussed four activity ratios which measure the effectiveness with which the company is using its assets: they are: (1) (2) (3) and (4) .

4. The improvement in Kalari Burns’ operating profits as a percentage of total assets between 2000 and 2004 was primarily due to:(1) (2) (3) and (4) .

D. Leverage ratios—How soundly is the company financed?The third basic type of financial ratio is the leverage ratio. The various leverage ratios

presented in Exhibit 2 measure the relationship of funds supplied by creditors and the funds supplied by owners. The use of borrowed funds by profitable companies will improve the return on equity. However, it also increases the riskiness of the business and, if used in excessive amounts, can lead to default or liquidation.

1. The improvement in Kalari Burns’ profitability, as measured by its return on equity, from 5.8% in 2000 to 16% in 2004, resulted from the combined impact of , and .

2. The financial riskiness of Kalari Burns ( ) increased or ( ) decreased between 2000 and 2004.


E. Liquidity ratios—Is the company able to meet current obligations as they become due?The fourth basic type of financial ratio is the liquidity ratio (see Exhibit 2). These ratios

assume that, if the company is struck by adversity, current assets are much more readily and assuredly convertible into cash than fixed assets. They also enable the financial manager to consider and project the amount of working capital (short-term financing) needed to pay next year’s (or even next month’s) bills. The current ratio—dividing current assets by current liabilities—relates these fairly liquid assets to the claims that are due within one year—the current liabilities. The quick ratio (or “acid test”) is similar to the current ratio but excludes inventories from the current assets because it is assumed that they often are difficult to convert into cash, particularly if inventories are comprised mainly of work-in-progress rather than resalable raw materials or finished goods.

Remember…Not enough to crunch numbers

Also need to look beyond numbers, see what they meanHow does this company’s financial performance stack up against other firms in the diet plan industry?

Study Questions1. How was Kalari Burns doing in 2004, relative to 2000?2. Is this a financially well-managed company? How do we know?3. Where do you see areas of strength? weakness?4. What contextual factors might influence your analysis?


Exhibit 1— Kalari Burns, Inc., Income Statements and Balance Sheets: 2000 and 2004

All numbers in $000 Consolidated Income StatementsEnding Dec. 31 2000 2004Net sales $44,991 $70,100 Cost of goods sold 23,715 33,504 Gross profit $21,276 $36,596 Operating expenses (exc. depreciation) 17,508 26,208 Depreciation 1,570 2,030 Interest expenses 1,041 1,418 Income before taxes $1,157 $6,940 Federal income taxes 82 3,200

Net Income $1,075 $3,740

Consolidated Balance SheetsAt Dec. 31 2000 2004AssetsCash $639 $1,079 Accounts receivable 11,936 18,145 Inventories 14,672 24,162

Total current assets $27,247 $43,386 Net fixed assets 6,518 7,706

Total assets $33,765 $51,092

Liabilities and Stockholders' EquityNotes payable—banks $8,480 $2,719 Accounts payable 2,154 6,528 Accrued expenses and taxes 1,660 7,482

Total current liabilities $12,294 $16,729 Long-term debt 3,088 11,230 Stockholders' equity 18,383 23,133

Total liabilities and stockholders' equity $33,765 $51,092


Exhibit 2 — Kalari Burns, Inc., Financial Ratio Analysis: 2000 and 2004

Formula 2000 2004 RemarksI. Profitability

Return on Sales Profit after taxes/Net sales

Return on Assets Profit bef. taxes + Interest charges/

Total assets

Return on Equity Profit after taxes/Owners' equity

II. ActivityTotal asset turnover (x) Net sales/

Total assets

Average collection period, days Accounts receivable/

Net sales/365 days

Inventory turnover (x) Cost of goods sold/

Inventories

Fixed asset turnover (x) Net sales/Net fixed assets

III. LeverageDebt:Assets Total debt/ Total

assets

Debt:Equity Total debt/Shareholders'

equity

Long-term debt:Equity Long-term debt/Shareholders'

equity

Times interest earned (x) Earnings before interest and taxes/Interest charges

IV. LiquidityCurrent ratio (x) Current assets/

Current liabilitiesQuick ratio (x) Current assets –

Inventories/Current liabilities

V. Compound Annual Growth Rates (CAGR)4 yrs. CAGR, Sales

4 yrs. CAGR, Net IncomeTotal Assets



OUR VALUES

The most important thing in life is to decide what is most important.

What should our organization, department, unit, or study group team stand for? What should be the values by which we operate? Look over the list of values below. Circle any values that “jump out” because of their importance to you. Then write your top three values, in order of importance, below the list. Feel free to add values, if needed.

truth persistence resources

efficiency sincerity dependability

initiative fun trust

environmentalism relationships excellence

power wisdom teamwork

control flexibility service

courage perspective profitability

competition commitment freedom

excitement recognition friendship

creativity learning influence

happiness honesty justice

honor originality quality

innovation candor hard work

sustainability prosperity responsiveness

financial growth respect fulfillment

community support fairness purposefulness

integrity order strength

peace spirituality self-control

loyalty adventure cleverness

clarity cooperation success

security humor stewardship

love collaboration support

1._____________________________________________________________________________2._____________________________________________________________________________3._____________________________________________________________________________Source: K. Blanchard & M. O’Connor (1997), Managing by Values, San Francisco: Berrett-Kohler, p. 112.


Bullshit Bingo

Do you keep falling asleep in meetings and seminars? What about those long and boring conference calls? Here is a way to change all of that!

How to play: Check off each block when you hear these words during a meeting, seminar, or phone call. When you get five blocks horizontally, vertically, or diagonally, stand up and shout BULLSHIT!!

Synergy Traction Core Competencies

Best Practice Bottom Line

Monetize Staycation 24/7 Outliers Benchmark

Value-added Proactive Win-Win Think outside the Box

Fast Track

Maverick

EmpowerKnowledge

BaseAt the End of

the DayGo(ing) Rogue

Tipping Point Ballpark “C” Level Game-changer

Bandwidth

Testimonials from satisfied players:

“I had only been in the meeting for five minutes when I won.” -Jack W. - Boston

“My attention span at meetings has improved dramatically.” -David D. - Florida

“What a gas. Meetings will never be the same for me after my first win.” -Bill R - New York City

“The atmosphere was tense in the last process meeting as 14 of us waited for the 5th box.” -Ben G. - Denver

“The speaker was stunned as eight of us screamed 'Bullshit' for the third time in 2 hours.” - Kathleen L. - Atlanta


Seminar in Strategic Management: Individual/Group Effectiveness Peer Evaluations

MY NAME IS:________________________________________

STUDY GROUP #_____________________________________ DATE__________________May, 2010

[Please circle one response: 1 = Poor; 2 = Fair; 3 = OK/Satisfactory; 4 = Good; 5 = Superior]

INDIVIDUAL EFFECTIVENESS — RATE YOURSELF

My name_________________________________________________

Poor

Fair

OK

Good Superior

Comments

1. Problem-solving1 2 3 4 5

----------------------------------2. Uses time wisely and well

1 2 3 4 5----------------------------------

3. Positive contributions to deliverables 1 2 3 4 5----------------------------------

INDIVIDUAL EFFECTIVENESS — RATE YOUR STUDY GROUP MEMBERS

Member name_____________________________________________

Poor

Fair

OK

Good Superior

Comments



1 2 3 4 5----------------------------------


Member name_____________________________________________

Poor

Fair

OK

Good Superior

Comments



1 2 3 4 5----------------------------------


Member name_____________________________________________

Poor

Fair

OK

Good Superior

Comments



1 2 3 4 5----------------------------------



Please rate your study group’s overall effectiveness this semester (1-low, 5-high)____________________[You may use the reverse side of this page for comments if necessary)