copyright 2002 by ernest r. cadotte quarter 4 the skillful adjustment
TRANSCRIPT
Copyright 2002 by Ernest R. Cadotte
Quarter 4The Skillful Adjustment
Copyright 2002 by Ernest R. Cadotte
Q4: Evaluate Performance Skillfully Adjust Strategy
• Check customer reaction to brands, prices and advertising
• Check financial performance
• Check production operations
• Check out competition– strategic direction– tactics– market’s response
Copyright 2002 by Ernest R. Cadotte
Q4: Skillfully Adjust Strategy
• As needed, adjust– strategy– brand designs and prices– advertising– sales management– production plan
• Check finances
• Feed decisions into Marketplace simulator
Copyright 2002 by Ernest R. Cadotte
Measures of Customer Satisfaction
• Brand judgment (0 to 100)
• Price judgment (0 to 100)
• Ad judgment (0 to 100)
100 indicates complete satisfaction. 70 would be a good brand and ad rating until new technology is available in Quarter 5.
Price ratings should be near 100.
Copyright 2002 by Ernest R. Cadotte
Goal of Monitoring Customer Satisfaction
Give the customer what they want and do so better
than the competition.
Copyright 2002 by Ernest R. Cadotte
Deduce the market’s many response functions
Hot
Cold
Less More
Hot
Cold
Less More
Hot
Cold
Less More
Hot
Cold
Less More
Hot
Cold
Less More
Hot
Cold
Less More
Copyright 2002 by Ernest R. Cadotte
Based upon customer feedback, skillfully adjust marketing tactics
• Revise brand designs or create new ones• Revise ad copy • Adjust prices• Hire more sales people or deploy the
differently
Add or take away elements to find the sweet spot in the customer’s response function.
Copyright 2002 by Ernest R. Cadotte
Competitor Benchmarks
• Brand and ad designs
• Prices and sale priorities
• Sales staffing
• Ad placements
• Demand by brand by segment
Copyright 2002 by Ernest R. Cadotte
Goals of Competitive Benchmarking
• Reverse engineer the strategy of each competitor.• Determine who is a threat and who is not.• Determine strengths and weakness of competition.• Emulate good decisions.• Predict direction of competitive moves.• Adjust strategy and tactics in reaction to
competitor strengths and weaknesses and in anticipation of future moves.
Copyright 2002 by Ernest R. Cadotte
Financial Performance
• Firm profitability
• Brand profitability
• Region profitability
• Return on investment
• Asset management
Copyright 2002 by Ernest R. Cadotte
Goals of Financial Management
• Discover which brands and markets are making the greatest and weakest contribution to the bottom line.
• Deploy resources to correct weaknesses and take advantage of strong performers.
Copyright 2002 by Ernest R. Cadotte
Managing Inventories and Cash(the Razor’s Edge)
• High production– Lower unit production costs– Risk of too much inventory
• Uses up large volumes of cash• Risk of brand obsolesce (wrong product in warehouse)
• Low production– Low cash requirements– Higher per unit production costs– Risk of too little inventory
• Stock outs • Lost revenue• Customer ill will (unhappy customers)
Copyright 2002 by Ernest R. Cadotte
Measurement of the Firm’s Performance
The Balanced Scorecard
Copyright 2002 by Ernest R. Cadotte
Why Use a Balanced Scorecard?
• It is too easy to get caught up in market share and short-term profits.
• Long-term viability requires that managers also deliver customer satisfaction and invest in the future.
• The balanced scorecard measures both the long-term and the short-term.
• The best managers will be good in all measured areas.
Copyright 2002 by Ernest R. Cadotte
Total Business Performance
Financial performance
Market performance
Marketing effectiveness
Investments in the firm’s future
Creation of wealth
Asset management
Manufacturingproductivity
Copyright 2002 by Ernest R. Cadotte
Action Potential of the Firm
The action potential of the firm is equal to the product of the company’s:
– Financial performance– Market performance– Marketing effectiveness– Investments in the firm’s future– Human resource management – Creation of wealth– Asset management– Manufacturing productivity
Copyright 2002 by Ernest R. Cadotte
Learning Points for Quarter 4
• The management of strategy– learning from your customers– learning from your competition– learning from your financial information– skillfully adjusting your strategy and tactics
• Management of financial resources
Copyright 2002 by Ernest R. Cadotte
Learning Points for Quarter 4
• Using the tools of management– market feedback – accounting reports (financial statements)– industry financial benchmarks (industry
financial ratios)– profitability analysis (activity based costing)
Copyright 2002 by Ernest R. Cadotte
Quarter 5Making Plans for the Future
An introduction to the Venture Capital Fair
Copyright 2002 by Ernest R. Cadotte
What Is New In Quarter 5?
• Feature R&D
• Debt
• Licensing
• Tactical plan
Copyright 2002 by Ernest R. Cadotte
Licensing R&D
Team A
Invest in RAM
Design in new brand
Receiveincome
Team BReceiveRAM/Pay fee
Q5 Q6 Q7
License R&D from Team A
Copyright 2002 by Ernest R. Cadotte
Cross-Licensing R&D
Team A Q5
Invest in more memory
Design in new brand
Team B
ReceiveMemory/Pay Fee
Invest inhard drive
Design in new brand
ReceiveHard drive /Pay Fee
Q6 Q7
License to B
License to A
Copyright 2002 by Ernest R. Cadotte
Your goal is to speed up the adoption rate
Demand
Time
introduction
growth
maturitydecline
New brand features, sales
offices, and plant capacity will push you
into the growth phase.
You are here
Copyright 2002 by Ernest R. Cadotte
Q5: Making Plans for the Future
What do you do when cash and net income from current operations are not sufficient to fund new business development activities?
• expand owners’ equity (bring in new investors)
• leverage your investment (borrow money from others)
Copyright 2002 by Ernest R. Cadotte
Business Dilemma
Cash to runthe business
Cash fromthe business
Time
Money
Free cash flow
Copyright 2002 by Ernest R. Cadotte
New Funding Options
• Sell part of the company to venture capitalists– venture capitalists are willing to
invest up to 5,000,000– venture capitalists may ask for
up to 60% of the company in exchange for their investments
• Borrow money– short-term bank loans– long-term bank loans
Copyright 2002 by Ernest R. Cadotte
The venture capital community is willing to invest 5,000,000
• Demand is up for the entire industry.• Your firm has established itself as a viable
competitor.• New sales offices would greatly expand
distribution, drive up unit volume, and thereby reduce unit costs.
• New brand features could be brought on the market if you invest in R&D. These brand features will increase customer satisfaction, and thereby demand.
• New production capacity and quality improvements will allow substantial market expansion.
Copyright 2002 by Ernest R. Cadotte
Venture Capital Guidelines
• No agreements can be made which involve the purchase or merger of another company.
• A signed contract between the Venture Capitalist and the company is required.
Copyright 2002 by Ernest R. Cadotte
Venture Capitalists Want a Plan
Copyright 2002 by Ernest R. Cadotte
A Strategy is a Plan of Action
A strategy is a series of interconnected tactics purposely organized to be executed in a particular order in time and space for the purpose of achieving specific goals.
Copyright 2002 by Ernest R. Cadotte
The best-planned strategies will not survive the test of battle.
Gen. George Patton
Copyright 2002 by Ernest R. Cadotte
Plans are worthless, but planning is everything.
Gen. Dwight D. Eisenhower
Copyright 2002 by Ernest R. Cadotte
The devil is in the details.
Adm. Rickover
Copyright 2002 by Ernest R. Cadotte
It is better to have a class A team with a class B plan than to have a class B team with a class A plan.
Almost any venture capitalist
Copyright 2002 by Ernest R. Cadotte
Venture Capitalists Want a Plan
• History of firm
• Market assessment
• Performance to date
• Marketing strategy
• Manufacturing strategy
• Financial strategy
• Pro forma financial statements
• What is in it for them?
Copyright 2002 by Ernest R. Cadotte
History of Firm
• Time line of major firm activities by quarter – Formation of team– Establishment of strategic direction– Location of factory and size– Location of sales offices– Creation of new brands– Entry into test market– Assessment of test market and adjustment to strategic
direction and tactics– Performance in second test market– Where you are today
Copyright 2002 by Ernest R. Cadotte
Market Assessment
• Nature of business opportunity
• Market potential
• Competition
Copyright 2002 by Ernest R. Cadotte
Firm’s Performance After 1 Year • Market position
– segments
– geography
– competition
• Market performance– demand and market share
– customer satisfaction (brands, prices, reliability)
• Financial performance– cash
– profitability
Copyright 2002 by Ernest R. Cadotte
Marketing Strategy
• Target markets
• Geographic market expansion– timing and order of new markets– expansion in advertising and sales efforts
• New brands– R&D investments in new features– introduction of new brands
Copyright 2002 by Ernest R. Cadotte
Manufacturing Strategy
• Plant expansions – when?– how much?– investment?
• Productivity improvements– changeover – quality – inventory
Copyright 2002 by Ernest R. Cadotte
Financial Strategy
• Cash flow requirements
• Sources of capital– venture capital– debt
• short-term
• long-term
• Profitability and asset projections
• Return on investment
Copyright 2002 by Ernest R. Cadotte
Oops Factor in Strategic Planning
Develop tactical plan
Check cash flow
Oops!
Check cash flow
Revise tactical plan
Copyright 2002 by Ernest R. Cadotte
Sources and Uses of Capital
• Venture capitalists want to know how their money will be spent.
• Venture capital can only be spent on R&D, new sales offices, and factory improvements.
• Venture capital can not be spent on advertising, or sales people.
• Use long-term debt for factory expansions.• Use short-term debt for market uncertainty and
inventory fluctuations.
Copyright 2002 by Ernest R. Cadotte
Venture Capital Fair
Copyright 2002 by Ernest R. Cadotte
Venture Capital Request
• The team is free to ask for up to 5,000,000 in common or preferred stock.
• The maximum you may take is 5,000,000.
• All buyback options and conversion options must take affect after after the end of the exercise.
Copyright 2002 by Ernest R. Cadotte
Procedure
• Each team is given 14 minutes to present its business plan to a group of investors.
• Each team will make two presentations to two sets of venture capitalists.
• The objective is to let the venture capitalists see all teams before they sit down to negotiate an equity investment with any one of them.
Copyright 2002 by Ernest R. Cadotte
At the end of the presentations
• The venture capital group will quickly evaluate the quality of the teams.
• Each individual investor:– decides which teams he or she wants to
negotiate with and the order (probably no more than three for detailed negotiations).
– may inform a team whether and when he or she wants to meet with them (team can approach venture capitalists).
– meets with the team to ask questions and negotiate an equity position.
Copyright 2002 by Ernest R. Cadotte
Each Investor is a Free Agent
• Each Individual Investor:– has 4,000,000 to invest.– is free to negotiate an equity position in any
team.– is free to contact each other for consultation.
• It is not necessary that the investors agree on a common stock price.
• Investors are encouraged to consider a stock price between 70 and 120 per share.
Copyright 2002 by Ernest R. Cadotte
The Deal• The negotiation is concluded when the
venture capitalist physically gives the cash (in play money) for the equity investment. Both parties should sign a contract for the exchange.
• The team can issue the stock once they have turned over the cash to the instructor, along with a copy of the stock agreements which they have negotiated with the venture capitalists.
Copyright 2002 by Ernest R. Cadotte
Fast Eddy's Venture Capital Fund
• Fast Eddy's Venture Capital Fund is the investor of last resort in case a team is not able to find suitable investors.
• FEVCF will make an open offer at a stock price 5 less than the worst stock price on the market.
Copyright 2002 by Ernest R. Cadotte
Details
• See schedule for the team presentation times.
• Negotiations will run for approximately one hour.
• All transactions must be completed within the allotted time.
• Quarter 5 decisions will be due shortly after the Venture Capital fair.
Copyright 2002 by Ernest R. Cadotte
Learning Points for Quarter 5
• Strategic and tactical planning– time phasing decisions into the future– working investment money and debt to support
tactical plans
Copyright 2002 by Ernest R. Cadotte
Learning Points for Quarter 5
• Understanding cash flows– Cash is king.– How is profit different from cash?– You can not go to Hawaii on market share. At
the end of the day, wealth creation is the goal.
Copyright 2002 by Ernest R. Cadotte
Competitive Thinking
• Competition or cooperation• Strategic alliances with competitors
– multiplying resources– developing markets more quickly– Versus helping the competition
• Game theory and prisoner’s dilemma (if I do this and they do that, then …….?)
• Negotiations
Copyright 2002 by Ernest R. Cadotte
Learning Points for Quarter 5
• Management of strategy – discover the causes of performance shortfalls– adapt to new opportunities and problems– work on the margin to improve performance
• where should money be spent next?
• how can we get more out of our current investments?
– manage the future (taking the initiative now by expending resources that will shape the events and opportunities of the future)
Copyright 2002 by Ernest R. Cadotte
When we work strictly in our functional silos, we are like a bunch of blind people trying to understand what an elephant is.
Please tell me
what it is?It’s a snake.
It’s atree trunk.
It’s a sheetof rawhide.
It’s a steeltube.
Copyright 2002 by Ernest R. Cadotte
With business war games, you can crawl all over and under the enterprise to help you
to see and understand the whole thing.
It is anenterprise!
Accounting
Production
MarketingSales
Finance
Copyright 2002 by Ernest R. Cadotte
Mental Discipline of Marketplace
Marketconditions
Marketingstrategy
Marketingtactics
Marketassessment
Marketobjectives
Marketperformance
Manufacturingconditions
Manufacturingstrategy
Manufacturingtactics
Manufacturingassessment
Manufacturingobjectives
Manufacturingperformance
EnvironmentalAnalysis
BusinessStrategy
Feedback
BusinessPerformance
Assessment of BusinessConditions B
USI
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SS
LE
VE
L
FU
NC
TIO
NA
L L
EV
ELStrategy
Financialconditions
Financialtactics
Financialassessment
Financialobjectives
Financialperformance
Financialstrategy
Copyright 2002 by Ernest R. Cadotte
Key Benefits
• Develop teamwork across functions & locations.
• Promote better decision making by helping participants see how their decisions can affect the performance of others & the organization as a whole.
• Facilitate learning of important business concepts, principles and ways of thinking.
Copyright 2002 by Ernest R. Cadotte
Key Benefits
• Develop strategic planning and execution
skills within a rapidly changing
environment.
• Instill a bottom line focus and the
simultaneous need to deliver customer value.
• Crystallize the financial implications of
business decisions and how they affect cash
flows and bottom-line performance.
Copyright 2002 by Ernest R. Cadotte
Key Benefits
• Discover how important it is to use market data and competitive signals to adjust the strategic plan and more tightly focus business tactics.
• Build confidence through knowledge and experience.
Copyright 2002 by Ernest R. Cadotte
Total Business Performance
Financial performance
Market performance
Marketing effectiveness
Investments in the firm’s future
Creation of wealth
Asset management
Manufacturingproductivity
Copyright 2002 by Ernest R. Cadotte