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Group 6

MMS-B

MANAGEMENT CONTROL SYSTEM

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Wal-Mart Case Study

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About Wal-Mart

• Founded by Sam Walton in 1962

• Worlds Largest Retailer

– $ 422 billion sales

– 2 million employees

– 3000 + suppliers

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Asset Richness of Wal-Mart

• Largest Trucking Company in the USA

• Largest privately owned Satellite Communication network

• Company owned 20 aircrafts

• Supply Chain & Logistics Capabilities next only to Pentagon

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• 2002 – Presented with Ron Brown Award for Corporate

Leadership

• 2004 – Fortune Magazine’s “Most Admired Companies”

• 2005 – Held an 89.9% retail store market share in the U.S.

ACHIEVEMENTS

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WAL – MART STRATEGY

• Selling branded products at low cost

• Ensured not to be too dependent on any one supplier

– No single vendor constituted more than 4% of its overall

purchase volume

• Saturation Strategy for Expansion

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WAL – MART V/S COMPETITOR

Wal - Mart Strategy Competitor’s Strategy

To build large discount stores in small rural towns

Competitors focussed on large towns with populations greater than 50,000

Marketing Strategy – Guarantee “everyday low prices”

Marketing Strategy – Relied on Advertised “Sales”

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WAL – MART CONTROL SYSTEMS

• Each store constituted an Investment Centre

• Data from each store were collected, analyzed and transmitted

electronically

• Information sharing enabled the company to reduce stock-outs

etc. and maximize inventory turnover

• Data from “outstanding” performers used to improve

“problem” stores

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WAL–MART CONTROL SYSTEMS

• Instituted a policy to address the issue of shoplifting :

– Sharing 50% of savings from decrease in pilferage

• Store managers to fill out “Best Yesterday” ledgers

• Store within Store : Encourage & gave incentive to be creative

• Successful experiments , recognized & applied to other stores

- People Greeter :An associate who welcomed shoppers

- 10- Foot Attitude :Pledge by the associates

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Policies & Programs for Associates

• Introduced Profit sharing in 1971

– Every associate who worked for 1 year or 1000 hrs was eligible for it

– Formula based distribution of profit

• Incentive bonuses

• Discount purchase plan

• Promotion from within

• Pay raises based on performance

• Open – door policy

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Q1. What is Wal-Mart strategy? What is the basis on which Wal-Mart builds its competitive advantage?

Wal-Mart Strategy

• Selling branded products at low cost

• Ensured not to be too dependent on any one supplier

• No single vendor constituted more than 4% of its overall

purchase volume

• Saturation Strategy for Expansion

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WAL – MART CONTROL SYSTEMS

• Each store constituted as an Investment Centre

• Data from each store were collected, analyzed and transmitted

electronically

• Information enabled the company to reduce stock-outs and

maximize inventory turnover

• Data from “outstanding” performers used to improve

“problem” stores

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Q2. How Wal-Mart’s control system executes the firm’s strategy?

• Wal-Mart don’t allow to exceed any single vendor’s contribution more than 4% of its purchase volume.

• Saturation strategy: Distribution centers are so strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a day.

• Wal-Mart persuade its suppliers to hook up with RFID which could increase monitoring & management of the inventory.

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Continued…

• Instituted a policy to address the issue of shoplifting :

– Sharing 50% of savings from decrease in pilferage

• Store managers to fill out “Best Yesterday” ledgers

• Store within Store : Encourage & gave incentive to be creative

• Information sharing enabled the company to reduce stock-outs

and maximize inventory turnover

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Continued….

• Every manager requires to fill best yesterdays ledger to track daily sales performance against the number from 1 year back

• The information within the organization is created & shared throughout the organization

• The data from outstanding performers among 5300 stores were used to improve operations in problem stores.

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Assignment Questions & Answers

Q.1.Economic Value Added (EVA) is a technique of management control considered

by some as superior of ROI. Analyze this statement and give your comment

There are two very good reasons why EVA is much better than ROI as a controlling tool and as a performance measure

• Reason 1: Steering failure in ROI

Suppose of a SBU earning currently a return (ROI) of 30% and suppose that this SBU faces an investment opportunity producing a return of 20%

• Before investment: Capital 100, Operating profit 30, Capital cost 10%• ROI = 30/100 = 30% , EVA = 30 - (10% x 100) = 20• Investment´s capital requirement 20, return 20%/year: Thus increase in

yearly operating profit is 20% x 20 = 4• After investment: Capital 100, Operating profit 30, Capital cost 10%• ROI = 34/100 = 28% , EVA = 34 - (10% x 120) = 22• In this case decreasing ROI is good for the shareholders, thus ROI

should not be maximised and therefore it is problematic controlling tool.

Reason 2: EVA is more practical and understandable than rate of return (ROI)

• Usually the rate of return is not used and totally understood at the lower levels of organizations in the companies using ROI as the prime performance measure. I.e. operating peoples like sales people, production engineers and supervisors etc. do not use ROI while making day-to-day operating actions (they use operating profit and perhaps also some turnover times instead)

• EVA, in contrast to ROI, is as an absolute measure easy to integrate into operating activities since all cost reductions and revenue increases are already in terms of EVA (reduction in costs in one period = increase in EVA in the same period). In the similar fashion capital increases /reductions are also fairly easy to turn into change of EVA

• EVA clarifies the profitability into one unambiguous and absolute figure. Thereafter improving profitability is simply increasing EVA

Q2. What are the challenges faced in pricing corporate services provided to the Business

units operating as profit centre?

Difficulties with Profit Centres

• Decentralized decision making • Increase in friction• Competition within the organization units• Divisionalisation • General management competence• Emphasis on short run profitability• No complete satisfaction

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Q.3 Internal audit is one of the avail to the top management for

ensuring continuous improvement for better performance. Give your

comments.

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Internal Audit

• Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.

• Internal auditing is a catalyst for improving an organization’s effectiveness and efficiency

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Role of Internal Audit

• Role in internal control

• Role in risk management

• Role in corporate governance

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Q.4 Explain the Concept of EVA, ROI. Give its Positive and

Negative. Explain calculations of the DuPont Formula

Definition for EVA

EVA is defined as net profit after taxes and after the cost of capital.FORMUALE for EVA

EVA

Net operating profit Taxes Cost of capital

Positive EVA

• A positive EVA means the firm generated a return to invested capital that exceeds the opportunity cost of capital– The “value” of the firm should increase

• Positive EVA indicates Value Creation– EVA is Positive if,NOPAT > (Capital Invested x WACC)

Negative EVA• A negative EVA means the firm did not generate sufficient

return to cover it’s cost of capital– The “value” of the firm should decline– Negative EVA indicates Value destruction

• The absolute value of EVA is less important than the trend in EVA

• Series of negative EVA is a signal that restructuring in a company may be needed– EVA is Negative if, NOPAT < (Capital Invested x WACC)

Calculations

Positive EVA• NOPAT = $3,380,000• Capital Investment =

$1,300,000• WACC = .056 or 5.60%• EVA = $3,380,000 -

($1,300,000 x .056) = $3,307,200

Negative EVA• NOPAT = $600000• Capital Investment =

$1,300,000• WACC = .056 or 5.60%• EVA = $60000 -

($1,300,000 x .056) = - $12800

ROI

• Traditional Formula– ROI = Net Profit After Taxes ÷ Total Assets

• DuPont Formula:– ROI = (Net Profit Margin) x (Total Asset Turnover)

i.e.– ROI = (Net Profit After Taxes ÷ Sales) x (Sales ÷

Total Assets)

Positive ROI• Sales Price Rs. 15,000

• Purchase Price Rs.10,000

_____________________

• Profit Rs. 5,000

X 100 50 % ROI=Rs. 10000

Rs. 5000

Negative ROI• Sales Price Rs. 7,000

• Purchase Price Rs.10,000

_____________________

• Loss (Rs. 3,000)

X 100 30 %Negative ROI

=Rs. 10000

Rs. 3000

Advantages of ROI

• Simplicity: its easy to apply formula, expressed simply as average earnings divided by average investment

• Consistency: ROI is consistent with many management reward systems that use ROI as a performance metric, which better reveals direct investment results expected of managers

• Uniformity: Return on investment is also a measure favored by investors when judging how effective management has been in utilizing company assets they have invested in

Disadvantages of ROI

• Investment in assets is typically measured using historical cost. ROI becomes larger as assets become depreciated. This may result in managers taking unnecessary delays in updating equipment.

• Managers may turn down projects with positive net present values, simply because accepting the project results in a reduced ROI. In other words, projects may be turned down if they provide a return above the cost of capital but below the current ROI.

DuPont formula

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Group Members

Name Roll No

Mr. Sandesh Singh 86

Mr. Sandip Kadam 87

Mr. Sanjay Dialani 88

Ms. Sara Rangwalla 89

Mr. Sarfaraaz Malik 90

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Thank You