Case Study
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Chapter13.pdf
346
Suggestions for Case Analysis
C H A P T E R 13
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Putting Strategy into Action
Developing Long-range Plans
Monitoring Performance
Feedback/Learning: Make corrections as needed
Gathering Information
Societal Environment: General forces
Natural Environment: Resources and
climate
Task Environment:
Industry analysis
Structure: Chain of command
Culture: Beliefs, expectations,
values
Resources: Assets, skills, competencies,
knowledge
Activities needed to accomplish a plan Cost of the
programs
Sequence of steps needed to do the job
Reason for existence
What results to accomplish by when Plan to
achieve the mission & objectives Broad
guidelines for decision making
Mission
Internal
External
Programs and Tactics
Budgets
Procedures
Performance
Objectives
Strategies
Policies
Actual results
Strategy Implementation:
Strategy Formulation:
Evaluation and Control:
Environmental Scanning:
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347
13-3. Employ the strategic audit as a method of organizing and analyzing case information
13-1. Explain the issues involved in researching a case situation
13-2. Analyze financial statements using ratio analysis, common-size statements, Z-values and economic measures
Learning Objectives After reading this chapter, you should be able to:
Finding the Problems in the Friendly Skies United Airlines agreed to merge with Continental Airlines in 2010 and
the passenger nightmare began. Rather than merge each of the big
systems (Reservations, Websites & Frequent Flyer Programs) over time,
they merged all three on the same day. The entire operation came to a
standstill as the system lost track of pilots and assigned flights to pilots
who were retired or deceased. A litany of problems plagued the airline for
the next five years as a series of senior leadership teams tried to figure out
how to fix the business. From 2012 to 2015 United was at or close to the bottom
of most airline performance metrics including delays, cancel lations, bumped passengers,
i 2015 d P &
Associates in their customer satisfaction survey.
The stunning number of poor business decisions just exasperated the situation:
1. The new CEO of the airline spent thousands of hours and over a year to pick the coffee for the organization
2. The company moved to a chute system of boarding that encouraged passengers to get in their chutes long
before the plane even landed
3. The new uniforms were cheap and did not hold up to repeated cleanings.
A new CEO took over in late 2014 and the company got to work systematically examining what it would take to
bring the organization back. The company began surveying customers collecting 8,000 surveys a day and they
sent “customer experience” teams to fully evaluate the current situation.
Looking both internally and externally the company found a large number of both small and large items
that needed to be corrected and got to work. Easier issues included matching the other major carriers method
for boarding planes, quickly selecting a far better type of coffee, and establishing a group to re-vamp the uni-
forms. Bigger issues were addressed including settling all the union-related issues (the company agreed to a
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348 PART 5 Introduction to Case Analysis
moratorium on outsourcing some jobs until 2017), revamping the travel patterns of planes
to minimize weather disruptions, and changing the baggage handling procedures.
Analyzing and systematically repairing the company appeared to be working by early
2016. Rates for mishandled bags, missed connections, and on-time performance were
improving dramatically.
This type of in-depth, investigative analysis is a key part of analyzing strategy cases.
This chapter provides various analytical techniques and suggestions for conducting this
kind of case analysis.
sourCes d B “T u w ” Bloomberg BusinessWeek 18 24 2016, 50 55 // / / / /201505 20na 20a 20 final
B. Mutzabaugh, “Era of airline merger mania comes to a close with last US Airways flight,” USA Today, October 16, 2015 (http://www.usatoday.com/story/travel/flights/todayinthesky/2015/10/15 /airline-mergers-american-delta-united-southwest/73972928/).
The Case Method The analysis and discussion of case problems has been the most popular method of teaching strategy and policy for many years. Furthermore, most of the big consulting companies use case analysis as their primary means of selecting candidates for on-site interviews. The case method offers the opportunity to move from a narrow, specialized view that emphasizes functional techniques to a broader, less precise analysis of the overall corporation. Cases present actual business situations and enable you to examine both successful and unsuccessful corporations. In case analysis, you might be asked to critically analyze a situation in which a manager had to make a decision of long-term corporate importance. This approach gives you a feel for what it is like to face making and implementing strategic decisions.
Researching the Case Situation You should not restrict yourself only to the information and timing of when the case was written unless your instructor states otherwise. You should, if possible, undertake outside research about the environmental setting. Check the decision date of each case (typically the latest date mentioned in the case) to find out when the situation occurred and then screen the business periodicals for that time period. An understanding of the economy during that period will help you avoid making a serious error in your analysis—for example, suggesting a sale of stock when the stock market is at an all-time low or taking on more debt when the prime interest rate is over 15%. Information about the industry will provide insights into its competitive activities. Important Note: Don’t go beyond the decision date of the case in your research unless directed to do so by your instructor.
Use industry information services such as Compustat, Compact Disclosure (for older cases), and a wide variety of information sources available on the Internet. Hoover’s online corporate directory (www.hoovers.com) and the U.S. Securities and Exchange Commission’s EDGAR database (www.sec.gov) provide access to corporate annual reports and 10-K forms. Most companies post their annual reports along with
13-1. Explain the issues involved in research- ing a case situation
CHAPTER 13 Suggestions for Case Analysis 349
all filings on the investor page of their company website. This background will give you an appreciation for the situation as it was experienced by the participants in the case. Use a search engine such as Google or Bing to find additional information about the industry and the company.
A company’s annual report and SEC 10-K form from the year of the case can be very helpful. According to the Yankelovich Partners survey firm, 8 out of 10 portfolio managers and 75% of security analysts use annual reports when making decisions.1 They contain not only the usual income statements and balance sheets, but also cash flow statements and notes to the financial statements indicating why certain actions were taken. On 10-K forms you will find detailed information not usually available in an annual report. SEC 10-Q forms include quarterly financial reports. SEC 14-A forms include detailed information on members of a company’s board of directors and proxy statements for annual meetings. Some resources available for research into the economy and a corporation’s industry are suggested in Appendix 13.A.
A caveat: Before obtaining additional information about the company profiled in a particular case, ask your instructor if doing so is appropriate for your class assignment. Your strategy instructor may want you to stay within the confines of the case informa- tion provided in the book. In this case, it is usually acceptable to at least learn more about the societal environment at the time of the case.
Financial Analysis: A Place to Begin Once you have read a case, a good place to begin your analysis is with the financial statements. Ratio analysis is the calculation of ratios from data in these statements. It is done to identify possible financial issues. A review of key financial ratios can help you assess a company’s overall situation and pinpoint some problem areas. Ratios are useful regardless of firm size and enable you to compare a company’s ratios with industry aver- ages. Table 13–1 lists some of the most important financial ratios, which are (1) liquidity ratios, (2) profitability ratios, (3) activity ratios, and (4) leverage ratios.
analy ing finanCial sTaTemenTs In your analysis, do not simply make an exhibit that includes all the ratios (unless your instructor requires you to do so), but select and discuss only those ratios that have an impact on the issues you are addressing about that company. For instance, accounts receivable and inventory provide a source of funds. If receivables and inven- tories are double the industry average, reducing them will provide needed cash. In this situation, the case report should include not only sources of funds but also the number of dollars freed for use. Compare these ratios with industry averages to discover whether the company is out of line with others in the industry. Annual and quarterly industry ratios can be found in the library or on the Internet. (See the resources for case research in Appendix 13.A.) In the years to come, expect to see financial entries for the trading of CERs (Certified Emissions Reductions). This is the amount of money a company earns from reducing carbon emissions and selling them on the open market.
A typical financial analysis of a firm would include a study of the operating state- ments for five or so years, including a trend analysis of sales, profits, earnings per share, debt-to-equity ratio, return on investment, and so on, plus a ratio study comparing the
13-2. Analyze financial statements using ratio analysis, common-size statements, Z-values and economic measures
350 PART 5 Introduction to Case Analysis
Formula How Expressed Meaning
1. Liquidity Ratios Current ratio Current assets
Current liabilities
Decimal A short-term indicator of the company’s ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities.
Quick (acid test) ratio
Current assets − Inventory
Current liabilities
Decimal Measures the company’s ability to pay off its short-term obligations from current assets, excluding inventories.
Inventory to net working capital
Inventory
Current assets − Current liabilities
Decimal A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory.
Cash ratio Cash + Cash equivalents
Current liabilities
Decimal Measures the extent to which the company’s capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets.
2. Profitability Ratios Net profit margin Net profit after taxes
Net sales
Percentage Shows how much after-tax profits are generated by each dollar of sales.
Gross profit margin
Sales − Cost of goods sold
Net sales
Percentage Indicates the total margin available to cover other expenses beyond cost of goods sold and still yield a profit.
Return on invest- ment (ROI)
Net profit after taxes
Total assets
Percentage Measures the rate of return on the total assets utilized in the company; a measure of management’s efficiency, it shows the return on all the assets under its control, regardless of source of financing.
Return on equity (ROE)
Net profit after taxes
Shareholders’ equity
Percentage Measures the rate of return on the book value of shareholders’ total investment in the company.
Earnings per share (EPS)
Net profit after taxes − Preferred stock dividends
Average number of common shares
Dollars per share
Shows the after-tax earnings generated for each share of common stock.
3. Activity Ratios Inventory turnover Net sales
Inventory
Decimal Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year.
Days of inventory Inventory
Cost of goods sold + 365
Days Measures the number of one day’s worth of inventory that a company has on hand at any given time.
TABLE 13–1 Financial Ratio Analysis
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CHAPTER 13 Suggestions for Case Analysis 351
TABLE 13–1 Financial Ratio Analysis, (continued)
Formula How Expressed Meaning
Net working capital turnover
Net sales
Net working capital
Decimal Measures how effectively the net work- ing capital is used to generate sales.
Asset turnover Sales
Total assets
Decimal Measures the utilization of all the com- pany’s assets; measures how many sales are generated by each dollar of assets.
Fixed asset turnover
Sales
Fixed assets
Decimal Measures the utilization of the company’s fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets.
Average collec- tion period
Accounts receivable
Sales for year + 365
Days Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers.
Accounts receiv- able turnover
Annual credit sales
Accounts receivable
Decimal Indicates the number of times that accounts receivable are cycled during the period (usually a year).
Accounts payable period
Accounts payable
Purchase for year ÷ 365
Days Indicates the average length of time in days that the company takes to pay its credit purchases.
Days of cash Cash
Net sales for year ÷ 365
Days Indicates the number of days of cash on hand, at present sales levels.
4. Leverage Ratios Debt-to-asset ratio Total debt
Total assets
Percentage Measures the extent to which borrowed funds have been used to finance the company’s assets.
Debt-to-equity ratio
Total debt
Shareholders’ equity
Percentage Measures the funds provided by creditors versus the funds provided by owners.
Long-term debt to capital structure
Long-term debt
Shareholders’ equity
Percentage Measures the long-term component of capital structure.
Times interest earned
Profit before taxes + Interest charges
Interest charges
Decimal Indicates the ability of the company to meet its annual interest costs.
Coverage of fixed charges
Profit before taxes + Interest charges + Lease charges
Interest charges + Lease obligations
Decimal A measure of the company’s ability to meet all of its fixed-charge obligations.
Current liabilities to equity
Current liabilities
Shareholders’ equity
Percentage Measures the short-term financing portion versus that provided by owners.
continued
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352 PART 5 Introduction to Case Analysis
firm under study with industry standards. As a minimum, undertake the following five steps in basic financial analysis.
1. Examine historical income statements and balance sheets: These two basic statements provide most of the data needed for analysis. Statements of cash flow may also be useful.
2. Compare historical statements over time if a series of statements is available. 3. Calculate changes that occur in individual categories from year to year, as well as
the cumulative total change. 4. Determine the change as a percentage as well as an absolute amount. 5. Adjust for inflation if that was a significant factor.
Examination of this information may reveal developing trends. Compare trends in one category with trends in related categories. For example, an increase in sales of 15% over three years may appear to be satisfactory until you note an increase of 20% in the cost of goods sold during the same period. The outcome of this comparison might suggest that further investigation into the manufacturing process is necessary. If a company is reporting strong net income growth but negative cash flow, this would suggest that the company is relying on something other than operations for earnings growth. Is it selling off assets or cutting R&D? If accounts receivable are growing faster than sales revenues, the company is not getting paid for the products or services it is counting as sold. Is the company dumping product on its distributors at the end of the year to boost its reported annual sales? If so, expect the distributors to return the unor- dered product the next month, thus drastically cutting the next year’s reported sales.
Other “tricks of the trade” need to be examined. Until June 2000, firms growing through acquisition were allowed to account for the cost of the purchased company through the pooling of both companies’ stock. This approach was used in 40% of the value of mergers between 1997 and 1999. The pooling method enabled the acquiring company to disregard the premium it paid for the other firm (the amount above the fair market value of the purchased company often called “good will”). Thus, when PepsiCo agreed to purchase Quaker Oats for $13.4 billion in PepsiCo stock, the $13.4 billion was not found
TABLE 13–1 Financial Ratio Analysis, (continued)
Formula How Expressed Meaning
5. Other Ratios Price/earnings ratio Market price per share
Earnings per share
Decimal Shows the current market’s evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings.
Divided payout ratio
Annual dividends per share
Annual earnings per share
Percentage Indicates the percentage of profit that is paid out as dividends.
Dividend yield on common stock
Annual dividends per share
Current market price per share
Percentage Indicates the dividend rate of return to common shareholders at the current market price.
NOTE: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard & Poor’s and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, former dean, Business School, Texas A&M University—Corpus Christi, Corpus Christi, Texas, for his definitions of these ratios.
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CHAPTER 13 Suggestions for Case Analysis 353
on PepsiCo’s balance sheet. As of June 2000, merging firms must use the “purchase” accounting rules in which the true purchase price is reflected in the financial statements.2
The analysis of a multinational corporation’s financial statements can get very complicated, especially if its headquarters is in another country that uses different accounting standards.
Common si e sTaTemenTs Common-size statements are income statements and balance sheets in which the dollar figures have been converted into percentages. These statements are used to identify trends in each of the categories, such as cost of goods sold as a percentage of sales (sales is the denominator). For the income statement, net sales represent 100%: calculate the percentage for each category so that the categories sum to the net sales percent- age (100%). For the balance sheet, give the total assets a value of 100% and calculate other asset and liability categories as percentages of the total assets with total assets as the denominator. (Individual asset and liability items, such as accounts receivable and accounts payable, can also be calculated as a percentage of net sales.)
When you convert statements to this form, it is relatively easy to note the percent- age that each category represents of the total. Look for trends in specific items, such as cost of goods sold, when compared to the company’s historical figures. To get a proper picture, however, you need to make comparisons with industry data, if available, to see whether fluctuations are merely reflecting industry wide trends. If a firm’s trends are generally in line with those of the rest of the industry, problems are less likely than if the firm’s trends are worse than industry averages. If ratios are not available for the industry, calculate the ratios for the industry’s best and worst firms and compare them to the firm you are analyzing. Common-size statements are especially helpful in devel- oping scenarios and pro forma statements because they provide a series of historical relationships (for example, cost of goods sold to sales, interest to sales, and inventories as a percentage of assets) from which you can estimate the future with your scenario assumptions for each year.
value and The index of susTainaBle growTh If the corporation being studied appears to be in poor financial condition, use Altman’s Z-Value Bankruptcy Formula to calculate its likelihood of going bankrupt. The Z-value formula combines five ratios by weighting them according to their importance to a corporation’s financial strength. The formula is:
Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5 where:
x1 = Working capital/Total assets (%) x2 = Retained earnings/Total assets (%) x3 = Earnings before interest and taxes/Total assets (%) x4 = Market value of equity/Total liabilities (%) x5 = Sales/Total assets (number of times)
A score below 1.81 indicates significant credit problems, whereas a score above 3.0 indi- cates a healthy firm. Scores between 1.81 and 3.0 indicate question marks.3 The Altman Z model has achieved a remarkable 94% accuracy in predicting corporate bankruptcies. Its accuracy is excellent in the two years before financial distress, but diminishes as the
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354 PART 5 Introduction to Case Analysis
13-3. Employ the strategic audit as a method of organizing and analyzing case information
lead time increases. It has also been found to be the strongest predictor of bankruptcy and it and the current ratio are great tools to assess the financial health of organizations.4
The index of sustainable growth is useful to learn whether a company embarking on a growth strategy will need to take on debt to fund this growth. The index indicates how much of the growth rate of sales can be sustained by internally generated funds. The formula is:
g* = [P(1 - D)(1 + L)]
[T - P(1 - D)(1 + L)]
where:
P = (Net profit before tax/Net sales) * 100 D = Target dividends/Profit after tax L = Total liabilities/Net worth T = (Total assets/Net sales) * 100
If the planned growth rate calls for a growth rate higher than its g*, external capital will be needed to fund the growth unless management is able to find efficiencies, decrease dividends, increase the debt-equity ratio, or reduce assets through renting or leasing arrangements.5
useful eConomiC measures If you are analyzing a company over many years, you may want to adjust sales and net income for inflation to arrive at a “true” financial performance in constant dollars. Constant dollars are dollars adjusted for inflation to make them comparable over vari- ous years. One way to adjust for inflation in the United States is to use the consumer price index (CPI), as given in Table 13–2. Dividing sales and net income by the CPI factor for that year will change the figures to 1982–1984 U.S. constant dollars (when the CPI was 1.0). Adjusting for inflation is especially important for companies operating in emerging economies like China and Russia. China’s inflation rate was just 1.8% in 2016; while the Russian inflation rate in 2016 was 9.8%.6
Another helpful analytical aid provided in Table 13–2 is the prime interest rate, the rate of interest banks charge on their lowest-risk loans. For better assessments of strategic decisions, it can be useful to note the level of the prime interest rate at the time of the case. A decision to borrow money to build a new plant would have been a difficult one in 2007 when the rate was at 8.05%, but far more practical just two years later when the average rate fell to 3.25%.
In preparing a scenario for your pro forma financial statements, you may want to use the gross domestic product (GDP) from Table 13–2. GDP is used worldwide and measures the total output of goods and services within a country’s borders. The amount of change from one year to the next indicates how much that country’s economy is grow- ing. Remember that scenarios have to be adjusted for a country’s specific conditions. For other economic information, see the resources for case research in Appendix 13.A.
Format for Case Analysis: The Strategic Audit There is no one best way to analyze or present a case. Each instructor has personal preferences for format and approach. Nevertheless, in Appendix 13.B we suggest an approach for both written and oral reports that provides a systematic method for successfully attacking a case. This approach is based on the strategic audit, which is
CHAPTER 13 Suggestions for Case Analysis 355
presented at the end of Chapter 1 in Appendix 1.A. We find that this approach provides structure and is very helpful for the typical student who may be a relative novice in case analysis. Regardless of the format chosen, be careful to include a complete analysis of key environmental variables—especially of trends in the industry and of the competi- tion. Look at international developments as well.
If you choose to use the strategic audit as a guide to the analysis of complex strategy cases, you may want to use the strategic audit worksheet in Figure 13–1. Print a copy of the worksheet to use to take notes as you analyze a case. See Appendix 13.C for an example of a completed student-written analysis of a 1993 Maytag Corporation case done in an outline form using the strategic audit format. This is one example of what a case analysis in outline form may look like.
Case discussion focuses on critical analysis and logical development of thought. A solution is satisfactory if it resolves important problems and is likely to be imple- mented successfully. How the corporation actually dealt with the case problems has no real bearing on the analysis because management might have analyzed its problems incorrectly or implemented a series of flawed solutions.
13-3. Employ the strategic audit as a method of organizing and analyzing case information
TABLE 13–2 U.S. Economic i Year
GDP (in $ billions) Gross Domestic
Product CPI (for all items)
Consumer Price Index PIR (in %) Prime
Interest Rate
1980 2,862 .824 15.26
1985 4,346 1.076 9.93
1990 5,979 1.307 10.01
1995 7,664 1.524 8.83
2000 10,284 1.722 9.23
2005 13,093 1.953 6.19
2006 13,855 2.016 7.96
2007 14,477 2.073 8.05
2008 14,718 2.153 5.09
2009 14,418 2.143 3.25
2010 14,964 2.180 3.25
2011 15,517 2.249 3.25
2012 16,155 2.295 3.25
2013 16,663 2.329 3.25
2014 17,348 2.367 3.25
2015 17,942 2.370 3.26
NOTES: Gross domestic product (GDP) in billions of dollars; Consumer price index for all items (CPI) (1982–84 = 1.0); Prime interest rate (PIR) in percentages.
SOURCES: Gross domestic product (GDP) from U.S. Bureau of Economic Analysis, National Economic Accounts (www.bea.gov). Consumer price index (CPI) from U.S. Bureau of Labor Statistics (www.bls.gov). Prime interest rate (PIR) (www.federalreserve.gov).
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FIGURE 13–1 Strategic Audit
Worksheet Analysi s
Strategic Audit Heading (+) Factors (–) Factors Comments
I. Current Situation
A. Past Corporate Performance Indexes
B. Strategic Posture: Current Mission Current Objectives Current Strategies Current Policies
SWOT Analysis Begins:
II. Corporate Governance
A. Board of Directors
B. Top Management
III. External Environment (EFAS): Opportunities and Threats (SWOT)
A. Natural Environment
B. Societal Environment
C. Task Environment (Industry Analysis)
IV . Internal Environment (IFAS): Strengths and Weaknesses (SWOT)
A. Corporate Structure
B. Corporate Culture
C. Corporate Resources
1. Marketing
2. Finance
3. Research and Development
4. Operations and Logistics
5. Human Resources
6. Information Technology
V. Analysis of Strategic Factors (SFAS)
A. Key Internal and External Strategic Factors (SWOT)
B. Review of Mission and Objectives
SWOT Analysis Ends. Recommendation Begins:
VI. Alternatives and Recommendations
A. Strategic Alternatives—pros and cons
B. Recommended Strategy
VII. Implementation
VIII. Evaluation and Control
NOTE: See the complete Strategic Audit on pages 32–39. It lists the pages in the book that discuss each of the eight headings. SOURCE: T. L. Wheelen and J. D. Hunger, “Strategic Audit Worksheet.” Copyright © 1985, 1986, 1987, 1988, 1989, 2005, and 2009 by T. L. Wheelen. Copyright © 1989, 2005, and 2009 by Wheelen and Hunger Associ- ates. Revised 1991, 1994, and 1997. Reprinted by permission. Additional copies available for classroom use in Part D of the Case Instructor’s Manual and on the Prentice Hall Web site (www.prenhall.com/wheelen).
356
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CHAPTER 13 Suggestions for Case Analysis 357
MyManagementLab® Go to mymanagementlab.com to complete the problems marked with this icon .
End of Chapter SUMMARY Using a structured case analysis approach is one of the best ways to understand and remember the strategic management process. By applying the concepts and techniques you have learned to cases, you will be able to remember them long past the time when you have forgotten other memorized bits of information. The use of cases to examine actual situations brings alive the field of strategic management and helps build your analytic and decision-making skills.
MyManagementLab® Go to mymanagementlab.com for auto-graded writing questions as well as the following assisted-graded writing questions:
13-1. What ratios would you use to begin your analysis of a case? 13-2. What are the five crucial steps to follow in basic financial analysis?
activity ratio (p. 349) Altman’s Z-Value Bankruptcy
Formula (p. 353) annual report (p. 349) common-size statement (p. 353) constant dollars (p. 354)
gross domestic product (GDP) (p. 354)
index of sustainable growth (p. 354) leverage ratio (p. 349) liquidity ratio (p. 349) prime interest rate (p. 354)
profitability ratio (p. 349) ratio analysis (p. 349) SEC 10-K form (p. 349) SEC 10-Q form (p. 349) SEC 14-A form (p. 349) strategic audit worksheet (p. 355)
K E Y T E R M S
D I S C U S S I O N Q U E S T I O N S 13-3. Why should you begin a case analysis with a
financial analysis? When are other approaches appropriate?
13-4. What are common-size financial statements? What is their value to case analysis? How are they calculated?
13-5. When should you gather information outside a case? What should you look for?
13-6. When is inflation an important issue in conducting case analysis? Why bother?
13-7. How can you learn what date a case took place?
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358 PART 5 Introduction to Case Analysis
S T R A T E G I C P R A C T I C E E X E R C I S E Convert the following two years of income state- ments from the Maytag Corporation into common-size
statements. The dollar figures are in thousands. What does converting to a common size reveal?
N O T E S 1. M. Vanac, “What’s a Novice Investor to Do?” Des Moines
Register (November 30, 1997), p. 3G. 2. A. R. Sorking, “New Path on Mergers Could Contain
Loopholes,” The (Ames, IA) Daily Tribune (January 9, 2001), p. B7; “Firms Resist Effort to Unveil True Costs of Doing Business,” USA Today (July 3, 2000), p. 10A.
3. M. S. Fridson, Financial Statement Analysis (New York: John Wiley & Sons, 1991), pp. 192–194.
4. M. Awais, F. Hayat, N. Mehar, & W. Ul-Hassan, 2015 “Do Z-Score and Current Ratio have Ability to Predict
Bankruptcy?” Developing Country Studies, Vol. 5 (13): 30–36. E. I. Altman, “Predicting Financial Distress of Companies: Revisiting the Z-Score and Zeta Models,” working paper at pages.stern.nyu.edu/~ealtman/Zscores. pdf (July 2000).
5. D. H. Bangs, Managing by the Numbers (Dover, NH: Upstart Publications, 1992), pp. 106–107.
6. Tradingeconomics.com/Russia/inflation-cpi; Tradingeconomics .com/China/inflation-cpi
Consolidated Statements of Income: Maytag Corporation
1992 % 1991 %
Net sales Cost of sales Gross pro ts Selling, general, & admin expenses Reorganization expenses Operating income Interest expense Other—net Income before taxes and
accounting changes Income taxes Income before accounting changes Effects of accounting changes for
postretirement bene ts Net income (loss)
$3,041,223 2,339,406
701,817 528,250 95,000 78,567
(75,004) 3983 7546
(15,900) (8354)
(307,000)
$ (315,354)
100 — — — — — — — —
— — —
—
$2,970,626 2,254,221
716,405 524,898
0 191,507 (75,159)
7069 123,417
(44,400) 79,017
0
$79,017
100 — — — — — — — —
— — —
—
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359
Resources for Case Research
A P P E N D I X13.A
Company Information 1. Annual reports 2. Moody’s Manuals on Investment (a listing of companies within certain industries that
contains a brief history and a five-year financial statement of each company)
3. Securities and Exchange Commission Annual Report Form 10-K (annually) and 10-Q (quarterly) 4. Standard & Poor’s Register of Corporations, Directors, and Executives 5. Value Line’s Investment Survey 6. Findex’s Directory of Market Research Reports, Studies, and Surveys (a listing by Find/SVP
of more than 11,000 studies conducted by leading research firms)
7. Compustat, Compact Disclosure, CD/International, and Hoover’s online corporate directory (computerized operating and financial information on thousands of publicly held corporations)
8. Shareholders meeting notices in SEC Form 14-A (proxy notices)
Economic Information 1. Regional statistics and local forecasts from large banks 2. Business Cycle Development (Department of Commerce) 3. Chase Econometric Associates’ publications 4. U.S. Census Bureau publications on population, transportation, and housing 5. Current Business Reports (U.S. Department of Commerce) 6. Economic Indicators (U.S. Joint Economic Committee) 7. Economic Report of the President to Congress 8. Long-Term Economic Growth (U.S. Department of Commerce) 9. Monthly Labor Review (U.S. Department of Labor)
10. Monthly Bulletin of Statistics (United Nations) 11. Statistical Abstract of the United States (U.S. Department of Commerce) 12. Statistical Yearbook (United Nations) 13. Survey of Current Business (U.S. Department of Commerce) 14. U.S. Industrial Outlook (U.S. Department of Defense) 15. World Trade Annual (United Nations) 16. Overseas Business Reports (by country, published by the U.S. Department of Commerce)
Industry Information 1. Analyses of companies and industries by investment brokerage firms 2. Bloomberg Businessweek (provides weekly economic and business information, as well as
quarterly profit and sales rankings of corporations)
3. Fortune (each April publishes listings of financial information on corporations within certain industries)
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360 PART 5 Introduction to Case Analysis
4. Industry Survey (published quarterly by Standard & Poor’s) 5. Industry Week (late March/early April issue provides information on 14 industry groups) 6. Forbes (mid-January issue provides performance data on firms in various industries) 7. Inc. (May and December issues give information on fast-growing entrepreneurial companies)
Directory and Index Information on Companies and Industries 1. Business Periodical Index (on computers in many libraries) 2. Directory of National Trade Associations 3. Encyclopedia of Associations 4. Funk and Scott’s Index of Corporations and Industries 5. Thomas’s Register of American Manufacturers 6. The Wall Street Journal Index
Ratio Analysis Information 1. Almanac of Business and Industrial Financial Ratios (Prentice Hall) 2. Annual Statement Studies (Risk Management Associates; also Robert Morris Associates) 3. Dun’s Review (Dun & Bradstreet; published annually in September–December issues) 4. Industry Norms and Key Business Ratios (Dun & Bradstreet)
Online Information 1. Hoover’s Online—financial statements and profiles of public companies (www.hoovers.com) 2. U.S. Securities and Exchange Commission—official filings of public companies in the
EDGAR database (www.sec.gov) 3. Fortune 500—statistics for largest U.S. corporations (www.fortune.com) 4. Dun & Bradstreet’s Online—short reports on 10 million public and private U.S. companies
(smallbusiness.dnb.com) 5. Competitive Intelligence Guide—information on company resources (www.fuld.com) 6. Society of Competitive Intelligence Professionals (www.scip.org) 7. The Economist—provides international information and surveys (www.economist.com) 8. CIA World Fact Book—international information by country (http://www.cia.gov) 9. Bloomberg—information on interest rates, stock prices, currency conversion rates, and other
general financial information (www.bloomberg.com) 10. CEOExpress—links to many valuable sources of business information (www.ceoexpress.com) 11. The Wall Street Journal—business news (www.wsj.com) 12. Forbes—America’s largest private companies (http://www.forbes.com/lists/) 13. CorporateInformation.com—subscription service for company profiles (www.corpora
teinformation.com) 14. Kompass International—industry information (www.kompass.com) 15. CorpTech—database of technology companies (www.corptech.com) 16. ADNet—information technology industry (www.companyfinders.com) 17. CNN company research—provides company information (http://money.cnn.com/news/) 18. Paywatch—database of executive compensation (http://www.aflcio.org/corporatewatch/paywatch/) 19. Global Edge Global Resources—international resources (http://globaledge.msu.edu
/resourceDesk/) 20. Google Finance—data on North American stocks (http://www.google.com/finance) 21. World Federation of Exchanges—international stock exchanges (www.world-exchanges.org/) 22. SEC International Registry—data on international corporations (http://www.sec.gov
/divisions/corpfin/internatl/companies.shtml) 23. Yahoo Finance—data on North American companies (http://finance.yahoo.com)
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361
A P P E N D I X13.B Suggested Case Analysis Methodology Using the Strategic Audit
First Reading of the Case ■ Develop a general overview of the company and its external environment. ■ Begin a list of the possible strategic factors facing the company at this time. ■ List the research information you may need on the economy, industry, and competitors.
Over the past six years, increases in yearly revenues have consistently reached 12%. Byte Products Inc., headquartered in the U.S. Midwest, is regarded as one of the largest-volume suppliers of specialized components and is easily the industry leader.
Second Reading of the Case ■ Read the case a second time, using the strategic audit as a framework for in-depth analysis.
(See Appendix 1.A on pages 32–39.) You may want to make a copy of the strategic audit worksheet (Figure 13–1) to use to keep track of your comments as you read the case.
■ The questions in the strategic audit parallel the strategic decision-making process shown in Figure 1–5 (pages 26–27).
■ The audit provides you with a conceptual framework to examine the company’s mission, objectives, strategies, and policies, as well as problems, symptoms, facts, opinions, and issues.
■ Perform a financial analysis of the company, using ratio analysis (see Table 13–1), and do the calculations necessary to convert key parts of the financial statements to a common-size basis.
Research ■ Each case has a decision date indicating when the case actually took place. Your research
should be based on the time period for the case. ■ See Appendix 13.A for resources for case research. Your research should include information
about the environment at the time of the case. Find average industry ratios. You may also want to obtain further information regarding competitors and the company itself (10-K forms and annual reports). This information should help you conduct an industry analysis. Check with your instructor to see what kind of outside research is appropriate for your assignment.
■ Don’t try to learn what actually happened to the company discussed in the case. What man- agement actually decided may not be the best solution. It will certainly bias your analysis and will probably cause your recommendation to lack proper justification.
362 PART 5 Introduction to Case Analysis
■ Analyze the natural and societal environments to see what general trends are likely to affect the industry(s) in which the company is operating.
■ Conduct an industry analysis using Porter’s competitive forces from Chapter 4. Develop an Industry Matrix (Table 4–4 on page 117).
■ Generate 8 to 10 external factors. These should be the most important opportunities and threats facing the company at the time of the case.
■ Develop an EFAS Table, as shown in Table 4–5 (page 125), for your list of external strategic factors.
■ Suggestion: Rank the 8 to 10 factors from most to least important. Start by grouping the three top factors and then the three bottom factors.
Internal Organizational Analysis: IFAS ■ Generate 8 to 10 internal factors. These should be the most important strengths and weak-
nesses of the company at the time of the case. ■ Develop an IFAS Table, as shown in Table 5–2 (page 161), for your list of internal strategic
factors. ■ Suggestion: Rank the 8 to 10 factors from most to least important. Start by grouping the three
top factors and then the three bottom factors. ■ Review the student-written audit of the Maytag case in Appendix 13.C for an example. ■ Write Parts I to IV of the strategic audit. Remember to include the factors from your EFAS
and IFAS Tables in your audit.
Strategic Factor Analysis Summary: SFAS ■ Condense the list of factors from the 16 to 20 identified in your EFAS and IFAS Tables to
only the 8 to 10 most important factors. ■ Select the most important EFAS and IFAS factors. Recalculate the weights of each. The
weights still need to add to 1.0. ■ This is a good time to reexamine what you wrote earlier in Parts I to IV. You may want to add
to or delete some of what you wrote. Ensure that each one of the strategic factors you have included in your SFAS Matrix is discussed in the appropriate place in Parts I to IV. Part V of the audit is not the place to mention a strategic factor for the first time.
■ Write Part V of your strategic audit. ■ This is the place to suggest a revised mission statement and a better set of objectives for the
company. The SWOT categorization coupled with revised mission and objectives for the company set the stage for the generation of strategic alternatives.
A. Alternatives ■ Develop two to three mutually exclusive strategic alternatives. If appropriate to the case
you are analyzing, you might propose one alternative for growth, one for stability, and one for retrenchment.
■ Construct a corporate scenario for each alternative. Use the data from your outside research to project general societal trends (GDP, inflation, etc.) and industry trends. Use these as the basis of your assumptions to write pro forma financial statements (particularly income state- ments) for each strategic alternative for the next five years.
■ List pros and cons for each alternative based on your scenarios.
B. Recommendation ■ Specify which one of your alternative strategies you recommend. Justify your choice in terms
of dealing with the strategic factors you listed in Part V of the strategic audit. ■ Develop policies to help implement your strategies.
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CHAPTER 13 Suggestions for Case Analysis 363
Implementation ■ Develop programs to implement your recommended strategy. ■ Specify who is to be responsible for implementing each program and how long each program
will take to complete. ■ Refer to the pro forma financial statements you developed earlier for your recommended
strategy. Use common-size historical income statements as the basis for the pro forma statement. Do the numbers still make sense? If not, this may be a good time to rethink the budget numbers to reflect your recommended programs.
Evaluation and Control ■ Specify the type of evaluation and controls you need to ensure that your recommendation is
carried out successfully. Specify who is responsible for monitoring these controls. ■ Indicate whether sufficient information is available to monitor how the strategy is being
implemented. If not, suggest a change to the information system.
Final Draft of Your Strategic Audit ■ Check to ensure that your audit is within the page limits set out by your professor. You may
need to cut some parts and expand others. ■ Make sure your recommendation clearly deals with the strategic factors. ■ Attach your EFAS and IFAS Tables, and SFAS Matrix, plus your ratio analysis and pro
forma statements. Label them as numbered exhibits and refer to each of them within the body of the audit.
■ Proof your work for errors. If on a computer, use a spell checker.
SPECIAL NOTE: Depending on your assignment, it is relatively easy to use the strategic audit you have just developed to write a written case analysis in essay form or to make an oral presentation. The strategic audit is just a detailed case analysis in an outline form and can be used as the basic framework for any sort of case analysis and presentation.
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364
A P P E N D I X13.C
I. Current Situation A. Current Performance
Poor financials, high debt load, first losses since 1920s, price/earnings ratio negative. ■ First loss since 1920s. ■ Laid off 4500 employees at Magic Chef. ■ Hoover Europe still showing losses.
B. Strategic Posture 1. Mission
■ Developed in 1989 for the Maytag Company: “To provide our customers with products of unsurpassed performance that last longer, need fewer repairs, and are produced at the lowest possible cost.”
■ Updated in 1991: “Our collective mission is world class quality.” Expands Maytag’s belief in product quality to all aspects of operations.
2. Objectives ■ “To be the profitability leader in the industry for every product line Maytag
manufactures.” Selected profitability rather than market share. ■ “To be number one in total customer satisfaction.” Doesn’t say how to measure
satisfaction. ■ “To grow the North American appliance business and become the third
largest-appliance manufacturer (in unit sales) in North America.” ■ To increase profitable market share growth in the North American appli-
ance and floor care business, 6.5% return on sales, 10% return on assets, 20% return on equity, beat competition in satisfying customers, dealer, builder, and endorser, and move into third place in total units shipped per year. Nicely quantified objectives.
3. Strategies ■ Global growth through acquisition, and alliance with Bosch-Siemens. ■ Differentiate brand names for competitive advantage. ■ Create synergy between companies, product improvement, investment in plant
and equipment.
Example of Student-Written Strategic Audit (For the 1993 Maytag Corporation Case)
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CHAPTER 13 Suggestions for Case Analysis 365
4. Policies ■ Cost reduction is secondary to high quality. ■ Promotion from within. ■ Slow but sure R&D: Maytag slow to respond to changes in market.
II. Strategic Managers A. Board of Directors
1. Fourteen members—eleven are outsiders.
2. Well-respected Americans, most on board since 1986 or earlier.
3. No international or marketing backgrounds.
4. Time for a change?
B. Top Management 1. Top management promoted from within Maytag Company. Too inbred?
2. Very experienced in the industry.
3. Responsible for current situation.
4. May be too parochial for global industry. May need new blood.
III. External Environment (EFAS Table; see Exhibit 1)
A. Natural Environment 1. Growing water scarcity
2. Energy availability a growing problem
B. Societal Environment 1. Economic
a. Unstable economy but recession ending, consumer confidence growing—could increase spending for big ticket items like houses, cars, and appliances. (O)
b. Individual economies becoming interconnected into a world economy. (O) 2. Technological
a. Fuzzy logic technology being applied to sense and measure activities. (O) b. Computers and information technology increasingly important. (O)
3. Political–Legal a. NAFTA, European Union, other regional trade pacts opening doors to mar-
kets in Europe, Asia, and Latin America that offer enormous potential. (O) b. Breakdown of communism means less chance of world war. (O) c. Environmentalism being reflected in laws on pollution and energy usage. (T)
4. Sociocultural a. Developing nations desire goods seen on TV. (O) b. Middle-aged baby boomers want attractive, high-quality products, like BMWs
and Maytag. (O) c. Dual-career couples increases need for labor-saving appliances, second cars,
and day care. (O) d. Divorce and career mobility means need for more houses and goods to fill
them. (O)
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366 PART 5 Introduction to Case Analysis
C. Task Environment 1. North American market mature and extremely competitive—vigilant consumers
demand high quality with low price in safe, environmentally sound products. (T) 2. Industry going global as North American and European firms expand inter-
nationally. (T) 3. European design popular and consumer desire for technologically advanced
appliances. (O) 4. Rivalry High. Whirlpool, Electrolux, GE have enormous resources and develop-
ing global presence. (T) 5. Buyers’ Power Low. Technology and materials can be sourced worldwide. (O) 6. Power of Other Stakeholders Medium. Quality, safety, environmental regula-
tions increasing. (T) 7. Distributors’ Power High. Super retailers more important: mom and pop dealers
less. (T) 8. Threat of Substitutes Low. (O) 9. Entry Barriers High. New entrants unlikely except for large international firms. (T)
IV. Internal Environment (IFAS Table; see Exhibit 2)
A. Corporate Structure 1. Divisional structure: appliance manufacturing and vending machines. Floor care
managed separately. (S) 2. Centralized major decisions by Newton corporate staff, with a time line of about
three years. (S)
B. Corporate Culture 1. Quality key ingredient—commitment to quality shared by executives and work-
ers. (S) 2. Much of corporate culture is based on founder F. L. Maytag’s personal philoso-
phy, including concern for quality, employees, local community, innovation, and performance. (S)
3. Acquired companies, except for European, seem to accept dominance of Maytag culture. (S)
C. Corporate Resources 1. Marketing
a. Maytag brand lonely repairman advertising successful but dated. (W) b. Efforts focus on distribution—combining three sales forces into two, concen-
trating on major retailers. (Cost $95 million for this restructuring.) (S) c. Hoover’s well-publicized marketing fiasco involving airline tickets. (W)
2. Finance (see Exhibits 4 and 5) a. Revenues are up slightly, operating income is down significantly. (W) b. Some key ratios are troubling, such as a 57% debt/asset ratio, 132% long-term
debt/equity ratio. No room for more debt to grow company. (W) c. Net income is 400% less than 1988, based on common-size income statements. (W)
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CHAPTER 13 Suggestions for Case Analysis 367
3. R&D a. Process-oriented with focus on manufacturing process and durability. (S) b. Maytag becoming a technology follower, taking too long to get product
innovations to market (competitors put out more in last six months than prior two years combined), lagging in fuzzy logic and other technological areas. (W)
4. Operations a. Maytag’s core competence. Continual improvement process kept it dominant
in the U.S. market for many years. (S) b. Plants aging and may be losing competitiveness as rivals upgrade facilities.
Quality no longer distinctive competence? (W) 5. Human Resources
a. Traditionally very good relations with unions and employees. (S) b. Labor relations increasingly strained, with two salary raise delays, and layoffs
of 4500 employees at Magic Chef. (W) c. Unions express concern at new, more distant tone from Maytag Corpora-
tion. (W) 6. Information Systems
a. Not mentioned in case. Hoover fiasco in Europe suggests information systems need significant upgrading. (W)
b. Critical area where Maytag may be unwilling or unable to commit resources needed to stay competitive. (W)
V. Analysis of Strategic Factors A. Situational Analysis (SWOT) (SFAS Matrix; see Exhibit 3)
1. Strengths a. Quality Maytag culture. b. Maytag well-known and respected brand. c. Hoover’s international orientation. d. Core competencies in process R&D and manufacturing.
2. Weaknesses a. Lacks financial resources of competitors. b. Poor global positioning. Hoover weak on European continent. c. Product R&D and customer service innovation are areas of serious weakness. d. Dependent on small dealers. e. Marketing needs improvement.
3. Opportunities a. Economic integration of European community. b. Demographics favor quality. c. Trend to superstores.
4. Threats a. Trend to superstores. b. Aggressive rivals—Whirlpool and Electrolux. c. Japanese appliance companies—new entrants?
B. Review of Current Mission and Objectives 1. Current mission appears appropriate.
2. Some of the objectives are really goals and need to be quantified and given time horizons.
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368 PART 5 Introduction to Case Analysis
VI. Strategic Alternatives and Recommended Strategy
A. Strategic Alternatives 1. Growth through Concentric Diversification: Acquire a company in a related
industry such as commercial appliances. a. [Pros]: Product/market synergy created by acquisition of related company. b. [Cons]: Maytag does not have the financial resources to play this game.
2. Pause Strategy: Consolidate various acquisitions to find economies and to encour- age innovation among the business units. a. [Pros]: Maytag needs to get its financial house in order and get administrative
control over its recent acquisitions. b. [Cons]: Unless it can grow through a stronger alliance with Bosch-Siemens or
some other backer, Maytag is a prime candidate for takeover because of its poor financial performance in recent years, and it is suffering from the initial reduction in efficiency inherent in acquisition strategy.
3. Retrenchment: Sell Hoover’s foreign major home appliance businesses (Australia and UK) to emphasize increasing market share in North America. a. [Pros]: Divesting Hoover improves bottom line and enables Maytag Corp.
to focus on North America while Whirlpool, Electrolux, and GE are battling elsewhere.
b. [Cons]: Maytag may be giving up its only opportunity to become a player in the coming global appliance industry.
B. Recommended Strategy 1. Recommend pause strategy, at least for a year, so Maytag can get a grip on its
European operation and consolidate its companies in a more synergistic way.
2. Maytag quality must be maintained, and continued shortage of operating capital will take its toll, so investment must be made in R&D.
3. Maytag may be able to make the Hoover UK investment work better since the recession is ending and the EU countries are closer to integrating than ever before.
4. Because it is only an average competitor, Maytag needs the Hoover link to Europe to provide a jumping off place for negotiations with Bosch-Siemens that could strengthen their alliance.
VII. Implementation A. The only way to increase profitability in North America
is to further involve Maytag with the superstore retailers; sure to anger the independent dealers, but necessary for Maytag to compete.
B. Board members with more global business experience should be recruited, with an eye toward the future, especially with expertise in Asia and Latin America.
C. R&D needs to be improved, as does marketing, to get new products online quickly.
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CHAPTER 13 Suggestions for Case Analysis 369
VIII. Evaluation and Control A. MIS needs to be developed for speedier evaluation and
control. While the question of control vs. autonomy is “under review,” another Hoover fiasco may be brewing.
B. The acquired companies do not all share the Midwestern work ethic or the Maytag Corporation culture, and Maytag’s managers must inculcate these values into the employees of all acquired companies.
C. Systems should be developed to decide if the size and location of Maytag manufacturing plants is still correct and to plan for the future. Industry analysis indicates that smaller automated plants may be more efficient now than in the past.
EXHIBIT 1 EFAS Table for Maytag Corporation 1993
External Factors Weight Rating Weighted
Score Comments
1 2 3 4 5
Opportunities
■ Economic integration of European Community
■ Demographics favor quality appliances ■ Economic development of Asia ■ Opening of Eastern Europe ■ Trend to “Super Stores”
.20
.10
.05
.05
.10
4.1
5.0
1.0
2.0
1.8
.82
.50
.05
.10
.18
Acquisition of Hoover
Maytag quality
Low Maytag presence
Will take time
Maytag weak in this channel
Threats
■ Increasing government regulations ■ Strong U.S. competition ■ Whirlpool and Electrolux strong globally ■ New product advances ■ Japanese appliance companies
.10
.10
.15
.05
.10
4.3
4.0
3.0
1.2
1.6
.43
.40
.45
.06
.16
Well positioned
Well positioned
Hoover weak globally
Questionable
Only Asian presence in Australia
Total Scores 1.00 3.15
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370 PART 5 Introduction to Case Analysis
Internal Factors Weight Rating Weighted
Score Comments
1 2 3 4 5
Strengths
■ Quality Maytag culture ■ Experienced top management ■ Vertical integration ■ Employer relations ■ Hoover’s international orientation
.15
.05
.10
.05
.15
5.0
4.2
3.9
3.0
2.8
.75
.21
.39
.15
.42
Quality key to success
Know appliances
Dedicated factories
Good, but deteriorating
Hoover name in cleaners
Weaknesses
■ Process-oriented R&D ■ Distribution channels ■ Financial position ■ Global positioning ■ Manufacturing facilities
.05
.05
.15
.20
.05
2.2
2.0
2.0
2.1
4.0
.11
.10
.30
.42
.20
Slow on new products
Superstores replacing small dealers
High debt load
Hoover weak outside the United Kingdom and Australia
Investing now
Total scores 1.00 3.05
EXHIBIT 2 ifas T m C 1993
2 3 4 Duration 5 6
Strategic Factors (Select the most important opportunities/threats from EFAS, Table 4–5 and the most important strengths and weaknesses from IFAS, Table 5–2) Weight Rating
Weighted Score
S H O R T
INT ER ME DIA TE
L O N G Comments
■ S1 Quality Maytag culture (S) .10 5.0 .50 X Quality key to success
■ S5 Hoover’s international orientation (S)
.10 2.8 .28 X X Name recognition
■ W3 Financial position (W) .10 2.0 .20 X X High debt
■ W4 Global positioning (W) .15 2.2 .33 X X Only in N.A., U.K., and Australia
■ O1 Economic integration of European Community (O)
.10 4.1 .41 X Acquisition of Hoover
■ O2 Demographics favor quality (O) .10 5.0 .50 X Maytag quality
■ O5 Trend to super stores (O + T) .10 1.8 .18 X Weak in this channel
■ T3 Whirlpool and Electrolux (T) .15 3.0 .45 X Dominate industry
■ T5 Japanese appliance companies (T)
.10 1.6 .16 X Asian presence
Total Scores 1.00 3.01
EXHIBIT 3 SFAS Matrix for Maytag Corporation 1993
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CHAPTER 13 Suggestions for Case Analysis 371
Ratio Analysis for Maytag Corporation 1993
1990 1991 1992 1993 1. LIQUIDITY RATIOS
Current 2.1 1.9 1.8 1.6
Quick 1.1 1.0 1.1 1.0
2. LEVERAGE RATIOS
Debt to Total Assets 61% 60% 76% 57%
Debt to Equity 155% 151% 317% 254%
3. ACTIVITY RATIOS
Inventory turnover—sales 5.7 6.1 7.6 6.9
Inventory Turnover—cost of sales 4.3 4.6 5.8 6.5
Avg. Collection Period—days 57 55 56 0
Fixed Asset Turnover 3.9 3.6 3.6 3.6
Total Assets Turnover 1.2 1.2 1.2 1.1
4. PROFITABILITY RATIOS
Gross Profit Margin 24% 24% 23% 5%
Net Operating Margin 8% 6% 3% 5%
Profit Margin on Sales 3% 3% −0% 2%
Return on Total Assets 4% 3% −0% 2%
Return on Equity 10% 8% −1% 8%
EXHIBIT 4
EXHIBIT 5 Common s i Statements for Maytag Corporation 1993
1992 1991 1990
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.92 75.88 75.50
Gross profit 23.08 24.12 24.46
Selling, general/admin. Expenses 17.37 17.67 16.90
Reorganization expenses .031 —— ——
Operating income .026 .064 .075
Interest expense (.025) (.025) (0.26)
Other—net .001 .002 .009
Income before accounting changes .002 .042 .052
Income taxes .005 .015 .020
Income before accounting changes (.002) .026 .032
Effect of accounting changes for postretirement benefits other than pensions and income taxes
(.101) —— ——
Total operating costs and expenses 74.9 76.0 76.3
Net income (.104) .026 .032
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372 PART 5 Introduction to Case Analysis
Strategic Factor Action Plan
Priority System (1–5)
Who Will Implement
Who Will Review
How Often Review Criteria Used
Quality Maytag culture
Build quality in acquired units
1 Heads of acquired units
Manufacturing VP
Quarterly Number defects & customer satisfaction
Hoover’s international orientation
Identify ways to expand sales
2 Head of Hoover
Marketing VP Quarterly Feasible alternatives generated
Financial position
Pay down debt 1 CFO CEO Monthly Leverage ratios
Global positioning
Find strategic alliance partners
2 VP of Business Development
COO Quarterly Feasible alternatives generated
EU economic integration
Grow sales throughout EU
3 Hoover UK Head
Marketing VP Annually Sales growth
Demographics favor quality
Simplify controls 3 Manufactur- ing VP
COO Annually Market research user satisfaction
Trend to super stores
Market through Sears
1 Marketing VP CEO Monthly Sales growth
Whirlpool & Electrolux
Monitor compet- itor performance
1 Competition committee
COO Quarterly Competitor sales & new products
Japanese appliance companies
Monitor expansion
4 Head of Hoover Australia
Competition committee
Semi- annually
Sales growth outside Japan
EXHIBIT 6 i e C P m C 1993
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