Bab 9 Manajemen Strategi

Source: © hansenn/fotolia
284
9
Strategy Implementation
leArning obJeCtiveS
After studying this chapter, you should be able to do the following:
9-1. Identify and describe strategic marketing issues vital for strategy implementation.
9-2. Explain why social media marketing is an important strategy-implementation tool.
9-3. Explain why market segmentation is an important strategy-implementation tool.
9-4. Explain how to use product positioning (perceptual mapping) as a strategy-
implementation tool.
9-5. Identify and describe strategic finance/accounting issues vital for strategy
implementation.
9-6. Perform EPS/EBIT analysis to evaluate the attractiveness of debt versus stock as a
source of capital to implement strategies.
9-7. Develop projected financial statements to reveal the impact of strategy
recommendations.
9-8. Determine the cash value of any business using four corporate evaluation methods.
9-9. Discuss IPOs, keeping cash offshore, and issuing corporate bonds as strategic
decisions that face many firms.
9-10. Discuss the nature and role of research and development (R&D) in strategy
implementation.
9-11. Explain how management information systems (MISs) impact strategy-implementa-
tion efforts.
ASSUrAnCe oF leArning exerCiSeS

The following exercises are found at the end of this chapter:
exerCiSe 9A Prepare an EPS/EBIT Analysis for Royal Dutch Shell Plc
exerCiSe 9b Develop a Product-Positioning Map for Nestlé S.A.
exerCiSe 9C Perform an EPS/EBIT Analysis for Nestlé S.A.
exerCiSe 9d Prepare Projected Financial Statements for Nestlé S.A.
exerCiSe 9e Determine the Cash Value of Nestlé S.A.
exerCiSe 9F Develop a Product-Positioning Map for Your College
exerCiSe 9g Do Banks Require Projected Financial Statements?
285
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286 Strategic ManageMent
S
trategies can be implemented successfully only when an organization markets its goods
and services effectively and raises needed working capital. This chapter examines market-
ing, finance/accounting, research and development (R&D), and management information
systems (MIS) issues that are central to effective strategy implementation. Special topics include
market segmentation, market positioning, evaluating the worth of a business, determining to
what extent debt or stock should be used as a source of capital, developing projected financial
statements, contracting R&D outside the firm, and creating an information support system.
Manager and employee involvement and participation are essential for success in marketing,
finance and accounting, R&D, and MIS activities.
A football quarterback can call the best play possible in the huddle, but that does not mean
the play will go for a touchdown. The team may even lose yardage unless the play is executed
(implemented) well. Royal Dutch Shell (Shell) is implementing strategies especially well, as
described below.
Strategy implementation generally impacts the lives of everyone in an organization. In some
situations, individuals may not have participated in the strategy-formulation process at all and
may not appreciate or understand the thought that went into strategy formulation, nor accept the
work required for strategy implementation. There may even be foot dragging or resistance on
their part. Managers and employees who do not understand the business and are not committed
to the business may attempt to sabotage strategy-implementation efforts in hopes that the organi-
zation will return to its old ways. The strategy-implementation stage of the strategic-management
process is highlighted in Figure 9-1 as illustrated with white shading.
Strategic Marketing Issues

Countless marketing variables affect the success or failure of strategy implementation efforts.
Some strategic marketing issues or decisions are as follows:
1. How to make advertisements more interactive to be more effective
2. How to take advantage of Facebook and Twitter conservations about the company and industry
exempLAry compAny showcAseD
Royal Dutch Shell Plc (RDS.A)

On September 2015, Royal Dutch Shell (Shell) announced the ter- Shell’s oil prod-
mination of its oil drilling activities in the Arctic offshore of Alaska. ucts and chemi-
Incorporated in the United Kingdom but headquartered in the cals are taken
Netherlands, Shell ranks second globally among the largest oil and gas care of by its
companies. It has worldwide reserves of the equivalent of 14.2 billion Downstream
barrels of oil. segment. The
Oman, Nigeria, and the United Kingdom account for most of Corporate seg-
Shell’s crude oil production, but the company is also spending a lot on ment includes
converting oil sands in Alberta to synthetic oil through its Athabasca all support func-
Oil Sands Project. With operations across 90 countries and in 44,000 tions, such as operations, legal, accounting, and maintenance.
gas stations, Shell is regarded as the world’s largest retail fuel network. For the second quarter of 2015, Shell’s revenues were USD 70,969.53
Vertically integrated, Shell explores, produces, refines, transports, and million and the firm reported earnings of USD 3,907.14 million,
sells oil related products and chemicals. Upstream, Downstream, and and an EPS of USD 1.22. All of these numbers represented a signifi-
Corporate are the three primary segments that the company has. cant drop from the prior year period, as oil and gas prices globally
Exploring for and retrieving crude oil and natural gas constitutes Shell’s dropped significantly due to rising levels of supply coupled with lower
Upstream segment along with the liquefaction and transportation of demand.
gas, producing wind energy, and using oil sands to extract bitumen.
The production, supply, and distribution and marketing activities for Source: Based on company documents.
CHAPTER9 • STRATEgyImPlEmEnTATIon 287
Chapter 2: Outside-USA Strategic Planning
The Internal
Audit
Chapter 6
Vision and Strategy

Types of Strategy Strategy Strategy
Mission Generation
Strategies Implementation Execution Monitoring
Analysis and Selection
Chapter 4
Chapter 5 Chapter 8
Chapter 9 Chapter 10 Chapter 11
The External
Audit
Chapter 7
Chapter 3: Ethics, Social Responsibility, and Sustainability
Strategy Strategy Strategy

Formulation Implementation Evaluation
Figure 9-1
A Comprehensive Strategic-Management Model
Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40,
© Fred R. David.
3. To use exclusive dealerships or multiple channels of distribution

4. To use heavy, light, or no TV advertising versus online advertising
5. To limit (or not) the share of business done with a single customer
6. To be a price leader or a price follower
7. To offer a complete or limited warranty
8. To reward salespeople based on straight salary, commission, or a combination salary
and commission
Three marketing activities especially important in strategy implementation are listed below and
then discussed:
1. Engage customers in social media.
2. Segment markets effectively.
3. Develop and use product-positioning/perceptual maps.
Social Media Marketing

Social media marketing has become an important strategic issue. Marketing has evolved to be
more about building a two-way relationship with consumers than just informing consumers
about a product or service. Marketers increasingly must get customers involved in the company
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website and solicit suggestions in terms of product development, customer service, and ideas.
The company website should enable customers to interact with the firm on the following social
media networks (listed along with the estimated number of current users in millions): Facebook
(1,200), Google Plus (500), Twitter (400), LinkedIn (300), Instagram (200), Pinterest (100), and
Foursquare (50). To manage this process, larger companies have hired a social media manager(s)
to be the voice of the company on social and digital media sites. The manager(s) responds to
comments and problems, track negative or misleading statements, manage the online discussion
about a firm, and gather valuable information about opinions and desires—all of which can be
vital for monitoring strategy implementation progress and making appropriate changes.
The online community of customers increasingly mirrors the offline community but is much
quicker, cheaper, and effective to reach than traditional focus groups and surveys. Successful
strategy implementation requires a firm to know what people are saying about it and its prod-
ucts. Customers are talking about and creating valuable content around every brand through blog
posts, tweets, e-mails, and conversations with family and friends. Instead of ignoring or trying
to quash “amateur content,” or trying to drown it out with “professional advertisements,” the
best firms today embrace amateurs’ opinions, desires, and feelings—because they are the firms’
customers. They learn from and leverage amateur content to improve the authenticity of their
marketing communication. Four example companies that do an excellent job of social media
marketing are as follows:
1. SpaceX (https://www.facebook.com/SpaceX); (https://twitter.com/SpaceX)
• Includes live broadcasts of rocket launches and pictures from space.
2. Zappos (https://www.facebook.com/zappos)
• Does a great job of engaging its audience on social media.
3. Starbucks (https://twitter.com/Starbucks)
• Launched “Tweet a Coffee” to engage customers and build awareness of brand.
4. JetBlue (https://twitter.com/JetBlue/)
• Questions and concerns are answered promptly, and the account is used to keep custom-
ers up-to-date, especially when travel conditions get complicated.

Companies and organizations should encourage their employees to create wikis—websites
that allow users to add, delete, and edit content regarding frequently asked questions and infor-
mation across the firm’s whole value chain of activities. The most common wiki is Wikipedia,
but wikis are user-generated content. Anyone can change the content in a wiki but the group and
other editors can change the content submitted.
Firms benefit immensely by providing incentives to customers to share their thoughts, opin-
ions, and experiences on the company website. Encourage customers to network among them-
selves on topics of their choosing on the company website. The company website must not be
just about the company—it must be all about the customer too. Perhaps offer points, discounts,
or coupons on the website for customers who provide ideas, suggestions, or feedback. Drive
traffic to the company website, and then keep customers at the website for as long as possible
with daily new material, updates, excitement, and offers. Encourage and promote customer par-
ticipation and interaction. Customers trust other customers’ opinions more than a company’s
marketing pitch, and the more they talk freely, the more the firm can learn how to improve its
product, service, and marketing. Marketers should monitor blogs daily to determine, evaluate,
and influence opinions being formed by customers. Customers must not feel like they are a cap-
tive audience for advertising at a firm’s website. Table 9-1 provides new principles of marketing
according to Parise, Guinan, and Weinberg.1
Wells Fargo and Bank of America tweet (Twitter.com) customers to describe features of
bank products. Some banks are placing marketing videos on YouTube. UMB Financial of Kansas
City, Missouri, tweets about everything from the bank’s financial stability to the industry’s pros-
pects. Steve Furman, Discover’s director of e-commerce, says the appeal of social networking is
that it provides “pure, instant” communication with customers.2
Although the exponential increase in social networking has created huge opportunities for
marketers, it also has produced some severe threats. Perhaps the greatest threat is that any kind of
negative publicity travels fast online. Seemingly minor ethical and questionable actions can cata-
pult these days into huge public relations problems for companies as a result of the monumental
online social and business communications.
Table 9-1 The New Principles of Marketing
1. Do not just talk at consumers—work with them throughout the marketing process.
2. Give consumers a reason to participate.
3. Listen to—and join—the conversation outside your company’s website.
4. Resist the temptation to sell, sell, sell. Instead attract, attract, attract.
5. Do not control online conversations; let it flow freely.
6. Find a “marketing technologist,” a person who has three excellent skill sets (marketing, technology,
and social interaction).
7. Embrace instant messaging and chatting.
Source: Based on Salvatore Parise, Patricia Guinan, and Bruce Weinberg, “The Secrets of Marketing in a
Web 2.0 World,” Wall Street Journal, December 15, 2008, R1.
Increasingly, people living in underdeveloped and poor nations around the world have
smartphones, but oftentimes no computers. This is opening up even larger markets to online mar-
keting. People in remote parts of Indonesia, Egypt, and Africa represent the fastest-growing cus-
tomer base for many companies, including Opera Software ASA, a Norwegian maker of Internet
browsers for mobile devices.
People ages 18 to 27 spend more time weekly on the Internet than watching television, listen-
ing to the radio, and watching DVDs combined. Most companies have come to the realization that
social networking and video sites are better means of reaching customers than spending so many
marketing dollars on traditional yellow pages, television, magazine, radio, or newspaper ads.
New companies such as Autonet Mobile based in San Francisco are selling new technology
equipment for cars so that everyone in the vehicle can be online except, of course, the driver.
This technology is accelerating the movement from hard media to web-based media. With this
technology, when the vehicle drives into a new location, information on shows, museums, hotels,
and other attractions in the location can be instantly downloaded.
Digital advertising spending on social media and mobile devices increased nearly 17 percent
to $50 billion in the United States in 2014, comprising 28 percent of total ad spending in the
nation; however, about 36 percent of all traffic on the Internet is fake, being the result of bogus
computers programmed to visit websites to take advantage of marketers who typically pay for
ads whenever they are loaded when a user visits a webpage, regardless if the user is an actual
person.3 Criminals can erect websites and deliver phony traffic and collect payments from adver-
tisers through middlemen, oftentimes in third-world countries. This fraud problem is becoming
so severe that Bob Liodice, CEO of the Association of National Advertisers, observes, “The total
digital-media ad budget is being questioned and totally challenged; marketers want to spend
more money in digital, but until there is more transparency on how their money is being spent,
many hold back.”4
The ad-fraud detection firm White Ops reports that more than $6 billion of online ads in the
United States annually are paid to “fraudsters.” Digital advertising is here to stay, no doubt, but
there is a need to be increasingly careful of automated (fake) systems/websites/individuals secur-
ing your ad monies.
Market Segmentation
Market segmentation and product positioning rank as marketing’s most important contributions
to strategic management. Market segmentation can be defined as the subdividing of a market
into distinct subsets of customers according to needs and buying habits. For example, eBay
recently initiated a new market segmentation strategy to target consumers under 18 years old.
“We’re definitely looking at ways to legitimately bring younger people in,” said Devin Wenig
at eBay. “We won’t allow a 15-year-old unfettered access to the site. We would want a parent,
an adult, as a ride-along. But the age 18 and up group [is] an increasingly savvy and desirable
consumer segment for us.”
Market segmentation is important in strategy implementation for at least three major rea-
sons. First, strategies such as market development, product development, market penetration,
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Table 9-2 The Marketing Mix Component Variables

Product Place Promotion Price
Quality Distribution channels Advertising Level

Features and options Distribution coverage Personal selling Discounts and
Style Outlet location Sales promotion allowances
Brand name Sales territories Publicity Payment terms
Packaging Inventory levels and locations
Product line Transportation carriers
Warranty
Service level
Other services
Source: Based on E. Jerome McCarthy, Basic Marketing: A Managerial Approach, 9th ed. (Homewood,
IL: Richard D. Irwin, Inc., 1987), 37–44. Used with permission.
and diversification require increased sales through new markets and products. To implement
these strategies successfully, new or improved market-segmentation approaches are required.
Second, market segmentation allows a firm to operate with limited resources because mass
production, mass distribution, and mass advertising are not required. Market segmentation
enables a small firm to compete successfully with a large firm by maximizing per-unit profits
and per-segment sales. And third, market segmentation decisions directly affect marketing
mix variables: product, place, promotion, and price, as indicated in Table 9-2. Geographic and
demographic bases for segmenting markets are the most commonly employed, as illustrated
in Table 9-3.
Evaluating potential market segments requires strategists to determine the characteristics
and needs of consumers, to analyze consumer similarities and differences, and to develop con-
sumer group profiles. Segmenting consumer markets is generally much simpler and easier than
segmenting industrial markets, because industrial products, such as electronic circuits and fork-
lifts, have multiple applications and appeal to diverse customer groups.
Segmentation is a key to matching supply and demand, which is one of the thorniest prob-
lems in customer service. Segmentation often reveals that large, random fluctuations in demand
actually consist of several small, predictable, and manageable patterns. Matching supply and
demand allows factories to produce desirable levels without extra shifts, overtime, and subcon-
tracting. Matching supply and demand also minimizes the number and severity of stock-outs.
The demand for hotel rooms, for example, can be dependent on foreign tourists, businesspersons,
and vacationers. Focusing separately on these three market segments, however, can allow hotel
firms to more effectively predict overall supply and demand.
Banks now are segmenting markets to increase effectiveness. “You’re dead in the water if
you aren’t segmenting the market,” observes Anne Moore, president of a bank consulting firm in
Atlanta. The Internet makes market segmentation easier today because consumers naturally form
“communities” on the Web.
To aid in segmenting markets and targeting specific groups of customers, companies com-
monly tag each of their active customers with three “retention” values:
• Tag 1: Is this customer at high risk of canceling the company’s service? One of the most
common indicators of high-risk customers is a drop off in usage of the company’s service.
For example, in the credit card industry this could be signaled through a customer’s
decline in spending on his or her card.
• Tag 2: Is this customer worth retaining? This determination boils down to whether the
postretention profit generated from the customer is predicted to be greater than the cost
incurred to retain the customer. Customers need to be managed as investments.
• Tag 3: What retention tactics should be used to retain this customer? For customers who
are deemed “save-worthy,” it is essential for the company to know which save tactics
are most likely to be successful. Tactics commonly used range from providing “special”
customer discounts to sending customers communications that reinforce the value
proposition of the given service.5
Table 9-3 Alternative Bases for Market Segmentation

Variable typical Breakdowns
Geographic
Region Pacific, Mountain, West North Central, West South Central, East North
Central, East South Central, South Atlantic, Middle Atlantic, New England
County Size A, B, C, D
City Size Under 5,000; 5,000–20,000; 20,001–50,000; 50,001–100,000; 100,001–
250,000; 250,001–500,000; 500,001–1,000,000; 1,000,001–4,000,000;
4,000,001 or over
Density Urban, suburban, rural
Climate Northern, southern
Demographic
Age Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65+

Gender Male, female
Family Size 1–2, 3–4, 5+
Family Life Cycle Young, single; young, married, no children; young, married, youngest child
under 6; young, married, youngest child 6 or over; older, married, with
children; older, married, no children under 18; older, single; other
Income Under $10,000; $10,001–$15,000; $15,001–$20,000; $20,001–$30,000;
$30,001–$50,000; $50,001–$70,000; $70,001–$100,000; over $100,000
Occupation Professional and technical; managers, officials, and proprietors; clerical
and sales; craftspeople; foremen; operatives; farmers; retirees; students;
housewives; unemployed
Education Grade school or less; some high school; high school graduate; some col-
lege; college graduate
Religion Catholic, Protestant, Jewish, Islamic, other
Race White, Asian, Hispanic, African American
Nationality American, British, French, German, Scandinavian, Italian, Latin American,
Middle Eastern, Japanese
Psychographic
Social Class Lower lowers, upper lowers, lower middles, upper middles, lower uppers,
upper uppers
Personality Compulsive, gregarious, authoritarian, ambitious
Behavioral
Use Occasion Regular occasion, special occasion

Benefits Sought Quality, service, economy
User Status Nonuser, ex-user, potential user, first-time user, regular user
Usage Rate Light user, medium user, heavy user
Loyalty Status None, medium, strong, absolute
Readiness Stage Unaware, aware, informed, interested, desirous, intending to buy
Attitude toward Product Enthusiastic, positive, indifferent, negative, hostile
Source: Adapted from Philip Kotler, Marketing Management: Analysis, Planning and Control, © 1984:
256. Adapted by permission of Prentice-Hall, Inc., Upper Saddle River, New Jersey.
The idea with retention-based segmentation is to examine and compare the attributes of active
customers with the attributes of prior customers in order to better target potential customers with
similar attributes. Using the theory that “birds of a feather flock together,” the approach is based on
the assumption that active customers will have similar retention outcomes as those of their compa-
rable predecessor. This whole process is possible through business analytics or data mining.
People all over the world are congregating into virtual communities on the web by becoming
members, customers, and visitors of websites that focus on an endless range of topics. People
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essentially segment themselves by nature of the websites that comprise their “favorite places,”
and many of these websites sell information regarding their “visitors.” Businesses and groups of
individuals all over the world pool their purchasing power in websites to get volume discounts.
Through its Connect feature, Facebook uses a type of mobile advertising that targets consum-
ers based on the apps they use from their phones. Connect lets users log into millions of web-
sites and apps with their Facebook identity, so the company then targets ads based on that data.
Facebook can also track what people do on their apps. Google uses similar means to gather (and
sell) market segmentation data.
Product Positioning and Perceptual Mapping

After markets have been segmented so that the firm can target particular customer groups, the
next step is to find out what customers want and expect. This takes analysis and research. A severe
mistake is to assume the firm knows what customers want and expect. Countless research studies
reveal large differences between how customers define service and rank the importance of differ-
ent service activities versus how companies view services. Many firms have become successful by
filling the gap between what customers versus companies see as good service. What the customer
believes is good service is paramount, not what the producer believes service should be.
Product positioning (sometimes called perceptual mapping) entails developing schematic
representations that reflect how products or services compare to those of the competitors on
dimensions most important to success in the industry. Product positioning is widely used for
deciding how to meet the needs and wants of particular consumer groups. The technique can be
summarized in five steps:
1. Select key criteria that effectively differentiate products or services in the industry.
2. Diagram a two-dimensional product-positioning map with specified criteria on each axis.
3. Plot major competitors’ products or services in the resultant four-quadrant matrix.
4. Identify areas in the positioning map where the company’s products or services could be
most competitive in the given target market. Look for vacant areas (niches).
5. Develop a marketing plan to position the company’s products or services appropriately.
Because just two criteria can be examined on a single product-positioning (perceptual) map,
multiple maps are often developed to assess various approaches to strategy implementation.
Multidimensional scaling could be used to examine three or more criteria simultaneously, but
this technique is beyond the scope of this text. Some rules for using product positioning as a
strategy-implementation tool are the following:
1. Look for the hole or vacant niche, which is a segment of the market currently not being
served.
2. Do not serve two segments with the same strategy. Usually, a strategy successful with one
segment cannot be directly transferred to another segment.
3. Do not position yourself in the middle of the map. The middle usually indicates a strategy
that is not clearly perceived to have any distinguishing characteristics. This rule can vary
with the number of competitors. For example, when there are only two competitors, as in
U.S. presidential elections, the middle becomes the preferred strategic position.6
An effective product-positioning strategy meets two criteria: (1) it uniquely distinguishes a
company from the competition and (2) it leads customers to expect slightly less service than a
company can deliver. Network Equipment Technology is an example of a company that keeps
customer expectations slightly below perceived performance. This is a constant challenge for
marketers. Firms need to inform customers about what to expect and then exceed the promise.
Underpromise and overdeliver! That is a key for excellent strategy implementation.
The product positioning map, or perceptual map, in Figure 9-2 shows consumer percep-
tions of various automobiles on the two dimensions of sporty and conservative and classy and
affordable. This sample of consumers felt Porsche was the sportiest and classiest of the cars
in the study (top right corner) and Plymouth was the most practical and conservative (bottom
left corner). Car manufacturers focus their marketing efforts on various target groups, or design
features in their vehicles, based on research and survey information illustrated in perceptual
maps. Perceptual maps can aid marketers in being more effective in spending money to promote
products. Products, brands, or companies positioned close to one another are perceived as similar
Classy
Distinctive
Lincoln
Porsche
Mercedes BMW
Cadillac
Chrysler
Oldsmobile Buick Pontiac

Conservative Sporty
Chevy
Ford Nissan
Toyota
Dodge
Plymouth VW
Practical
Affordable
Figure 9-2
A Perceptual Map for the Automobile industry
Source: Based on info at http://en.wikipedia.org/wiki/Perceptual_mapping.
on the relevant dimensions. For example, in Figure 9-2, consumers see Lincoln, Mercedes, and
Cadillac as similar. They are close competitors and form a competitive grouping. A company
considering the introduction of a new or improved model may look for a vacant niche on a
perceptual map. Some perceptual maps use different size circles to indicate the sales volume or
market share of the various competing products.
Perceptual maps may also display consumers’ ideal points. These points reflect ideal combi-
nations of the two dimensions as seen by a consumer. Dots are often used to represent one respon-
dent’s ideal combination of the two dimensions. Areas where there is a cluster of ideal points
indicates a market segment. Areas without ideal points are sometimes referred to as demand
voids. A company considering introducing a new product will look for areas with a high density
of ideal points. They will also look for areas without competitive rivals (a vacant niche), perhaps
best done by placing both the (1) ideal points and (2) competing products on the same map.
Companies commonly develop several perceptual maps to better understand competitive
advantages and disadvantages versus rival companies. For example, the largest homebuilder in
the United States, D. R. Horton (DRH), competes with Pulte, Lennar, KB Home, and other
homebuilders. Figures 9-3, 9-4, and 9-5 reveal recently developed D. R. Horton perceptual maps.
Note the author commentary provided for each illustration.
Author Commentary
AuThor CoMMeNTAry oN Figure 9-3 Price versus Quality is used in a perceptual map because
these two factors are often viewed as the most important considerations when purchasing a home.
The average sale price per DRH home is lower than any other major homebuilders in the United
States, which is why they are the lowest on the perceptual map. Oftentimes, however, being the
low-cost provider can mean actual, or perceived, low quality. The map reveals that DRH is above
only KB Home in quality. Quality was determined through interpreting online ratings of the
companies, as well as reviewing all of the competitor’s websites for proof that quality was being
provided. Note that Lennar is the closet to DRH on the Price versus Quality perceptual map.
AuThor CoMMeNTAry oN Figure 9-4 When buying or building a new home, consumers not
only want to make sure it can be built where they want it but also with the layout or options they
desire. By comparing coverage maps of the largest homebuilders in the United States, it was
concluded that DRH has the highest geographical coverage of all the competitors. Additionally,
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High Price
NVR Inc.
Pulte
Low Quality High Quality
KB home
Lennar
DR Horton
Low Price
Figure 9-3
A Drh Perceptual Map—Price versus Quality
through a review of the homebuilder’s websites, it was determined that DRH has the largest
quantity of options and layouts for new homes. Neither of these facts should come as a surprise,
as DRH does hold the title of “Largest Home Builder in the USA.” Rival firms are placed
accordingly on the perceptual map. Note that Lennar is the closest to DRH on the Number of
Options and Layouts versus Geographical Coverage perceptual map.
High number of options

and layout
DR Horton
Lennar
Low geographical High geographical

availability availability
NVR Inc.
KB home Pulte
Low number of options

and layout
Figure 9-4
A Drh Perceptual Map—Number of options/Layouts
versus geographical Availability
High quality of
customer service
Pulte
Lennar NVR Inc.
Not green conscientious Green conscientious
DR Horton
KB home
Low quality of
customer service
Figure 9-5
A Drh Perceptual Map—Quality of Customer Service
versus extent the Firm is green Conscientious
AuThor CoMMeNTAry oN Figure 9-5 Consumers increasingly are concerned with what and
from whom they are purchasing. Thus, customer service and green conscientiousness are often
key factors considered by consumers. After examining online ratings of the largest homebuilders
and reviewing competitor’s websites, it was determined that DRH has, at best, average customer
service. There were numerous complaints at several websites, and not very many resolutions, or
ways to find resolutions. Furthermore, through a review of the competitors’ websites, it appears
that DRH is the least green conscientious builder among the major players. It had very little,
if any, mention of green considerations, whereas some firms had very involved and detailed
sections on their web pages about green building. Note that Lennar is the closest to DRH on the
Quality of Customer Service versus Extent the Firm is Green Conscientious perceptual map.
Strategic Finance/Accounting Issues

Several finance/accounting concepts central to strategy implementation are acquiring needed capi-
tal, developing projected financial statements, preparing financial budgets, and evaluating the worth
of a business. Some examples of decisions that may require finance and accounting policies are:
1. To raise capital with short-term debt, long-term debt, preferred stock, or common stock
2. To lease or buy fixed assets
3. To determine an appropriate dividend payout ratio
4. To use last-in, first-out (LIFO), first-in, first-out (FIFO), or a market-value accounting
approach
5. To extend the time of accounts receivable
6. To establish a certain percentage discount on accounts within a specified period of time
7. To determine the amount of cash that should be kept on hand
Five especially important finance/accounting activities central to strategy implementation are
listed below and then discussed:
1. Acquire needed capital to implement strategies; perform EPS/EBIT analysis
2. Develop projected financial statements to show expected impact of strategies implemented
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3. Determine the firm’s value (corporate valuation) in the event an offer is received
4. Decide whether to go public with an Initial Public Offering (IPO)
5. Decide whether to keep cash offshore that was earned offshore
EPS/EBIT Analysis: Acquire Needed Capital

When students complete their recommendations page with expected costs summed as part of a
case analysis, or in actual practice when a firm decides what strategies to pursue at what cost, it
is necessary to address the following questions:
1. Can the company obtain the needed capital via stock or debt?
2. Would common stock, bank debt, corporate bonds, or some combination be better to raise
needed capital?
3. What would the firm’s projected EPS values be, given securement of the capital and imple-
mentation of the strategies?
Successful strategy implementation often requires additional capital beyond net profit from
operations or the sale of assets. Two primary sources of capital are debt and equity. Determining
an appropriate mix of debt and equity in a firm’s capital structure is an important strategy-
implementation decision. Earnings per share/earnings before interest and taxes (EPS/EBIT)
analysis is the most widely used technique for determining whether debt, stock, or a combination
of the two is the best alternative for raising capital to implement strategies. This technique involves
an examination of the impact that debt versus stock financing has on earnings per share (EPS) under
various expectations for EBIT, given specific recommendations (strategies to be implemented).
Theoretically, an enterprise should have enough debt in its capital structure to boost its return
on investment by applying debt to products and projects earning more than the cost of the debt.
In low-earning periods, too much debt in the capital structure of an organization can endanger
stockholders’ returns and jeopardize company survival. Fixed debt obligations generally must be
met, regardless of circumstances. This does not mean that stock issuances are always better than
debt for raising capital. When the cost of capital (interest rates) is low, debt may be better than
stock to obtain capital, but the analysis still must be performed because high stock prices usually
accompany low interest rates, making stock issuances attractive for obtaining capital. Some spe-
cial concerns with stock issuances are dilution of ownership, effect on stock price, and the need
to share future earnings with all new shareholders.
Another popular way for a company to raise capital is to issue corporate bonds, which is
analogous to going to the bank and borrowing money, except that with bonds, the company
obtains the funds from investors rather than banks. Especially when a company’s balance sheet
is strong and its credit rating excellent, issuing bonds can be an effective, and certainly an
alternative way to raise needed capital. In 2014, companies around the world issued more than
$1 trillion in corporate bonds, more than 4 percent higher than the prior year. Thus, even with
high stock prices, the low interest rate environment enticed companies to increasingly use debt to
(1) finance growth, (2) pay dividends, and (3) buy back their own stock (called treasury stock). In
fact, in 2014, companies sold corporate bonds at the fastest pace ever, led by Apple, Numericable
Group (a French firm), Oracle, Petrobras, Cisco, and Bank of America. Twitter recently raised
$1.5 billion by offering convertible bonds in two chunks of $650 million. The word convert-
ible means the bonds can be converted into shares of stock in some cases. Companies lately
have been flocking to the convertible bond market to raise cash, as many investors look for
less volatility in their investments. Medtronic, the Minneapolis medical-device-maker, recently
eclipsed even Apple’s $12 billion bond sale and Alibaba’s $8 billion bond sale. Medtronic raised
$17 billion selling bonds, enabling the company to finance its $43 billion purchase of Ireland’s
Covidien PLC. Companies are selling bonds at a hectic rate in order to finance strategies at low
interest rates, since rates are expected to climb in 2016–2017.
Before explaining EPS/EBIT analysis, it is important to know that EPS is earnings per
share, which is net income divided by number of shares outstanding. Another term for shares
outstanding is shares issued. In addition, know that the denominator of EPS is reduced when a
firm buys its own stock (treasury stock), thus increasing the overall EPS value. Also know that
EBIT is earnings before interest and taxes, or as it is sometimes called, operating income. EBT is
earnings before tax. EAT is earnings after tax.
The purpose of EPS/EBIT analysis is to determine whether all debt, all stock, or some com-
bination of debt and stock yields the highest EPS values for the firm. Earnings per share is
perhaps the best measure of success of a company, so it is widely used in making the capital
acquisition decision. It reflects the common “maximizing shareholders’ wealth” overarching
corporate objective. By chance if profit maximization is the company’s goal, then in performing
an EPS/EBIT analysis, you may focus more on the EAT row than the EPS row. Large compa-
nies may have millions of shares outstanding, so even small differences in EPS across different
financing options can equate to large sums of money saved by using that highest EPS value alter-
native. Any number of combination debt/stock (D/S) scenarios, such as 70/30 D/S or 30/70 D/S,
may be examined in an EPS/EBIT analysis. The free Excel template at www.strategyclub.com
can enable easy calculation of various scenarios of financing options.
Perhaps the best way to explain EPS/EBIT analysis is by working through an example for
the XYZ Company, as provided in Table 9-4. Note that 100 percent stock is the best financing
alternative as indicated by the EPS values of 0.0279 and 0.056. An EPS/EBIT chart can be con-
structed to determine the breakeven point, where one financing alternative becomes more attrac-
tive than another. Figure 9-4 reveals that issuing common stock is the best financing alternative
for the XYZ Company. As noted in Figure 9-6, the top row (EBIT) on the x-axis is graphed
with the bottom row (EPS) on the y-axis, and the highest plotted line reveals the best method.
Sometimes the plotted lines will interact, so a graph is especially helpful in making the capital
acquisition decision, rather than solely relying on a table of numbers.
All analytical tools have limitations and EPS/EBIT analysis is no exception. But unless you
have a compelling reason to overturn the highest last row EPS values dictating the best financing
option, then indeed those highest values along the bottom row should dictate the financing deci-
sion, because EPS is arguably the best measure of organizational performance, and thus is the
best variable to examine in deciding which financing option is best. Seven potential limitations
of EPS/EBIT analysis are here:
1. Flexibility is a limitation. As an organization’s capital structure changes, so does its flex-
ibility for considering future capital needs. Using all debt or all stock to raise capital in the
Table 9-4 ePS/eBiT Analysis for the XyZ Company

input Data the number How Determined
$ Amount of Capital Needed $100 million Estimated $ cost of recommendations

EBIT Range $20 to $40 million Estimate based on prior year EBIT and recommendations for the coming
year(s)
Interest Rate 5 percent Estimate based on cost of capital
Tax Rate 30 percent Use prior year %: taxes divided by income before taxes, as given on
income statement
Stock Price $50 Use most recent stock price
# Shares Outstanding 500 million For the debt columns, enter the existing # shares outstanding. For stock
columns, use the existing # shares outstanding + the # new shares that
must be issued to raise the needed capital (i.e., based on stock price).
So divide the stock price into the $ amount of capital needed.
100% Debt 100% Stock 50/50 Debt/Stock combo
$ EBIT 20,000,000 40,000,000 20,000,000 40,000,000 20,000,000 40,000,000

$ Interest 5,000,000 5,000,000 0 0 2,500,000 2,500,000
$ EBT 15,000,000 35,000,000 20,000,000 40,000,000 17,500,000 37,500,000
$ Taxes 4,500,000 10,500,000 6,000,000 12,000,000 5,250,000 11,250,000
$ EAT 10,500,000 24,500,000 14,000,000 28,000,000 12,250,000 26,250,000
# Shares 500,000,000 500,000,000 502,000,000 502,000,000 501,000,000 501,000,000
$ EPS 0.0210 0.049 0.0279 0.056 0.0245 0.0523
Conclusion: The best financing alternative is 100% stock because the EPS values are largest; the worst financing alternative is 100% debt
because the EPS values are lowest.
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.06
.056 = Stock, SF
.052 = Combo, CF
.05 .049 = Debt, DF
.04
.03
.0279
.0245
.02 .0210
.01
.00
$20 Million $40 Million
SF = Stock Financing
DF = Debt Financing
CF = 50/50 Combination (Debt/Stock) Financing
Figure 9-6
An ePS/eBiT Chart for the XyZ Company
present may impose fixed obligations, restrictive covenants, or other constraints that could
severely reduce a firm’s ability to raise additional capital in the future.
2. Control is a limitation. When additional stock is issued to finance strategy implementation,
ownership and control of the enterprise are diluted. This can be a serious concern in
today’s business environment of hostile takeovers, mergers, and acquisitions. Dilution
of ownership could be a problem, and if so, debt could be better than stock regardless of
determined EPS values in the analysis.
3. Timing is a limitation.. If interest rates are expected to rise, then debt could be bet-
ter than stock, regardless of the determined EPS values in the analysis. In times of high
stock prices, stock may prove to be the best alternative from both a cost and a demand
standpoint.
4. Extent leveraged is a limitation. If the firm is already too highly leveraged versus industry
average ratios, then stock may be best regardless of determined EPS values in the analysis.
5. Continuity is a limitation. The analysis assumes stock price, tax rate, and interest rates are
constant during all economic conditions.
6. EBIT ranges are a limitation. The estimated EBIT low and high values are estimated
based on the prior year, plus the impact of strategies to be implemented.
7. Dividends are a limitation. If EPS values are highest for the “all-stock scenario,” and if the
firm pays dividends, then more funds will leave the firm due to dividends if the all stock
scenario is selected.
Table 9-5 provides an EPS/EBIT analysis for Boeing Company. Notice in the analysis that
the combination stock/debt options vary from 30/70 to 70/30. Any number of combinations
Table 9-5 ePS/eBiT Analysis for Boeing Company (M = in millions)
Amount Needed: $10,000 M

Interest Rate: 5%
Tax Rate: 7%
Stock Price: $53.00
# of Shares Outstanding: 826 M
common Stock Financing Debt Financing
Recession Normal Boom Recession Normal Boom
EBIT 1,000.00 2,500.00 5,000.00 1,000.00 2,500.00 5,000.00

Interest 0.00 0.00 0.00 500.00 500.00 500.00
EBT 1,000.00 2,500.00 5,000.00 500.00 2,000.00 4,500.00
Taxes 70.00 175.00 350.00 35.00 140.00 315.00
EAT 930.00 2,325.00 4,650.00 465.00 1,860.00 4,185.00
# Shares 1,014.68 1,014.68 1,014.68 826.00 826.00 826.00
EPS 0.92 2.29 4.58 0.56 2.25 5.07
70% Stock—30% Debt 70% Debt—30% Stock
Recession Normal Boom Recession Normal Boom
EBIT 1,000.00 2,500.00 5,000.00 1,000.00 2,500.00 5,000.00

Interest 150.00 150.00 150.00 350.00 350.00 350.00
EBT 850.00 2,350.00 4,850.00 650.00 2,150.00 4,650.00
Taxes 59.50 164.50 339.50 45.50 150.50 325.50
EAT 790.50 2,185.50 4,510.50 604.50 1,999.50 4,324.50
# Shares 958.08 958.08 958.08 882.60 882.60 882.60
EPS 0.83 2.28 4.71 0.68 2.27 4.90
6.0
5.5 Debt
5.0 70% Debt
4.5 70% Stock
4.0 Common Stock
3.5
EPS 3.0
2.5
2.0
1.5
1.0
0.5
0.0
1,000 2,500 5,000

EBIT
Conclusion: Boeing should use common stock to raise capital in a recession (see 0.92) or a normal (see 2.29) economic conditions but should
use debt financing under boom conditions (see 5.07).
could be explored. However, sometimes in preparing the EPS/EBIT graphs, the lines will inter-
sect, thus revealing breakeven points at which one financing alternative becomes more or less
attractive than another. The slope of these lines will be determined by a combination of factors,
including stock price, interest rate, number of shares, and amount of capital needed. Also, it
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should be emphasized here that the best financing alternatives are indicated by the highest EPS
values. In Table 9-5, the 7 percent tax rates was computed from Boeing’s income statement by
dividing taxes paid by income before taxes. Always calculate the tax rate in this manner.
In Table 9-5, note that Boeing should use stock to raise capital in a recession (see 0.92) or
in normal (see 2.29) economic conditions but should use debt financing under boom conditions
(see 5.07). Let us calculate here the “# Shares” figure of 1,014.68 given under Boeing’s stock
alternative. Divide $10,000 M funds needed by the stock price of $53 = 188.68 M new shares to
be issued + the 826 M shares outstanding already = 1014.68 M shares under the stock scenario.
Along the final row, EPS is the number of shares outstanding divided by EAT in all columns.
Note in Table 9-5 that a dividends row is absent from the Boeing analysis. The more shares
outstanding, the more dividends to be paid (if the firm indeed pays dividends). To consider
dividends in an EPS/EBIT analysis, simply insert another row for “Dividends” right below the
“EAT” row and then insert an “Earnings After Taxes and Dividends” row. Considering dividends
would make the analysis more robust.
In the Boeing graph, notice that there is a breakeven point between the normal and boom
range of EBIT where the debt option overtakes the 70/30 D/S option as the best financing alter-
native. A breakeven point (where two lines cross each other) is the EBIT level where various
financing alternatives represented by lines crossing are equally attractive in terms of EPS. The
Boeing graph indicates that EPS values are highest for the 100 percent debt option at high EBIT
levels. The graph also reveals that the EPS values for 100 percent debt increase faster than the
other financing options as EBIT levels increase beyond the breakeven point. At low levels of
EBIT, however, the Boeing graph indicates that 100 percent stock is the best financing alternative
because the EPS values are highest.
Projected Financial Statements

Projected financial statement analysis is a technique that allows an organization to examine
the expected results of strategies being implemented. This analysis can be used to forecast
the impact of various implementation decisions (e.g., to increase promotion expenditures by
50 percent to support a market-development strategy or to increase research and development
expenditures by 70 percent to support product development). Most financial institutions require
at least three years of projected financial statements whenever a business seeks capital. A pro-
jected income statement and balance sheet allows an organization to compute projected finan-
cial ratios under various scenarios. When compared to prior years and to industry averages,
financial ratios provide valuable insights into the feasibility of various strategy-implementation
approaches.
A 2017 projected income statement and a balance sheet for the Litten Company are pro-
vided in Table 9-6. The projected statements for Litten are based on five assumptions: (1) The
company needs to raise $45 million to finance expansion into foreign markets; (2) $30 million
of this total will be raised through increased debt and $15 million through common stock;
(3) sales are expected to increase 50 percent; (4) three new facilities, costing a total of $30 million,
will be constructed in foreign markets; and (5) land for the new facilities is already owned by
the company. Note in Table 9-6 that Litten’s strategies and their implementation are expected to
result in a sales increase from $100 million to $150 million and in a net increase in income from
$6 million to $9.75 million in the forecasted year.
Projected financial analysis can be explained in seven steps:
1. Prepare the projected income statement before the balance sheet. Start by forecasting sales
as accurately as possible. Be careful not to blindly push historical percentages into the fu-
ture with regard to revenue (sales) increases. Be mindful of what the firm did to achieve
those past sales increases, which may not be appropriate for the future unless the firm takes
similar or analogous actions (such as opening a similar number of stores, for example). If
dealing with a manufacturing firm, also be mindful that if the firm is operating at 100 per-
cent capacity running three 8-hour shifts per day, then probably new manufacturing facilities
(land, plant, and equipment) will be needed to increase sales further.
2. Use the percentage-of-sales method to project cost of goods sold (CGS) and the expense
items in the income statement. For example, if CGS is 70 percent of sales in the prior year
Table 9-6 A Projected income Statement and Balance Sheet for the Litten
Company (in millions)
Prior Projected
year2016 year2017 remarks
PROJECTED INCOME STATEMENT

Sales $100 $150.00 50% increase
Cost of Goods Sold 70 105.00 70% of sales
Gross Margin 30 45.00
Selling Expense 10 15.00 10% of sales
Administrative Expense 5 7.50 5% of sales
Earnings Before Interest and Taxes 15 22.50
Interest 3 3.00
Earnings Before Taxes 12 19.50
Taxes 6 9.75 50% rate
Net Income 6 9.75
Dividends 2 5.00
Retained Earnings 4 4.75
PROJECTED BALANCE SHEET
Assets
Cash 5 7.75 Plug figure
Accounts Receivable 2 4.00 100% increase
Inventory 20 45.00
Total Current Assets 27 56.75
Land 15 35.00 Purchased land
Plant and Equipment 50 80.00 Add three new plants
at $10 million each
Less Depreciation 10 20.00
Net Plant and Equipment 40 60.00
Total Fixed Assets 55 75.00
Total Assets 82 151.75
Liabilities
Accounts Payable 10 10.00
Notes Payable 10 10.00
Total Current Liabilities 20 20.00
Long-Term Debt 40 70.00 Borrowed $30 million
Additional Paid-in-Capital 20 35.00 Issued 100,000 shares
at $150 each
Retained Earnings 2 6.75 $2 + $4.75
Total Liabilities and Net Worth 82 151.75
(as it is in Table 9-6), then use that same percentage to calculate CGS in the future year—
unless there is a reason to use a different percentage. Items such as interest, dividends, and
taxes must be treated independently and cannot be forecasted using the percentage-of-sales
method.
3. Calculate the projected net income.
4. Subtract from the net income any dividends to be paid for that year. This remaining
net income is retained earnings (RE). Bring this retained earnings amount for that year
(NI – DIV = RE) over to the balance sheet by adding it to the prior year’s RE shown on
the balance sheet. In other words, every year, a firm adds its RE for that particular year
(from the income statement) to its historical RE total on the balance sheet. Therefore, the
RE amount on the balance sheet is a cumulative number rather than money available for
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strategy implementation. Note that retained earnings is the first projected balance sheet item
to be entered. As a result of this accounting procedure in developing projected financial
statements, the RE amount on the balance sheet is usually a large number. However, it also
can be a low or even negative number if the firm has been incurring losses. The only way
for RE to decrease from one year to the next on the balance sheet is (1) if the firm incurred
an earnings loss that year or (2) the firm had positive net income for the year but paid out
dividends more than the net income. Be mindful that RE is the key link between a projected
income statement and balance sheet, so be careful to make this calculation correctly.
5. Project the balance sheet items, beginning with retained earnings and then forecasting
shareholders’ equity, long-term liabilities, current liabilities, total liabilities, total assets,
fixed assets, and current assets (in that order), working from the bottom to the top of the
balance sheet.
6. Use the cash account as the plug figure—that is, use the cash account to make the assets
total the liabilities and net worth. Then make appropriate adjustments. For example, if the
cash needed to balance the statements is too small (or too large), make appropriate changes
to borrow more (or less) money than planned. If the projected cash account number is too
high, a firm could reduce the cash number and concurrently reduce a liability or equity
account the same amount to keep the statement in balance. Rarely is the cash account
number perfect on the first pass-through, so adjustments are needed and made.
7. List commentary (remarks) on the projected statements. Any time a significant change is
made in an item from a prior year to the projected year, an explanation (comment) should
be provided. Comments/remarks are essential because otherwise changes can be difficult
to understand.
The U.S. Securities and Exchange Commission (SEC) conducts fraud investigations if pro-
jected numbers are misleading or if they omit information that is important to investors. Projected
statements must conform with generally accepted accounting principles (GAAP) and must not
be designed to hide poor expected results. The Sarbanes-Oxley Act requires CEOs and CFOs of
corporations to personally sign their firms’ financial statements attesting to their accuracy. These
executives could thus be held personally liable for misleading or inaccurate statements. Some
firms still “inflate” their financial projections and call them “pro formas,” so investors, sharehold-
ers, and other stakeholders must still be wary of different companies’ financial projections.7
On financial statements, different companies use different terms for various items, such as
revenues or sales used for the same item. Net income, earnings, or profits can refer to the same
item on an income statement, depending on the company.
Projected Financial Statement Analysis for D. R. Horton

Because so many strategic management students have limited experience developing projected
financial statements, let us apply the steps outlined on the previous pages to the largest American
homebuilder company by revenues, D. R. Horton (DRH). The projected statements, developed
on January 14, 2014, considered that D.R. Horton would go forward with the following four
recommendations in 2014–2016, and incur the following expected costs:
1. Acquire four building products firms: (a) Universal Forest Products, (b) Scotch and Gulf
Lumber, (c) United Plywood and Lumber, and (d) Dixie Plywood. Total Cost = $850 million
2. Expand home-building services to North and South Dakota to gain 5% of the market by
the end of 2016. (Start with an office in Bismarck, ND, the second-largest city in ND. It is
close enough to the ND/SD border to serve both states, and it is located where Bismarck
and Minneapolis can both help serve Fargo/Moorhead. If all goes well, place a second lo-
cation in Rapid City, SD, the second-largest city in SD. It is located where Rapid City and
Minneapolis can both help serve Sioux Falls, and is located close enough to Casper, WY,
and Scottsbluff, NE, for possible future service expansions.) Total Cost = $232 million
3. Increase the number of communities that DRH services by 50% in California and Nevada
by 2016 (20 more communities in California and 10 more communities in Nevada). Total
Cost = $290 million
4. Develop and launch a nationwide marketing campaign. Topics should include
D. R. Horton’s low prices in the industry (while still stressing they provide value),
Table 9-7 Drh’s Actual and Projected income Statements (in millions)
actual Projected Projected Projected

year2013 2014 2015 2016
Sales $6,259.00 $10,607.94 $12,520.69 $14,776.03

Costs of Goods Sold $4,854.00 $8,570.14 $10,115.44 $11,937.52
Gross Margin $1,405.00 $2,037.81 $2,405.25 $2,838.50
Selling & Administrative $766.00 $1,298.24 $1,532.33 $1,808.35
Other Operating –$15.00 –$25.42 –$30.01 –$35.41
EBIT $654.00 $764.99 $902.93 $1,065.57
Interest $5.00 $8.47 $10.00 $11.80
Other Income $9.00 $15.25 $18.00 $21.25
EBT $658.00 $771.77 $910.93 $1,075.01
Taxes $195.00 $228.72 $269.96 $318.58
Net Income $463.00 $543.05 $640.97 $756.43
Dividends $60.20 $70.45 $72.57 $74.74
Retained Earnings $402.80 $472.60 $568.41 $681.69
home owning is still more cost effective than renting, green solutions offered by DRH,
corporate social responsibility efforts by DRH, and targeting the 55 to 75 age group
for buying homes. Total Cost = $35 million
Based on these recommendations, DHR’s actual and projected income statements are given
in Table 9-7. Note the large increase in sales in 2014 were due to DRH potentially acquiring four
smaller homebuilder companies. Note also at the bottom of Table 9-7 the dividends to be paid
and resultant annual retained earnings to be carried forward to the DRH projected balance sheets.
Commentary regarding DRH’s actual and projected income statements is provided in Table 9-8.
Table 9-9 reveals DRH’s actual and projected balance sheets given the four recommenda-
tions listed earlier and the annual retained earnings carried forward to the balance sheet. Table
9-10 provides commentary regarding the projected balance sheet changes.
Note in Table 9-9 that DRH increased its retained earnings on the projected balance sheets
correctly, expecting to pay out the dividend amounts indicated in Table 9-8. Note in Table 9-9
Table 9-8 Comments regarding Drh’s Actual and Projected income Statements
in millions comments
Sales New home building up 18% in last year. 15% increase year to year
seems fair (works out to about 15% in the housing market and 10%
in building supplies). Plus, the goal of 1% increase in market share
(0.33%/yr). Plus, $3,000 in year 1 from acquisitions.
Costs of Goods Sold 80.8% of sales after acquisitions
Gross Margin
Selling and Admin. Expense 12.25% of sales
Other Operating Expenses 0.25% of sales
EBIT
Interest 0.08% of sales
Other Income 0.14% of sales
EBT
Taxes 29.65% of EBT
Net Income
Dividends 3% increase year to year. Plus, $8.2M in year 1 from acquisitions.
Retained Earnings NI − Dividends
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Table 9-9 Drh’s Actual and Projected Balance Sheets (in millions)
Actualyear2013 Projectedyear2014 Projectedyear2015 Projectedyear2016
Assets
Cash $937.00 $1,091.30 $891.72 $652.53
Inventory $6,197.00 $7,955.96 $9,390.52 $11,082.02
Deferred Income Taxes $587.00 $994.87 $1,174.25 $1,385.77
Other Current Assets $77.00 $99.00 $99.00 $99.00
Total Current Assets $7,798.00 $10,141.12 $11,555.49 $13,294.06
Land, Plant, and Equipment $237.00 $924.76 $943.40 $962.98
Less Depreciation $130.00 $500.00 $530.00 $560.00
Goodwill $39.00 $199.00 $199.00 $199.00
Other Long-Term Assets $913.00 $981.40 $1,053.23 $1,128.64
Total Fixed Assets $1,059.00 $1,605.16 $1,665.63 $1,730.62
Total Assets $8,857.00 $11,746.28 $13,221.12 $14,949.94
Liabilities
Accounts Payable $400.00 $583.44 $688.64 $812.68
Taxes Payable $60.00 $60.00 $60.00 $60.00
Accrued Liabilities $211.00 $318.24 $375.62 $443.28
Other Current Liabilities $615.00 $615.00 $615.00 $615.00
Total Current Liabilities $1,286.00 $1,576.68 $1,739.26 $1,930.96
Long-Term Debt $3,509.00 $4,959.00 $5,702.85 $6,558.28
Minority Interest $3.00 $3.00 $3.00 $3.00
Total Noncurrent Liabilities $3,512.00 $4,962.00 $5,705.85 $6,561.28
Total Liabilities $4,798.00 $6,538.68 $7,445.11 $8,492.24
Additional Paid-in Capital $2,042.00 $2,218.00 $2,218.00 $2,218.00
Common Stock $3.00 $3.00 $3.00 $3.00
Retained Earnings $2,146.00 $3,118.60 $3,687.01 $4,368.70
Treasury Stock –$134.00 –$134.00 –$134.00 –$134.00
Other Accumulated Income $2.00 $2.00 $2.00 $2.00
Total Stockholders’ Equity $4,059.00 $5,207.60 $5,776.01 $6,532.44
Total Liabilities and Net Worth $8,857.00 $11,746.28 $13,221.12 $14,949.94
that the projections show DRH not buying back any of its own stock (treasury stock), as indi-
cated by the $134 number staying unchanged. Many companies lately have been aggressively
buying their own stock, reflecting optimism about their future. However, some analysts argue
that stock buybacks eat cash that a firm could better use to grow the firm. Stock buybacks do
however reduce a firm’s number of shares outstanding, which increases a firm’s EPS, so firms
reap this “intangible benefit” with stock buybacks. Sometimes firms will thus increase their trea-
sury stock near the end of the quarter, or near the end of the year, to “artificially” inflate their
EPS, which oftentimes makes the stock price go up. For example, FedEx bought $2.8 billion
worth of its own stock in its 2014 fiscal fourth quarter, contributing 15 cents to the company’s
EPS of $2.10, thus beating Wall Street’s expectation of $1.95. In fact, 25 percent of the S&P 500
companies in the third quarter of 2014 alone increased their EPS by 4 percent or more simply by
buying back their own stock.
Corporate Valuation
Evaluating the worth of a business is central to strategy implementation because numerous
strategies are often implemented by acquiring other firms. In addition, some strategies, such as
retrenchment and divestiture, may result in the sale of a division of an organization or of the firm
itself. Thus, thousands of transactions occur each year in which businesses are bought or sold in
Table 9-10 Comments regarding Drh’s Actual and Projected Balance Sheets
comments
Assets
Cash Plug Variable
Inventory 75% of sales after acquisitions
Deferred Income Taxes 9.4% of sales
Other Current Assets $22 increase in year one due to acquisition
Total Current Assets
Land, Plant, and Equipment Currently 63 locations, Average = 3.75 million. Upgrading 5 facilities
at 50% and adding 2 new facilities in the next 3 years. Plus 5% average
increase with market share per year. Plus $670 in year 1 from acquisitions
Less Depreciation $340 increase in year 1 from acquisitions plus 30 million per year
Goodwill $160 increase due to acquisitions
Other Long-Term Assets Increase at the same percentage as Land, Plant, and Equipment, less
acquisitions
Total Fixed Assets
Total Assets
Liabilities
Accounts Payable 5.5% of sales after acquisitions
Taxes Payable
Accrued Liabilities 3.0% of sales after acquisitions
Other Current Liabilities
Total Current Liabilities
Long-Term Debt Borrowed $1450 for acquisitions and expansions in year 1. Plus 15%
thereafter.
Minority Interest
Total Noncurrent Liabilities
Total Liabilities
Additional Paid-in Capital $176 increase in year one due to acquisitions
Common Stock
Retained Earnings Prior RE + the new annual RE
Treasury Stock
Other Income
Total Stockholders’ Equity
Total Liabilities and SE
the United States. In all these cases, it is necessary to establish the financial worth or cash value
of a business to successfully implement strategies.
Corporate valuation is not an exact science; value is sometimes in the eye of the beholder.
Companies desire to sell high and buy low, and negotiation normally takes place in both sit-
uations. The valuation of a firm’s worth is based on financial facts, but common sense and
good judgment enter into the process because it is difficult to assign a monetary value to some
factors—such as a loyal customer base, a history of growth, legal suits pending, dedicated
employees, a favorable lease, a bad credit rating, or good patents—that may not be reflected in
a firm’s financial statements. Also, different valuation methods will yield different totals for a
firm’s worth, and no prescribed approach is best for a certain situation. Evaluating the worth of
a business truly requires both qualitative and quantitative skills.
Before we examine four methods widely used for corporate valuation, let’s examine the
concepts of goodwill, premium, and discount a bit further because these issues directly relate to
corporate valuation. FASB Rule 142 requires companies to admit once a year if the premiums
they paid for acquisitions, called goodwill, were a waste of money. Goodwill is not a good thing
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AcADemic reseArch cApsuLe 9-1

When Should We Overpay to Acquire a Firm?
Scholars have long been interested in the decision-making process may not always be beneficial. In particular, Zhu reports a tendency
regarding when firms pay premiums versus discounts for acquired for directors to support low premiums when their average prior pre-
firms. Paying high acquisition premiums inflate a firm’s goodwill, and mium was low, but directors tend to support paying high premiums
has often been criticized in research. Acquisition premiums the last when their average prior premium was relatively high. Due to this
few years have averaged 25 to 40 percent, but sometimes exceed “group bias,” Zhu questions the extent (or whether) members of
100 percent. Prior research suggests that high premiums gener- a firm’s board of directors should be involved with acquisition pur-
ally have negative impacts on acquisition performance. Scholars chase decisions.
have explored the how and why of excessive premium decisions to
determine if overconfidence or hubris on the part of chief executive Source: Based on Zhu, David, “Group Polarization on Corporate Boards:
officers (CEOs) is the culprit. Specifically, Zhu recently reported that Theory and Evidence on Board Decisions about Acquisition Premiums,”
board members’ influence on premium versus discount decisions Strategic Management Journal, 34 (2013): 800–822.
to have on a balance sheet. J. Crew Group Inc., for example, recently wrote down the value of the
goodwill on its balance sheet by 57 percent, or $536 million. Hewlett-Packard, Boston Scientific,
Frontier Communications, and Republic Services carry more goodwill on their balance sheet
than their market (or book) value. This is a signal that their goodwill should be “written down,”
which means “reduced and recorded as an expense on the income statement.” Jack Ciesielski,
publisher of Analyst’s Accounting Observer, says, “Writing down goodwill is an admission that
the company screwed up when it budgeted what an acquired firm is worth.” Sometimes it is OK
to pay more for a company than its book value if the firm has technology or patents you need or
economies of scale you desire or even to reduce competitive pricing pressure, but, like buying
a house, paying a “premium” for a company is almost always not a good thing. Acquiring at a
“discount” is far better for shareholders. Because goodwill write-down accounting rules involve
projections and judgments, companies have leeway for when to write down goodwill, and by
how much. If the purchase price is less than the stock price times the number of shares outstand-
ing (rather than more), that difference is called a discount. For example, Clayton Doubilier &
Rice LLC recently acquired Emergency Medical Services (EMS) Corp. for $2.9 billion, a
9.4 percent discount below EMS’s stock price of $64.00. Academic Research Capsule 9-1
addresses the premium versus discount issue.
Corporate Valuation Methods

Four methods are often used to determine the monetary value of a company; these four methods
are described below.
MeThoD 1 The Net Worth Method = Total Shareholders’ Equity (SE) − (Goodwill + Intangibles)
Other terms for Total Shareholders’ Equity are Total Owners’ Equity or Net Worth, but this line
item near the bottom of a balance sheet represents the sum of common stock, additional paid-in
capital, and retained earnings. After calculating total SE, subtract goodwill and intangibles if
these items appear as assets on the firm’s balance sheet. Whereas intangibles include copyrights,
patents, and trademarks, goodwill arises only if a firm acquires another firm and pays more than
the book value for that firm
MeThoD 2 The Net Income Method = Net Income × Five
The second approach for measuring the monetary value of a company grows out of the belief that
the worth of any business should be based largely on the future benefits its owners may derive
through net profits. A conservative rule of thumb is to establish a business’s worth as five times
the firm’s current annual profit. A 5-year average profit level could also be used. When using this
approach, remember that firms normally suppress earnings in their financial statements to mini-
mize taxes. Note in Table 9-11 that Method 2 results in the lowest corporate valuation of all meth-
ods for all three firms. If you were acquiring a business, this might be a good first offer, but likely
Method 2 does not produce a value you would want to begin with if you are selling your business.
Table 9-11 Company Worth Analysis for Amazon.com, ross Stores, and Panera
Bread Company (in millions, except stock price and ePS)
input Data amazon.com ross Stores Panera Bread
$ Shareholders’ Equity (SE) 9,746 2,007 699

$ Net Income (NI) 274 837 196
$ Stock Price (SP) 307 90 160
$ EPS 7.59 4.24 6.80
# of Shares Outstanding 463 205 27
$ Goodwill 2,656 0 123
$ Intangibles 0 0 79
$ Total Assets 40,159 3,896 1,180
company Worth analyses
1. SE – Goodwill – Intangibles 7,090 2,007 497

2. Net Income × 5 1,370 4,185 980
3. (Stock Price/EPS) × NI 142,572 17,766 4,611
4. # of Shares Out × Stock Price 142,141 18,450 4,320
5. Four Method Average $73,293 $10,604 $2,602
$ Goodwill/$ Total Assets 6.6% 0 10.4%
If a firm’s net income is negative, theoretically Method 2 yields a negative number, implying that
the firm would pay you to acquire them. Of course, when you acquire another firm, you obtain all
of the firm’s debt and liabilities, so theoretically this would be possible.
MeThoD 3 Price-Earnings Ratio Method = (Stock Price ÷ EPS) × NI
To use this method, divide the market price of the firm’s common stock by the annual earnings
per share (EPS) and multiply this number by the firm’s average net income for the past five
years. Notice in Table 9-12 this method yields an answer close to Method 4. Algebraically, this
method is identical to Method 4, if earnings and # of shares figures are taken at the same point
in time.
MeThoD 4 Outstanding Shares Method = # of Shares Outstanding × Stock Price
To use this method, simply multiply the number of shares outstanding (or issued) by the mar-
ket price per share. If the purchase price is more than this amount, the additional dollars are
called a premium. The outstanding shares method may also be called the market value or
market capitalization or book value of the firm. The premium is a per-share dollar amount
that a person or firm is willing to pay beyond the book value of the firm to control (acquire)
the other company.
Table 9-11 provides the cash value analyses for three companies—Amazon.com, Ross
Stores, and Panera Bread Company at year-end 2014. Note in Table 9-11 that Panera Bread
Company’s $ Goodwill to $ Total Assets is high at 10.4 percent, indicating that a tenth of the
company’s assets are “Goodwill,” which is not good.
Notice in Table 9-11 there is significant variation among the four methods used to determine
cash value. For example, the worth of Amazon ranged from $1.3 billion to $142 billion.
Obviously, if you were selling your company, you would seek the larger values, whereas if pur-
chasing a company you would seek the lower values. In practice, substantial negotiation takes
place in reaching a final compromise (or averaged) amount.
In addition to preparing to buy or sell a business, corporate valuation analysis is oftentimes
performed when dealing with the following issues: bank loans, tax calculations, retirement pack-
ages, death of a principal, divorce, partnership agreements, and IRS audits. Practically, it is just
good business to have a reasonable understanding of what a firm is worth. This knowledge pro-
tects the interests of all parties involved.
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Table 9-12 The Top 20 College Football Programs in Terms of Monetary Value
(all numbers are in millions of $)
team revenue net income team Value
1. Texas Longhorns 109 82 139

2. Notre Dame Fighting Irish 78 46 117
3. Alabama Crimson Tide 89 47 110
4. LSU Tigers 74 48 105
5. Michigan Wolverines 81 58 104
6. Florida Gators 75 49 94
7. Oklahoma Sooners 70 45 92
8. Georgia Bulldogs 66 40 91
9. Ohio State Buckeyes 61 38 83
10. Nebraska Cornhuskers 56 35 80
11. Auburn Tigers 75 39 77
12. Arkansas Razorbacks 61 32 74
13. USC Trojans 58 35 73
14. Texas A&M Aggies 54 36 72
15. Penn State Nittany Lions 59 30 71
16. Wisconsin Badgers 51 19 70
17. Washington Huskies 56 33 66
18. South Carolina Gamecocks 49 24 65
19. Oregon Ducks 54 33 64
20. Tennessee Volunteers 55 28 63
Source: Based on information from the U.S. Department of Education as of February 1, 2014, and http://
www.forbes.com/forbes/welcome/.
Table 9-12 provides a list of U.S. college football teams ranked in terms of their monetary
value. Note that the Texas Longhorns are Number 1, followed by the Notre Dame Fighting Irish.
Also observe that there are eight Southeastern Conference (SEC) teams among the top 20. In cal-
culating the team value amounts, analysts made various cash flow adjustments, so the amounts
are generally less than the “net income times five” formula described in Method 2. Net income
times two (or three) is much closer to actual figures reported for the monetary value of college
football programs.
IPOs, Cash Management, and Corporate Bonds

Go Public With An IPO?
Hundreds of companies annually hold initial public offerings (IPOs) to move from being pri-
vate to being public. In 2014, the number of firms going public was at its fastest pace in years,
as investors bid aggressively for new shares of new companies, paying on average 14.5 times
annual sales for firms. The average U.S. IPO stock price in 2014 increased 19 percent, rewarding
investors.8 However, nearly three quarters of the firms going public in 2014 were unprofitable,
and most had annual sales of less than $50 million. In addition to Alibaba, some of the most suc-
cessful IPOs in 2014 were GoPro, maker of the popular action photography camera, whose stock
hit the market mid-year priced at $24 and rose to $71 for a 195 percent total return. Also in 2014,
the IPO from Immune Design, a large pharmaceutical firm, saw its initial stock price of $12 rise
to $34, up 184 percent. There were 275 IPOs on the U.S. stock markets in 2014, up from 222 the
prior year. However, not all initial public offering stock prices increased. Even Facebook’s stock
dropped dramatically after its IPO, although it eventually recovered nicely.
“Going public” means selling off a percentage of a company to others to raise capital;
consequently, it dilutes the owners’ control of the firm. Going public is not recommended
for companies with less than $10 million in sales because the initial costs can be too high for
the firm to generate sufficient cash flow to make going public worthwhile. One dollar in four
is the average total cost paid to lawyers, accountants, and underwriters when an initial stock
issuance is under $1 million; $1 in $20 will go to cover these costs for issuances over $20 mil-
lion. In addition to initial costs involved with a stock offering, there are costs and obligations
associated with reporting and management in a publicly held firm. For firms with more than
$10 million in sales, going public can provide major advantages. It can allow the firm to raise
capital to develop new products, build plants, expand, grow, and market products and services
more effectively.
Keep Cash Offshore is Earned Offshore?

Many U.S. firms have most of the cash on their balance sheet in overseas accounts, since a
large percentage of their revenues are derived in foreign countries. Many such firms prefer
to leave their cash outside the United States because to use those funds to pay dividends or
purchase treasury stock, for example, would trigger a big U.S. corporate income tax payment.
During calendar year 2014, U.S.-based companies added $206 billion to their stockpiles of off-
shore profits, recorded as “Cash” on their balance sheet. Keeping earnings (cash) in banks in
low-tax countries has resulted in U.S. multinational companies having now accumulated $1.95
trillion in cash held outside the United States, up 11.8 percent from a year earlier, according
to securities filings from 307 corporations reviewed by Bloomberg News. Three U.S.-based
companies in particular—Microsoft, Apple, and IBM—added $37.5 billion, or 18.2 percent of
the total increase in 2014. So, when you see “Cash” on a firm’s balance sheet, that cash may
not be readily available, given the firm may prefer not to pay U.S. taxes on those “foreign”
earnings. The federal government is currently considering legislation to tax those foreign cash
accounts, such as pay a one-time tax of 10 percent and bring all that cash back to U.S. banks,
but nothing has been decided so far.
Issue Corporate Bonds for What Purpose?

Corporations normally issue bonds to raise capital for acquisitions, to refinance debt, and to
fund various strategies expected to yield long-term profits. However, increasingly, companies
are issuing bonds to buy back their own stock and to pay cash dividends to shareholders.
This practice has become a concern. For example, in the first half of 2015, at least ten junk-
rated or B-rated companies, including Sirius XM Holdings, Nathan’s Famous (Hotdogs), and
McGraw-Hill Education, issued more than $5.4 billion in bonds at least in part to finance pay-
ing out cash dividends and buying back company stock. For all of 2014, 30 companies issued
more than $14.8 billion of bonds for the same purpose. Companies in the S&P 500 in 2014
paid out a record $93.4 billion in dividends and repurchased $148 billion worth of stock—
partly (or largely) by issuing corporate bonds. Stock buybacks in 2015 are on pace to exceed
$600 billion, a huge increase. The CFO of Legg Mason says “debt analysts hate companies’
practice of using debt to fund buybacks.”9 A strategic decision facing corporations therefore, is
whether to issue bonds to raise capital to pacify shareholders with cash dividends and purchase
company stock, or to issue bonds to finance strategies carefully formulated to yield greater
revenues and profits.
Strategic Research and Development (R&D) Issues

Research and development (R&D) personnel can play an integral part in strategy implemen-
tation. These individuals are generally charged with developing new products and improving
old products effectively. R&D persons perform tasks that include transferring complex technol-
ogy, adjusting processes to local raw materials, adapting processes to local markets, and altering
products to particular tastes and specifications. Strategies such as product development, market
penetration, and related diversification require that new products be successfully developed and
that old products be significantly improved.
Technological improvements that affect consumer and industrial products and services
shorten product life cycles. Companies in virtually every industry rely on the development of new
products and services to fuel profitability and growth. Surveys suggest that the most successful
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Table 9-13 r&D involvement in Selected Strategy-implementation Situations
Strategy Being
Typeoforganization implemented r&D activity
Pharmaceutical company Product development Test the effects of a new drug on different
subgroups.
Boat manufacturer Related diversification Test the performance of various keel
designs under various conditions.
Plastic container manufacturer Market penetration Develop a biodegradable container.
Electronics company Market development Develop a telecommunications system in
a foreign country.
organizations use an R&D strategy that ties external opportunities to internal strengths and is
linked with objectives. Well-formulated R&D policies match market opportunities with internal
capabilities. Strategic R&D issues include the following:
1. To emphasize product or process improvements.
2. To stress basic or applied research.
3. To be a leader or follower in R&D.
4. To develop robotics or use manual-type processes.
5. To spend a high, average, or low amount of money on R&D.
6. To perform R&D within the firm or contract R&D to outside firms.
7. To use university researchers or private-sector researchers.
Research and development policy among rival firms often varies dramatically. Various
pharmaceutical firms, for example, have a philosophical disagreement over the merits of heavy
investment to discover new drugs, versus waiting for others to spend the money and then fol-
low up with similar products. Table 9-13 gives some examples of R&D activities that could
be required for successful implementation of various strategies. Many U.S. utility, energy, and
automotive companies have charged their R&D departments with determining how the firm can
effectively reduce its gas emissions.
Many firms wrestle with the decision to acquire R&D expertise from external firms or to
develop R&D expertise internally. The following guidelines can be used to help make this decision:
1. If the rate of technical progress is slow, the rate of market growth is moderate, and there are
significant barriers to possible new entrants, then in-house R&D is the preferred solution.
The reason is that R&D, if successful, will result in a temporary product or process
monopoly that the company can exploit.
2. If technology is changing rapidly and the market is growing slowly, then a major effort
in R&D may be risky because it may lead to the development of an ultimately obsolete
technology or one for which there is no market.
3. If technology is changing slowly but the market is growing quickly, there generally is not
enough time for in-house development. The prescribed approach is to obtain R&D expertise
on an exclusive or nonexclusive basis from an outside firm.
4. If both technical progress and market growth are fast, R&D expertise should be obtained
through acquisition of a well-established firm in the industry.10
There are at least three major R&D approaches for implementing strategies, as discussed here:
1. The first approach is to be the first firm to market new technological products. This is a
glamorous and exciting strategy but also a dangerous one. Firms such as 3M, Apple, and
General Electric have been successful with this method, but many other pioneering firms
have fallen, with rival firms seizing the initiative.
2. The second approach is to be an innovative imitator of successful products, thus minimiz-
ing the risks and costs of a “startup.” This approach entails allowing a pioneer firm to
develop the first version of the new product and to demonstrate that a market exists. Then,
laggard firms develop a similar product. This strategy requires excellent R&D and market-
ing personnel.
3. The third approach is to be a low-cost producer by mass-producing products similar to but

less expensive than products recently introduced. As a new product is accepted by customers,
price becomes increasingly important in the buying decision. Also, mass marketing replaces
personal selling as the dominant selling strategy. This approach requires substantial invest-
ment in plant and equipment, but fewer expenditures in R&D than the other two approaches.
Dell and Lenovo have utilized this third approach to gain competitive advantage.
R&D spending in China increased to about $285 billion in 2014, up 22 percent from 2012.
In contrast, R&D spending in the United States grew about 4 percent to $465 billion during the
same period. Analysts expect R&D spending in China to surpass U.S. R&D spending by 2022.11
For example, Shenzhen-based Huawei Technologies, the second-largest telecom-equipment firm
in the world behind Ericsson, spends almost $6 billion annually on R&D. Huawei’s R&D cen-
ter in Shanghai employs more than 10,000 engineers, many of whom have computer science
advanced degrees. Lenovo, another Chinese firm spending billions on R&D, just opened its huge
new hub for R&D in the central Chinese city of Wuhan. China’s Fuzhou Rockchip Electronics
and Allwinner Technology are rapidly trying to catch up in the mobile processor chips industry
with the U.S. Qualcomm and Nvidia Corp. Generally speaking, Chinese firms are “on a mission”
to eventually lead the world in technological advancements.
Perhaps the most current trend in R&D has been lifting the veil of secrecy whereby firms,
even major competitors, join forces to develop new products. Collaboration is on the rise as a
result of new competitive pressures, rising research costs, increasing regulatory issues, and accel-
erated product development schedules. Companies are also turning to consortia at universities for
their R&D needs; more than 600 research consortia are now in operation in the United States.
Strategic Management Information

Systems (MIS) Issues
Firms that gather, assimilate, and evaluate external and internal information most effectively are
gaining competitive advantages over other firms. Having an effective management information
system (MIS) may be the most important factor in differentiating successful from unsuccessful
firms. The process of strategic management is facilitated immensely in firms that have an effective
information system. Information collection, retrieval, and storage can be used to create competitive
advantages in ways such as cross-selling to customers, monitoring suppliers, keeping managers and
employees informed, coordinating activities among divisions, and managing funds. Like inventory
and human resources, information is now recognized as a valuable organizational asset that can be
controlled and managed. Firms strive to implement strategies using the best information.
A good information system can allow a firm to reduce costs. For example, online orders
from salespersons to production facilities can shorten materials ordering time and reduce inven-
tory costs. Direct communications between suppliers, manufacturers, marketers, and customers
can link together elements of the value chain as though they were one organization. Improved
quality and service often result from an improved information system.
Firms are increasingly concerned about computer hackers and are taking specific measures to
secure and safeguard corporate communications, files, orders, and business. Thousands of com-
panies today are plagued by computer hackers, who may include disgruntled employees, com-
petitors, sociopaths, thieves, spies, and hired agents. Computer vulnerability is a huge, strategic,
expensive headache. The first big hacking of 2015 happened at the health insurer Anthem Inc.,
exposing 80 million customers’ personal information. Two recent hackings occurred at Home
Depot, exposing 56 million customers’ information, and a month later, at J.P. Morgan Chase,
exposing 76 million customers’ information. Millions of companies are vulnerable to hackers.
In many firms, information technology is allowing employees to work at home or anywhere,
anytime. The mobile concept of work allows employees to work the traditional 9-to-5 workday
across any of the 24 time zones around the globe. Desktop videoconferencing allows employees
to “beam in” whenever needed. Any manager or employee who travels a lot away from the office
is a good candidate for working at home. Salespersons and consultants are good examples, but
any person whose job largely involves talking to others or handling information could operate at
home with the proper MIS.12
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Mobile Tracking of Employees

Mobile devices and inexpensive monitoring software now enable companies to know where
employees are, eavesdrop on their phone calls, and do other things such as know whether or
not a driver is wearing his/her seatbelt. More than 40 percent of businesses that send employ-
ees out on service calls today track the location and movement of those employees by their
company-owned/provided hand-held devices or vehicles.13 Some employees complain that vari-
ous monitoring practices are an invasion of privacy, but businesses contend that such measures
improve workplace safety and productivity, while also reducing theft and protecting against
discrimination.
No federal laws currently prevent businesses from using GPS devices to monitor employ-
ees, nor does federal law require businesses to disclose to employees whether they are using
such techniques. In fact, in the United States, only two states currently require businesses to
tell employees if their electronic communications—including e-mails, instant messages, texts,
impLicAtions for strAtegists

Figure 9-7 reveals that to gain and sustain competitive advan- important tools for strategists to make sure that monies devoted
tages, firms must attract customers and manage their finances bet- to advertising, promotion, publicity, and selling are wisely used.
ter than the best rival firms. Thus, being good is most usually not Marketing expenditures can be unnecessarily exorbitant if not based
good enough; being superior is often required. Perceptual mapping on clear product positioning analyses, target marketing, and cus-
and market segmentation, as described in this chapter, are vitally tomer analysis.
Establish A Clear
Vision & Mission
Evaluate & Monitor Formulate Strategies:

Results: Gain & Sustain Collect, Analyze, &
Take Corrective Competitive Prioritize Data Using
Actions; Adapt Advantages Matrices; Establish A
To Change Clear Strategic Plan
Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances
Figure 9-7
how to gain and Sustain Competitive Advantages
According to Figure 9-7, strategists must manage the firm’s matter and successful strategy implementation is dependent on
financial resources exceptionally well, better than strategists at rival superior “dollar management.” Its take dollars to gain and sustain
firms, especially using corporate valuation analysis, EPS/EBIT analy- competitive advantage, and strategists are entrusted with dollar
sis, and projected financial statement analysis. It is difficult to make management.
a dollar of profit; every dollar saved is like a dollar earned. Dollars
impLicAtions for stuDents

Regardless of your business major, be sure to capitalize on that spe- the dollars to be spent. Spend sufficient time on the nuts-and-bolts
cial knowledge in delivering your strategic-management case analy- of those analyses, so fellow students (and your professor) will be
sis. Whenever the opportunity arises in your oral or written project, assured that you did them correctly and reasonably. Too often, when
reveal how your firm can gain and sustain competitive advantage students rush at the end, it means their financial statements are
using your marketing, finance and accounting, or MIS recommenda- overly optimistic or incorrectly developed—so avoid that issue. The
tions. Continuously compare your firm to your firm’s rivals and draw marketing, finance and accounting, R&D, and MIS aspects of your
insights and conclusions so that your recommendations come across recommended strategies must ultimately work together to gain and
as well conceived. Never shy away from the EPS/EBIT or projected sustain competitive advantage for the firm—so point that out fre-
financial statement analyses, because your audience must be con- quently. By the way, the free student Excel template at www.strat-
vinced that what you recommend is financially feasible and worth egyclub.com can help immensely in performing EPS/EBIT analysis.
photos, and websites visited—are being monitored; the two states are Delaware and Connecticut.
MIS tracking technology today has permeated many industries and is utilized by thousands
of businesses ranging from landscaping firms to restaurants. And, in many of the businesses,
employees do not realize that their actions, location, and habits are being monitored whenever
they are on the job.
Mobile Apps for Customers

Companies are increasingly developing mobile apps for customers and using resultant data to
devise improved strategies for attracting customers. For example, hotels are rapidly developing
apps to help speed up check-in for travelers, including letting customers go straight to their rooms
by using their smartphone to unlock doors. In November 2014, Starwood Hotels and Resorts
became the first hotel to let guests unlock doors with their phones. Starwood Hotels requires the
phone to actually touch a pad on the outside of the door to open it—to make sure if there is a knock
on the door late at night and a guest goes to the peephole to see who is there, the guest’s phone
in his or her pocket will not accidently unlock the door. Some hotel chains, such as Marriott, are
holding off on using smartphones as keys until potential security issues can be resolved.
Hilton Worldwide is the second hotel chain, behind Starwood, to announce plans for mobile
room keys, which it plans to roll out at the end of 2015 at some U.S. properties. In all 4,000
Hilton properties worldwide, guests can also use maps on the Hilton app to select a specific room.
However, guests who like personal interaction at check-in, such as to ask about pool hours or
whatever, can still opt for a more leisurely check-in. Hotels eventually would like all travelers to
be comfortable using mobile apps on their iPad, smartphone, or smartwatch to request a wakeup
call, purchase suite upgrades, book spa treatments, request room service, and open their room door.
Chapter Summary
Successful strategy implementation depends on cooperation among all functional and divisional
managers in an organization. Marketing departments are commonly charged with implementing
strategies that require significant increases in sales revenues in new areas and with new or improved
products. Finance and accounting managers must devise effective strategy-implementation
approaches at low cost and minimum risk to that firm. Research and development managers have
to transfer complex technologies or develop new technologies to successfully implement strategies.
Information systems managers are being called on more and more to provide leadership and train-
ing for all individuals in the firm. The nature and role of marketing, finance/accounting, R&D, and
MIS activities, coupled with the management, production/operations, and human resource activities
described in Chapter 10, largely determine organizational success.
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ASSUrAnCe oF leArning exerCiSeS

Strategic Marketing Issues

exempLAry compAny showcAseD

Royal Dutch Shell Plc (RDS.A)

Chapter 2: Outside-USA Strategic Planning

Vision and Strategy

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Strategy Strategy

3. To use exclusive dealerships or multiple channels of distribution

Social Media Marketing

ers up-to-date, especially when travel conditions get complicated.

Table 9-1 The New Principles of Marketing

Table 9-2 The Marketing Mix Component Variables

Quality Distribution channels Advertising Level

Table 9-3 Alternative Bases for Market Segmentation

Age Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65+

Use Occasion Regular occasion, special occasion

Product Positioning and Perceptual Mapping

Oldsmobile Buick Pontiac

Low Quality High Quality

High number of options

Low geographical High geographical

Low number of options

Lennar NVR Inc.

Not green conscientious Green conscientious

Strategic Finance/Accounting Issues

EPS/EBIT Analysis: Acquire Needed Capital

Table 9-4 ePS/eBiT Analysis for the XyZ Company

$ Amount of Capital Needed $100 million Estimated $ cost of recommendations

$ EBIT 20,000,000 40,000,000 20,000,000 40,000,000 20,000,000 40,000,000

Table 9-5 ePS/eBiT Analysis for Boeing Company (M = in millions)

Amount Needed: $10,000 M

common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom

EBIT 1,000.00 2,500.00 5,000.00 1,000.00 2,500.00 5,000.00

70% Stock—30% Debt 70% Debt—30% Stock

Recession Normal Boom Recession Normal Boom

EBIT 1,000.00 2,500.00 5,000.00 1,000.00 2,500.00 5,000.00

1,000 2,500 5,000

Projected Financial Statements

PROJECTED INCOME STATEMENT

Projected Financial Statement Analysis for D. R. Horton

actual Projected Projected Projected

Sales $6,259.00 $10,607.94 $12,520.69 $14,776.03

Actualyear2013 Projectedyear2014 Projectedyear2015 Projectedyear2016

AcADemic reseArch cApsuLe 9-1

Corporate Valuation Methods

input Data amazon.com ross Stores Panera Bread

$ Shareholders’ Equity (SE) 9,746 2,007 699

1. SE – Goodwill – Intangibles 7,090 2,007 497

team revenue net income team Value

1. Texas Longhorns 109 82 139

IPOs, Cash Management, and Corporate Bonds

Keep Cash Offshore is Earned Offshore?

Issue Corporate Bonds for What Purpose?

Strategic Research and Development (R&D) Issues

Table 9-13 r&D involvement in Selected Strategy-implementation Situations

3. The third approach is to be a low-cost producer by mass-producing products similar to but

Strategic Management Information

Mobile Tracking of Employees

impLicAtions for strAtegists

Evaluate & Monitor Formulate Strategies:

impLicAtions for stuDents

Actualyear2013 Projectedyear2014 Projectedyear2015 Projectedyear2016