Implementing strategies: marketing, finance/accounting, R&D, and mis issues




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IMPLEMENTING STRATEGIES: MARKETING, FINANCE/ACCOUNTING, R&D, AND MIS ISSUES


OUTLINE


¨

The Nature of Strategy Implementation

¨

Marketing Issues

¨

Finance/Accounting Issues

¨

Research and Development (R&D) Issues

¨

Management Information Systems (MIS) Issues



OBJECTIVES


After studying this paper, you should be able to do the following:


1.

Explain market segmentation and product positioning as strategy-implementation tools.

2.

Discuss procedures for determining the worth of a business.

3.

Explain why pro forma financial analysis is a central strategy-implementation tool.

4.

Explain how to evaluate the attractiveness of debt versus stock as a source of capital to implement strategies.

5.

Discuss the nature and role of research and development in strategy implementation.

6.

Explain how management information systems can determine the success of strategy-implementation efforts.



^ PAPER OVERVIEW


Strategies have no chance of being implemented successfully when organizations do not market goods and services well, when firms cannot raise needed working capital, when firms produce technologically inferior products, or when firms have a weak information system. This Paper, therefore, examines marketing, finance/accounting, R&D, and 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 and/or stock should be used as a source of capital, developing pro forma 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/accounting, R&D, and management information systems activities.


^ EXTENDED PAPER OUTLINE


I. THE NATURE OF STRATEGY IMPLEMENTATION


A. Implementation Is a Challenge


1. Less than 10 percent of strategies formulated are successfully implemented. There are many reasons for this low success rate, including failing to segment markets appropriately, paying too much for a new acquisition, falling behind competitors in R&D, and not recognizing the benefit of computers in managing information.


  1. Strategy implementation directly affects the lives of plant managers, division managers, department managers, sales managers, project managers, personnel managers, staff managers, supervisors, and all employees.


Tip: Some consulting firms offer courses and training sessions to help firms implement their strategies effectively. An example is Strategy Implementation Inc. at {http://www.strategyimplementation.com/index.html}.


  1. ^ MARKETING ISSUES


VTN (Visit the Net): www.cl.uh.edu/bpa/hadm/HADM_5731/ppt_presentations/3mktpln/index.htm gives an excellent presentation on marketing issues related to strategic management.


A. Marketing decisions may require policies:


  1. To use exclusive dealerships or multiple channels of distribution.

  2. To use heavy, light, or no TV advertising.

  3. To limit (or not) the share of business done with a single customer.

  4. To be a price leader or follower.

  5. To offer a complete or limited warranty.

  6. To reward salespeople based on straight salary, straight commission, or a combination salary/commission.

  7. To advertise online or not.

  8. To protect consumer privacy/designate web policies.




  1. A marketing issue of increasing concern to consumers today is the extent to which companies can track individuals’ movements on the Internet and are even be able to identify the individual by name and e-mail address.


b. Recently completed research reveals that web advertising dollars spent by businesses will increase to 27 percent of total advertising expenditures by 2002, up from 17 percent in 1999.


^ VTN (Visit the Net): www.checkmateplan.com provides the strategic planning software CheckMATE for twenty-three different industries.


VTN (Visit the Net): www.musc.edu/plan gives the strategic plan for the Medical University of South Carolina.


B. Market Segmentation


1. Market segmentation is widely used in implementing strategies, especially for small and specialized firms. Market segmentation can be defined as the subdividing of a market into distinct subsets of customers according to needs and buying habits.


2. Market-segmentation is an important variable in strategy implementation for at least three major reasons.


a. First, strategies such as market development, product development, market penetration, and diversification require increased sales through new markets and products.


b. Second, market segmentation allows a firm to operate with limited resources because mass production, mass distribution, and mass advertising are not required.


c. Finally, market-segmentation decisions directly affect marketing mix variables: product, place, promotion, and price,.


  1. Geographic and demographic bases for segmenting markets are the most commonly employed.


E-Commerce Perspective: Male Versus Female Internet Usage Globally. Males dominate the Internet in every country except the United States.


C. Product Positioning


1. After segmenting markets 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.


2. Identifying target customers on whom to focus marketing efforts sets the stage for deciding how to meet the needs and wants of particular consumer groups. Product positioning is widely used for this purpose.


  1. Positioning entails developing schematic representations that reflect how your products or services compare to competitors on dimensions most important to success in the industry.


VTN (Visit the Net): www.nara.gov/nara/vision/naraplan.html provides the strategic plan for the National Archives and Records Administration including a section on “How Do We Want to Get There?”

  1. Steps in product positioning:




  1. Select key criteria that effectively differentiates 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 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 appropriately.




  1. Some rules of thumb for using product positioning as a strategy-implementation tool are the following:


a. Look for the hole or vacant niche.

b. Don’t squat between segments.

c. Don’t serve two segments with the same strategy.

d. Don’t position yourself in the middle of the map.


  1. 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. Firms should not create expectations that exceed the service the firm can or will deliver.



^ III. FINANCE/ACCOUNTING ISSUES


A. Finance and Accounting Topics Central to Strategy Implementation


1. Some examples of decisions that may require finance/accounting policies:


a. To raise capital with short-term debt, long-term debt, preferred stock, or common stock.

b. To lease or buy fixed assets.

c. To determine an appropriate dividend payout ratio.

d. To use LIFO, FIFO, or a market-value accounting approach.

e. To establish a certain percentage discount on accounts within a specified period of time.

f. To determine the amount of cash that should be kept on hand.


B. Acquiring Capital to Implement Strategies


1. Successful strategy implementation often requires additional capital.


2. An 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 debt and stock is the best alternative for raising capital to implement strategies.


3. EPS/EBIT analysis is a valuable tool for making capital financing decisions needed to implement strategies, but several considerations should be made whenever using this technique.


a. First, profit levels may be higher for stock or debt alternatives when EPS levels are lower.


b. Another consideration when using EPS/EBIT analysis is flexibility. As an organization’s capital structure changes, so does its flexibility for considering future capital needs.


c. Control is also a concern. When additional stock is issued to finance strategy implementation, ownership and control of the enterprise are diluted.


  1. When using EPS/SBIT analysis, timing in relation to movements of stock prices, interest rates, and bond prices becomes important.



C. Pro Forma Financial Statements


1. Pro forma (projected) financial statement analysis is a central strategy-implementation technique because it allows an organization to examine the expected results of various implementation decisions.


2. For example, a 2004 pro forma income statement and balance sheet for the Litten Company


  1. The six steps required to perform a pro forma financial analysis:




  1. Prepare the pro forma income statement before the balance sheet. Start by forecasting sales as accurately as possible.

  2. Use the percentage of sales method to project the 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 then use that same percentage to calculate CGS in the future year. 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 and add the remaining net income to Retained Earnings. Reflect the Retained Earnings total on both the income statement and balance sheet because this item is the key link between the two projected statements.

  5. Project the balance sheet items, beginning with retained earnings and then forecasting stockholder’s equity, long-term liabilities, current liabilities, total liabilities, total assets, fixed assets, and current assets (in that order). 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.

  6. List comments on the projected statements. Any time a significant change is made in an item from a prior year to the projected year, a remark should be provided.


D. Financial Budgets


1. A financial budget is a document that details how funds will be obtained and spent for a specified period of time. Annual budgets are the most common, although the period of time for a budget can range from one day to more than 10 years.


2. There are almost as many different types of financial budgets as there are types of organizations. Some common types of budgets include cash budgets, operating budgets, sales budgets, and fixed budgets.


3. Perhaps the most common type of financial budget is the cash budget.


E. Evaluating the Worth of a Business


1. Evaluating the worth of a business is central to strategy implementation because integrative, intensive, and diversification strategies are often implemented by acquiring other firms.


2. All the various methods for determining a business’s worth can be grouped into three main approaches: what a firm owns, what a firm earns, or what a firm will bring in the market. But it is important to realize that valuation is not an exact science. The valuation of a firm’s worth is based on financial facts, but common sense and intuitive judgment must enter into the process.


a. The first approach in evaluating the worth of a business is determining its net worth or stockholders’ equity.


b. The second approach to measuring the value of a firm 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.


c. The third approach is to let the market determine a business’s worth. First, base the firm’s worth on the selling price of a similar company. Second, calculate a price-earnings ratio. To use this method, divide the market price of the firm’s common stock by the annual earnings per share and multiply this number by the firm’s average net income for the past five years. The third approach can be called the outstanding share method. To use this method, simply multiply the number of shares outstanding by the market price per share and add a premium.


F. Deciding Whether to Go Public


1. Going public means selling off a percentage of your company to others in order to raise capital; consequently, it dilutes the owners’ control of the firm.


2. Before going public, a firm must have quality management with a proven track record for achieving quality earnings and a positive cash flow.


Global Perspective: September 11, 2001, Events Usher in Corporate Retreat from Global Operations. Despite cut-backs prior to September 11, 2001, companies have significantly cut foreign direct investment. China appears to be one exception.


^ IV. RESEARCH AND DEVELOPMENT (R&D) ISSUES


A. R&D


1. R&D personnel can play an integral part in strategy implementation.


2. Surveys suggest that the most successful organizations use an R&D strategy that ties external opportunities to internal strengths and is linked with objectives.


3. R&D policies can enhance strategy-implementation efforts to:


a. Emphasize product or process improvements.

b. Stress basic or applied research.

c. Be leaders or followers in R&D.

d. Develop robotics or manual-type processes.

e. Spend a high, average, or low amount of money on R&D.

f. Perform R&D within the firm or contract R&D to outside firms.

g. Use university researchers or private sector researchers.


B. R&D Approaches for Implementing Strategy


1. There are at least three major R&D approaches for implementing strategies.


a. The first strategy is to be the first firm to market new technological products.


b. The second R&D approach is to be an innovative imitator of successful products, thus minimizing the risks and costs of start-up.


c. A third R&D strategy is to be a low-cost producer by mass-producing products similar to, but less expensive than products recently introduced.


2. R&D activities among American firms need to be more closely aligned to business objectives.


3. Perhaps the most current trend in R&D management has been lifting the veil of secrecy whereby firms, even major competitors, are joining forces to develop new products.


^ V. MANAGEMENT INFORMATION SYSTEMS (MIS) ISSUES


A. MIS


1. Although no firm would use the same marketing or management approach for 20 years, many companies have 20-year-old computer information systems that threaten their very existence.


2. Firms that gather, assimilate, and evaluate external and internal information most effectively are gaining competitive advantages over other firms.


3. 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.


Tip: CIO (Chief Information Officer) Online is an award-winning website that contains a vast array of information pertaining to the role of computers and information technology in the workplace. The website, which includes an on-line magazine, is available at {http://www.cio.com/CIO/}.

^ ISSUES FOR REVIEW AND DISCUSSION


  1. Suppose your company has just acquired a firm that produces battery-operated lawn mowers, and strategists want to implement a market-penetration strategy. How would you segment the market for this product? Justify your answer.


Answer: Several segmentation bases can be used in this case. First, segmentation by geographic location may be useful. Battery-operated lawn mowers may not be appropriate for large yards. Therefore, segmentation based on whether families live in cities or suburbs may be useful. Second, families who are concerned about the environment may be more likely to purchase a battery-operated lawn mower. In this case, psychographic segmentation will be useful. In addition, because it is an innovative product, families with a higher socioeconomic status may be more likely to purchase a battery-operated lawn mower. Furthermore, men tend to make decisions about lawn equipment. In this case, demographic segmentation will be useful. Often times, segmentation is accomplished using several bases.


  1. ^ Explain how you would estimate the total worth of a business.


Answer: There are three approaches are described in the paper: 1) what a firm owns, 2) what a firm earns, or 3) what a firm will bring in the market.


The first approach in evaluating the worth of a business is determining its net worth or stockholders’ equity.


The second approach to measuring the value of a firm 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.


The third approach is to let the market determine a business’s worth. First, base the firm’s worth on the selling price of a similar company. Second, calculate a price-earnings ratio. To use this method, divide the market price of the firm’s common stock by the annual earnings per share and multiply this number by the firm’s average net income for the past five years. The third approach can be called the outstanding share method. To use this method, simply multiply the number of shares outstanding by the market price per share and add a premium.


A recommended procedure is to determine the firm’s value using all three approaches. Then decide which amount is most reasonable or use an average of the three computed amounts.


  1. D
    Variety of items on menu: High

    Geared to kids

    Geared to adults

    1

    2

    3

    4

    5

    6
    iagram and label clearly a product-positioning map that includes six fast-food restaurant chains.



Answer: The answer to the question will vary by companies chosen. An example is provided.


Fast Food Restaurant Chains:


1. Wendy’s

2. McDonald’s

3. Burger King

4. Taco Bell

5. Hardee’s

6. KFC


  1. Explain why EPS/EBIT analysis is a central strategy-implementation technique.


Answer: EPS/EBIT analysis is a key strategy-implementation technique because additional capital is often needed to implement strategies. EPS/EBIT analysis provides information regarding whether (1) stock should be issued, (2) funds should be borrowed, or (3) a combination of stock and debt is the best method to raise the capital.


  1. ^ How would the R&D role in strategy implementation differ in small versus large organizations?


Answer: The R&D role in strategy implementation would depend more on the type of industry than the size of the firm. Some firms do research and development solely as their business.


  1. ^ Discuss the limitations of EPS/EBIT analysis.


Answer: An EPS/EBIT analysis is the most widely used technique for determining whether debt, stock, or a combination of debt and stock is the best alternative for raising capital to implement strategies.


Several considerations should be made whenever using this technique.


Profit levels may be higher for stock or debt alternatives when EPS levels are lower.


Control is also a concern. When additional stock is issued to finance strategy implementation, ownership and control of the enterprise are diluted. When using EPS/SBIT analysis, timing in relation to movements of stock prices, interest rates, and bond prices becomes important.


  1. ^ Explain how marketing, finance/accounting, R&D, and computer information systems managers involvement in strategy formulation can enhance strategy implementation.


Answer: Marketing, finance/accounting, R&D, and computer information systems managers play a vital role in implementing strategies, so their active involvement in formulating strategies is needed to gain support and commitment for actions to come. Perhaps, more importantly, their expertise should weigh heavily in prioritizing internal strengths/weaknesses, external opportunities/threats, and in generating and selecting from among alternative strategies.


  1. Consider the following statement: “Retained earnings on the balance sheet are not monies available to finance strategy implementation.” Is it true or false? Explain.


Answer: This is a true statement. Retained earnings on the balance sheet represent historical earnings that have been reinvested in the firm in the form of plants, equipment, inventory, and the like.


  1. ^ Explain why pro forma financial statement analysis is considered both a strategy-formulation and a strategy-implementation tool.


Answer: Pro forma analysis is a strategy-formulation tool in the sense that it enables the financial impact of alternative strategies to be forecasted and scrutinized. This information can be instrumental in selecting from among feasible alternative strategies. It allows various approaches for implementing strategies to be scrutinized.


  1. Describe some marketing, finance/accounting, R&D, and management information systems activities that a small restaurant chain might undertake to expand into a neighboring state.


Answer: Marketing— Assess the consumer demand for that type of establishment. Determine the competitive environment. Obtain information regarding advertising rates for major newspapers and television stations in the neighboring state; identify suppliers in the neighboring state; and undertake site selection analyses for potential locations in the neighboring state.


Finance/Accounting—Obtain information regarding potential creditors in the neighboring state; and identify different tax, legal, and accounting practices in the neighboring state.


Research and Development—Obtain information regarding preferences for different types of food in the neighboring state.


Management Information Systems—Purchase a computer networking system whereby inventory, accounts receivable, accounts payable, and similar information can be entered immediately and easily. Integrate system with existing one.


What effect is e-commerce having on firms’ efforts to segment markets?


Answer: E-commerce is making it possible for firms to further segment their markets at low cost due to the inherent cost advantages of selling via the Internet. In addition, the Internet makes market segmentation easier today because consumers naturally form “communities” on the Web as explained in the feature in the paper titled “Does the Internet Make Market Segmentation Easier?”

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