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S I M U L A T I O N
M A N A G E M E N T
Performance Mgt & Assessment
Performance Mgt & Assessment
S I M U L A T I O N
M A N A G E M E N T The Big Picture
•CCompanyompany
•CConsumersonsumers
•CCompetitorsompetitors
•CConditionsonditions• PESTPEST
GrowthGrowth &&
Competitive Competitive StrategiesStrategies
Finance
HR
Production
R&D
Marketing
FunctionFunctional al IntegratiIntegrationon
Profits Mrkt Share ROA ROS ROE Asset T/O Stock Mrkt Cap
Situation/SWOT Situation/SWOT AnalysisAnalysis
Strategic Strategic PlanningPlanning
Functional Functional IntegrationIntegration
Performance Performance AssessmentAssessment
S I M U L A T I O N
M A N A G E M E N T
• Cumulative Profits• Ending Market Share• ROS• Asset Turnover • ROA• ROE• Ending Stock Price• Market Cap.
Success Measures
Performance Measures- Defined Performance Measures-Dynamics
NET PROFITS $$NET PROFITS $$
•Year 1 $6 million
•Year 2 $8 million
•Year 3 $10 million
•Year 4 $12 million
•Year 5 $16 million
•Year 6 $21 million
•Year 7 $27 million
•Year 8 $35 million
NET PROFITS $$NET PROFITS $$
•Year 1 $6 million
•Year 2 $8 million
•Year 3 $10 million
•Year 4 $12 million
•Year 5 $16 million
•Year 6 $21 million
•Year 7 $27 million
•Year 8 $35 million
CUM PROFITCUM PROFIT Typical Range: $20
to $100 M
CUM PROFITCUM PROFIT Typical Range: $20
to $100 M
S I M U L A T I O N
M A N A G E M E N T It is important to look at the means used to achieve
outcomes …. not just focus on the outcomes themselves
• To only focus on traditional financial accounting measures (such as
ROI, ROE, EPS) …..does not give mgt the whole picture….
S I M U L A T I O N
M A N A G E M E N TPerformance needs to be judged thru mix of both financial & non-financial measures….
As - nonnon--financialfinancial measures are driversdrivers of financial outcomes
Performance needs to be judged thru mix of both financial & non-financial measures….
As - nonnon--financialfinancial measures are driversdrivers of financial outcomes
Will Make $$$ - if sell product
Will sell product if consumer wants, knows about , can get, &
LIKES product
To achieve “above’ everyone must effectively do their job
To effectively do job must know what to do
S I M U L A T I O N
M A N A G E M E N T
Strategic Thinking- the ten big ideas - the ten big ideas Strategic Thinking- the ten big ideas - the ten big ideas
9 9. Metrics that matter
Balanced score card- a system that attempts to balance financial performance w/ consideration of customer's perspective, learning & growth perspective, & internal business process perspective
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
Balanced ScorecardPuts Mission- Vision-
Values & Strategy At Top
of Assessment System
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
What is measured gets noticed
What is noticed gets acted on
What is acted on
gets improved
Today …
~ 70% of Fortune 1,000 companies utilize a Balanced Balanced ScorecardScorecard to help manage performance—
because…..
Today …
~ 70% of Fortune 1,000 companies utilize a Balanced Balanced ScorecardScorecard to help manage performance—
because…..
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
S I M U L A T I O N
M A N A G E M E N T
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S I M U L A T I O N
M A N A G E M E N T
For Each Perspective:
FinancialObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
Customer… Business processes… LearningObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
FinancialObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
Customer… Business processes… LearningObjectives Measures Targets Initiatives Responsibility Budget1.2.3.
S I M U L A T I O N
M A N A G E M E N T
Basic Scorecard Terminology(Southwest Airlines Example)
Objectives
• Fast ground turnaround
Objectives:What the
strategy is trying to achieve
Targets
• 30 Minutes• 90%
TargetsThe level of
performance or rate of
improvement needed
• Cycle time optimization
InitiativesKey action programs
required to achieve targets
InitiativesMeasures
• On Ground Time
• On-Time Departure
MeasuresHow
performance is measured
against objectives
Strategic Theme: Operating Efficiency
Profits and RONAFinancial
Learning
Ground crew alignment
Lowest prices
Fewer planes
Customer
Internal
Fast ground turnaround
Strategy Map
On-time Service
Attract & Retain More Customers
Grow Revenues
S I M U L A T I O N
M A N A G E M E N T
• % Ground crew trained
• % Ground crew stockholders
A Complete Scorecard is a Program for Action
Objectives Measures
• # Customers• FAA On Time
Arrival Rating• Market Survey
• On Ground Time
• On-Time Departure
Strategic Theme:Operating Efficiency
Initiatives
• Cycle time optimization
• Ground crew training
• ESOP
•Customer loyalty program• Quality management
Targets
•30% +/yr
•20%
•5% • 12% growth• Ranked #1• Ranked #1
• 30 Minutes• 90%
• yr. 1 70%yr. 3 90%yr. 5 100%
• Profitability
• Grow Revenues
• Fewer planes
• More Customers
• Flight is on -time
• Lowest prices
• Fast ground turnaround
• Ground crew alignment
Strategic Theme:
Operations ExcellenceProfits and
RONAFinancial
Learning
Ground crew alignment
Fewer planes
Customer
Internal
Fast ground turnaround
Attract & Retain More Customers
Grow Revenues
Lowest prices
On-time Service
S I M U L A T I O N
M A N A G E M E N T
Capstone's Balanced Scorecard Manager's Guide: Balanced Scorecard
Capstone's Balanced Scorecard Manager's Guide: Balanced Scorecard
S I M U L A T I O N
M A N A G E M E N T Additional Tools/Techniques for Managing & Assessing Your Performance:
1.Accurate Sales Forecasting
2.Marketing-Evaluation Checklist
3.Round Analysis & Analyst Report
•Tutorials: Forecasting & Developing a Unit Sales Forecast• Guidelines Re: Sales Forecasting
You’ll be left w/less revenue than
anticipated PLUS production &
inventory carrying costs that must be
paid..
IF You Produce a crappy product &/or Your Competitors produce a
better product &/or You produce too much product
Then
You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs....
IF
Then
Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment
•Maintain Adequate working
capital & cash reserves
In order to:
In order to:
•Have realistic/ accurate sales forecasts
•Avoid “Big AL” & a Liquidity Crisis-
Need to:Need to:
Sales Forecasting
1. Quick N’ Dirty
2. Consumer Pref’s
3. Best / Worst Case
Estimate Your FAIR SHARE
Answer 2 Q’s:
1.What will average product sell in this segment next round?
2.To what degree is your product above or below average- on consumers'’ buying criteria?
1
2
3
4
Fair Share - Sales Forecast Fair Share - Sales Forecast Determine industry demand next round. Take last year’s total demand -- multiply by (1 + Growth
Rate).
Estimate # products that will be in segment. Divide total industry demand by the number of products. Your product’s demand will typically be between one half and twice the average product’s demand.
Compare your product with competing products.
Factors include design, awareness, accessibility, and planned mid-year revisions.
Examine industry capacities, and the capacities of the “best” products.Can products meet the demand they generate?
#2 Forecast by Consumer Pref’s
Forecast off Customer Survey Scores
For Example-in Traditional segment everyone begins w/ 13% market share
Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.)
Initial round demand can vary +/- 25%
Later rounds best case/worst case vary ~~~~ 10-15%
After 1st Year/Round-Can see demand spread
Total=223
R#1 Dec Survey score
% of 223 Predicted sales R#2
Actual Sales R#2
Baker 43 19% 1827 units 1758 units
Able 40 18% 1731 1598
Fast 36 16% 1339 1560
Eat 36 16% 1539 1492
Cake 42 19% 1827 1339
Daze 26 12% 1154 1045
R#1 Survey score
43
40
36
36
42
26
R#2
12
CASE
CASE
Worst Case:BIG INVENTORY/
little cash Best case:
Lots of CASH / little Inventory
•Enter WORSE case- in “your sales forecast” on marketing spreadsheet
•Enter BEST case- in “production schedule” on production spreadsheet
•Spread show up as inventory on proforma BALANCE SHEET
$0.00
In WORSE CASE: You have lots of Inventory
& little or no Cash.
In WORSE CASE: You have lots of Inventory
& little or no Cash.
$0.00
In WORSE CASE: You have lots of Inventory
& thus need to drive your cash position to the black…
In WORSE CASE: You have lots of Inventory
& thus need to drive your cash position to the black…
If you are cash poor, issue Stock /Bonds - or consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.
If you are cash poor, issue Stock /Bonds - or consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.
To adjust your cash position --
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest
or depreciation) already covered Thus, any additional sales would
only incur variable (production) costs
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest
or depreciation) already covered Thus, any additional sales would
only incur variable (production) costs
For example, 1. If your annual sales
were $120M, in one month you’d sell $10M.
2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.
3. This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.
Worst Case:BIG INVENTORY/ no
cash– risk seeing Big Al Best case:
Lots of CASH / no Inventory -you risk stockout
How Big is your Slinky?
Determining A Reasonable Spread
Want to avoid generating an ultra Conservative Worst case scenario …matched w/ an ultra Optimistic Best case scenario
Should be able to sell excess inventory in ~betw. 6 & 16 weeks Any less -- risk a visit from Big Al Any more –- would require major screw-up from
competition
Take your total inventory costs
$23,900M
Take your total inventory costs
$23,900M
How to measure your slinky slack--
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid
stockout
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid
stockout
Additional Tools/Techniques for Managing & Assessing Your Performance:
1.Accurate Sales Forecasting
2.Marketing-Evaluation Checklist
3.Round Analysis & Analyst Report
S I M U L A T I O N
M A N A G E M E N T
Evaluating Product Success
S I M U L A T I O N
M A N A G E M E N T
Simulation Scoring System
S I M U L A T I O N
M A N A G E M E N T
Round analysis-example
S I M U L A T I O N
M A N A G E M E N T
The Relationship between Your
Strategy & Success Measures
One more thing to think about:
Diff Strategies Play into Different Success Measures
Profit MS SP & MC ROE
pf/e
ROS
pf/s
AT
s/a
ROA
pf/a
BCL
L=2-3X X X X
Cost- Niche & PLC X X X
B-Diff L=1.5-2
X X X X
Niche-PLCDiff
X X X X
Cost Strategy = higher leverage/more
investment/ more assets/more debt/ le
ss
equity
Cost Strategy = higher leverage/more
investment/ more assets/more debt/ le
ss
equity
Differentiation Strategy =lower
leverage/less investment/ less assets
Differentiation Strategy =lower
leverage/less investment/ less assets All Segments= more sales & thus enable
greater Cum. profit & overall market share
All Segments= more sales & thus enable greater Cum. profit & overall market share
Focused
Strategies should
operate more
effectively &
have overall less
sales
Focused
Strategies should
operate more
effectively &
have overall less
sales
M A R K E T I N G
M A N A G E M E N T
• Select Success Measures & Determine Relative Weightings
• Need to enter weightings – prior to round-1
• Select Success Measures & Determine Relative Weightings
• Need to enter weightings – prior to round-1
1) Draft- Financial Objectives & Tactics
2) Draft- Mission & Vision Statements
This week’s assignment:
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