J411 // MORE ON SUCCESS MEASURES

SOME KEY IDEASYour score in the simulation depends, in part, on how effective your company is at meeting its self-chosen measures of success and achievement. All companies are playing by the same accounting rules and within the same competitive environment; thus quantitative measures, while not perfect, are a good indicator of companys ability to meet it main goal of creating value. In the sensor industry there are 8 success measures; you must choose at least 3 (you may choose up to 8 if you wish) and you must assign a weight to each measure. The weights must add up to 100%. The key: choose a combination of success measures that mesh with your strategy. That is to say, select measures that will be maximized if you succeed in achieving your stated strategic objectives.

SUCCESS MEASURES: WHAT THEY MEANSuccess MeasureDefinitionRoughly What is Tells You

RETURN ON SALES (ROS)Net Income / SalesYour success at squeezing Profit out of Revenue; i.e. Operating Efficiency

RETURN ON ASSETS (ROA)Net Income / AssetsYour success at squeezing Profit out of Investment; i.e. Asset Management

RETURN ON EQUITY(ROE)Net Income / EquityThe size of your Profit compared to the funds your owners have invested in the business. Combines the effect of ROA with use of borrowed funds to create wealth

TOTAL ASSET TURNOVER (TAT)Sales / AssetsYour use of investments to capture Market Share by gaining customers and Sales

STOCK PRICE (P)Market Value / Number of Shares OutstandingThe combination of the markets perception of your companys value and the funding and distribution policies of your company

CUMULATIVE PROFIT (CUM)Sum of Net Income for All YearsYour consistent ability to generate a magnitude of profit relative to that of your competitors

MARKET SHARE(SHARE)Your Sales / Industry SalesThe size of your revenue and customer base relative to all other competitors in the marketplace

MARKET CAPITALIZATION(MARKET CAP) Stock Price x Shares OutstandingWhat your company is worth in the market after all debts have liquidated

A KEY DISTINCTIONNote in the above list some of the measures are ABSOLUTE others are RELATIVE. In other words, some are measured strictly on the MAGNITUDE of a QUANTITY relative to the QUANTITY produced by other companies. These measures depend upon SIZE relative to other companies:

Other measures are not dependent upon the SIZE of the company; they measure a RATIO and thus are RELATIVE measures in which size is factored out:

Finally, some rely directly upon FINANCING DECISIONS (for example, the mix of debt and equity you use), whereas others do not at all:

Note that the above leaves out CUM and ROS, which are somewhat reliant upon FINANCING DECISIONS. CHOOSING THE RIGHT SUCCESS MEASURESHere are a few things to think about: 1. First, note that, generally speaking, BROAD Strategies will produce a company that has LARGER SALES and PROFITS than a company pursuing a NICHE strategy. This should tell you something about choosing (or, perhaps, eliminating!) one or more success measures. Ask yourself: is size important to our company strategy? 2. DIFFERENTIATORS use PREMIUM PRICING to attain margin and spend heavily on administrative costs like R&D and Marketing. COST LEADERS rely upon VOLUME and heavy investments in PLANT & EQUIPMENT to drive down cost to attain margin. Look at the Success Measures again, then think about your strategy and ask yourself: whats more important to our company, turnover or margin? 3. Finally, how do your choices about the firms CAPITAL STRUCTURE (the mix of DEBT & EQUITY) impact a given success measure? For example, what impact does the use of DEBT to finance have on STOCK PRICE, MARKET CAPITALIZATION or ROE? And is there a preferred financing mix that works best with your chosen strategy? Take that into account as you make your choices about financing your plant & equipment.

FROM THERE ITS YOUR CALL!