J411 // MORE ON SUCCESS MEASURES

SOME KEY IDEAS

Your 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 MEAN

Success
Measure
RETURN ON
SALES (ROS)
RETURN ON
ASSETS (ROA)
RETURN ON
EQUITY
(ROE)

Definition
Net Income / Sales
Net Income / Assets

Net Income / Equity

TOTAL ASSET
TURNOVER
(TAT)

Sales / Assets

STOCK PRICE
(P)

Market Value / Number of

Shares Outstanding

CUMULATIVE
PROFIT (CUM)

Sum of Net Income for All

Years

MARKET SHARE
(SHARE)

Your Sales / Industry Sales

Roughly What is Tells You

Your success at squeezing Profit out of
Revenue; i.e. Operating Efficiency
Your success at squeezing Profit out of
Investment; i.e. Asset Management
The 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
Your use of investments to capture Market
Share by gaining customers and Sales
The combination of the markets
perception of your companys value and
the funding and distribution policies of
your company
Your consistent ability to generate a
magnitude of profit relative to that of your
competitors
The size of your revenue and customer
base relative to all other competitors in
the marketplace

MARKET
CAPITALIZATION
(MARKET CAP)

Stock Price x Shares

Outstanding

What your company is worth in the

market after all debts have liquidated

A KEY DISTINCTION
Note 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:

SHAR
E
CUM

SIZ
E

MARK
ET
CAP

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:

RO
A
RO
S

RO
E TAT
RATI
O

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

RELIANT
UPON
FINANCING
DECISONS

ROE
P
MARKET CAP

NOT RELIANT ROA

UPON
FINANCING TAT
DECISIONS SHARE
Note that the above leaves out CUM and ROS, which are somewhat reliant upon
FINANCING DECISIONS.
CHOOSING THE RIGHT SUCCESS MEASURES
Here 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!