University of Melbourne

Faculty: Economics and Commerce

Department: Accounting and business information system

Undergraduade

3. Subject title and code: 306-302 Enterprise Performance

Management

Assignment: 1. Musimundo (Seminar 7)

Semester: 1. 2006\

Syndicate group: F.13

Date: 22.03.2006
Table of contents

Musimundo (Seminar 7)__________________________________________________ 3

Answer 1. ___________________________________________________________ 3

Answer 2. ___________________________________________________________ 3

Answer 3. ___________________________________________________________ 4

Answer 4. ___________________________________________________________ 4

Answer 5. ___________________________________________________________ 5

Answer 6. ___________________________________________________________ 5

Answer 7. ___________________________________________________________ 5

Answer 8. ___________________________________________________________ 6

Answer 9. ___________________________________________________________ 7

Answer 10. __________________________________________________________ 7

Musimundo (Seminar 7)

Answer 1.

A budget culture indicates how a business deals with its budget. This is manly related to

the importance which a company sees in the budgeting process and its realisation. In the

case of Musimundo there was no emphasis on the budget plan at the years before. That’s

why the people were not used to this process and its benefit. This ignorance is meant by

“Musimundo did not have a budget culture”

Living by the budget indicates a deep-rooted budget culture. This culture is very much

focused on meeting the planed budget targets and the results are measured by this

achievement.

Budgeting for an other retail business like a supermarket is in its main features pretty much

the same. There are the same categories of cost drivers and revenues. Nevertheless the

budgeting for a supermarket can differ because of its brighter product segment and the

product positioning. Supermarkets could as well have some sale brake-ins but more likely

this is compensated by an other product range, whether entertainment products are more on

the luxury position which is more influenced by general market movements.

In the special case of Musimundo this different should not be such essential according to

page 4 “Musimundo’s business was not fundamentally different from any other retail

operation”

Answer 2.

One of the main difficulties was the lack of budgeting experience it self so this approach

was very new to all involved people.

As well Musimundo had, because of the inconsistent position of Argentine economic

situation, no accurate dates on which they could relate their forecast for 2004.
Furthermore there were internal interferences because of conflicts of interests between the

store managers and the upper management regarding the incentive.

Answer 3.

Bottom-up budgeting is when the budgeting process is started with the forecasts from the

lower levels of management and then step by step built up until the whole company is

covered.

The first budgeting step where the store managers forecasted their sale numbers and their

expenses is a bottom-up budgeting example.

In top-down budgeting the top management set the budget according to the overall strategy.

This budget is then divided in smaller categories for each level and every division down to

the lowest managing level.

Even though Musimundo started with a bottom-up budgeting process, the final budgeting

is based on a top-down decision. This is especially shown by the fact that at the end the top

management forced the decision to increase the sales forecast by AR$ 40 million.

Answer 4.

It is not realistic because there was no 2003 budget to use as a starting point. Besides that,

all the budgets are based on judgment which may be biased or budgetary slack. The

economy is always changing and it is very difficult to estimate the future economy of the

country. It will have implications on whether the company is operating above or below

their capacity and demoralizing of the staffs if the targets are not met. If the cost exceeds

the budget, the company will be suffering a greater loss

Answer 5.

From our perceptive, we think that the most important components to get it right are the

sales. For sales forecast, it is important because sales determine cost estimates and resource

allocation.

Answer 6.

For sales forecast, we must take a look at the substitutes available, trends, managerial

experience, customer service, customer demand, competitor moves, mix and pricing of

product categories and marketing programmes.

For COGS budget, we must look at the supplier relationships, supplier prices, economy,

sales forecast

For variable operating expense budget, we must look at the payroll, logistics, packaging,

advertising and utilities

For fixed expense budget, we must look at the rent, insurance, depn/amort, interest, utilities,

payroll and advertising

Answer 7.

For a retail company such as Musimundo the payroll division of the organisation performs

the roles of setting wage levels for employees and determining the amount of employee

hours each store is to be allocated for a given period. Payroll may also have some say in

the method by which employees are paid, however this depends on both the companies

structure and local regulations. The budgeting of payroll within Musimundo is crucial to

the success of the company-wide budget, with payroll making up around a quarter of the

companies operating expenses. The payroll centre for Musimundo encompasses both fixed

costs, in the form of salary paid to full time contracted managers, along with variable costs,

in the form of wages paid to part-time and casual store staff along with any commissions or

bonuses. It is this variable cost that it is most critical for Musimundo’s payroll to control.
In most economies part-time and casual staff are very flexible (i.e their hours employed per

period can be quickly increased or decreased) and thus Musimundo payroll diversion must

ensure that stores are never over-staffed, which means they are paying people who aren’t

contributing, nor ever under-staffed, as they could lead to lost sales from frustrated

customers. Variable staffing costs are extremely flexible and controllable, thus making

them expenses that need consistent and careful monitoring in order to allow the firm to

maximise its efficiency and thus profit. Musimundo also employees a commission element

in its staffs salaries and thus payroll will have develop a system for testing the probability

level of managers earning these commission’s when budgeting for them in order to keep

them as an effective but profitable method of payment for the firm.

Answer 8.

When any company is setting a budget there are always costs that are problematic when

attempting to build an accurate budget. For Musimundo these problematic expenses

include marketing expenses, large imports and unforseen expenses.

As for many business, Musimundo faces difficulty when attempting to set its budgeted

level of expense for marketing as here it is difficult to determine the input/output ratio of

each dollar spent on marketing. In completing its budget Musimundo will have forecast for

itself a desired level of sales and one of the major generators of sales for a retail firm is

marketing. As such Musimundo must budget for a level of marketing expense that will

allow this sales level to be achieved, which is difficult when the input/output relationship is

so hard to quantify.

A problematic expense that would be more firm specific to Musimundo would be the

purchase of large-scale items such as wide screen TVs or computers from overseas

suppliers. As the case study outlines, the Argentine Peso has been subject to a large level

of fluctuations over the past few years and the Argentinean economy remains uncertain,
which of course means that the price an item costs to import when the budget is set could

vary widely from the price actually paid, due to shifts in the value of Argentina’s currency.

Of course for any company, retail or otherwise, the most difficult costs to budget for are

those that are difficult to foresee, such as wild shifts in economic policy or conditions (a

threat in a barely stable Argentina) or sudden losses of key staff.

Answer 9.

When Mr. Quintana is said to “see that the actual performance surpassed the initial budget,

but he was not sure how to interpret this information” we can see the exact problem

Musimundo faces when attempting to create its first significant budget with a lack of real

data available to it. In creating it’s first budget Musimundo not only faced the common

problem among first time budgeters of having to generate a set of estimated figures without

any previously estimated figures or experience upon which to base themselves but also a

total lack of meaningful previous period results to use as the basis of their estimations.

With such a lack of both data and experience to draw upon when Musimundo was creating

their budget it is difficult for Mr. Quintana to have any confidence in the results. The

question facing Mr. Quintana and Musimundo’s other top level managers is should they

trust in their original budget and thus interpret that the firm is performing exceptionally

well or should they take the 2004 budget with a grain of salt and look upon the years

results as what they should always have been achieving. Due to the fact that Musimundo is

so new to budgeting as an organisation and had such a sever lack of data when attempting

to create their budget it is difficult for them to have an real confidence in what it is telling

them, thus making it very difficult to interpret.

Answer 10.

As Musimundo’s 2004 results begun to come in and Mr. Quintana begun preparing for the

July board meeting it became apparent that sales were forecasted to be 7% above their
original target by years end. This exceeding of their goals so easily and quickly

demonstrated to Mr. Quintana that it was possible Musimundo had set its targets far to low.

This led Mr. Quintana to consider revising the target upwards however some other

Musimundo board members, such as Mr. Nalda were against a company wide upward

revision of targets. This dispute amongst board members over what should be down with

the companies targets demonstrates the fact that such a practice can have both positive and

negative outcomes, which any board must weigh up when deciding whether to revise their

targets.

Amongst the many arguments for the revising of Musimundo’s budgetary targets is that

keeping an inaccurate budget will affect current period performance. It is possible that as

employees begin to realise both they and the company are over achieving in the eyes of the

budget and thus management’s original expectations they will loosen they efforts so that

they simple achieve what was expected of them. Linked in with this argument is the fact

that store managers compensation is linked to performance against the budget and thus if

we set the aims to low will we be paying them bonuses when they aren’t actually

performing at their best. Another argument for the revising of Musimundo’s budgetary

figures is that it will give the organizations inexperienced budgeters another chance to

develop their skills and help develop a culture of continuos budgeting within the

organisation.

Some of the counter-arguments towards revising the budgets figures are just as strong as

those for it. As noted by Mr. Nalda when he recommends only revising specific parts of the

budget, to revise upwards the overall figure would further demoralise those stores already

unable to meet the current standards. This concept of harming moral, a key element in any

successful organisation, is actually very central to any revision of the original budget

figures as many employees will have there feelings of achievement in regard to

outperforming their set goals replaced with a feeling of mistrust in management as they
simply continue to demand more, no matter the employee’s level of performance. By

failing to acknowledge their employee’s performance, Musimundo risk severely damaging

their staff motivation and moral for the future, especially when they have just weathered

such tough times. Another more figure-based argument against the revising of Musimundo

budget mid-year is that the organisation still doesn’t really know where it’s at. With

prevailing economic conditions so unstable within Argentina, Musimundo management

needs to be sure their current half period’s performance figures will be indicative of

coming months and years and not that current performance is not simply a result of quickly

shifting economic conditions. Should Musimundo revise their figures upwards for the

period and then witness sales tail off and targets becoming irreverent again they will not

only be left with another seemingly useless set of figures but harmed the integrity of any

future budget development and set back the development of a strong budget culture within

the firm.

As with any management decision, Musimundo’s board faces a number of trade-offs in

deciding whether or not to revise their budgeted figures and most decide what is most

appropriate for their organisation.

EPM Tutorial 4

Syndicate Group: F13

Names: Carl Erich Batliner

King Chen

Yan Pei Lee

Matthew Daniel Mccormack

1. By examining Musimundo’s budgeted and actual performance documents we

are able to quickly gain a general impression of the company’s performance

over the current period. We can quickly identify that areas of concern for

Musimundo’s management should include the high level of inventory

shrinkage, which currently sits at 200% of the budgeted amount, the fact that

books along with accessories are selling at well below the budget level along

with the fact that the sales of tickets and extended warranties weren’t even

budgeted for. Another significant area of concern for Musimundo’s

management would be its greater than expected COGS figures. However the

figures also highlight the fact that despite these concerns Musimundo is

outperforming its budgeted level of performance by selling higher levels of

hardware and electronics than expected as well as achieving higher sales mark-

ups on some products. The overall impression given by a comparison of the

firms budgeted figures and their performance to date is that while some costs

could further be brought under control, the overall performance of the

company is continuing to improve.

2.

• For the impact of volume being off-target, it will have an impact of $89,000 on

the contribution margin of volume in the profit plan

• For the impact of the price variance, it will have an impact of $382,000

favourable to the contribution margin of price in the profit plan.

• For the impact of the unit costs being off-target, it will have an impact of $2.50

unfavourable on the contribution margin of price per unit in the profit plan.

3. I should be concerned with CDs and cassettes, accessories and books. We need

to consider CDs and cassettes because it has a high unfavourable price variance

of $682,000. For accessories, we are concerned about the price and volume

variances because we are selling less than we expected and at a lower price.

For books, we are concerned about the volume variances as we are selling

lesser than expected. We are concerned about whether the budget will be

realistic because of the uncertainty of the economy. We can focus on videos,

electronics and hardware as they provide us with a higher contribution margin.

4.

1) The market has grown as the total market units sold is more than the

budgeted amount.

2) Market size variance

= ∆ Mkt Size * Planned Mkt Share * Planned Average CM

= (1,643,567 – 1,635,000)*0.417*($5,768,000 – $534,000)/1,643,567

= $11,376.5643421

= $11,376.56 Favourable
 Given their planned market share and standard product contribution margin,

they would have gained $11,376.56 in profit due to the growth in the overall

market.

3) Market share variance

= ∆ Mkt Share * Actual Mkt Size * Planned CM

= (0.385 – 0.417)*1,643,567*(5,768,000 – 534,000)/1,643,567

= $ 167,488 Unfavourable

There is a loss of profits due to the loss of market share.

5. Product mix variance

= ∆ Average CM * Actual Unit Volume

= ($10,783,000/3,287,545 - $10,490,000/3,494,250) * 3,287,545

= $1,003,543.87923

= $1,003,543.88 Favourable

Yes. The product mix has shifted more towards electronics and hardware, which

has higher profit margins. Therefore, it increases the average contribution margin.

Clearly, the effect yields a positive outcome, shown by the favourable product mix

variance.

6. In summarising the overall profit analysis we are able to determine both

negatives and positives in Musimundo’s performance. The major areas of

concern for Musimundo’s management would include:

 • high levels of inventory shrinkage (which would demonstrate that

management may need to rethink issues like security, store layout, etc);

• the far lower than expected level of demand for books and accessories

(which may lead management to review the levels sold in stores, or

reconsider if these products are worth continuing with); and,

• the total lack of data within the budget for extended warranties and tickets.

The biggest concern for Musimundo’s management, however, should be the higher

than budgeted level of cost of good sold (COGS) for the period. This increase in

COGS is not only affected by higher overall sales volumes but also due to actual

increases in the cost per good, as the flexible budget demonstrates. These figures

should alert Musimundo management to the fact that the price they are paying to

bring each unit to the point of sale is currently higher than expected. This should be

addressed. The strategy to address this could include the renegotiation of contracts,

switching suppliers or the revision of expectations. Musimundo’s loss of market

share in the market for CDs and cassettes should also be of concern to

management, particularly as the company is not benefiting from the growth in the

market.

However while Musimundo management should be concerned with the above-

mentioned issues it can also take some positives away from the profit analysis. The

profit analysis demonstrates Musimundo has been able to achieve a higher than

expected contribution, capture at least some of the growth in market and has seen

its electronics and hardware departments perform better than expected.

Overall the biggest positive Musimundo management can take away from its profit

analysis is that it is outperforming its expectations as set out in the budget. This

overall level of performance is of course the most important factor to Musimundo’s

management. While Musimundo management should be concerned with the above-

mentioned issues, it can also take some positives away from the profit analysis. The

profit analysis demonstrates Musimundo has been able to achieve a higher than

expected contribution, capture at least some of the growth in market and has seen

its electronics and hardware departments perform better than expected.

Overall, the biggest favourable trend is that it is outperforming its expectations as

set out in the budget.

University of Melbourne

Faculty: Economics and Commerce

Department: Accounting and business information system

Undergraduate

3. Subject title and code: 306-302 Enterprise Performance

Management

Assignment: 3. Westport Electric Corporation & Grand Jean

Company

Semester: 1. 2006

Syndicate group: F.13

Members: Carl Batliner

Matthew Daniel Mccormack

Yan Pei Lee

King Chen

Date: 06.04.2006
Table of contents

Grand Jean Company (Seminar 11) ________________________________________ 17

Answer 1. __________________________________________________________ 17

Answer 2. __________________________________________________________ 17

Answer 3. __________________________________________________________ 18

Answer 4. __________________________________________________________ 18

Westport Electric Corporation (Seminar 11) _________________________________ 19

Answer 1. __________________________________________________________ 19

Answer 2. __________________________________________________________ 19

Answer 3. __________________________________________________________ 20

Answer 4. __________________________________________________________ 20

Answer 5. __________________________________________________________ 21
Grand Jean Company (Seminar 11)

Answer 1.

Grand Jean Company adopted a hybrid structure. That means that their structure contains

both functional and divisional elements.

The manufacturing department is a cost centre as mentioned in the text (bottom 2. page)

“expense centre”.

The marketing department is a revenue centre, as mentioned in the text (middle 3. page).

The main weakness of this structure is the lack of supply chain coordination. This is shown

in the changes of the marketing production numbers every half year. It also seems to be

difficult for the vice president of production operations to coordinate 27 contact people.

Another weakness that has to be considered is that the production and marketing is not

market but product oriented.

The key strength is that it has a very high level of production efficiency and control, for

example, with the price knowledge of their maximum costs and their learning curve. The

company also has a great amount of managers that are trained in the 25 plants and made

much more accountable for their performance.

Answer 2.

As mentioned in the case (bottom 1. page), the company aims to produce quality jeans at a

reasonable price while also wanting to maintain their current market leadership.

The reasonable price policy is adopted by the production department through a focus on

achieving high efficiency levels. In the case, there is also a focus on production quality and

reliability of external contractors which is also applied to the internal production. The

achievement of these targets is controlled by the maximum price barriers per jeans and by

the other standard production targets.

The marketing department is mainly involved with the task of keeping the company the

market leader. Therefore they forecast costumer demand and thus sales quantity per jeans

type. The outcome is to set a product mix that will result in maximum sale and define

production numbers.

Answer 3.

It has developed over the last few years as a strong focus on production efficiency,

therefore accurate figures regarding maximum production cost per unit and learning curves

have been developed. This allows the information and control system to give instant

feedback on the production efficiency.

The problem that they face is to focus on achieving the monthly set production targets,

which is linked directly to the management reward system. Therefore all plant managers

who are able to overproduce in good months hoard goods in order to avoid drops in their

production numbers during slow months. This is critical because Grand Jean is constantly

facing an inability to meet demand in the last four month of the production year. The

weakness of the control system is that it is creating production shortfalls by only

encouraging plant managers to hit their target in a given month only. It also appears that

there is a bias in the awarding of managements rating where head office managers

constantly out perform lower level managers on their assessments.

Answer 4.

It appears that Grand Jean’s ability to always sell their entire level of production and thus

avoid any performance problems has hidden some of the shortcomings in their

management’s ability and the way the company is being run. If Grand Jean wishes to

maximise its performance and fully meet the level of demand for their product in the

market, they will have to make changes.

The main problem is that the production departments are focusing on their own set targets,

resulting in them failing to have an incentive to produce more. The outcome is that they

cannot meet costumer demand levels at the end of the year.

Besides that, it may also be necessary to review the reward measurement system for staff at

headquarters in order to develop a fairer system. Another point of improvement would be

to increase the communication between the marketing and the production departments in

order to ensure the desired product mix is clearly being worked out. This could be done by

implementing a more flexible, monthly production planning system.

Westport Electric Corporation (Seminar 11)

Answer 1.

Within Westport Electric Corporation the organisation’s structure includes six individual

administrative staff offices. Each of these divisions is a discretionary cost centre. These

problems include a difficulty in determining how a certain level of inputs is affecting the

resulting level of outputs, a difficulty in actually quantifying the level of output of each

division and difficulty in assigning accountability to divisions due to a lack of quantifiable

output to measure them by. The major issue with such discretionary cost centres is that it is

difficulty to assign value to an output that is not directly quantifiable.

Answer 2.

Westport is currently facing major issues with its budgeting process, resulting in severe

planning and control issues. Under Westport’s current budgeting system, the budgeting

department only scrutinised the accounting accuracy of the actual figures and paid no

attention to the efficiency or usefulness of the expenses budgeted for. When budgets were

assessed for approval by top management, who lack direct budgeting or divison specific
expertise, they simply listen to the presentation from the division and then approved or

rejected the budget. This system lead to a lack of critical analysis of the figures included in

the budget and the budgeting department having no say in the actual formation of budgets.

In turn a lack of critical analysis of the budgets from outside parties had lead to divisions

becoming very closed in an attempt to grab for themselves as much funding as they can in

order to implement best practices systems that may not be cost effective for the

organisation as a whole.

Answer 3.

While it is likely King is correct that the legal and training divisions of the company are

currently inefficient it is unlikely that such inefficiencies are confined to just these two

divisions. With a lack of control or analysis of each departments budgeting policy, it is

likely that each of the departments will be budgeting in their own interests rather than the

companies and creating inefficient practices with their department

Answer 4.

King is looking for a solution to solve the problem of linking the goals of the

administrative staff office to the entire corporation’s goals. It is stated in the case that the

administrative staff are fulfilling their interests, as each administrative staff officer, at best,

wanted to have the “best” operation in the country and, at worst, was simply interested in

building an empire. In order to do this, King is looking to have the budgeting department’s

role in the setting of budgets increased and to create a culture of not just figure analysis but

also efficiency analysis when setting budgets. However, King needs to realise that

efficiency problems could exist throughout the entire organisation and not just in the two

departments he highlights.
Answer 5.

WestPoint is facing two major issues in the company. Firstly, upper management needs to

promote a far more positive organization wide culture based around success for the entire

organisation instead of individuals. This is to ensure that the goals of the organization are

at the forefront of the minds of the employees when they are making decisions. However,

this can be a long and difficult process which is difficult to quantify.

The second issue is to change the way budgeting is done from the administrative

departments of the organisation. WestPoint’s upper management needs to assign more

responsibility to the budgeting department and ensure that budget’s figures are not just

correct but also that the programs budgeted for will benefit the organisation in terms of

value.
University of Melbourne

Faculty: Economics and Commerce

Department: Accounting and business information system

Grade: Undergraduate

3. Subject title and code: 306-302 Enterprise Performance Management

Semester: 1. 2006

Syndicate group: F.13

Members: Carl Batliner / 260952

Matthew Daniel McCormack / 214351

King Chen / 215594

Yan Pei Lee / 217661

Seminar: 13 (Simions Case 15)

Company: Tennessee Controls

Date: 12.04.2006

Word count: 847

Table of contents

Answer 1_______________________________________________________________ 24

Answer 2_______________________________________________________________ 24

Answer 3_______________________________________________________________ 25

Answer 4_______________________________________________________________ 26
Answer 1

Financial Return Factor

= org profit over product life X Life Cycle

Maximum negative cash flow Years to maximum negative cash flow

High Volume = 39.8 m / 17 m x (15 -1) / 2

= 16.39%

SCADA Technology = 44.5 m / 16.4 m x (15 -1.5) / 3

= 12.21%

MDA Acquisition = 108.5 m / 25 m x (25 – 0) / 6

= 18.08%

Answer 2

Instead of taking into account the cashflows over the project’s life (as done in NPV), the

Financial Return Index (FRI) covers the organisation profit in its calculation. If the

project’s profit were expected to differ greatly from cashflows (e.g. credit sales VS cash

sales), then the index would be uninformative and of little use to managerial decision

making

Unlike the NPV, the financial return index does not discount organisation profit by interest

rates, therefore failing to account for the time value of money. For projects with abstract

life cycles or with a larger proportion of its profit derived from the early product life, this

would not be of a great concern. However, if projects had long products lives or
constituted of majority of its profit in the later years of life, then the approach is less

relevant.

Answer 3

Under Tennessee Control’s unique SRI formula, which it developed for use in its

assessment of potential projects, not only is financial data used to rank projects but they are

also assigned subjective ratings relating to the projects credibility and risk. The Corporate

Planning Manager, based on their assessment of the projects circumstances, assigns these

two subjective ratings using a predefined matrix of scores, with each figure indicating a

different level of credibility or risk. The creditability score relates to how strong a projects

champion is and how complete the strategic analysis of the project is, while the risk score

relates to how risky a project is, with greater levels of risk regarded as undesirable. In

terms of Tennessee Control’s current three prospective projects we can use the information

provided in the case to assign each a credibility and a risk score.

For Proposal 1 we first must assign a credibility score. We can see from the information in

the case that the idea’s champion Steve Gregg, is a well respected and experienced team

members while we can from the large amounts of strategic data provided by Mr Gregg he

has undertaken large levels of strategic analysis. These two strong factors allow us to give

this proposal the highest credibility rating of 9. In terms of risk the project is not unique

and quite copyable by the Japanese manufacturers whom are about to enter the market and

take some share we can assign the proposal a risk rating of 5.

For Proposal 2 the idea champion is Mr Mowry whom is also a strong idea champion. In

terms of strategic analysis Mr Mowry has followed Mr Gregg in providing greatly detailed

strategic analysis of the project, allowing us to assign it a credibility rating of 9. For

Proposal 2’s risk assessment we can see that project will be difficult to copy and would be

a market leader, allowing us to assign it the best risk rating of 1.

Finally for Proposal 3 we can see that unlike the first two idea champions Mr Neirman in

new to division and has had little to do with product development in the past however he is

in expert in takeovers, which is what he wants to undertake. This lack of expertise along

with analysis that is not as complete as previously means we will assign this project a

credibility rating of 4. This Proposal also is quite copyable as the technology is already in

the hands of competitors, meaning we will give it a risk rating of 5.

Answer 4

A major weakness of the strategic evaluation method is the possibility of managerial bias.

The judgmental nature the Credibility Factor and Risk Factor remains questionable as

different evaluators may have different perspectives on the same project proposed by the

same person. For instance, a lower manager with served little time in the firm had an

abnormally profitable project proposal with low risk, he/she might be seen as unreliable

and therefore given a low champion commitment score. The proposal may also be

perceived as risky even if her presentation was informative and persuasive. Consequently,

the biased factors will lead to rejection of the proposal and the firm missing an opportunity

to maximize its value for shareholders.

The Cash Flows Wave is only a prediction of the future cashflows, it is as good as the

input data that is provided. Its reliability is again questionable and should not be relied on

excessively, especially the cashflows in the later years of the product’s life cycle as sales

volume further into the future are even more unpredictable.

However, the overall evaluation ranking system has its benefits. The thorough analysis

required to prepared the four individual attachments are timely and, more or less, provides

a systematic method of ranking proposed projects so that budgets can be effectively

distributed.
EPM Seminar 15

Syndicate Group: F13

Names: Carl Erich Batliner

King Chen

Yan Pei Lee

Matthew Daniel Mccormack

1) Northern Division should accept the bid from Eire papers. It is because Eire papers

bought outliner from the southern division at a price equivalent to $90 per thousand boxes,

and would be printed for $30 per thousand by the Thompson division. This will increase

the profits of the company

2) No. It is because he will seek to maximize his own division’s profit and has no

vested interest in increasing profit of another division even though the performance is

evaluated independently. Besides that, he wants to get the best value of money and he will

accept the offer from West Paper Company as they offered the lowest bid price. This will

help to increase the profit of his division more as compared to the other options.
University of Melbourne

Faculty: Economics and Commerce

Department: Accounting and business information system

Grade: Undergraduate

3. Subject title and code: 306-302 Enterprise Performance Management

Semester: 1. 2006

Syndicate group: F.13

Members: Carl Batliner / 260952

Matthew Daniel McCormack / 214351

King Chen / 215594

Yan Pei Lee / 217661

Assignment: Group assignment

Company: The E.W. Scripps Company

Date: 30.04.2006

Word count: x
Table of contents

Answer 1a ______________________________________________________________ 31

Answer 1b______________________________________________________________ 31

Answer 2_______________________________________________________________ 33

Answer 3a ______________________________________________________________ 33

Answer 3b______________________________________________________________ 33

Answer 4a ______________________________________________________________ 33

Answer 4b______________________________________________________________ 34

Answer 4c ______________________________________________________________ 34

Answer 4d______________________________________________________________ 34

Answer 5_______________________________________________________________ 35
Answer 1a

Based on our analysis on the figures given for year 2003 and 2004, we have discovered

that all the four divisions of the E. W. Scripps Company had an increase in the operating

profit. The highest percentage increase in operating segment revenue is cable network

division (35.27%), followed by TV/Online retailing division (22.9%), broadcast television

division (12.6%) and finally, the newspapers division (1.77%). Besides that, the highest

percentage increase in the segment profit is broadcast television division (27.02%),

followed by cable network division (4.54%), TV/Online retailing division (0.40%) and

finally, the newspapers division (-8.47%).

For the industry trend for 2003, we are not provided any information with regards to the

media market penetration for the newspaper division. For the broadcast television stations

division, the media market penetration remains at 98.2% of the US households as

compared to 2002 whereas the cable network division’s media market penetration

increases from 69.4% to 69.8%. For TV/Online retailing division, the profits have been

going up during the year 2003. However, there is a fluctuation in the profits of E-

commerce segment.

Answer 1b

For the newspaper division, there are a few opportunities. The first is that “they are

generators of original, localized content that many consumers still value and for which they

are willing to pay.” (Iacovou, Pg 11) Since they are the innovators, it will be a new market

for them to explore if it turns out to be a success. Besides that, local papers are likely to be

an important in the new media puzzle as “the conglomerates that become “multimedia

proficient” by mixing and converging the various media are best positioned to become

dominant players in the new information age.” (Iacovou, Pg 11) It means that with the
availability of various media, it will be a great advantage if you can mix and converge

them to an effective usage. The third is the aging of baby boomers and changing

demgraphics. It will have a temporary impact on the newspapers’ market. The last

opportunity is the use of the internet to promote their paper-based products and services to

the younger consumers. The threats are the emergent of internet and the other news

delivery channels will affect the purchasing behaviour of the consumers. They will go

online to read the news instead of buying it. The strength is that it generates 40% of the

segment profits and they have established themselves as primarily a newspaper publisher.

For broadcast television stations division, the opportunity is the introduction of the new

technology of the digital signal whereby it “allows the stations to offer “over-the-air”

digital TV subscription by utilizing the new digital broadcast channels and regular

UHF/VHF antennas.” (Iacovou, Pg 12) With this, they can provide a lower subscription

price to attract customers. The threat is the “declining viewership, reduced local

advertising revenue, and increasing competition from the newer information channels.”

(Iacovou, Pg 12) Because of these, they have to upgrade their technologies to remain

competitive. The strength is the margins whereby the segment profit is 32% to the revenue.

It contributes a lot of profits to the company. The weakness is that it is not as attractive as

other newer segments of the media industry. It will be harder to sell off because of the size

of the business.

For the cable network division, the opportunity and the weakness is the development stage

of some of their networks, Do-It-Yourself (DIY) network, Fine Living and the Great

American Country (GAC). If they prove to be a success, they will generate a huge profit to

the company and vice versa. The threats are the potential entry of new competitors and

consolidations of the cable operators. This means that they may lose the market share

which in turns affects the profits and the consolidations of the cable operators may causes

them to refuse to pay for the subscription fees that is required by network to generate
profits. The strength is that it is the fastest growing division. It will be a division that may

be a main source of the revenue and profits to the company in the future.

For the TV/Online retailing division, the opportunity is emergence of the retail commerce.

It is growing at a fast pace and the success may also reduce the firm’s reliance on

advertising which is considered the strength. The threats that they are facing is the potent

entry of major names into the market. It is because people tend to go for the major names

which they percept to be more reliable. The weakness is that the division is making a loss

for 2003 and 2004. The loss is quite huge and we are unclear whether it can convert the

losses into profits in the near future.

Answer 2

Answer 3a

Answer 3b

Answer 4a

Even though quantity based analyses are comprehensible, easier to get and provide a good

understanding of the past, they can not help as much to take a decision for the future.

Therefore the qualitative analysis of answer one b is seen as the most useful regarding to

come up with a new strategy for the future. The quantitative analyses can help to

understand and prove the qualitative factors which otherwise would only rely on subjective

human interpretation.
Answer 4b

The corporate profit margin is an important tool to find out how a company and its division

performs and so give a clear ranking which division added how much to the overall

company profit in the past. But there is no connection why this profitability breakdown

should stay this way for the future. Furthermore it is a tool to spot weaknesses and improve

them in the future. Also it not considers the stage of the life circle in which the products of

a division are currently. A company tries to invest in future markets with the profit of

established products (cash cows) and so keep a balanced product portfolio. So the

corporate profit margin of the past is not a reliable analysis regarding the future trends and

the recommendation shouldn’t be focused on it.

Answer 4c

Answer 4d

The problem with all kind of quantity based analyses is that they can only relate on past

data. The aim of these analyses is to recognise a trend in the past which allows a forecast

regarding the future development of a specific opportunity. So the first concern has to be

under which circumstances the past data can provide a reliable background for the future

trend. That’s why a recommendation can not only rely on the analyses from answer one

and two. To give a valuable recommendation a broad understanding of the company, the

industry, the costumer and the related environment is necessary. The text only mention a

few general reasons for the adjustments in the past and the future forecast is more like a

worst / best case scenario description.

The most basic thing for the recommendation has to be the company’s strategy. After

analyse the quantitative and qualitative factors of the company in answer one the company
has to find out on what they want to concentrate on in the future. Therefore a five force

analyses would be recommended.

To get a reliable feeling for the environment, a first step would be to take a closer look

regarding the competitors, which will provide an over all view of the industry

segmentation. This help to understand if it was an overall trend or a positive / negative

trade of between competitors.

Answer 5

x
University of Melbourne

Faculty: Economics and Commerce

Department: Accounting and business information system

Grade: Undergraduate

3. Subject title and code: 306-302 Enterprise Performance Management

Semester: 1. 2006

Syndicate group: F.13

Members: Carl Batliner / 260952

Matthew Daniel McCormack / 214351

King Chen / 215594

Yan Pei Lee / 217661

Assignment: Group assignment

Company: Purity Steel Corporation

Date: 04.05.2006

Word count: 1259

Table of contents

Answer 1_______________________________________________________________ 38

Answer 2_______________________________________________________________ 39

Answer 4_______________________________________________________________ 40

Answer 4_______________________________________________________________ 41
Answer 1

ROI is an important key digit for the upper management in this industry. Actually the

lower management is more concerned about operating efficiency and productivity and not

so much in over all return of investments. To make sure that the lower management

concerns about the ROI and so help the upper levels of management to achieve their goals,

Purity Steel connected it to the performance measurement of the lower management.

In the industry in which Purity Steel is in, ROI is much more important than in others as

for example the service industry. Their assets are manly bounded in hardware investments

and stocks. So from an over all view the ROI can be seen as how many time they get the

invested money back thru their sales and so how profitable it was to invest in this company

in the first place. Therefore the ROI is a main indicator of owners profit and market value

of the company.

Base of this industry are investment. They need it to perform, because without stock there

are no sales, but as well to align the company to the future strategy as for example growth

or maintaining quality. The problem with ROI as a performance measurement indicator is,

as Larry Hoffman already starts to think about, that it encourages managers to concentrate

not on the future strategy but on the short therm ROI. That means that they try to

manipulate their ROI figures by not invest but leas their property, what will be bad for the

long time ROI and future strategy.

ROI shouldn’t be looked as a stand alone figure but more compared with long time profit.

The investments should be on a sufficient level to maintain current standards and support

future strategies. Not based on ROI but on need of the related investments. The market

value of the company should be an important indicator of the investment balance of the

company. ROI is more a control than a manipulative figure which can be adjusted. The

undesirable side effects of ROI as a performance measurement figure is as discussed above

the interest conflicts which occur between future strategies for the good of the company

and reaching of short therm performance figures which lead to personal incentives.

Answer 2

Besides the in answer one discussed general problem with using ROI as a performance

measurement figure, it get even worse in regards to individual warehouses. The main

problem is that each warehouse is situated in a different environment. For example there

are old ware houses which need investments to maintain the standards verses new ones or

there are some in cities where for example the ground is much more expensive than

somewhere in the country. Their different environments make it unfair to measure their

performance based on the same ROI. If ROI should be used for a performance

measurement, it is important to apply the specific situation to each warehouse.

Another problem with ROI as a performance measurement indicator at the lower

management is the little influence this level of management has on this figure. They can

make their internal processes as efficient as possible but how for example can they directly

influence the stock turn over which is caused by the costumer or the leas payments which

are related to the location.

Use ROI as a performance measurement influence the purchase culture of a warehouse. To

reach the targets each warehouse will try to purchase their stock as cheap as possible to

keep the investments low. This means that the pressure on internal pre-step suppliers will

increase because of external competitors. Even thou this most likely is not in the over all

interest of the company. The centralised management of receivables is measured by

something which thy can not control, they are depended on the marketing and selling

department and their ability to sell to the costumer.

Answer 4

a) When the issue if whether to lease or buy the warehouse is raised the decision

should be made based upon which option would add the greatest value to the firm.

The decision should not be based upon which option would give Larry Hoffman’s

division the greatest R.O.I figure, as this is not in the entire firms best interests. In

order to determine which option to take an NPV analysis of the two projects should

be undertaken in order to determine which would add the greatest value to the firm.

b) Seeing as though the decision on whether to lease or buy the warehouse is one of a

long-term strategic nature it should be made by Harold Higgins, general manager of

the division. By having Harold make the decision it will also remove the problem

of Mr. Hoffman choosing the option that will have the best possible impact on his

R.O.I when this may not create the greatest value for the firm.

c) The issue of whether to lease of purchase the warehouse is of such concern to Mr.

Hoffman because the option that is chosen will have an impact upon his R.O.I

result and thus his compensation level. Seeing as though his compensation is based

partially upon this R.O.I figure Larry will of cause have an interest in insuring it

remains as high as possible.

d) The decision to invest in a new warehouse, be that investment by purchasing or

leasing the building, is being undertaken by Mr. Hoffman because his current plant

is old and unable to hold the full variety of inventory that a majority of Purity Steel

warehouses are able to store. This inability to store the full product line is resulting

in falling profits for Larry’s warehouse and thus by investing he expects profit

levels to grow significantly. However this level of investment is not encouraged by

the firms use of R.O.I as a performance measure as by investing in a new

warehouse the branch’s asset base will increase significantly more than it potential
 revenue stream growth and this, coupled with the fact that these new revenue

streams are unlikely to be realisable immediately, means that the investment will

cause Larry’s R.O.I to decrease significantly even though the investment is likely to

add value to the firm.

e) As we can see from the above responses Purity Steel’s problem lie in the fact that

the indicator it is using to set managers compensation levels, that being R.O.I, does

not align managements goals with overall firms goal of adding value to the

business. As R.O.I can discourage investment even when such investment will add

value to the firm its use as a performance measure of managers can lead to a

divergence between management’s goals and the entire firm’s goals.

Answer 4

The problems are the alignment of the organization goals, incentive payments and the

return of investment penalizes the future cash flows that are discounted. By using the EVA,

the management is rewarded based on the value accrues to the shareholders. It will be

maximizing the shareholders’ wealth which in turns meets the corporate goal of the

company. It will also solve the incentive problems because they are paid according to the

wealth created to the shareholders. It is because some divisions may have a high

investment which is so much that it outweighs the profits earned even though the divisions

are making a huge increase in profits. Besides that, it also solves the future cash flows

which are penalized. It is because the future cash flows will be discounted more if they are

to be generated at the later part even though they are making huge profits.
University of Melbourne

Faculty: Economics and Commerce

Department: Accounting and business information system

Grade: Undergraduate

3. Subject title and code: 306-302 Enterprise Performance Management

Semester: 1. 2006

Syndicate group: F.13

Members: Carl Batliner / 260952

Matthew Daniel McCormack / 214351

King Chen / 215594

Yan Pei Lee / 217661

Assignment: Group assignment

Company: Automation Consulting Services

Date: 26.05.2006

Word count: 1197

Table of contents

Answer 1_______________________________________________________________ 44

Answer 2_______________________________________________________________ 44

Answer 3_______________________________________________________________ 45
Answer 1

For San Jose Office, they did not share the same billing practices and client philosophy as

the founders. This led to billing practices – namely cross-subsidizing – which the

Executive Committee did not approve of.

For Detroit Office, they faced low billability, therefore unlikelihood to achieve targeted

revenue growth, as it relied on a small number of large clients and lacked the client breadth

that had developed at the larger older offices. Despite the attempt of the Executive

Committee to amend the crisis with a ‘client prospecting system’, the proposal was

strongly opposed by rest of the partnership which led to its rejection two years ago.

For Boston office, there is a lack of strategic guidance at the firm level caused acceptance

of inappropriate projects by less experienced partners, leading to over-budgeting and

running behind in schedule.

For Philadelphia office, the treatment of the office as revenue center implied a lack of

incentive for partners to control expense budgets – especially individual expense categories.

Trend over the years indicates ‘creeping up’ of expense groups, which ultimately leads to

reduction of the firm’s profitability.

Answer 2

The San Jose office used the levers of belief control. It is shown that they neither used the

interactive or diagnostic control approach by the lack of a general performance

measurement system. As well there are no real boundaries for the employees, which tell

them how things should be done, that's an indicator that they don’t use a boundary control

system. There are many evidences for the use of a belief approach in the case. This office

is proud about their entrepreneurial spirit which was installed by the three founders. The

employees over all target is to meet the company’s revenue target.

The Detroit office comes from the same basic values as the one in San Jose. However they

face now some problems because they did not focus much into the future, that’s why they

don’t build up new costumers but concentrated on existing projects. Now they will install a

control system which should act as a kind of pre warning system for such situations. The

aim of this performance control system is not to challenge the chosen strategy but for

giving the management data on which it can base its operational decisions. Therefore this

new approach is an interactive control system.

The Boston office as well was based on a belief control approach the problem they face

now regarding their decision to go into a new market questions if the chosen strategy was

right. Therefore they think now to install an interactive control system which performance

measurements influence the taken challenge and foremost their key recourses. They found

out that if they want to expend into the service sector they will need to build up the

required knowledge first to meet the costumer demands in this area.

The Philadelphia office faces the problem that now that the growth rate slows down it gets

more important to control their expenses. Even tough budgets were given to the managerial

partners, these targets were not broken down to the individual offices. This caused that the

individual offices don’t focused on their budgets and so the overall budget were extended.

To control this situation in the future specific boundaries for each office must be in place.

Therefore the aim of the Philadelphia office is to but a boundary system in place.

Answer 3

It can be seen from the Automation Consulting Services case that the organisation is facing

a number of control issues between its regional divisions. These control issues appear to

stem from the fact that the firm has grown much larger and the three founding partners

were previously able to have an active role in a majority of the businesses decisions but not

now. As they lack of control over monitoring, they need to implement a number of control
systems in order to control the issues they have identified on their annual tour of the firm.

When trying to implement these systems, they also do not want to kill off the

entrepreneurial sprit of the firm, demonstrating the difficulty between maintaining a

previously successful small firm culture in a firm that has now grown much larger.

In terms of actual control systems that need to be implemented we will look at the

problems raised in each office to identify the control systems that need implementing.

Firstly the San Jose office highlights the problem being created within the firm by the

founding partners no longer having such an active role with staff, meaning their desired

culture is no longer being taught by them directly to new managers. In order to allow this

successful culture to flow through the entire organisation the founding partners should set

this culture out clearly in a document and also clearly state how the feel the culture should

be maintained, allowing all members of the firm to see what sort of behaviours are

acceptable within the firm, especially when dealing with clients.

The Detroit office is currently facing a severe issue with a lack of upcoming projects. ACS

has used a compensation system that linked to revenue levels to encourage the managing

partners of offices to actively seek upcoming projects. However, this does not appear to

have worked at the Detroit office and the founding partners are concerned that they have

not been informed of the severe work shortage until so late. While the current control

system using financial reward as an incentive to generate business has proved successful

previously and thus should remain, the founding partners should go ahead with the system

outlined to monitor each offices future workload so that they can identify any such

problems much earlier and take steps to fix them before they get out of control. While this

will remove some autonomy from the managing partners of the divisions, it is necessary

because the business is becoming so larger and more difficult to monitor.

The third office is the firm’s original office in Boston. Here, a partner has run into trouble

by taking on a project outside Boston’s traditional area of manufacturing. This project has
run into problems, which appears to go over budget and also sees a first for ACS, the need

to outsource part of the project because in-house employees are incapable of completing

the job. All of these problems have lead ACS’s founding partners to decide that the in the

future ACS should stick to its speciality of consulting to manufacturing businesses only

and also instead of letting partners choose their jobs a formal structure should be set to aid

them in choosing their projects.

The last regional division is Philadelphia. The problem identified is that they are revenue

centres and the expenses are not being monitored closely. During the early and high

growth periods of the business, revenue growth was crucial. However, markets begin to

slow and revenues are not able to grow as quickly. Focus will have to be applied to

controlling expenses in order to maintain profit growth. With little focus currently being

placed on expenses, it would be better to switch the regional offices to profit centres which

will allow ACS to maintain growth is a changing market.

Table of Contents

Table of Figures.....................................................................2

Question 1(a).........................................................................3

Question 1(b)

™ Opportunities and Strengths..........................................4

™ Threats and Weaknesses................................................5

Corporate Profit Margin........................................................6

Forecast Scripps’ Revenue in each Sector (Division)...........8

Forecast Scripps’ Profit in each Sector...............................10

Question 4(a).......................................................................12

Question 4(b).......................................................................13

Question 4(c).......................................................................14

Question 4(d).......................................................................15

One Page Report..................................................................16

Reference Section................................................................17
Table of Figures

Figure 1…………………………………………………..…6

™ Comparison of Profit Margins

Figure 2.1...……………………………….…………..….....8

™ Historic/Forecast Revenues

Figure 2.2………………………………………………….10

™ Historic/Forecast Expenses

Figure 2.3………………………………………………….11

™ Historic/Forecast Profit

49
1. Question 1(a)

Based on our analysis for the figures in the year 2003 and 2004, all the four Scripps’

divisions experienced an increase in their operating profit. The increase in segment

revenues are as follows: the cable network division (35.27%), TV/Online retailing division

(22.9%), television broadcasting division (12.6%) and lastly, the newspapers division

(1.77%). The increase in segment profits are as follows: television broadcasting division

(27.02%), cable network division (4.54%), TV/Online retailing division (0.40%) and

finally, the newspapers division (-8.47%).

For the industrial trend for 2003, we were not provided any information with regards to the

media market penetration for the newspaper division. For the television broadcasting

stations division, the media market penetration remains at 98.2% of the US households as

compared to 2002 where the cable network division’s media market penetration increased

from 69.4% to 69.8%. For TV/Online retailing division, the profits have been rocketing

except for the fluctuation of segment profits in E-commerce.

50
Question 1(b)

Opportunities and Strengths

For the newspaper division, one opportunity is that it will be a new market to explore,

which is visible in the following quote, “they are generators of original, localized content

that many consumers still value and for which they are willing to pay” (Iacovou, Pg 11).

Another is the aging of baby boomers and changing demographics. It will cause a

temporary impact to further boost their profits. Its strength is generating 40% of the

segment profits and the establishment as a primary newspaper publisher.

For television broadcasting stations division, the opportunity is the introduction of new

technology, the digital signal whereby it “allows the stations to offer “over-the-air” digital

TV subscription by utilizing the new digital broadcast channels and regular UHF/VHF

antennas” (Iacovou, Pg 12). They can provide subscription prices at an inexpensive rate to

attract customers as a result. Its strength revolving the segment profit margin (32% of the

total company profit).

For the cable network division, opportunity lies in the development stage involving some

of their networks, like Do-It-Yourself (DIY) network. If they prove to be a success, they

will generate more profits for the company. Its strength no doubt would be being the fastest

growing division. It may prove a main source of income for the company in years to come.

For the TV/Online retailing division, the opportunity is the emergence of the retail

commerce. It will definitely increase their profits but strength would be questionable.

51
Threats and Weaknesses

For the newspaper division, the threats are the emergence of the internet and other news

delivery channels which will affect the purchasing behaviour of the consumers. They will

log in to read news instead of buying the physical newspaper. The weakness lies in the

market maturity.

For television broadcasting stations division, the threat is the “declining viewership,

reduced local advertising revenue, and increasing competition from the newer information

channels” (Iacovou, Pg 12), which affects their profits. The weakness would be a declining

popularity as other newer segments emerge and therefore, harder to sell off in regards to

department size.

For cable network division, the threats are the potential entry of new competitors and

consolidations of the cable operators. This means that they may lose market share and

consolidated cable operators will not pay for the usage of the network. The weakness

includes developmental stage of some networks. If the networks fail, they will incur losses.

For TV/Online retailing division, the threat is the potent entry of established names

which link reliability and brand loyalty. The weakness is that they might result in

losses and may end up in a struggle for survival.

52
2. Corporate Profit Margin

2003 2004

Segment Profit Margins

Newspapers 14.33% (51%) 11.35% (40%)

Broadcast Television 4.55% (16%) 4.99% (18%)

Cable Networks 10.89% (39%) 14.04% (49%)

TV/Online Retailing -1.18% (-4%) -1.01% (-4%)

Others -0.69% (-2%) -0.98% (-3%)

Corporate Profit Margin 27.90% (100%) 28.39% (100%)

Figure 1 – Comparison of Profit Margins

Over 2003-04, we can observe that Scripp’s corporate profit margin has been relatively

consistent, varying by less than 1.0%. However, there has been a certain degree of

alternations to its constituents.

Firstly, the most obvious and probably most significant trend is shown by the newspapers

division – a reduction of 11% in its constituency in the corporate profit margin. This is

caused by a relatively small decrease in its segment profit and an increased total profit.

This finding is consistent with the research result of declining newspaper readership in the

media market over the decades and suggests lower advertising revenue. Nevertheless,

being one of two most important divisions in maintaining the company’s profit margin, the

company is likely to face cashflows problems and lower profit margin if all, or even a third,

of the segment is divested.

53
Secondly, the cable networks division has achieved significant growth over the two years,

raising their share of the corporate profit margin by 10% – led by a relatively large increase

in segment profit. Majority of the profits influx from operations of the two established

networks – HGTV and Food Network. Though the three newer networks have been

making losses for the period 2003-04, it is fortunate to observe a decrease in these losses.

This reduction is consistent with the high growth suggested by the division’s higher share

of profit margin. Given the optimistic pattern in cable networks division alone, it is highly

likely that the newer networks will soon become profitable and therefore readily available.

This suggests that divesting of these projects probably will dampen the division’s

enormous growth, and the company’s growth as a whole.

Finally, the rest of the divisions – broadcast television, TV/online retailing, and others –

have shown little changes over the two years in their mixture of the company’s profit

margin. The uniformity in the TV/online retailing segment suggests lack of growth and

could signal an unsuccessful investment and little future profitability prospects. Divesting

of this division may correspond to a wise decision if management believes its market

position is unlikely to vary in the near future, therefore its divestiture will reduce losses.

54
3. Forecast Scripps’ Revenue in each Sector (Division)

Any analysis of a division future performance is aided by forecast figures, generated via

the use of historical data and future market expectations. In creating the following figures

(Figures 2.1 and 2.2), it was assumed that a single average growth figure could be used to

estimate the growth in revenues and expenses over the forecasted periods.

Previous Forecast

Period Annual

Historic Revenues Growth Forecast Revenues Revenue

Division 2003 2004 2005 2006 2007 2008

Newspapers $691,858 $704,124 1.02% $710,109 $716,145 $722,232 $728,371 0.85%

Broadcast Television $304,162 $342,498 1.13% $345,991 $349,521 $353,086 $356,687 1.02%

Cable Networks $535,013 $723,713 1.35% $731,095 $738,552 $746,085 $753,695 1.31%

TV/Online retailing $238,484 $293,092 1.23% $296,082 $299,102 $302,152 $305,234 1.25%

Figure 2.1 – Historic/Forecast Revenues

The creation of each division’s forecast growth rates are explained below.

Firstly for the newspaper division, market analysis has demonstrated that total copies

printed in the US are falling at a market average of 3% per annum, while consumption is

likely to decrease by 1.5% per annum. The general market outlook for the newspaper

industry suggests that revenues will grow at slower rates before eventually entering a

decline. This market outlook is in-line with the outlook for Scripp’s newspaper division,

which states that revenues are becoming increasingly difficult to grow. Taking this

expectation of falling growth rates into account, we predict that the division’s revenue will

grow at a historically low average of 0.85% over the period.

55
Broadcast Television is the next division to be analysed. Here revenue growth is slowing

as viewers are lost to developing media streams such as the Internet. While this drop in

viewers and advertising revenue may be slowed by the revenue opportunities created via

digital technology, it is likely to be expensive to implement. Coupling these forecasted

revenue drops with the fact that the case states previous periods’ revenue level are

unsustainable as the recent election has caused exaggerated advertising expenditure, we

forecast broadcast television revenues to grow at 1.02%.

Currently Scripp’s cable television division is the fastest growing and is likely to continue

over the forecast period, with advertising dollars expected to continue to flow from

broadcast television into cable with subscription rates increasing as digital technologies

open up greater service possibilities. However, competitive changes and new technologies

are likely to prevent this division from growing as quickly as it has been, plus given a

previous growth rate of 1.35%, we expect revenues to grow by merely 1.31% on average

over the forecast periods.

Finally, analysis of forecast revenues for Scripp’s TV/Online retailing division. This

division has been reducing the rate at which it is incurring losses, and is predicted to have

fierce levels of competition. The TV retailing industry is expected to struggle as online

retailing moves forward, rendering it redundant. In contrast, Internet retailing is expected

to generate solid revenue streams. With revenue growing at 1.23%, we expect revenues to

grow at an average of 1.25% over the forecast period.

56
Forecast Scripps’ Profit in each Sector
As Scripp’s expected revenues for the periods 2005-08 is unveiled, forecasts of their

expense and profit figures is needed to analyse how each division is performing.

Previous Period Forecast Annual

Historic Expenses Growth Rate Forecast Expenses Expense Growth (%)

2003 2004 2005 2006 2007 2008

$423,153 $458,188 1.08% $463,045 $467,953 $472,913 $477,926 1.06%

$218,944 $234,255 1.07% $236,832 $239,437 $242,071 $244,734 1.10%

$330,750 $419,355 1.27% $424,723 $430,159 $435,665 $441,242 1.28%

$260,541 $315,060 1.21% $318,998 $322,986 $327,023 $331,111 1.25%

Figure 2.2 – Historic/Forecast Expenses

Expenses in Scripp’s newspaper division are expected to fall over the forecast period due

to the development of more cost effective technologies, reflected in the forecast figures

lower than historical growth rate of 1.06%. The Broadcast Television division’s expenses

are expected to grow at a faster rate due to the division’s requirement to invest in digital

technologies. Cable Networks are expected to see a slight increase in expenses as they

have a share in digital technologies. However, this will be offsetted by a reduced need to

spend on the development of established network infrastructure. Expenses are expected to

grow at 1.25% in the TV/Online Retailing industry as Scripp’s holdings are expected to

require substantial levels of investment while coming under intense competition that will

increase expenses like advertising.

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 Previous Period Forecast Annual

Historic Profits Growth Rate Forecast Profits Profit Growth (%)

2003 2004 2005 2006 2007 2008

$268,705 $245,936 0.92% $251,921 $253,100 $254,279 $255,458 1.03%

$85,218 $108,243 1.27% $111,736 $112,689 $113,649 $114,616 1.05%

$204,263 $304,358 1.49% $311,740 $313,829 $315,926 $318,030 1.03%

-$22,057 -$21,968 1.00% -$18,978 -$19,897 -$20,833 -$21,789 0.93%

Figure 2.3 – Historic/Forecast Profit

These profit figures (Figure 2.3) provide us with an overall view of where each division is

expected to thrive. Newspapers division is expected to pick up slightly, in line with market

analysis suggesting readership in the US post-recession, while Broadcast Television will

decrease as revenue streams are absorbed by new media. Cable will continue to grow

strongly but not as quickly as recent periods and TV/Online retailing will struggle to

generate profits as competition heats up and further investment needed.

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4. Question 4(a)

Even though quantity based analysis are comprehensible, easier to get and provide a good

understanding of the past, they cannot help as much to present a decision for the future.

Therefore the qualitative analysis of answer 1(b) is seen as the most useful with regards to

coming up with a new strategy. The quantitative analysis can help to understand and prove

the qualitative factors which otherwise would only rely on subjective human interpretation.

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Question 4(b)

The corporate profit margin is an important tool to observe how a company performs and

hence, provides a clear ranking of which division contributed to the overall profit. It is a

tool to identify weaknesses and formulate improvements. Furthermore, it does not take the

products of the divisions in relation to the product life cycle. A company should attempt to

invest in products which are projected to be more established and profitable. Therefore, the

corporate profit margin of the past is not a reliable analysis to frame the future trends and

recommendations.

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Question 4(c)

The type of analysis that could be used in order to support or decide if the firm should

divest a business division would be a Net Present Value (NPV) analysis. NPV analysis is a

financial calculation that involves the discounting back of a division’s expected future cash

flow by a relevant risk rate. This form of analysis is popular as it gives managers a single

figure that they can use to determine how much value a project will add or subtract from

the firm’s overall value, whether they should invest or otherwise. Thus resulting in

discarding of the idea or, if it has already been undertaken, discontinued.

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Question 4(d)

The problem with all kinds of quantity based analysis is that they only rely on past data. To

provide a valuable recommendation, broader understanding of the company, the industry,

the customers and the environment are necessary. The selected text mentioned a few

general reasons for the adjustments in the past and future forecasts are not in-depth,

resulting in not able to draft a reliable recommendation.

If necessary recommendation is required, it is the company’s strategy. Having analysed the

various factors in preceding parts, the company has to identify and concentrate on the key

aspects chosen. Therefore, a five force analysis would be recommended.

To obtain reliability, actions include acquiring a detailed impression of the competitors,

which will provide an insightful view of industrial segmentation. This would aid the

understanding of overall development or gather positive/negative tradeoffs between

competitors.

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5. One Page Report

We have concluded that the most strategic action to undertake would be the divestiture of

the TV/Online retailing division. The Shop-at-Home segment, despite the impressive

revenue growth, it has exhibited poor performance of approximately $22 million of losses.

Its negative effect on the corporate profit margin has persisted and future profitability

prospects are low. Management believes that profitability can be achieved, but not without

additional investments. The proposed synergies between divisions and the company’s

reliance on advertising revenue are attractive. However, uncertainty prevails as the success

of profitability cannot be assured when competition is brutal and management has lack of

expertise. The division’s divestiture will not raise the required $700 million; it is not the

company’s priority to provide the liquidity by taking risks which may spoil the market’s

long-term strategic performance.

The newspaper division is not recommended for divesting due to its important role in the

media conglomerate. The changing demographics due to the baby boom will result in

temporal abnormal gain from increased readership.

With an inspiring growth rate, Scripps’ Network division exhibits its long-term potential

value to the company. Two established networks which are generating profits are vital to

the corporate profitability. Newly developed networks are exhibiting enormous revenue

and are highly speculative - likely to enhance its market position if the unestablished prove

to be successful.

Reaching over 10 million households, the Broadcast Television station’s segment has

proved its profitability. In comparison to the Shop-at-Home division, profitability is more

likely to be achieved in this division.

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6. Bibliography

Comcast raising cable rates 7 percent. (2005, December 30). The Harford Courant,

Retrieved 25th April 2006, from LexisNexis Database.

Iacovou, C., and S. Davis (2005). A Tough Decision at the E. W. Scripps Company.

Working Paper – Wake Forest University.

Mouse may nibble away at shopping bags. (2006, April 5). The Economic times, India,

Retrieved 25th April 2006, from LexisNexis Database.

Newspaper Industry Trends and Implications for Suppliers. (2004). Retrieved 24th April,

2006, www.npes.org/research/newspapers.pdf

Traditional Broadcast TV is still alive and well. (2006, January 24). M2 Presswire,

Retrieved 24th April 2006, from LexusNexis Database.

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