Question

1. The performance measures/metrics used to assess organizational performance are many. The measures employed by managers must be applicable/relevant and vary depending on certain issues. Once we are able to measure strategic initiatives, we can manage them. Listed below are three corporate-level strategies/initiatives discussed in class. For each corporate-level strategy/initiative listed below, offer three (3) performance measures relevant (i.e., especially meaningful) for monitoring the success of that particular strategy/initiative. Offer the measure and explain why it is especially relevant for that particular strategy/initiative. Make sure each measure has its own explanation accompanying it. Keep in mind that I am asking you for actual measures/metrics!

• Product Development
• Backward Vertical Integration
• Related Diversification

Let me give you a hint using horizontal integration. When I think of horizontal integration, I think of the airline industry when an airline buys another airline. To measure the success of say Delta Airlines buying Northwest Airlines, I would look at cost per gallon of jet fuel because the now larger airline should have more bargaining power over fuel suppliers and thus command a better price. This lower fuel cost should in turn increase the airline’s GPM since its part of Cost Of Services Delivered. Another measure I would use would be ROE because a larger airline should be able to increase its NPM due to efficiencies gained in variable and fixed costs (as reported on a common-sized income statement). An increase in NPM would then positively impact ROE because as you know from your finance class when discussing the DuPont decomposition for ROE, ROE = NPM*TAT*(1+D/E).

You may use generic measures/metrics (e.g., ROE, ROA, current ratio, etc.) or specific to an industry (e.g., cost per gallon of jet fuel, profit per thousand cigarettes, extraction cost per barrel of oil, etc.). Keep in mind that indirectly financial measures are also acceptable (e.g. measures relating to quality, customer satisfaction, employee morale, etc.). Additionally, you may even want to answer the question drawing upon the industry in which you work or have chosen to analyze for your group project.

Answer 1

hint using horizontal integration. When I think of horizontal integration, I think of the airline industry when an airline buys another airline. To measure the success of say Delta Airlines buying Northwest Airlines, I would look at cost per gallon of jet fuel because the now larger airline should have more bargaining power over fuel suppliers and thus command a better price. This lower fuel cost should in turn increase the airline’s GPMsince its part of Cost Of Services Delivered. Another measure I would use would be ROE because a larger airline should be able to increase its NPM due to efficiencies gained in variable and fixed costs (as reported on a common-sized income statement).

• Product Development
  • R&D spend % : This metric is quite important for the development of innovative products. R&D helps in improving the product and making it more value adding for the customers. R&D spend % is basically the percentage of gross company sales spent in the R&D sector. This metric must be high to facilitate the product development and maintain the competitive edge of the company.
  • Product ROI: This metric helps in evaluating the return on investment in a product. High the product ROI, more profitable it can be considered. Product ROI is calculated by dividing the sales amount of the products sold by the cost of developing the product.
  • New product released: This is a great way of analyzing the potential of product development by the company. This metric is calculated by estimating the total new products in consideration, in development and already released in a year. Usually this metric is kept high by companies.
• Backward Vertical Integration
  • Rate of Transport cost reduction: Usually a company opts for backward vertical integration if it wants to cut down the transport costs and have more control. A company is considered to be performing well in backward vertical integration, if the transport costs of the company have been reduced substantially. This metric is calculated by dividing the difference of transport cost before and after company opted for backward vertical integration divided by the expenses of the company.
  • Change in making cost: A backward vertical integration is considered to be successful if it has been able to reduce the making cost of the product substantially. This is calculated by change in making cost divided by making cost of company before backward integration.
  • Quality rate %: This helps in assessing if there is any change in the product quality post backward integration. This metric is calculated by dividing quality assess by total sales of the company. Usually it is compared with the quality rate of previous years to analyze if the backward integration was effective.
• Related Diversification
  • Resource utilization: Related diversification facilitates the sharing of resources between 2 product units. Hence a related diversification can be considered successful if the resource utilization is 100%. Resource utilization is calculated by dividing the manhour consumed in product development and management by total manhour available.
  • New Product ROI: This metric helps in evaluating the return on investment in a new product. High the product ROI, more profitable it can be considered. New Product ROI is calculated by dividing the sales amount of the new products sold by the cost of developing the product.
  • Increase in demand: Related diversification is considered successful if it increases the overall demand of the products offered by the company. This metric can be calculated by dividing the rate of change in demand by original demand of the products.