Question

There are several options for evaluating a firm's performance. Among these are Net profit trends, market share trends, and the balanced scorecard. These have all been used to evaluate your firm's performance in the simulation. Provide a comparative discussion of the three indicators mentioned above.

Answer 1

A profitability trend is the evolution of profit within a business. An upward trend means that profit has generally increased over time in the short or long run. A downward profitability trend means profits are declining. Recognizing problems early in profitability trends gives you a better chance to address revenue and cost issues in play. Companies actually monitor three types of profitability trends -- gross, operating and net.

Net profit is the result of subtracting costs and expenses from revenues. Sales minus cost of goods sold equals gross profit and gross profit minus expenses equals operating profit. Deducting taxes from operating profit results in net profit. Net profit is the amount business owners receive as income from business operations during a particular time period. Net profit trends refer to the general tendency or direction of increase or decrease in net profit over a period of time. Presenting a series of chronologically arranged net profit amounts and calculating the percentage increase or decrease of each net profit over the earliest net profit will reveal the general direction of change over time. Net profit margins are those generated from all phases of a business, including taxes. In other words, this ratio compares net income with sales. It comes as close as possible to summing-up in a single figure how effectively the managers are running a business. Trend charts are graphical representations of data arranged in a time sequence. It shows a trend line that displays the general pattern of change. Using the chart to observe net profit trends over a given period of time allows you to identify favorable and unfavorable trend changes. To maintain uniformity and accuracy of comparison, the net profit figures used must have similar time periods, such as months to months, quarters to quarters and years to years. When a company has a high profit margin, it usually means that it also has one or more advantages over its competition. Companies with high net profit margins have a bigger cushion to protect themselves during hard times. Companies with profit margins reflecting a competitive advantage can improve their market share during the hard times, leaving them even better positioned when things improve.

Market share is the percent of total sales in an industry generated by a particular company. Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period. This metric is used to give a general idea of the size of a company in relation to its market and its competitors. The market leader in an industry is the company with the largest market share. Investors and analysts monitor increases and decreases in market share carefully as this can be a sign of the relative competitiveness of the company's products or services. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors.  Changes in market share have a larger impact on the performance of companies in mature or cyclical industries where there is low growth. In contrast, changes in market share have less impact on companies in growth industries. In these industries, the total pie is growing, so companies can still be growing sales even if they are losing market share. For companies in this situation, the stock performance is more affected by sales growth and margins than other factors. A company can increase its market share by offering its customers innovative technology, strengthening customer loyalty, hiring talented employees, and acquiring competitors.Market share is a measure of the consumers' preference for a product over other similar products. A higher market share usually means greater sales, lesser effort to sell more and a strong barrier to entry for other competitors. A higher market share also means that if the market expands, the leader gains more than the others.

A balanced scorecard is a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Balanced scorecards are used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information and use it to make better decisions for the organization. The balanced scorecard model reinforces good behavior in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve learning and growth, business processes, customers, and finance.The balanced scorecard is used to attain objectives, measurements, initiatives, and goals that result from these four primary functions of a business. Companies can easily identify factors hindering business performance and outline strategic changes tracked by future scorecards.

Information is collected and analyzed from four aspects of a business:

1. Learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees use the information to convert it to a competitive advantage over the industry.
2. Business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
3. Customer perspectives are collected to gauge customer satisfaction with quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
4. Financial data, such as sales, expenditures, and income are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.

These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected. The balanced scorecard is thus often referred to as a management tool rather than a measurement tool.