Chapter 06 – Financial Strategy
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CHAPTER 6
FINANCIAL STRATEGY
ANNOTATED OUTLINE
INSTRUCTOR NOTES
• Financial objectives and goals are an integral component in
every aspect of a retailer’s strategy. Retailers can use
financial tools to measure and evaluate their performance.
I. Objectives and Goals
• The first step in the strategic planning process involves
LO 6-1 Review the strategic
objectives of a retail firm.
See PPT 6-3
A. Financial Objectives
• A commonly used measure of the return on investment is
return on assets (ROA), or the profit generated by the
assets possessed by the firm.
B. Societal Objectives
• Societal issues are related to broader issues about
providing benefits to society – making the world a better
place to live, such as providing employment opportunities
Ask students to provide specific
examples of retailers meeting
societal objectives
C. Personal Objectives
• Many retailers, particularly owners of small, independent
businesses, have important personal objectives such as
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• Whereas societal and personal objectives are important to
II. Strategic Profit Model
• The strategic profit model, illustrated in Exhibit 6-1, is a
method for summarizing the factors that affect a firm’s
financial performance, as measured by ROA.
• Asset turnover is the retailer’s net sales divided by its
assets. This measure assesses the productivity of a firm’s
investment in its assets and indicates how many sales
dollars are generated by each dollar of assets.
LO 6-2 Contrast the two paths
to financial performance using
the strategic profit model.
See PPT 6-4
A. Profit Margin Management Path
• The information used to analyze a firm’s profit margin
management path comes from the income statement, also
called the statement of operations or profit and loss (P&L)
statement.
1. Components in the Profit Margin Management Path
• The components in the profit margin management path
See PPT 6-7, 6-8, and 6-9
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margin.
• The term net sales refers to the total revenue received by
a retailer after refunds have been paid to customers for
returned merchandise and payments have been collected
• Gross margin, also called gross profit, gives a retailer a
measure of how much profit it’s making on merchandise
sales without considering the expenses associated with
operating the store and corporate overhead expenses.
Gross margin = Net sales – Cost of
goods sold.
• Operating profit margin is the gross margin minus the
operating expenses and reflects the performance of
retailers’ fundamental operations
Operating profit margin = Gross margin − Operating
expenses
Discuss the difference in gross
margin percentage between
Costco and Macy’s. Why is the
difference to be expected?
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2. Analyzing Performance in the Profit Margin Management
Path
• Retailers use ratios with net sales in the denominator
when evaluating a retailer’s performance and comparing it
with other retailers’.
• Operating expenses (in%), are expressed as a percentage
of net sales to facilitate comparisons across items, stores,
and merchandise categories within and between firms.
Operating expenses / Net sales = Operating expense %
See PPT 6-10
Discuss the difference in
expense to sales ratio between
B. Asset Turnover Management Path
• The information used to analyze a firm’s asset
management path primarily comes from the retailer’s
balance sheet.
See PPT 6-15
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1. Components in the Asset Turnover Management Path
• Assets are economic resources (such as inventory or store
fixtures) owned or controlled by an enterprise as a result
of past transactions or events.
• By accounting definition, current assets are those that can
normally be converted to cash within one year.
Inventory turnover =
COGS / Average inventory at cost
• Think of inventory as a measure of the productivity of
inventory—how many sales dollars can be generated from
$1 invested in inventory.
considered at retail because
sales are in terms of retail as
well.
Ask students what a turnover
of 1.61 means. (Answer: For
every dollar in inventory the
firm generates $1.61 in sales.)
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critical assets used by retailers to develop a sustainable
competitive advantage (discussed in Chapter 5) such as
brand image, customer loyalty, customer service,
Ask students to think about the
2. Analyzing the Performance of the Asset Turnover
Management Path
• Asset turnover is an overall performance measure from
See PPT 6-16
Ask students which firm has the
C. Combining the Profit Margin and Asset Turnover Management
Paths
• Overall performance, as measured by ROA, is determined
by considering the effects of both paths by multiplying the
net profit margin by asset turnover:
D. Implications for Improving Financial Performance
• The strategic profit model assumes two important issues:
III. Evaluating Growth Opportunities
• To illustrate the use of strategic profit model for evaluating
LO 6-3 Illustrate the use of the
strategic profit model for
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A. Profit Margin Management Path
• Review Exhibit 6-7 and Exhibit 6-8. The gross margin
percentage will be the same in both channels (50%), but
B. Asset Turnover Management Path
• Asset turnover for Gifts-to-Go.com will be 2.09 instead of
C. Using the Strategic Profit Model to Analyze Other Decisions
• Another investment that Kelly might consider is installing a
computerized inventory control system that would help
her make better decisions about which merchandise to
IV. Setting and Measuring Performance Objectives
• There are measures used to assess the performance of
specific assets possessed by a retailer—its employees, real
LO 6-4 Review the measures
retailers use to assess their
performance.
A. Top-Down versus Bottom-Up Process
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• Top-down planning means that goals are set at the top of
the organization and filter down through the operating
levels.
• This top-down planning is complemented by a bottom-up
planning approach. Buyers and store managers are also
estimating what they can achieve. Their estimates are
transmitted up the organization to the corporate planners.
Describe a situation where
management has set a higher
sales goal for a particular
For a comparison of top-down
and bottom-up planning, refer
to PPTs 6-27 and 6-28.
B. Who Is Accountable for Performance?
• At each level of the retail organization, the business unit
and its manager should be held accountable only for the
C. Performance Objectives and Measures
• The measures used to evaluate retail operations vary
depending on (1) the level of the organization where the
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D. Types of Measures
• Retailers’ performance measures are broken into three
types: input measures, output measures, and productivity
measures.
• A productivity measure (the ratio of an output to an input)
determines how effectively a retailer uses a resource.
See PPT 6-29
Productivity measures are a
ratio of outputs to inputs. Ask
1. Corporate Performance
• At a corporate level, retail executives have three critical
resources (inputs)—merchandise inventory, store space,
and employees—that they can manage to generate sales
and profits (outputs).
2. Merchandise Management Measures
• The critical resource (input) controlled by merchandise
managers is merchandise inventory.
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3. Store Operations Measures
• The critical assets controlled by store managers are the use
of the store space and the management of the store’s
E. Assessing Performance: The Role of Benchmarks
• The financial measures used to assess performance reflect
the retailer’s market strategy.
See PPT 6-30
V. Summary
• Basic elements of the retailing financial strategy and
examines how retailing strategy affects the financial
performance of a firm. The strategy undertaken by
retailers is designed to achieve financial, societal, and
personal objectives.
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Chapter 06 – Financial Strategy
ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS
2. INTERNET EXERCISE Go to the latest annual reports and use the financial information to
update the numbers in the net profit margin management model and the asset turnover
management model for Nordstrom and Walmart. Have there been any significant changes in
their financial performance? Why are the key financial ratios for these two retailers so
different?
Depending on the time of year, this information might not be different from what is already in
the text. Once new information is available, students will obviously observe differences in sales
3. GO SHOPPING Go to your favorite store and interview the manager. Determine how the
retailer sets its performance objectives. Evaluate its procedures relative to the procedures
presented in the text.
After the interview, students should be able to articulate whether or not the store uses a top–
down or bottom-up approach in setting objectives. A top-down approach involves planning at