Marketing Chapter 6 Homework The first step in the strategic planning process involves articulating the retailer’s objectives and the scope of activities it plans to undertake.

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

articulating the retailer’s objectives and the scope of

activities it plans to undertake.

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

• Regardless of the form the objective takes, performance

with respect to societal objectives is more difficult to

measure than financial objectives.

C. Personal Objectives

• Many retailers, particularly owners of small, independent

businesses, have important personal objectives such as

self-gratification, status, and respect.

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.

• In fact, two different retailers with wide discrepancies in

net profit margin and asset turnover could have exactly the

same return on assets. See Exhibit 6-2.

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

are net sales, cost of goods sold (COGS), gross margin,

operating expenses, interest and taxes, and net profit

See PPT 6-7, 6-8, and 6-9

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

from vendors for promotions:

• 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.

• The operating expense category includes salaries for sales

associates and managers, advertising, utilities, office

supplies and rent.

• 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

See PPT 6-7, 6-8. and 6-9

Discuss the difference in gross

margin percentage between

Costco and Macy’s. Why is the

difference to be expected?

Net profit margin = Operating profit margin − Other

income or expenses − Interest − Taxes

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 %

• Net profit margin (in%) facilitates comparisons across

firms and is often expressed as a percentage of sales.

Net profit / Net sales = Net profit %

See PPT 6-10

Discuss the difference in

expense to sales ratio between

B. Asset Turnover Management Path

• The income statement summarizes the financial

performance over a period of time, while the balance

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.

• Merchandise inventory is a retailer’s lifeblood. Exceptions

to this generalization are service retailers, who carry little

or no inventory.

• Inventory turnover is used to evaluate how effectively

managers utilize their investment in inventory:

Inventory turnover =

COGS / Average inventory at cost

• Assets that are not likely to be converted to cash within

one year represent noncurrent assets.

• Fixed assets are assets that require more than a year to

convert to cash.

See PPT 6-19

Average inventory is always

considered at retail because

sales are in terms of retail as

well.

Ask students what a turnover

why they would expect this to

be the case. Whose inventory

turnover would be higher: a

discount store or a specialty

retailer? Why?

critical assets used by retailers to develop a sustainable

competitive advantage (discussed in Chapter 5) such as

2. Analyzing the Performance of the Asset Turnover

Management Path

• Asset turnover is an overall performance measure from

the asset side of the balance sheet.

Asset turnover = Net sales / Total assets

See PPT 6-16

Ask students which firm has the

highest asset turnover and why

they would expect this to be the

case.

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:

• First, retailers and investors need to consider both net

profit margin and asset turnover when evaluating the

retailer’s financial performance.

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

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

the net profit % will be higher in the Internet channel

(15.9% vs 14.3% in stores).

B. Asset Turnover Management Path

• Asset turnover for Gifts-to-Go.com will be 2.09 instead of

1.84 in stores.

• The ROA for Gifts-to-Go.com will be 33.25% versus 26.29%

in stores.

C. Using the Strategic Profit Model to Analyze Other Decisions

IV. Setting and Measuring Performance Objectives

• There are measures used to assess the performance of

specific assets possessed by a retailer—its employees, real

estate, and merchandise inventory. Retailers use these

measures to evaluate their firm’s performance and set

objectives.

LO 6-4 Review the measures

retailers use to assess their

performance.

A. Top-Down versus Bottom-Up Process

• 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.

• Differences between bottom-up and top-down plans must

be resolved through a negotiation process involving

corporate planners and operating managers.

Describe a situation where

management has set a higher

sales goal for a particular

period but has also cut

For a comparison of top-down

and bottom-up planning, refer

to PPTs 6-27 and 6-28.

B. Who Is Accountable for Performance?

• Performance objectives and measures can be used to

pinpoint problem areas. The reasons that performance

may be above or below planned levels must be examined.

C. Performance Objectives and Measures

• The measures used to evaluate retail operations vary

depending on (1) the level of the organization where the

decision is made and (2) the resources the manager

controls.

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.

• In general, since productivity measures are a ratio of

outputs to inputs, they can be used to compare different

business units.

See PPT 6-29

Productivity measures are a

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.

• Finally, they negotiate with vendors over the price paid for

merchandise.

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

employees.

E. Assessing Performance: The Role of Benchmarks

• The financial measures used to assess performance reflect

the retailer’s market strategy.

• In other words, the performance of a retailer cannot be

accurately assessed by simply looking at isolated measures

because they are affected by the retailer’s strategy.

• A second approach for assessing a retailer’s performance is

to compare it with its competitors.

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.

• This chapter illustrates the use of the strategic profit model

for analyzing growth opportunities.

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