Business Functions

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					     Today’s Topic:
  Company Organizations
     and Functions
  How Businesses are Structured
 to Deliver and Support Products;
                and
 Peoples’ Roles and Compensation

(after we finish “financial measurements”)
          The Course’s First
             Four Weeks
 Companies’ objectives: shareowner wealth,
 earnings/growth, product success --- previously

         statements: earnings and financial
 Financial
 performance, opportunities/challenges --- finish
 today

      and responsibilities: how companies bring
 Roles
 new products to market--- new today

 Business/productplans: creating a plan for
 superior revenue and profit/growth --- next
 week
         Today’s Agenda
 Learnings to date
 Balance sheet and cash flow statements
 Analysis of Medtronic
   (financial and business perspective)

 How businesses are organized
 Organization roles and responsibilities
 Product teams: Getting products to market
 Employee incentives and rewards (comp)
 Readings and Assignment for next week
Today’s Learning Objectives
   confirm our understanding of how to analyze
    an income statement

   begin to look at the business of a company
    (customers, products, competitors, ... )

   learn about the process companies use to
    bring new products to market

   understand how companies use compensation
    to align personal and corporate objectives
     What we’ve learned so far……

   Companies try to maximize the wealth of their owners -
    -- market cap (stock price) plus dividends

   Stock price and the ability to pay dividends are driven
    by earnings, and beliefs about future earnings
    growth

   Individual products and services are expected to
    contribute targeted amounts to earnings/growth

   Earnings growth (ultimately) requires revenue growth

   Firms use financial statements to develop plans, and
    measure/analyze/report on their performance
           …..and, in terms of
         business objectives…..
   A company’s basic financial objective is to
    grow its earnings quickly and sustainably,
    in order to raise its stock price and have
    the ability to pay its owners dividends

   Products are successful if and only if they
    attain their targeted contribution to
    corporate earnings
The Income Statement

     Revenues
   - Cost of Goods Sold (COGS)
   = Gross Margin (gross profit)
     - M&S expense
     - R&D expense
      - G&A expense
   = Operating income (EBIT)
     - Interest
     - Taxes
   = Net income (earnings)
       Key Financial Concepts
   Operations vs. total (e.g., OI vs. NI)

   Normalizing results: return measures (e.g., OI as
    % of revenue; operating return on assets)

   Knowing what “good” results are: general or
    competitive (industry) analogs/benchmarks

   Recognizing cash vs. non-cash --- today
       - Measures (e.g., OI vs. NOCF)
       - Capital goods: depreciation/amortization
       - Working capital: inventory, accounts rec’bl.
        Method: How to analyze an
            Income Statement

   (First, compute “the percentages”)
   Operating income vs. net income
   In-period operating performance: costs and
    expenses as a % of revenue; compare to
    benchmarks
   Cross-period performance (trends): relative
    change in rev, costs, expenses, earnings…
    improvements vs. deteriorations, and why
   Going-forward opportunities and challenges/
    risks for each line item
       “Good” Operating Returns
        in the Business Market
                          Sold direct    Sold
                                        indirect
               Software        27%            23%
Higher GM %
Higher R&D %
               Hardware        18%            12%

               Service         15%              -



                                   Lower GM %
                                  Lower M&S %
       “Good” Operating Returns
        in the Consumer Market
                          Sold direct   Sold indirect

               Software        20%             16%

Higher GM %    Hardware        11%             7%
Higher R&D %

               Service           9%            -



                                  Lower GM %
                                 Lower M&S %
    Financial Statement Objectives

   Income statement            revenues, costs,
      (for a time period)        expenses, &
                                 earnings


   Balance sheet               assets, liabilities and
      (at a point in time)       net capital



   Cash Flow statement         cash ($$) in and out ,
      (for a time period)        and uses of cash
The Balance Sheet Equation


 Net worth = what you own - what you owe


     Net Capital = Assets - Liabilities


                     or
     Assets = Liabilities + Net Capital
      The Balance Sheet
       Assets            Liabilities & Capital
 Current Assets:
      Cash               Current Liabilities:
      +Accts Rec.               Accounts Payable
      +Inventory                +Accrued taxes
     +Prepaid expenses          +Accrued expenses
                                + Short term debt
+ Net PP&E:              + Long term debt
       PP&E at cost      Total liabilities
     - Depreciation      + Retained earnings/loss
 Total Assets             + Owners’ equity
                         Total liabilities&capital
Cash Flow Statement
     Net operating cash flow
     (cash from operations)

    + Net cash from investing
       activities:
          capital expenditures
          +short term investments
           +securities (long term)

    + Net cash from financing
        activities:
           debt financing
           +stock financing
      Net change in cash
Net Operating Cash Flow
      Net operating cash inflows:
             revenues
          - change in accts rec
     - Net operating cash outflows:
           COGS - depreciation
          + operating expenses
           + change in prepaid exp
           - change in accrued exp
           + change in inventory
           - change in accts payable
        Net operating cash flow
                (NOCF)
Today’s Learning Objectives
   confirm our understanding of how to analyze
    an income statement

   begin to look at the business of a company
    (customers, products, competitors, ... )

   learn about the process companies use to
    bring new products to market

   understand how companies use compensation
    to align personal and corporate objectives
     Assignment for Next Week:
       Analyzing a Company
            Medtronic

              Medical technology

                -Founded   in 1949
-$16.25 B annual revenue and OI%=29.0% (last 12
                     months)
     - $41.9 B market cap, current P/E = 11.7

 -Market share leader in several product categories
    Getting Info on Medtronic
   Company website: www.medtronic.com
     - especially “Investor Relations” section

   Yahoo: finance.yahoo.com
      - enter “MDT” (Medtronic’s stock ticker symbol)

   Securities Exchange Commission: www.sec.gov
      - select “search for company filings,” enter MDT,
      see esp. the 10K annual report filed 6/25/12
Medtronic Stock Price: last five years
     Assignment Questions -- 1
   What business is Medtronic in?
   What product categories does it compete in?
   Who are its customers?
   How does it sell its products?
   Who are its competitors?
   Is its financial performance good?
       (use the annual income statement for YE Apr2012 (FY12);
        suggestion: use the version in the SEC 10K report)
   Is it improving or deteriorating? In absolute
    terms? In relative (% revenue) terms? Why?
   What were the major determinants of the change
    in relative operating income from FY11 to FY12?
     Assignment Questions -- 2
   Why did MDT stock price fall significantly during June
    – July 2011? (suggestion: look for MDT news items in
    that time period; try Yahoo Finance’s “interactive
    chart” for MDT; click on “key developments” under
    “events”)

   How has MDT’s stock price fared vs. the overall stock
    market (use the Nasdaq index) in the last 2 years?
    Why?

   What opportunities & challenges does Medtronic
    face in accelerating its revenue and profit growth in
    the future?
    (see esp. 10K data, “management’s discussion…”)

   If you owned MDT stock, would you sell it right now?
MDT Opportunities & Challenges
 Revenue?    (product categories?)
 Costs?
 Expenses?
 Operating   Income?

 Markets? (product/customer/geog?)
 Competitors?
 Regulatory/governmental?
    A Business’ Functions and
          Organizations
 Marketing (incl. “product management”)
 R&D
 Sales
 Operations (manufacturing,
  distribution/logistics, service operations)
 Support:    IT, Finance, HR, Legal,
               Investor Relations, Public/
               Media Relations (PR), Quality
               Office, etc
     Alternative Org Structures
    Determined largely by the level to which the
            multiple functions report

   Corporate (functional structure)

   Division (product groups or market groups)

   Product (local responsibility)
   Getting Products to Market:
      from concept to product launch
    (various names/labels for this activity)…

 R&D/Engineering   (a misnomer)
 New product development (NPD)
 Product realization
 Product innovation
 Product commercialization
 Product development & management
 …etc…
    What’s a “New” Product?
  New
   to
Company


              New
            Product                Completely
              Line                   New


            Core         Line
           Product    Extensions
          Revisions
                                   Repositionings
          Product Enhancements                       New
                                                    to the
                                                    World
 Many new products fail…

“35 percent of all new [IT] products
now fail to achieve minimum
acceptable market share or financial
return --and the failure rate is
rising.”
    VAR Business, November 1999
 New Product Failure Rates

For every 4 projects that enter development, only
            1 makes it to the market.

  At launch, at least 1 of 3 products fail despite
             research and planning.

 An estimated 46% of all resources allocated to
 product development and commercialization by
U.S. firms is spent on products that are cancelled
   or fail to yield an adequate financial return.


      Source : Winning at New Products, Dr. R.G. Cooper, 2001
What are some reasons that a new
      product might “fail” ?

 (i.e., fail to meet the market and
    financial objectives set for it)
Some Reasons for Product Failures
 Mismatched to market needs
 Little/no competitive differentiation
 Late to market
 Too costly (price and/or COGS)
 Poor quality
 Inability to deliver to customers
 Poor service/support
 Ineffective sales/channels
 Unrealizable objectives
 …
Getting Products to Market

 Structure:     product teams

 Process:    how the team will work

 Plan:   the product plan
          (to be discussed next week)
Product Development Process:
      Overall Structure

    Linear (“handoffs”)

    Parallel/concurrent (multifunction
     involvement at all/most stages)
Core Product Team and Roles
   Marketing - leader, product definition,
    project management, marketing program,
    sales training, forecasts, financials

   R&D - product development (milestones and
    dates), tech support for marketing/sales,
    transfer to manufacturing, support for
    trials/betas, product fixes/revisions

   Operations - manufacturing engineering,
    manufacturing (ramp), product costs and
    quality, logistics and service plan
      Other Team Members
     Depends on the Product, Market and
            Company Practices

 Sales? Friendly customers?
 Finance?

 Information technology/MIS?

 Field operations (installation and service)?

 Public Relations?

 Partner companies (esp. manufacturing
  and/or sales and service)?
Product Development Process:
     Common Elements

 Stages/phases with “gates”
 Customer involvement and/or input

 Concept-through-lifecycle tenure

 Goals/measurements/rewards
  focused on overall success
Example of NPD Stages & Gates
Product Development Process:
    Some Best Practices
 design-to-market (customers/needs)
 design-to-cost (COGS)
 concurrent engineering
 requirements “freeze”
 time-driven milestones
 time-to-market or time-to-volume
 fast iteration
 cross-team communication
 team goal compensation
Employee Incentives/Rewards
 Assigned  work
 Working conditions

 Promotion (power and perks)

 Recognition

 (Direct) Compensation ($$)

 Benefits ($$: medical, dental, legal,
  401-K/savings/ESOP, ESPP, etc)
Forms of Direct Compensation
   Salary (fixed wages, paid regularly)

   Bonus (annual/quarterly/spot payments from
    a pool, often based on profits)

   Stock options (the option to buy stock at a
    specific strike price, upon future vesting)

   Stock grants (grants of stock upon future
    vesting, often with restricted rights)
So, why should you care about
     your company’s….
    Revenue     growth ?

    Efficient   use of resources?

    Earnings    ?

    Stock   price ?
What would you do…?
 You need to decide whether to add a
particular feature to a product you are
               designing.

 The product requirements document
         doesn’t mention it.

 You ask someone in Marketing, but he
really can’t say with confidence whether
             to add it or not.
What would you do…?
You are behind schedule in implementing
an important new process technology for
         the Manufacturing line.

  A sales person asks you to join her in
visiting an important potential customer.

The customer location is in Japan and the
        visit will take 3-4 days.
What would you do…?
 You need a new piece of test equipment
          for your design lab.

A manufacturing engineer on your product
team also needs a (different) piece of test
equipment; there’s not enough money for
                 both.

Your product team leader (a non-technical
 person from Marketing) asks the two of
 you to decide which one to buy, and to
  explain the reason for your decision.
What would you do…?
 Your product team is meeting to make
 some important decisions on: (1) new
product directions, (2) which markets to
   focus on, and (3) how to improve
           customer service.

    You are asked to represent the
engineering department at the meeting.

  What contributions will you make to
         these deliberations?
 What would you do…?
   You have an idea for an exciting new
   intrusion detection product, based on a
     new signal processing algorithm you
                  invented.

  You’d like to convince “management” to
    fund the development of this product.

What arguments will be persuasive, and will
        you be able to make them?
        Next week…….

       Creating a
  winning business plan

  Key aspects of a successful plan

Critical importance of differentiation
      Readings for Next Week
   Writing a Business Plan: The Basics
      (first article in casebook)


   Sources of Information on Starting a
    Business
       (course website under “Supplementary Materials”)


   Opportunity Assessment Aperture
      (course website under “Supplementary Materials”)

   FHP Wireless
       (in casebook; our first case analysis)
          FHP Wireless case
   Timeframe is late 2002
   FHP has invented a unique (?) technology for
    building wide-area wireless networks (Wi-Fi)
   Their first-year sales efforts have been mostly
    unsuccessful
   They need to decide which customers to target:
    current targets, telecommunications companies,
    or public safety
   ……and whether they need to change/enhance
    their product
   ……and they are just about out of money, and are
    looking for additional investors
         Homework Questions
   What are the reasons FHP Wireless is having
    difficulty in getting sales and revenues?

   How is FHP’s solution differentiated from
    customers’ other alternatives?

   Which customer(s) should they pursue? Why?

   How can they make their (whole) product more
    appealing to potential customers?

    (see the next four slides and the presentation
     materials for next week for homework “hints”)
   The “Whole” Product:
The Customer’s Perspective



           The
         Product
          Itself
Dimensions of the “Whole” Product:
       Everything Customers Care About

   The product itself        Installation
   Auxiliary or related      Payment method
    products                  Storage/movement
   Price and cost-in-        Aesthetics/style
    service                   Advice on use
   Awareness and             Help in use (e.g.,
    information                hotline)
   Where it is sold          Returns/exchanges
   Ease of choice,           Service/repair
    purchase, ordering
   Brand image               Disposal
   Delivery                  and…
          Differentiation
    from Competitors’ Products
   Whole product differentiation is the answer to:

       Why do customers choose your product
       instead of somebody else’s ?
       (or buying nothing at all?)

   Product differentiators are the things that are
    unique or best about the whole product compared
    to the customers’ other alternatives
    (differentiators must include words like:
            only, highest, cheapest, fastest,…)

   Potential areas for differentiation = dimensions of
    the whole product (product features, price, sales,
    marketing, customer service/support, brand, etc)
Customer Alternatives are the
  Competitors’ Products:
     Like-products: products of the same
      “type”
          e.g., for an airline: airline flights
          provided by other competitors

     Substitute products: other ways the
      customer can obtain a similar benefit
          e.g., bus, train, auto, boat,
          video conferencing, letter

				
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