CH 8

1. Suppose your company has just acquired a firm that produces battery-operated lawn mowers,
and strategists want to implement a market-penetration strategy. How would you segment the
market for this product? Justify your answer.
Answer: Several segmentation bases can be used in this case. First, segmentation by geographic location
may be useful. Battery-operated lawn mowers may not be appropriate for large yards. Therefore,
segmentation based on whether families live in cities or suburbs may be useful. Second, families who are
concerned about the environment may be more likely to purchase a battery-operated lawn mower. In this
case, psychographic segmentation will be useful. In addition, because it is an innovative product, families
with a higher socioeconomic status may be more likely to purchase a battery-operated lawn mower.
Furthermore, men tend to make decisions about lawn equipment. In this case, demographic segmentation
will be useful. Often times, segmentation is accomplished using several bases.
2. Explain how you would estimate the total worth of a business.
Answer: There are three approaches described in the chapter: 1) what a firm owns, 2) what a firm earns, or
3) what a firm will bring in the market. The first approach in evaluating the worth of a business is
determining its net worth or stockholders’ equity.
The second approach to measuring the value of a firm grows out of the belief that the worth of any business
should be based largely on the future benefits its owners may derive through net profits.
The third approach is to let the market determine a business’s worth. First, base the firm’s worth on
the selling price of a similar company. Second, calculate a price-earnings ratio. To use this method,
divide the market price of the firm’s common stock by the annual earnings per share and multiply this
number by the firm’s average net income for the past five years. The third approach can be called the
outstanding share method. To use this method, simply multiply the number of shares outstanding by
the market price per share and add a premium. A recommended procedure is to determine the firm’s
value using all three approaches. Then decide which amount is most reasonable or use an average of
the three computed amounts.
3. Explain why EPS/EBIT analysis is a central strategy-implementation technique.
Answer: EPS/EBIT analysis is a key strategy-implementation technique because additional capital is often
needed to implement strategies. EPS/EBIT analysis provides information regarding whether (1) stock should
be issued, (2) funds should be borrowed, or (3) a combination of stock and debt is the best method to raise
the capital.
4. How would the R&D role in strategy implementation differ in small versus large organizations?
Answer: The R&D role in strategy implementation would depend more on the type of industry than the size
of the firm. Some firms do research and development solely as their business.
5. Discuss the limitations of EPS/EBIT analysis.
Answer: An EPS/EBIT analysis is the most widely used technique for determining whether debt, stock, or a
combination of debt and stock is the best alternative for raising capital to implement strategies.
Several considerations should be made whenever using this technique.
Profit levels may be higher for stock or debt alternatives when EPS levels are lower.
Control is also a concern. When additional stock is issued to finance strategy implementation, ownership and
control of the enterprise are diluted. When using EPS/SBIT analysis, timing in relation to movements of stock
prices, interest rates, and bond prices becomes important.
6. Explain how marketing, finance/accounting, R&D, and computer information systems managers’
involvement in strategy formulation can enhance strategy implementation.
Answer: Marketing, finance/accounting, R&D, and computer information systems managers play a vital role
in implementing strategies, so their active involvement in formulating strategies is needed to gain support
and commitment for actions to come. Perhaps, more importantly, their expertise should weigh heavily in
prioritizing internal strengths/weaknesses, external opportunities/threats, and in generating and selecting
from among alternative strategies.
7. Consider the following statement: “Retained earnings on the balance sheet are not monies
available to finance strategy implementation.” Is it true or false? Explain.
Answer: This is a true statement. Retained earnings on the balance sheet represent historical earnings that
have been reinvested in the firm in the form of plants, equipment, inventory, and the like.
8. Explain why projected financial statement analysis is considered both a strategy-formulation
and a strategy-implementation tool.
Answer: Projected analysis is a strategy-formulation tool in the sense that it enables the financial impact of
alternative strategies to be forecasted and scrutinized. This information can be instrumental in selecting
from among feasible alternative strategies. It allows various approaches for implementing strategies to be
scrutinized.
9. Discuss the management information system at your college or university.
Answer: This answer will vary by institution.
10.What effect is e-commerce having on firms’ efforts to segment markets?
Answer: E-commerce is making it possible for firms to further segment their markets at low cost due to the
inherent cost advantages of selling via the Internet. In addition, the Internet makes market segmentation
easier today because consumers naturally form “communities” on the Web as explained in the feature in
the chapter titled “Does the Internet Make Market Segmentation Easier?”
11.Under what conditions would Retained Earnings on the Balance Sheet decrease from one year
the next?
Answer: The only way for RE to decrease from one year to the next on the balance sheet is 1) if the firm
incurred an earnings loss that year or 2) the firm has positive net income for the year but paid out dividends
more than the net income.
12.In your own words, list all the steps in developing projected financial statements.
Answer: The six steps required to perform a projected financial analysis:
• Prepare the projected income statement before the balance sheet. Start by forecasting sales
as accurately as possible.
• Use the percentage of sales method to project the cost of goods sold (CGS) and the expense
items in the income statement. For example, if CGS is 70 percent of sales in the prior year then use that
same percentage to calculate CGS in the future year. Items such as interest, dividends, and taxes must
be treated independently and cannot be forecasted using the percentage-of-sales method.
• Calculate the projected net income.
• Subtract from the net income any dividends to be paid for that year. This remaining net
income is Retained Earnings. Reflect the Retained Earnings total on both the income statement and
balance sheet because this item is the key link between the two projected statements. Bring this
retained earnings amount for that year (NI-DIV = RE) over to the balance sheet by adding it to the prior
year’s RE shown on the balance sheet. The RE on the balance sheet is a cumulative number rather than
money available for strategy implementation.
• Project the balance sheet items, beginning with retained earnings and then forecasting
stockholder’s equity, long-term liabilities, current liabilities, total liabilities, total assets, fixed assets, and
current assets (in that order). Use the cash account as the plug figure; that is use the cash account to
make the assets total the liabilities and net worth. Then, make appropriate adjustments.
• List comments on the projected statements. Any time a significant change is made in an item
from a prior year to the projected year, a remark should be provided.
13.Why should you be careful not to use historical percentages blindly in developing projected
financial statements?
Answer: One must be aware of what the firm did to achieve past sales increases which may not be
appropriate for the future unless the firm takes similar or analogous actions. Similarly, for manufacturing
firms, if the firm is already operating at 100% capacity in all shifts then new manufacturing facilities would
be necessary to increase sales further.
14.In developing projected financial statements, what should you do if the amount you must put in
the Cash account (to make the statement balance) is far more (or less) than desired?
Answer: If the cash needed to balance the statements is too small or too large, make appropriate changes to
borrow more (or less) money than originally planned.
15.Why is it both important and necessary to segment markets and target groups of customers,
rather than marketing to all possible consumers?
Answer: Segmentation is the subdividing of a market into distinct subsets of customers according to needs
and buying habits. If all consumers are marketed to in the same way, it will be difficult to please all the
different needs and buying preferences in the marketplace. To tailor offerings to distinct subsets in an
efficient and effective manner, segmentation is necessary.
22. In full detail, explain the EPS/EBIT chart.
Answer: In this diagram, the combination financing option offers the most consistent performance in EPS.
Whether EBIT is low or high, EPS is moderate. Stock financing will result in a low EPS when EBIT is low but the
highest EPS if EBIT is high. Debt offers a higher EPS than stock in recessionary times, but in boom times will
result in a lower EPS.