Case studies & Workshops PDF

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case studies and workshops for the oral exam
case is based on the textbook and connected to the theories we learned...

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Bellagio Casino Resort Key information In-class discussion

2 2 2

Puente Hills Toyota Key information In-class discussion

2 2 2

Global Investors Key information In-class discussion

2 2 3

Raven Capital (Session 7)

4

Key information In-class discussion

4 6

Las Ferreterías de México

7

Key information In-class discussion

7 9

Olympic Car Wash (p.531 Ch.12)

11

Key information In-class discussion

11 11

Boston Lyric Opera Key information In-class discussion

12 12 14

Don Russell (p.641-647 Ch.14) Key information In-class discussion

17 17 17

Golden Parachutes (p.594-597 Ch.13) Key information In-class discussion

19 19 20

Philip Anderson (p.189-190 Ch.5) Key information In-class discussion

21 21 22

Case Studies Management Control Systems

Questions to keep in mind when looking at cases: What business are we in? Environment Problem Bellagio Casino Resort Key information In-class discussion

Puente Hills Toyota Key information In-class discussion

Global Investors Questions to keep in mind when looking at cases: What business are we in? Environment Problem Key information ●

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“GI focused on two activities: investment management (which included research, portfolio manage- ment, and trading) and client services (which included marketing and investor advisory services provided to institutional investors and independent brokers/dealers)” Basic debate: who generates value in the business? Conflict between: London office and HQ in NY ○ They have offices in Tokyo, London, SF, NY & Singapore London: we do independent service ( local analysts) NY: finance PhDs that develop strategies & policies are the value creators What kind of transfer prices are there? ○ Dual rate ○ Market price ○ Cost based ○ Market based ○ Negotiated prices What kind of policy/transfer price do they have?

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Current policy is controllable cost + 10% ■ All revenue goes to NY and transfer out revenue amount of controllable cost +10% to the subsidiaries The way they bring in different kinds of information

In-class discussion 1. What kind of transfer pricing model does GI have in place (pros/cons)? Why have they chosen this model? 2. List what information they use to support their arguments 3. What are the pros and cons of the different solutions proposed by Hoskinds and Davis? 4. How should Bob Mascola run the meeting? CEO just wants this problem to go away - Bob Mascola Run the meeting in a way to calm down the london office and satisfise the CEO’s wish of staying status quo - Issue of taxes… - Focus on: even though we have a story of negotiating, they start using info about “what are the costs of various things?”... hire the service from outside? - Even if they use one method, they still have to consider the rest

Raven Capital (Session 7) Key information ● Raven capital is a hedge fund ○ A hedge fund is a pool of money contributed by investors and run by a fund manager whose goal is to maximize returns and eliminate risk ○ Hedge funds can come from multiple other funds ● What is the analyst's job? ○ They are analyzing stocks in a particular industry = then make a recommendation on what to buy and sell.. ■ Complicated factor to determine what their bonus is ■ Portfolio managers… Case summary ● Most hedge fund companies derive revenue from two sources: management fees and incentive fees ● Hedge fund managers operate with fewer regulations and are less restricted in their use of leverage → more flexibility ● Key Information: Incentive fee = 20% Bonus pool 30% of the incentive fee = = 0.2*0.3 = 0.06

Assignment Figure A Background Information about Four Raven Analysts Nick Steinberg (NS) has been with Raven for 10 years, longer than any other analyst. He has a BA from Cal Tech and an MBA from USC. Nick analyzes consumer stocks, a sector which performed very well in 2009. Nick’s stocks were responsible for most of Raven’s fund’s long returns. He communicates well with the PMs, and there is a great deal of trust between them. James Johnston (JJ) has been with Raven for 8 years. He has a BS from UC San Diego. James analyzes healthcare stocks. He is thought to have been a consistently strong performer during his tenure at Raven. In 2008 his stocks generated significant profits for Raven, but the management team believes that he was not adequately compensated for his 2008 performance because the bonus

pool was small. This year James’ stocks only returned +2%, despite the fact that the healthcare index fund was up +8%. His poor performance is explained by his heavy weighting in short positions. But James was said to have saved Raven $7 million by recommending that they exit their position in a large healthcare provider shortly before the company lost a large government contract and its stock price plummeted. Kate Landry (KL) has been with Raven for 5 years, with a prior industry focus on technology stocks. She has a BA from USC and an MBA from Wharton. Kate’s stocks delivered strong returns, even though relatively little capital was allocated to them. Kate’s stocks solidly outperformed the tech indexes, but the PMs were not sure that Kate should be given full credit for choosing the stocks. She was perceived not to be very effective at filtering ideas. On average, the PMs estimated that they had to sort through about 20 of her ideas to find one that they were willing to invest in. Although they had not done the calculation, the PMs believed that if they had implemented all of Kate’s recommendations their results would not have been nearly as strong. Christopher (Chris) Frost (CF) has been with Raven for 3 years. His specialty is financial stocks. He has a BS from Columbia University. The financial sector was down in 2009, and very little capital was allocated to it. But Chris’s stocks beat the industry index. He could also point to a list of recommendations he made that were not implemented by the PMs but that turned out, in retrospect, to be winners. He insists that he could have earned the fund an extra $10 million, had the PMs allocated more capital to his ideas. But Chris is seen by some Raven employees as being arrogant and stubborn, and he is not among the more popular members of the Raven team. 1. How would you allocate bonuses to the 4 analysts? What alternatives did you consider? Why did you make the choices you made? This year’s bonus pool → $5,607,000 Fixed $ → $180,000 Average DK → 350,000DKK Things to consider ● Quantitative factors (objectivity) ○ How long the employee has been working in the company (size of portfolio) ○ Performance compared to the industry benchmark ● Qualitative factors (subjectivity) ○ How “trusted” the employee is/was in the company and how did this influence their performance? (e.g. Kate Landry) ○ Opportunity losses and gains that are not traced in the numbers How to allocate bonuses ● Performance (year 2009) ● Potential performance ● Tenure ● Other (e.g. previous performance (year 2008)) Bonus $ (in million) NS

2242 1330

40% 35%

Performance

Potential

Tenure

3

neutral

10

Other

JJ

1682 132

30% 35%

4

neutral

8

KL

1401 147

25% 10%

1

-

5

CH

280 145

5% 20%

2

+

3

Underpaid

2. Is there any information you would like to have available? ● More personal information ○ Innovative ideas that can help the company grow ○ Not only for personal gain 3. Would you pay out the entire pool this year or hold something in the ‘bonus pool reserve? ● 2008 financial crisis → the employees were underpaid and underappreciated 4. Should the proportions allocated vary depending on the size of the bonus pool? Redo the allocations assuming that due to a high water constraint, the incentive fees earned in 2009 were only $300,000 In-class discussion ● Different types of funds ○ Private equity fund ■ a collective investment scheme used for making investments in various equities and debt instruments ■ usually managed by a firm or a limited liability partnership ■ The tenure (Investment horizon) can be anywhere between 5-10 years with an option of annual extension ○

Venture capital fund ■ Venture capitalists invest in startups or new ideas ■ Løvernes hule (The lions are venture capitalists)

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Mutual fund ■ Sum collected by small investors to invest in securities like stocks, bonds, etc.

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Stock brokerage → advisor for trodes/investors

Las Ferreterías de México Questions to keep in mind when looking at cases: What business are we in? ● Hardware stores, retail, B2C and B2B ● 82 stores in 9 regions (store managers enjoy a lot of autonomy) Environment ● Mexico (founded in 1902 in a suburb of Mexico City) → Quite diverse local markets ● There are other large competitors (it’s the second largest) ● Growth in the mexican economy => opportunities to growth ● Long term relationships with customers Problem ● Need for new performance measures and incentive plans, as bonus pay is relatively small ● Help from a consulting firm (but will others in the firm agree to this plan?) Key information Intro ● Improving market share and improving operating efficiencies became Ferreterías’ strategic priorities. ● Store managers like autonomy ● The 82 stores were organized into 9 geographical regions Current incentive plan of the company: ● All Ferreterías’ employees paid a base salary or hourly wage plus a bonus based on a share of the company’s overall profits. ○ Small Bonuses = around 2% or 5% of base salary ○ Everyone of the employees gets a bonus ○ Higher in the hierarchy = more % bonus ○ Not effective in motivating behavior A new incentive plan Hierarchy of everyone included in the new incentive plan:

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CEO and CFO are not included in the corporate sales managers

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Hired a consulting firm = new performance-based compensation plan Not easy to measure the performances of salesmen and buyers ○ Salesmen performance → difficult to assess whether a sale came from the assigned salesperson's efforts ○ Buyer performance → influenced by order size and market conditions

Consultants concluded that the measures that could be tracked would not provide meaningful bases on which to assign bonus award Concluded to make incentive plan for managers while other employees continue on the previous plan Consultants’ suggestion: ○

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Store managers

Regional managers

Corporate staff managers

70%

15%

15%

82

9

5

ROI 5% → 11% Max 6 bonus points

Proportion of bonus units in region / total bonus units earned by all stores

CEO decides (subjective)

70%/82 = 0.85% per person

15%/9 = 1.67% per person

15%/5 = 3% per person

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Bonus pool ( 4 million pesos + 8 percent of the corporate income (120 million pesos before taxes and bonuses)

■ ROI measure of performance (Bonus pools would be assigned based on ROI: 𝑏𝑜𝑛𝑢𝑠 𝑒𝑙𝑖𝑔𝑖𝑏𝑙𝑒 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 ) 𝑡𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑟𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ■ The revenues (all shipments from the store (not included: sales from regional or corporate staff) ■ The expenses (direct store costs + costs of activities by regional/headquarter linked to the store + rest of the regional/headquarter costs distributed to all stores based on revenue) ■ The investment (Annual average of the month-end balances of cash, inventory in stock, accounts receivable associated with the bonus-eligible revenues, equipment, furniture, fixtures, buildings, and land) Allocation of the bonus pool ■ Store managers’ bonus pool would be divided among the store managers based on their relative proportion of bonuses units earned ● At least 5% ROI = one bonus unit ● For each full % above five = earn additional bonus units (max of 6 bonus units = 11%) ■ Regional managers bonus pool would be divided among the regional managers based on a proportion of the bonus units earned by stores in their region divided by the total bonus units earned by all stores ■ Corporate staff bonus pool would be decided by Fernando Gonzales (CEO) based on the corporations annual ROI performance ● Subjective ■ Employees have no incentives… ● Can become a store manager ● Potential for financial bonus Form of the awards (Bonus was paid in cash)

Concerns before implementation ● Increase in company’s compensation expense

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○ Includes recruiting costs, salaries, payroll taxes, benefits and bonuses Manager’s reactions ○ Likely complaints ○ Fairness of the plan Personnel in regional sales and corporate purchasing organizations were not included in the new plan

In-class discussion Questions 1. Evaluate the proposed bonus plan that Mr.Gonzalez is considering ● Definition of incentive plan: Monetary short-term incentive plan (rewards) ● Try to evaluate the plan in the light of ○ Who is included → managers (corporate, regional, store) ■ It doesn’t affect the lower rank employees, who are actually doing the work - might be a problem ○ How is the pool divided ■ Previous plan → Bonuses = around 2% or 5% of base salary ■ New plan → 4 million pesos + 8 percent of the corporate income ○ Link between measure and reward ■ Qualitative measures should be included ■ The current new plan only focuses on the ROI (monetary measurement) ○ Controllability ○ Fairness ■ The fact that the Personnel in regional sales and corporate purchasing organizations were not included in the new plan due to difficulty in measuring their performance is not fair ■ ○ Is corporate profit the right measure? Focus on monetary measurement (profit and profitability), which is good for the short-term however in the long run it might be better to take also non-monetary measurements like customer retention, learning processes, etc. into account as they determine whether a company is successful in the long run ■ Focus on ROI to allocate the bonuses might lead to sub optimization → an investment that would increase the ROI of the whole company, but decreases the ROI of a individual store would not be made, as the store manager would lower his bonus with this investment ■ Myopia => investment would not be made in general as the the profit of the regional center would decrease => ROI goes down => bonus goes down

2. How, if at all, would you modify the proposed plan? During your analysis, you can try to: ● Clarify recurring decisions and responsibility ○ ● How will the calculation of ROI affect the behavior? ○ ROI is a relatively short-term focused measurement tool ○ Add another measurement tool that considers long-term performance ? → Balance Scorecard(considers non-monetary measurements like customer retention) ● Do you see any implementation issues? Suggestions (for employees) ● Basing bonus on team performance ○ Then it is easier to reward employees fairly ● More personal measures for bonuses ○ Define growth measures, bonus based on how much the store is growing ● 2% of salary is still a good gesture, employees have low education ● Non financial incentives ○ You can easily reward employees non-financially ○ E.g. office upgrades ● Everything is based on ROI ○

Olympic Car Wash (p.531 Ch.12) Questions to keep in mind when looking at cases: What business are we in? ● Car washing (service) Environment ● 30 car washes in Belgium Problem ● Budget target set based on inaccurate assumptions Key information Intro ● ●

General managers in each of the 30 locations report to chief operating manager (Jacques) Size of a bonus pool allocated to personnel at each location determined based on Jacques’ performance evaluation ○ Achieved budgeted profit target → €3,000 put into bonus pool ○ Extra €1 for every €10 exceeded profit target

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Subjective adjustments were made by the chief operating manager to consider factors that are outside the control of employees → weather ○ Sales dropped sharply when it rained and it rained frequently in Belgium ○ The budget was set assuming good weather (inaccurate assumptions)

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Aalst location ○ Open every, 10 hours per day when it is not raining ○ Employees are paid legally required minimum wage + fixed amount for each car wash completed → labor costs are variables

In-class discussion Question: How large should the bonus pool be for the Aalst location? ● Achieved “average number of vehicles washed in a good weather hour” → 3,000€ put into bonus pool ● For every x budget ★ They shouldn’t base the bonus on the weather (uncontrollable factors) but on controllable factors :))) ○ Maybe base the bonus system on efficiency or the service provided :) ★ Flexible budget: ○ Adjust the budget as things happen

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You can adjust the distribution of the bonus pool through a flexible budget ■ → give them the basis of 3,000€ anyway, even though the real “unrealistic” budget wasn’t met. You make a new realistic budget that’s based on the uncontrollable factors and see if that was met

Boston Lyric Opera

Key information Intro ● Janice Mancini Del Sesto: General Director of the BLO ● Opera increased its audience from 4 mio (1970s) - 20 mio (2000) ● Arts organizations increased operating costs ○ Donations from operating funds also decreased ■ Increased the pressure on cultural institutions to generate high donations from the board ○ Opera = most expensive art form to produce ● Performing arts institutions generated revenue fro,: gifts, foundations, ticket sales, individual contributions Opera in Boston ● The opera in Boston was known for putting up artistic performances without sufficient funds ○ When the money was not there - she spent it anyway ○ Sometimes they had to cancel entire seasons ● Opera in Boston existed in the shadow of Opera in New York Boston Lyric Opera ● BLO: founded 1976 ● In 1990s → the BLO had launched a “Fund for Emerging Artists” which underwrote the costs of talent search and audition expenses, coashing, travel, and housing for promising artists ● BLO operated a variety of education and community outreach programs → goal: make opera available into communities in the greater Boston area ● BLO has a 46 person Board of Directors and separate 51 person Board of Overseers ● Del Sesto: supervised the company’s 5 operating departments and interfaced with its 2 boards ● BLO built a loyal base of opera subscribers and supporters The New Planning Process ● P.4-7 A new planning Process 2,200 seat facility = more ambitious artistic productions ● Greater financial stability through increased ticket sales

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Needing a more formal strategic planning process Boston Lyrics Opera’s mission= ensuring the future of the art form ○ Knowledgeable/supportive about the opera ○ Developing the next generation of professionals, audience.. Dahling-Sullican = felt that BLO could use the BSC to focus its planning process

Developing the BLO Balanced Scorecard ● Kaplan challenged the group to define its strategy, its CA and characteristic of BLO ● Three high-level strategic themes ○ Develop a loyal indv. ○ Build the BLO reputation ○ Reach the boston-are community Two customer objectives were create for the first strategic theme - Target loyal and generous contributors and prospects (obvious) - Enhance involvement and recruitment of board members (not obvious) *Many initiatives underway for subscribers and potential donors, but had no process for...