Marketing Management, Millenium Edition - epiheirimatikotita.gr

Management uses financial analysis to identify the factors that affect the company’srate of return on net worth. 25 The main factors are shown in Figure 6-9, alongwith illustrative numbers for a large chain-store retailer. The retailer is earning a 12.5percent return on net worth. The return on net worth is the product of two ratios,the company’s return on assets and its financial leverage. To improve its return on networth, the company must increase the ratio of its net profits to its assets or increasethe ratio of its assets to its net worth. The company should analyze the compositionof its assets (i.e., cash, accounts receivable, inventory, and plant and equipment) andsee if it can improve its asset management.The return on assets is the product of two ratios, the profit margin and the assetturnover. The profit margin in Figure 6-13 seems low, whereas the asset turnover ismore normal for retailing. The marketing executive can seek to improve performancein two ways: (1) Increase the profit margin by increasing sales or cutting costs; and(2) increase the asset turnover by increasing sales or reducing the assets (e.g., inventory,receivables) that are held against a given level of sales. 26Market-Based Scorecard AnalysisMost company measurement systems amount to preparing a financial-performancescorecard at the expense of more qualitative measures. Companies would do well toprepare two market-based scorecards that reflect performance and provide possibleearly warning signals.A customer-performance scorecard records how well the company is doing year afteryear on such customer-based measures as:■ New customers ■ Target market preference■ Dissatisfied customers ■ Relative product quality■ Lost customers ■ Relative service quality■ Target market awarenessNorms should be set for each measure, and management should take action when resultsget out of bounds.The second measure is called a stakeholder-performance scorecard. Companies needto track the satisfaction of various constituencies who have a critical interest in andimpact on the company’s performance: employees, suppliers, banks, distributors, retailers,stockholders. Again, norms should be set for each group and managementshould take action when one or more groups register increased levels of dissatisfaction.27 Consider Hewlett-Packard’s program:F I G U R E 6-13Financial Model of Return on NetWorthProfit margin1.5%Net profits–––––––Net sales=Return on assets4.8%xFinancialleverage2.6=Rate of returnon net worth12.5%Asset turnover3.2Net profits–––––––Total assetsTotal assets–––––––Net worthNet profits–––––––Net worth700part fiveManaging andDelivering MarketingProgramsNet sales–––––––Total assets