ACC640 Week 3 Assignment Strategic Analysis

NAME

AGCU

ACC640

25/10/2022

Part I: Decision Making

Hypothetical situation

In a company, a special order is being offered to the employees. Accepting this order would require the company to work extra hours. However, suppose they don’t accept this order. In that case, the customer may end up going with another company for their project, which would mean that all the effort put into it thus far will be wasted, and it also means that there is less chance for future contracts coming in due to lost credibility (Killing,2020). So management must decide whether or not to accept the special order.

Decision making

Janet works in a company and reports that the special order is at least $10,000 LESS than the company’s average order. Is this enough to justify accepting the order?

Considerations

The circumstances to be considered are:

How many hours per day will staff have to work?

Are we meeting the company’s $10,000 profit/order target?

What if a competitor accepts the order and offers cash upfront payment or discounts since they consider it part of their advertising expenses?

What is our average inventory cost per month at this time?

What would it be during the period that this special order will take to complete (assuming no other charges during that period)?

Based on the analysis above, should we assign Janet to work on this special order?

Is there any way to offset some of these concerns and get an additional discount on the sale price so that more profits can be made from this special order?

The quantitative factors to be considered include the following:

What is the amount of profit per order?

What would be the profit if we accept this special order?

Are our best practices being followed, such as lowering costing and keeping inventory at a minimum even during these low business times?

Evaluate and Quantitative and Factors

Qualitative The qualitative factors to be considered include:

How much will it cost to cover the extra hours required to produce this special order?

Will there be any lost opportunities in other areas of the company due to covering these hours by providing overtime work on ‘special orders’ versus working on another lucrative order that might come in later?

What are some of the other effects which might occur from not accepting this special order?

Costs

Relevant costs

The differential costs are the amount of money necessary to produce an item. For example, labor is included in these costs to a certain degree. The time it takes to do something is part of the differential cost (Banker,2018). For example, it would take much more time to produce a special order than a normal one. In Janet’s case, it would cost the company more money to make the special order than to have a normal order because of the extra hours put in.

You can avoid avoidable costs if you don’t accept this order. The avoidable costs are costs that are associated with an action, but they can be avoided. For example, if the company chooses not to accept the special order, it will save a significant amount on labour. These savings can be compared against other costs, such as orders that might come in later. Those savings will become avoidable costs if the orders do not go in. Of course, this assumes that the company does not need more staff during this time.

The opportunity costs are what one loses by taking this special order versus not taking it and allowing someone else to get the contract. In Janet’s case, the company would lose the potential for future agreements which may cost them some credibility in the industry. They might not be able to get other orders from this customer because they feel that the company is unreliable. This might cost them a lot of money, especially if they have to rehire another person for this position when business starts picking up again.

Irrelevant costs

The irrelevant costs are those which are not of much importance. For example, in Janet’s case, the cost of rehiring people and the cost of hiring outside workers would not be relevant if the company was doing well enough to stay afloat with just their regular staff. In her case, the sunk costs cannot be recovered if not accepted (Leeds,2019). For example, the company would lose any related costs that come with changing suppliers and producing a special order. The sunk costs in this case are relatively low since the company has only been producing a few thousand special orders.

The fixed costs in her case are those which are not affected by the acceptance or rejection of a special order. For example, most of the equipment used to make the special order is already in use and any additional cost for this equipment is really just fixed costs. In Janet’s case, these fixed costs include things like rent, utilities, etc.

Recommendation

Deciding whether or not to take on this special order is a complex problem since it involves many different factors such as financial, people and time. In most cases, a decision will be taken based on many of these factors because they have a significant effect on the outcome. Other professionals may be able to consider all these factors and provide recommendations on how to proceed in this situation. The decision I would recommend is to say yes to this special order. This means that the company will accept the order and work with the client until it is complete. Because the company is not going to lose much money if they do not take on this order, I think that there are benefits, such as getting a new customer who will want more orders during the future. Over the course of time, the company may lose some people and miss out on getting other contracts. However, this is a small cost compared to what they may potentially save by not taking on this order. The costs associated with doing the job right will outweigh any potential losses in the future. The company would benefit from building up their credibility in this industry because of how hard it is to get contracts that are long term.

Part II: Balanced scorecard

Overview of Bechtel Corporation

The Construction industry is my choice, and the company is Bechtel Corporation. Bechtel Corporation is an American multinational engineering, procurement, construction, and project management corporation (Henderson,2021). The firm has never had many full­time employees; most workers are subcontractors. The company works closely with the U.S. Army Corps of Engineers to complete work. It is one of the few companies with an unlimited service contract with the U.S. government’s Military Construction Program (MILCON). Bechtel also works closely with other US federal agencies such as NASA and the Department of Energy, in major projects. The corporation is founded in San Francisco, California, and headquartered in Reston, Virginia. The core operations of the corporation include civil, chemical, environmental, geothermal, and water projects; nuclear waste disposal; building systems; international development projects; and oil, gas, and mineral production activities (Henderson,2021). Some of the other major construction projects carried out by the company include Hoover Dam (1935), the Alaskan oil pipeline (1974), Hong Kong International Airport (1997), Jubail industrial city in Saudi Arabia (2000) and the Channel Tunnel – officially called the “Chunnel”, a rail link between Great Britain and France under the English Channel (1994). The Bechtel Corporation has 2,100 employees, and the revenue per employee ratio is $8,380,952. Bechtel Corporation’s peak revenue was $17.6B in 2021.

Balanced scorecard perspective

Financial perspective

From the financial perspective, the metrics that the company might use to evaluate performance include the following eight metrics:

1.  Profit margin

2.  Return on investment (ROI)

3.  Return on capital employed (ROCE)

4.  Return On Investment per Share (ROI/Share)

5.  Net Profit Margin per Share

6.  Return on Assets (ROA)

7.  Cash flow per share for profit and loss statement

8.  Total Debt to Equity ratio

Profit margin is a good metric to evaluate performance because it shows how much money the corporation generates from selling goods and services for every dollar spent on goods and services. This gives a clear picture of how Bechtel Corporation manages costs such as materials, wages and services. Profit margin is a metric used to assess how much the company is earning compared to the total revenue earned by the company. It measures a part of an operating performance called gross margin, which represents how much sales are generated after subtracting the cost of goods sold.

Return on investment (ROI) refers to how well a company exploits its assets. It measures the total pre­tax earnings divided by the total book value of assets, which can be considered an estimate of shareholders' equity or owner’s equity.

Return on capital employed (ROCE) is similar to ROI. It measures how much profit a company makes compared to the amount of money it has invested in its business, but it differs from ROI in one important way. Whereas ROI measures how well a business is doing by comparing profit with assets, ROCE compares profits with a business’s total assets and equity ( Kaplan,2020).

Return on investment per share (ROI/Share) refers to a portion of earnings the company earns per share owned by the shareholders. It measures the return on investment in comparison to the share price of a company.

Net profit margin per share refers to the tons of companies earning on each share they sell. The total debt­to­equity ratio refers to the amount of money that a company owes its creditors and how much is owed by shareholders. It measures how much money was used for financing its assets and how much equity was used for financing the assets.

Customer perspective

From the customer perspective, the metrics that the company might use to evaluate performance include the following eight metrics:

1.  Market Share (per cent)

2.  Average order value (AOV) (dollars)

3.  Prime customers (per cent)

4.  Qualified customers (percent)

5.  Net Promoter Score (NPS)

6.  Customer retention rate (percent)

7.  Percentage of new customers by revenue (percent)

8.  Customer Order Value (COV) (dollars)

Market share is useful because it shows how a company’s market share is changing over time (Kaplan,2020). The market for a product in the United States and Canada tends to be more price sensitive than most of the world so if a company has 50 percent of the U.S. market or 95 percent of Canada market then this would be very significant as it indicates that the company is growing significantly faster than their competitors.

AOVE is useful because it measures how much money an average customer spends on products and services at a firm’s facilities. AOVE can vary and provide additional insight into where customers are spending their money on­site versus off­site. Prime prime customers are those who purchase a company’s product at the highest price points and typically have the highest customer retention rate. Customers who make up 10 percent of a company’s revenue in terms of dollar value tend to be more important than customers who make up 90 percent.

The net promoter score is an index that measures how likely someone is to recommend a product, brand or business to others. The net promoter score would be very useful because it would allow management to recognize the value that they could gain by improving their customers' opinions of their services and products. The metric can be used to develop a target of recognized customers that the company is trying to gain and it would be useful in evaluating the effectiveness of marketing activities.

The percentage of new customers by revenue is very useful because it provides a good indication as to how many potential new customers may be available for companies. This metric would provide a very good indication of how open and how visible a firm is, both from a customer’s perspective and from an investor’s perspective.

The customer order value is very useful because it reflects the amount that an average customer spends on products in comparison to the amount that they spend on other products and services.

Internal­Business­Process perspective

For the Internal­Business­Process perspective, the metrics that the company might use to evaluate performance include the following eight metrics:

1.  Revenue (sale of services) for each of the four operating segments

2.  Net Profit for each of the four operating segments

3.  Cash flow from operations for each of the four operating segments

4.  Balance sheet ratios, including: Liquidity, Equity and Total debt leverage, and Depreciation and Amortization as a percentage of net assets

5.  Income statement ratios including: Gross margin, Operating margin and Net profit margin

6.  Return on equity (ROE)

7.  Return on invested capital (ROIC)

8.Return on assets (ROA)

Revenue (sale of services) for each of the four operating segments shows how well

Bechtel Corporation is developing new opportunities from existing product lines. Net Profit for each of the four operating segments indicates how well the company is competing in its service markets. Cash flow from operations for each of the four operating segments reflects the effectiveness of Bechtel Corporation operating and financing decisions. Balance sheet ratios, including: Liquidity, Equity and Total debt leverage, and Depreciation and Amortization as a percentage of net assets indicate how well Bechtel Corporation is managing its inventory, accounts receivables and debt levels. Income statement ratios including: Gross margin, operating margin and Net profit margin describe how profitable Bechtel Corporation is at different stages in its manufacturing cycle. Return on equity (ROE) compares Bechtel Corporation’s return to investors with that of other companies in similar businesses. Return on invested capital (ROIC) compares Bechtel Corporation’s return to investors with that of other companies in similar businesses. Return on assets (ROA) indicates Bechtel Corporation’s performance relative to the investment in assets that it has made.

Learning­and­Growth perspective

For the Learning­and­Growth perspective, the metrics that the company might use to evaluate performance include the following eight metrics:

1)  New orders

2)  Number of employees

3)  Revenue per employee

4)  Order backlog (closed ­ total)

5)  60­day past due accounts receivable

6)  Inventory turnover (cost of goods sold/average inventory)

7)  Dividend yield

8)  Earnings per share

 I have chosen these metrics for several reasons. First, the metric identifies the performance of a company’s sales department. A large number of sales leads to a large number of new orders. The value is an important measure for the company as a whole, and therefore can be used to evaluate performance from the Learning­and­Growth perspective.

Second, I believe that the number of employees reflects the ability of an organization to complete projects. The value is also an important measure for the company as a whole, and therefore can be used to evaluate performance from the Learning­and­Growth perspective.

Third, another important measure for us is backlog (closed ­ total). A large backlog (closed) indicates that there are projects that have been completed but not yet invoiced, or that there are no completed projects (Ahn,2021). Again, from the Learning­and­Growth perspective, this value indicates how effectively management is moving forward in completing projects.

Fourth, another important measure is income per employee. As explained above, this metric reflects on how well employees are paid as part of their salary packages.

Fifth, inventory turnover (cost of goods sold/average inventory) is another important measure. A large value indicates that there is low inventory­to­sales ratio. I consider this to be valuable as it reduces the cost of inventory.

Sixth, I consider dividends per share as an important measure to evaluate performance management because a high dividend payout ratio indicates that management is holding on to cash and not distributing some of the profits to shareholders (Ahn,2021). On the other hand, I believe that high dividends yield indicates management’s confidence in the future of the company and its ability to pay out large dividends going forward.

Lastly, earnings per share is another important metric for measuring performance from a Learning­and­Growth perspective. I believe that this value is important as it shows how well a company is performing financially as a whole.

References

Ahn, H. (2021). Applying the balanced scorecard concept: an experience report. Long range

planning, 34(4), 441­461.

Banker, R. D., Datar, S. M., & Kekre, S. (2018). Relevant costs, congestion and stochasticity in production environments. Journal of Accounting and Economics, 10(3), 171­197.

Crossan, M. M., Fry, J. N., & Killing, J. P. (2020). Strategic analysis and action. Pearson

Prentice Hall.

Henderson, J. (2021). Bechtel: The Global Corporation. In Engineering Earth (pp. 783­801).

Springer, Dordrecht.

Leeds, D. M., Leeds, M. A., & Motomura, A. (2019). Are sunk costs irrelevant? Evidence from playing time in the National Basketball Association. Economic Inquiry, 53(2), 1305­1316 Kaplan, R. S., & Norton, D. P. (2020). Strategic learning & the balanced scorecard. Strategy &

Leadership.