Bitcoin: The New Global Currency
Using cryptography, a new worldwide digital payment system has emerged in which money can be exchanged without the involvement of a central authority or bank. Cryptocurrencies, also referred to as digital currencies or altcoins, are becoming popular among investors, businesses, and consumers around the world. Much like cash for the Internet, but with no physical backing, digital currencies are increasingly prevalent as a means of value exchange between individuals and businesses.
With a total market value of more
than $600 billion, the digital currency market is made up of several players including Bitcoin, Ethereum, Ripple, and Litecoin. Bitcoin is the most well-known and widely used digital currency, making up over half of the cryptocurrency market value. Simply put, Bitcoin is a mobile app that provides individuals with a personal Bitcoin wallet that can be used to exchange Bitcoin with other users. Bitcoin is increasingly being used; Bloomberg, Dish, Fidelity, Expedia, Overstock.com, Reddit,
Reeds Jeweler, United Way, and USAA are among a growing number of busi- nesses accepting Bitcoin. Key advantages of Bitcoin include a simple payment pro- cess that can easily and quickly be done 24 hours a day and across international borders, all while protecting one’s iden- tity, protecting against fraud, and avoiding typical transaction fees imposed by banks or other intermediaries.
Companies are increasingly being faced with difficult decisions regard- ing Bitcoin. Should firms accept Bitcoin as a method of payment? Should products be priced in Bitcoin? If so, should firms price their products in both the local currency and Bitcoin?
Executives are currently addressing these and other such questions.
Source: Based on https://bitcoin.org/en/how-it-works and Paul Vigna, “Rival Digital Currencies Nip at Bitcoin,” Wall Street Journal, (December 20, 2017): B16.
Is this money?
Travis Wolfe/123RF
Marketing Audit Checklist of Questions
The following types of questions about marketing must be examined in performing an internal assessment
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Are present channels of distribution reliable and cost effective?
4. Is the firm conducting and using market research effectively?
5. Are product quality and customer service good?
6. Are the firm’s products and services priced appropriately?
7. Does the firm have an effective promotional strategy?
8. Is the firm’s Internet presence excellent as compared to rivals?
Finance and Accounting
Financial condition is often considered the single-best measure of a firm’s competitive position and overall attractiveness to investors. Table 4-7 lists top companies for financial strength according to the Drucker Institute, which assesses financial performance based on return on assets, return on equity, return on invested capital, market share and profits, as well as investors’ return on their shares. Note that Accenture PLC heads the list. Determining an organization’s financial strengths and weaknesses is essential in formulating strategies.
A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow, and equity can eliminate some strategies as being feasible alternatives. Financial factors often impact existing strategies and influence strategy-implementation plans.
Finance and Accounting
According to James Van Horne, finance and accounting activities can be categorized into three decision areas: the investment decision, the financing decision, and the dividend decision.8 The investment decision, also called capital budgeting, is the allocation and real- location of capital and resources to projects, products, assets, and divisions of an organization.
After strategies are formulated, capital budgeting decisions are required to successfully imple- ment strategies. The financing decision determines the best capital structure for the firm and includes examining various methods by which the firm can raise capital (for example, by issuing stock, increasing debt, selling assets, or using a combination of these approaches). The financing decision must consider both short-term and long-term needs for working capital. Two key finan- cial ratios that indicate whether a firm’s financing decisions have been effective are the debt-to- equity ratio and the debt-to-total-assets ratio.
LO 4.4
TABLE 4-7 A Sampling of Top Companies for Financial Strength
Company Number of Employees 2017 Revenues (in billions)
Accenture PLC 425,000 $34.8
Altria Group, Inc. 8,300 $25.7
Apple Inc. 123,000 $215.6
Berkshire Hathaway, Inc. 45,500 $223.6
Home Depot, Inc. 406,000 $94.5
Mastercard, Inc. 11,900 $10.7
P&G Company 95,000 $65.0
Starbucks Corporation 254,000 $21.3
United Parcel Service, Inc. 434,000 $60.9
Verizon Communications, Inc. 160,900 $125.9
Walmart, Inc. 2,300,000 $482.1
Source: Based on Ezequiel Minaya, “Consumer-Goods Firms Shine in Financial Category,” Wall Street Journal, (December 6, 2017): R2.
Dividend decisions concern issues such as the dollar amount per share to pay quarterly to stock- holders, the stability of dividends paid over time, and the repurchase or issuance of stock. Dividend decisions determine the amount of funds that are retained in a firm compared to the amount paid out to stockholders. Three financial ratios that are helpful in evaluating a firm’s dividend decisions are the earnings-per-share ratio, the dividends-per-share ratio, and the price-earnings ratio. The benefits of paying dividends to investors must be balanced against the benefits of internally retaining funds, and there is no set formula on how to balance this trade-off. Sometimes to appease shareholders, dividends are paid out (1) even when the firm has incurred a negative annual net income, (2) even when the firm has to obtain outside sources of capital to pay for the dividends, and (3) even when the funds were needed as reinvestment in the business. Reasons for this practice are as follows:
1. Paying cash dividends is customary for some firms. Failure to do so could be thought of as a stigma. A dividend change is a signal about the future.
2. Dividends represent a sales point for investment bankers. Some institutional investors can buy only dividend-paying stocks.
3. Shareholders often demand dividends, even in companies with great opportunities for rein- vesting all available funds.
4. A myth exists that paying dividends will result in a higher stock price.
Financial Ratios
Financial ratio analysis is the most widely used method for determining an organization’s streng- ths and weaknesses in the investment, financing, and dividend areas. Because the functional areas of business are so closely related, financial ratios can actually signal strengths or weaknesses anywhere up and down a firm’s value chain from suppliers through production to distribution.
Financial ratios are computed from an organization’s income statement and balance sheet.
Computing financial ratios is like taking a photograph: The results reflect a situation at just one point in time. Comparing ratios over time and to industry averages is more likely to result in meaningful statistics that can be used to identify and evaluate strengths and weaknesses. Financial ratio trend analysis, illustrated in Figure 4-2, is a useful technique that incorporates both the time and industry average dimensions of financial ratios. Note that the dotted lines reveal projected ratios.
Financial ratios are equally applicable in for-profit and nonprofit organizations, but the ratios vary considerably across types of industries. Even though nonprofit organizations would not have return-on-investment or earnings-per-share ratios, they would routinely monitor many other spe- cial ratios. For example, a religious organization would monitor the ratio of dollar contributions to the number of members, whereas a zoo would monitor dollar food sales to number of visitors.
A university would monitor number of students divided by number of professors. Nonprofit organizations because strive to be financially sound just as for-profit firms do. Nonprofit organi- zations need strategic planning just as much as for-profit firms.
Financial ratio analysis should be conducted on three separate fronts:
1. How has each ratio changed over time? This information provides a means of evaluating historical trends. Examine whether each ratio has been historically increasing, decreasing, or nearly constant. Analysts often calculate the percentage change in a ratio from one year to the next to assess historical financial performance on that dimension. Large percentage changes can be especially relevant, but be mindful that if base numbers are small then large percentage changes can ensue more easily.
2. How does each ratio compare to industry norms? A firm’s inventory turnover ratio may appear impressive at first glance but may pale when compared to industry standards or norms. Industries can differ dramatically on certain ratios. For example, grocery companies have a high inventory turnover, whereas automobile dealerships have a lower turnover.
Therefore, comparison of a firm’s ratios within its particular industry can be essential in determining strengths and weaknesses.
3. How does each ratio compare with key competitors? Often competition is more intense between several competitors in a given industry or location than across all rival firms in the industry. When this is true, financial ratio analysis should include comparison to those key competitors. For example, if a firm’s profitability ratio is trending up over time and compares favorably to the industry average, but it is trending down relative to its leading competitor, there may be reason for concern.
Excellent free online and subscription (fee-based) resources for obtaining financial information about firms and industries are provided in Table 4-8. Some sources listed provide financial ratios.
The free Excel template at www.strategyclub.com calculates ratios once students enter in rel- evant data.
Financial ratio analysis is not without some limitations. For example, financial ratios are based on accounting data, and firms differ in their treatment of such items as depreciation, inven- tory valuation, R&D expenditures, pension plan costs, mergers, and taxes. Also, seasonal factors can influence comparative ratios. Therefore, conformity to industry composite ratios does not establish with certainty that a firm is performing normally or that it is well managed. Likewise, departures from industry averages do not always indicate that a firm is doing especially well or badly. For example, a high inventory turnover ratio could indicate efficient inventory manage- ment and a strong working capital position, but it also could indicate a serious inventory shortage and a weak working capital position.
Another limitation of financial ratios in terms of including them as key internal factors in the upcoming IFE Matrix is that financial ratios are not very “actionable” in terms of reveal- ing potential strategies needed (i.e., because they generally are based on performance of the overall firm). For example, to include as a key internal factor that the firm’s “current ratio increased from 1.8 to 2.1” is not as actionable because the factor does not specify which cur- rent assets or current liabilities were most significant in contributing to the change. In contrast, a factor such as “the firm’s fragrance division revenues increased 18 percent in Africa in 2018”
would be considerably more actionable because more insight is provided as to actions needed to address the issue. Recall from the prior chapter the importance of factors being stated in actionable terms. The AQCD (actionable-quantitative-comparative-divisional) Test discussed in the prior chapter for performing an external assessment is equally important in performing an internal assessment.
Table 4-9 provides a summary of key financial ratios showing how each ratio is calculated and what each ratio measures. However, all the ratios are not significant for all industries and companies. For example, accounts receivable turnover and average collection period are not 5.0
4.0 3.0 2.0 1.0 0.0
2017 Current ratio
2017 Profit margin 10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0
2018 2019 2020 2021
2018 2019 2020 2021
Industry average
Company
Company Industry average
FIGURE 4-2
Financial Ratio Trend Analysis
meaningful to a company that takes only cash receipts. As indicated in Table 4-9, key financial ratios can be classified into the following five types: liquidity (how is the firm’s cash position), leverage (how is the firm’s debt position), activity (how efficient is the firm’s operations), profit- ability (how is the firm performing), and growth (is the firm meeting shareholders’ expectations).
Finance and Accounting Audit Checklist
Strengths and weaknesses in finance and accounting commonly arise from answering the follow- ing types of questions:
1. Where is the firm financially strong and weak as indicated by financial ratio analysis?
2. Can the firm raise needed short-term capital?
3. Should the firm raise needed long-term capital through debt or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
7. Does the firm have excellent relations with its investors and stockholders?
8. Are the firm’s financial managers experienced and well trained?
9. Is the firm’s debt situation excellent?
TABLE 4-8 Excellent Websites to Obtain Strategic Information (Including Financial Ratios) on Companies and Industries
1. Online Free Resources.
a. Form 10K or Annual Report b. http://finance.yahoo.com c. www.hoovers.com
d. http://globaledge.msu.edu/industries/
e. www.morningstar.com
2. Online Subscription Resources (Likely Subscribed to by Your University Library) a. Mergent Online: www.mergentonline.com
At this website, financial statements seem to be more complete than at other sites. You can also search for companies with the same SIC or NAICS code and then create a comparison financial ratio report. A number of different ratios can be used as comparison criteria to create a tailored report that can then be exported into a Microsoft Excel format. Alternatively, use the Competi- tors Tab in Mergent to build a list of companies and compare their ratios. Your college library likely subscribes to this service.
b. Factiva: http://new.dowjones.com/products/factiva/
At this website, first use the Companies & Markets tab to search for a company. Next, click
“Reports” and choose the “Ratio Comparison Report” to get a company’s ratios compared to industry averages. Your college library likely subscribes to this service.
c. S&P NetAdvantage: http://www.standardandpoors.com/products-services/industry_surveys/en/us This website provides company and industry ratios and information in two sections of the da- tabase: (1) the Compustat Excel Analytics section of a particular company’s information page and (2) the S&P Industry Surveys.
d. Onesource: www.avention.com/OneSource
This is a widely used source for financial ratio information. Search for a particular company and then click on the link for “Ratio Comparisons” on the left side of the company information page. The data in Onesource will compare your company against the industry, against the sec- tor, and against the stock market as a whole.
e. Yahoo Industry Center: http://biz.yahoo.com/ic/
This is an excellent free resource that allows a user to browse industries by performance rank- ings, including return on equity, price-earnings ratio, market cap, price change, profit margin, price-to-book value, long-term debt, and more.
3. Hardcopy Reference Books for Financial Ratios in Most Libraries
a. Robert Morris Associate’s Annual Statement Studies: An excellent source of financial ratio information.
b. Dun & Bradstreet’s Industry Norms & Key Business Ratios: An excellent source of financial ratio information.
Source: Based on a variety of sources.
TABLE 4-9 A Summary of Key Financial Ratios
Ratio How Calculated What It Measures
I. Liquidity Ratios
Current Ratio Current assets
Current liabilities
The extent to which a firm can meet its short-term obligations
Quick Ratio Current assets minus inventory
Current liabilities
The extent to which a firm can meet its short- term obligations without relying on the sale of its inventories
II. Leverage Ratios
Debt-to-Total-Assets Ratio Total debt
Total Assets
The percentage of total funds provided by creditors
Debt-to-Equity Ratio Total debt
Total stockholders’ equity
The percentage of total funds provided by creditors versus by owners
Long-Term Debt-to-Equity Ratio Long-term debt Total stockholders’ equity
The balance between debt and equity in a firm’s long-term capital structure
Times-Interest-Earned Ratio Profits before interest and taxes Total interest charges
The extent to which earnings can decline without the firm becoming unable to meet its annual interest costs
III. Activity Ratios
Inventory Turnover COGS/Inventory Whether a firm holds excessive stocks of inventories
and whether a firm is slowly selling its inventories compared to the industry average
Fixed Assets Turnover Sales
Fixed assets
Sales productivity and plant and equipment utilization
Total Assets Turnover Sales
Total assets
Whether a firm is generating a sufficient volume of business for the size of its asset investment Accounts Receivable Turnover Sales/Accounts Receivable The average length of time it takes a firm to collect
credit sales (in percentage terms)
Average Collection Period Accounts receivable
Total credit sales/365 days
The average length of time it takes a firm to collect on credit sales (in days)
IV. Profitability Ratios
Gross Profit Margin Gross Profit/Sales The total margin available to cover operating
expenses and yield a profit Operating Profit Margin Earning before interest and taxes EBIT
Sales
Profitability without concern for taxes and interest
Net Profit Margin Net income
Sales
After-tax profits per dollar of sales
Return on Total Assets (ROA) Net income
Total assets
After-tax profits per dollar of assets; this ratio is also called return on investment (ROI) Return on Stockholders’ Equity
(ROE)
Net Income Total stockholders’ equity
After-tax profits per dollar of stockholders’
investment in the firm
Earnings Per Share (EPS) Net income
Number of shares of common stock outstanding
Earnings available to the owners of common stock
Price-Earnings Ratio Market price per share
Earnings per share
Attractiveness of firm on equity markets V. Growth Ratios
Sales Annual percentage growth in total sales Firm’s growth rate in sales
Net Income Annual percentage growth in profits Firm’s growth rate in profits Earnings Per Share Annual percentage growth in EPS Firm’s growth rate in EPS
Dividends Per Share Annual percentage growth in dividends per share Firm’s growth rate in dividends per share
Financial analysis provides an excellent tool for identifying many strengths and weaknesses of the firm but the numbers themselves generally do not reveal the source of issues, which could stem for example from marketing and promotional effectiveness, HRM and employee produc- tivity, accounting errors, and so on. Therefore, carefully study your firm’s Form 10K or Annual Report and other company documents including quarterly reports to uncover strengths and weak- nesses associated within the functional areas. Finance and accounting strengths and weaknesses could relate to issues such as the firm’s use of debt versus equity to raise capital, the firms divi- dend policy, or the firm’s acquisition versus organic growth practices.
Management Information Systems
Information ties all business functions together and provides the basis for all managerial decisions. Information can represent a major source of competitive advantage or disadvan- tage and a major source of a firm’s internal strength and weakness factors. A management information system (MIS) collects, codes, stores, synthesizes, and presents information in such a manner that it aids in operational and strategic decision making. The heart of an infor- mation system is a database containing the kinds of records and data important to managers.
If a business fails to manage information well, this is an internal weakness that needs fixing.
Business Analytics
Business analytics is a business technique that involves using software to mine huge volumes of data to help executives make decisions. Sometimes called predictive analytics, machine learning, or data mining, this software enables a researcher to assess and use the aggregate experience of an organization, which is a priceless strategic asset for a firm. The history of a firm’s interaction with its customers, suppliers, distributors, employees, rival firms, and more can all be tapped with data mining to generate predictive models. Business analytics is similar to the actuarial methods used by insurance companies to rate customers by the chance of posi- tive or negative outcomes. Every business is basically a risk management endeavor! Therefore, like insurance companies, all businesses can benefit from measuring, tracking, and computing the risk associated with hundreds of strategic and tactical decisions made every day.
Strategists use business analytics to provide a firm with proprietary business intelligence regarding, for example, which segment(s) of customers choose your firm versus those who defer, delay, or defect to a competitor and why. In addition to understanding consumer behavior better, which yields more effective and efficient marketing, business analytics also is being used to slash expenses by, for example, withholding retention offers from customers who are going to stay with the firm anyway, or managing fraudulent transactions involving invoices, credit-card pur- chases, tax returns, insurance claims, mobile phone calls, online ad clicks, and more. Business analytics can also reveal where competitors are weak so that marketing activities can be directly targeted to take advantage of resultant opportunities.
Business analytics enables a firm to learn from experience and to make current and future decisions based on prior information. Deriving robust predictive models from data mining to support hundreds of commonly occurring business decisions is the essence of learning from experience. The mathematical models and analysis of thousands, millions, or even billions of prior data points can reveal patterns of behavior for optimizing the deployment of resources and can dramatically enhance decision making at all organizational levels and all stages of strategic management. Business analytics can identify and analyze patterns, but perhaps more impor- tantly, they can reveal the likelihood of an event, and that information can be worth millions of dollars to companies, organizations, and governments.
In 2018, global data analytics software is expected to reach $21.7 billion, a 64 percent increase from 2012.9 Leading firms providing the software include IBM, SAP, Oracle, Microsoft, Qlik Technologies, Tibco Software, and Tableau Software. CEOs are increasingly worried about cybersecurity issues. The number of U.S. data breaches reached a record of 791 in the first 6 months of 2017, up 29 percent from the same period the prior year.10 Fearing potential data breaches, CEOs are emphasizing to individuals throughout the company the importance of data security and are prioritizing cybersecurity efforts.
In terms of cyberthreats, a recent Wall Street Journal article revealed what companies should be most concerned about and what they can do to mitigate the threat.11 The biggest threat currently LO 4.5