MANAGEMENT CONTROL SYSTEM

MMSMMS-B

Group 6
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Wal-Mart Case Study

About Wal-Mart
Founded by Sam Walton in 1962 Worlds Largest Retailer $ 422 billion sales 2 million employees 3000 + suppliers
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Asset Richness of Wal-Mart

Largest Trucking Company in the USA Largest privately owned Satellite Communication network Company owned 20 aircrafts Supply Chain & Logistics Capabilities next only to Pentagon
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ACHIEVEMENTS
2002 Presented with Ron Brown Award for Corporate Leadership 2004 Fortune Magazines Most Admired Companies 2005 Held an 89.9% retail store market share in the U.S.

WAL MART STRATEGY

Selling branded products at low cost Ensured not to be too dependent on any one supplier
No single vendor constituted more than 4% of its overall purchase volume

Saturation Strategy for Expansion

WAL MART V/S COMPETITOR

Wal - Mart Strategy Competitors Strategy

To build large discount stores in small rural towns

Competitors focussed on large towns with populations greater than 50,000

Marketing Strategy Guarantee everyday low prices

Marketing Strategy Relied on Advertised Sales

WAL MART CONTROL SYSTEMS

Each store constituted an Investment Centre Data from each store were collected, analyzed and transmitted electronically Information sharing enabled the company to reduce stock-outs etc. and maximize inventory turnover Data from outstanding performers used to improve problem stores

WAL MART CONTROL SYSTEMS

Instituted a policy to address the issue of shoplifting :
Sharing 50% of savings from decrease in pilferage

Store managers to fill out Best Yesterday ledgers Store within Store : Encourage & gave incentive to be creative Successful experiments , recognized & applied to other stores - People Greeter :An associate who welcomed shoppers - 10- Foot Attitude :Pledge by the associates

Policies & Programs for Associates

Introduced Profit sharing in 1971
Every associate who worked for 1 year or 1000 hrs was eligible for it Formula based distribution of profit

Incentive bonuses Discount purchase plan Promotion from within Pay raises based on performance Open door policy

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Q1. What is Wal-Mart strategy? What is the basis on which Wal-Mart builds its competitive advantage?
Wal-Mart Strategy Selling branded products at low cost Ensured not to be too dependent on any one supplier No single vendor constituted more than 4% of its overall purchase volume Saturation Strategy for Expansion
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WAL MART CONTROL SYSTEMS

Each store constituted as an Investment Centre Data from each store were collected, analyzed and transmitted electronically Information enabled the company to reduce stock-outs and maximize inventory turnover Data from outstanding performers used to improve problem stores

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Q2. How Wal-Mart s control system executes the firm s strategy?

Wal-Mart don t allow to exceed any single vendor s contribution more than 4% of its purchase volume. Saturation strategy: Distribution centers are so strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a day. Wal-Mart persuade its suppliers to hook up with RFID which could increase monitoring & management of the inventory.
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Continued
Instituted a policy to address the issue of shoplifting :
Sharing 50% of savings from decrease in pilferage

Store managers to fill out Best Yesterday ledgers Store within Store : Encourage & gave incentive to be creative Information sharing enabled the company to reduce stock-outs and maximize inventory turnover

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Continued .
Every manager requires to fill best yesterdays ledger to track daily sales performance against the number from 1 year back The information within the organization is created & shared throughout the organization The data from outstanding performers among 5300 stores were used to improve operations in problem stores.
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Assignment Questions & Answers

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Q.1.Economic Value Added (EVA) is a technique of management control considered by some as superior of ROI. Analyze this statement and give your comment

There are two very good reasons why EVA is much better than ROI as a controlling tool and as a performance measure
Reason 1: Steering failure in ROI Suppose of a SBU earning currently a return (ROI) of 30% and suppose that this SBU faces an investment opportunity producing a return of 20% Before investment: Capital 100, Operating profit 30, Capital cost 10% ROI = 30/100 = 30% , EVA = 30 - (10% x 100) = 20 Investment s capital requirement 20, return 20%/year: Thus increase in yearly operating profit is 20% x 20 = 4 After investment: Capital 100, Operating profit 30, Capital cost 10% ROI = 34/100 = 28% , EVA = 34 - (10% x 120) = 22 In this case decreasing ROI is good for the shareholders, thus ROI should not be maximised and therefore it is problematic controlling tool.

Reason 2: EVA is more practical and understandable than rate of return (ROI) Usually the rate of return is not used and totally understood at the lower levels of organizations in the companies using ROI as the prime performance measure. I.e. operating peoples like sales people, production engineers and supervisors etc. do not use ROI while making day-to-day operating actions (they use operating profit and perhaps also some turnover times instead) EVA, in contrast to ROI, is as an absolute measure easy to integrate into operating activities since all cost reductions and revenue increases are already in terms of EVA (reduction in costs in one period = increase in EVA in the same period). In the similar fashion capital increases /reductions are also fairly easy to turn into change of EVA EVA clarifies the profitability into one unambiguous and absolute figure. Thereafter improving profitability is simply increasing EVA

Q2. What are the challenges faced in pricing corporate services provided to the Business units operating as profit centre?

Difficulties with Profit Centres

Decentralized decision making Increase in friction Competition within the organization units Divisionalisation General management competence Emphasis on short run profitability No complete satisfaction

Q.3 Internal audit is one of the avail to the top management for ensuring continuous improvement for better performance. Give your comments.

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Internal Audit
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. Internal auditing is a catalyst for improving an organization s effectiveness and efficiency

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Role of Internal Audit

Role in internal control Role in risk management Role in corporate governance

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Q.4 Explain the Concept of EVA, ROI. Give its Positive and Negative. Explain calculations of the DuPont Formula

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Definition for EVA

EVA is defined as net profit after taxes and after the cost of capital. FORMUALE for EVA

EVA

Net operating profit

Taxes

Cost of capital

Positive EVA
A positive EVA means the firm generated a return to invested capital that exceeds the opportunity cost of capital
The value of the firm should increase

Positive EVA indicates Value Creation

EVA is Positive if, NOPAT > (Capital Invested x WACC)

Negative EVA
A negative EVA means the firm did not generate sufficient return to cover it s cost of capital
The value of the firm should decline Negative EVA indicates Value destruction

The absolute value of EVA is less important than the trend in EVA Series of negative EVA is a signal that restructuring in a company may be needed EVA is Negative if, NOPAT < (Capital Invested x WACC)

Calculations
Positive EVA NOPAT = $3,380,000 Capital Investment = $1,300,000 WACC = .056 or 5.60% EVA = $3,380,000 ($1,300,000 x .056) = $3,307,200 Negative EVA NOPAT = $600000 Capital Investment = $1,300,000 WACC = .056 or 5.60% EVA = $60000 ($1,300,000 x .056) = - $12800

ROI
Traditional Formula
ROI = Net Profit After Taxes Total Assets

DuPont Formula:
ROI = (Net Profit Margin) x (Total Asset Turnover) i.e. ROI = (Net Profit After Taxes Sales) x (Sales Total Assets)

Positive ROI
Sales Price Purchase Price Rs. 15,000 Rs.10,000

_____________________ Profit Rs. 5000 Rs. 10000 Rs. 5,000

X 100

50 % ROI

Negative ROI
Sales Price Purchase Price Rs. 7,000 Rs.10,000

_____________________ Loss Rs. 3000 Rs. 10000 (Rs. 3,000)

X 100

30 % Negative ROI

Advantages of ROI
Simplicity: its easy to apply formula, expressed simply as average earnings divided by average investment Consistency: ROI is consistent with many management reward systems that use ROI as a performance metric, which better reveals direct investment results expected of managers Uniformity: Return on investment is also a measure favored by investors when judging how effective management has been in utilizing company assets they have invested in

Disadvantages of ROI
Investment in assets is typically measured using historical cost. ROI becomes larger as assets become depreciated. This may result in managers taking unnecessary delays in updating equipment. Managers may turn down projects with positive net present values, simply because accepting the project results in a reduced ROI. In other words, projects may be turned down if they provide a return above the cost of capital but below the current ROI.

DuPont formula

Group Members
Name Mr. Sandesh Singh Mr. Sandip Kadam Mr. Sanjay Dialani Ms. Sara Rangwalla Mr. Sarfaraaz Malik Roll No 86 87 88 89 90

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Thank You

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