Financial analysis of coles ltd - Free Essay Example

Sample details Pages: 10 Words: 2857 Downloads: 2 Date added: 2017/06/26 Category Statistics Essay Did you like this example? 1. INTRODUCTION 1.1 Purpose In this report my purpose is to do a financial analysis of Coles Ltd which provides a basis, on which the valuation of company can be done. 1.2 Scope This report conducts a financial analysis for Coles by performing a trend analysis of financial ratios using the data given for past 5 years. It also includes a cash flow analysis which along with financial ratios helps compare coles with its industry counterparts, Woolworths and Metcash; and finally this analysis would help in price valuation to calculate a fair price for coles share. Don’t waste time! Our writers will create an original "Financial analysis of coles ltd" essay for you Create order 1.3 Methodology This report is based on primary data available from Coles website as well as secondary data such as research paper, electronic database and other publications. 1.4 Limitation Although all efforts have been made to use as much available information as possible but there were some constricting factors such as lack of available data of past financial information which restricted this research. Reliability of data and time constraints were also hurdle in performing this analysis. The biggest shortcoming was that current data was based on AIFR and data for years before 2005 was based on AGAAP, which made comparative trend analysis very difficult. 2. FINANCIAL ANALYSIS In this we will be evaluating the firms financial ratios and cash flow measures of the operating, financing, and investing performance of a company in relation to key competitors historical performance. Given the firms strategy and goals, together these tools allow the analyst to investigate and examine a firms performance and its financial condition. Ratio analysis is the tool which involves assessing the firms income statement and balance sheet data. On the other side, the cash flow analysis relies on firms cash flow statement. 2.1 Ratio analysis The ratio analysis deals with evaluation of the performance of Coles in perspective of its mentioned strategies and goals. In order to achieve this objective a combination of cross sectional analysis and time series analysis is performed. Workings of Ratios for 2006 are mentioned in APPENDIX 4. 2.1.1 Profitability analysis If we look at the return on equity (ROE) of Coles, for a period of 5 years, it is being observed that ROE has increased in 2006 as compared to 2002. Although ROE has fallen in 2006 (15. 30%) as compared to 2005 (18.30 %) but it can be seen that on an average Coles ROE has been stable or increased over last 5 years. Return on asset (ROA) has also been stable around 10% during the last 3 years and increasing from 7.17% in 2002 to 9.54% in 2006.The main reason for stable ROE and ROA are better performance delivered by the management and as well as the mature characteristic of the industry, that produces stable return as well as stable growth seeing population demographics in the country. Table 1 Profitability Ratio of Coles Ltd 2006 2005 2004 2003 2002 ROE 15.30% 18.30% 15.69% 12.13% 10.80% ROA 9.54% 11.57% 10.83% 8.42% 7.17% Gross Profit Margin 23.53% 23.36% 25.44% 27.38% 24.40% Net Profit Margin 1.57% 2.08% 1.91% 1.59% 1.38% Financial Leverage 2.54 2.70 2.21 2.23 2.51 Source: Coles financial statement after adjustment Gross profit has been quite stable and good for the last 5 years but the concerned part is the net profit margin. Net profit margin has been very low, it had been increasing from 2002 to 2005 but it again fell in 2002 to 1.57% from 2.08%. Coles need to reduce its operating and interest expenses so as to increase its net profit margin. Table 2 Profitability Ratio Comparison within the industry in 2006 Coles ltd Woolworths Metcash ROE 15.30% 33.80% 7.80% ROA 9.54% 15.57% 1.69% Net Profit Margin 1.57% 2.69% 0.98% Financial leverage 2.54 3.08 3.07 On comparing the performance of Coles with its industry counterparts we can conclude that Coles Ltd is way behind its major competitor, Woolworths, in terms of ROE and ROA which might be attributable to lower net profit margin and lower financial leverage. Coles has higher financial leverage as compared to Woolworths and metcash, which means it, has greater financial risk. But despite of high leverage it has low ROE which confirms the fact that Coles has low net profit margin asset turnover ratio. 2.1.2 Activity Analysis A firms operating activities require investments in both short-term (inventory and accounts receivable) and long term assets. Activity ratios describe the relationship between the firms level of operations and assets needed to sustain operating activities. Asset turnover is important in determining firms ROA; it also formulates reasons of how it will affect firms ROE. Evaluating the effectiveness of asset management is the purpose of asset turnover analysis. 2.1.2.1 Short term activity ratios Working capital is our main concern while evaluating a company. It can clearly be observed that since Coles has high turnover ratios it uses cash basis in its sales. It can be clearly being seen that it took only 4.48 days on an average for Coles to convert its inventory investment back in to cash. From the figures last 5 years we can clearly interpret that Coles has drastically improved its cash conversion cycle from 23 days in 2002 to 4.48 days in 2006. Table 3 Short-term Activity Ratios for Coles Ltd 2006 2005 2004 2003 2002 Inventory Turnover 8.56 8.04 8.20 6.95 6.80 Avg. No. Days Inv. in Stock (A) 42.65 45.39 44.52 52.52 53.69 Receivables Turnover 72.18 54.86 65.01 43.82 32.27 Avg. No. Days Rec. O/S (B) 5.06 6.65 5.61 8.33 11.31 Payable Turnover 8.44 8.75 9.17 8.28 8.72 Avg. No. Days Pay. O/S ( C) 43.22 41.70 39.82 44.10 41.88 Cash Conversion Cycle (A+B-C) 4.48 10.35 10.32 16.75 23.12 Table 4 Short-term activity ratio comparison, 2006 Coles ltd Woolworths Metcash Inventory Turnover 8.56 13.2 16.09 Avg. No. Days Inv. In Stock (A) 42.65 27.65 22.68 Receivables Turnover 72.18 42.24 10.9 Avg. No. Days Rec. O/S (B) 5.06 8.64 33.48 Payable Turnover 8.44 11.18 7.54 Avg. No. Days Pay. O/S ( C) 43.22 32.64 48.23 Cash Conversion Cycle (A+B_C) 4.48 3.65 7.93 Now, if we compare Coles with its competitors we can see that Woolworths has lower cash conversion cycle and metcash has higher cash conversion cycle. Woolworths has lower cash conversion cycle because it keeps inventory in stock for shorter duration and stock is converted in to good sold in less span of time. On the other hand Metcash keeps inventory in stock for lower no. of days but it provides more no. of days to its receivables for payment due to which it has higher cash conversion cycle. Seeing the industry it can be concluded that Coles has good cash conversion cycle but it can improve on it by reducing the Average number of days for which inventory is in stock. 2.1.2.2 Long term activity ratios In the analysis of long term activity ratios, long-term asset turnover and property, plant and equipment turnover have been utilized. Table 5 Long term activity ratios for Coles Ltd 2006 2005 2004 2003 2002 Total Asset Turnover Ratio 372.70% 361.62% 369.45% 323.18% 310.12% PPE Turnover Ratio 1033.42% 959.34% 958.00% 799.00% 746.09% On the whole both ratios moved in the same pattern during these periods. Relatively, this pattern shows that asset utilization has improved uniformly for the period ranging from 2002 (310.12%) to 2006(372.70%). This helps to conclude that company is continuously improving its utilization of assets to increase its production. Table 6 Long term activity ratios comparison, 2006 Coles ltd Woolworths Metcash Total Asset Turnover Ratio 372.70% 341.11% 343.81% PPE Turnover Ratio 1033.42% 993.24% 7359.85% While comparing to its competitors it can be seen that Coles total asset turnover ratio is approximately 30% higher than its competitors. It helps to analyze that Coles is more efficiently utilizing its resources to increase its production as compared to its competitors. Metcashs high PPE turnover ratio can be contributed to the fact that PPE forms a very small part of Metcashs total assets. If compare Coles with its major competitor Woolworth on PPE Turnover Ratio we can conclude that Coles has been utilizing its fixed asset better than Woolworths. 2.1.3 Liquidity Analysis Liquidity is referred to a firms ability to have sufficient funds when needed and convert its non-cash assets in to cash easily. Liquidity Ratios are employed to determine the firms ability to pay its short-term liabilities. Liquidity analysis enables us to determine Coles ability to cover its liquidity risk. Liquidity risk may arise due to shortfall or over liquidity within the firm and this in turn lead to firms disability of fulfilling its liquidity needs. In order to determine firm liquidity level, Current ratio, quick ratio and cash ratio are short- term liquidity ratios which have been employed. Table 7 Coles Short-term Liquidity Ratios 2006 2005 2004 2003 2002 Current ratio 0.98 1.07 1.20 1.35 1.37 Quick ratio 0.26 0.25 0.40 0.42 0.42 Cash ratio 0.16 0.11 0.23 0.31 0.11 On doing the trend analysis for last 5 years it can be observed that Coles current ratio has been consistently falling, which increases the possibility that Coles will not be able to meet up its short term liabilities. Current ratio has fallen from 1.37 in 2002 to 0.98 in 2006 which is of major concern, as a current ratio of less than 1 means that company has negative working capital and is probably facing a liquidity crisis. The more stringent measure of liquidity is quick ratio and cash ratio which have also been falling uniformly in last 5 years. It seems Coles is falling in to liquidity crunch and might need short term funds to meet its current liabilities. There has been lot of volatility in the cash ratio of the firm as they have been rising and again falling, so we can conclude that Coles is not able to maintain stable liquidity. Table 8 Short term liquidity ratios comparisons, 2006 Coles ltd Woolworths Metcash Current ratio 0.98 0.84 1.41 Quick ratio 0.26 0.37 0.99 Cash ratio 0.16 0.13 0.32 As compared to its competitors Coles has better current ratio than Woolworths but has current ratio less than Metcash. Comparing Coles with its major competitor in retail sector, Woolworth, we can clearly see Coles has better current cash ratio but is behind on quick ratio. On comparing with metcash we see that Coles is behind on all the short term liquidity ratios by a very high margin. Metcash has twice the cash ratio as compared to Coles, which makes Coles ability to meet its short term liabilities questionable. 2.1.4 Long term Debt and solvency Analysis The analysis of a firms capital structure is essential to evaluate its long term risk and return prospects. The long term debt and solvency ratios which we are going to use here are debt to equity, debt to capital and interest coverage ratio. Table 9 Coles long term Debt and Solvency ratios 2006 2005 2004 2003 2002 Debt to Equity 1.54 1.70 1.21 1.23 1.51 Debt to Capital 0.61 0.63 0.55 0.55 0.60 Interest Coverage Ratio 7.07 12.54 13.30 8.10 5.77 As indicated by Coles debt and long term solvency ratios, it denotes that firm is not a solvent company and relies heavily on debt financing. The firms debt to equity and debt to capital ratios are consistently above 1.00 which shows that Coles employed more debt than equity as its source of financing. Debt to total capital has also been consistently been around 0.55-0.60 during the 5 year period. This shows that firm has been stable with its financing policy and has not done much change with its debt and equity mix. Since it relies so heavily on debt financing, issues can be raised regarding its ability to pay off the interest arising due to long term debt financing but we see that company has EBIT 7 times more than the interest charges it has to pay, so that should concern much. It can be observed interest coverage ratio has declined in 2006, as compared to 2005 2004, but it is still able to meet industry benchmarks. Table 10 Debt and Solvency ratios Comparison 2006 Coles ltd Woolworths Metcash Debt to Equity 1.54 2.13 2.01 Debt to Capital 0.61 0.68 0.67 Interest Coverage Ratio 7.07 8.5 3.95 Compared to its competitors, long term solvency ratios of Coles seem to be performing optimally. Woolworths has got the highest debt to equity, debt to capital interest coverage ratio. Historically a debt to equity ratio of 2:1 is considered optimal so Coles can still rely on debt to finance its future undertaking rather then issuing new shares. It can be observed that Coles has interest coverage ratio greater than Metcash but less than Woolworths but that can be attributable to its low profit margin as compared to Woolworths. It seems Coles is at par with its competitors in terms of debt and solvency ratios. 2.2 Cash Flow Analysis Cash flow analysis is essential to understand that whether the firms cash flow have the ability to sustain the business, to meet unexpected obligations and to meet its short term liabilities. This also helps to understand whether firm will be requiring additional financing and firm can take advantage of new business opportunities as they arise. In cash flow analysis we will evaluate 3 ratios; Operating cash flow to current liabilities, Interest coverage (cash flow basis) operating cash flow to dividend payment. Methodology for calculation of cash flow ratios is shown in APPENDIX 5 Table 11 Cash flow ratios for Coles Ltd 2006 2005 2004 2003 2002 Op. cash flow to current liabilities 32.82% 29.20% 35.20% 38.74% 38.20% Interest coverage(cash flow basis) 10.50 13.74 18.82 13.56 10.86 Op. cash flow to dividend payment 2.87 2.67 4.35 4.10 3.92 Based on the table above, we can say that Coles has the ability to service its debts which can be seen in firms interest coverage ratio from cash flow basis. Moreover, we observe that Op. cash flow to dividend payment has fallen over the time span from 2002 to 2006 which could be an area of concern. Operating cash flow to current liabilities has also fallen a bit, which means it can be a problem for the firm if certain unexpected obligation come up due to which it might require additional financing. Table 12 Cash flow ratios Comparison, 2006 Coles ltd Woolworths Metcash Op. cash flow to current liabilities 32.82% 34.98% 18.90% Interest coverage(cash flow basis) 10.5 8.45 5.36 Op. cash flow to dividend payment 2.87 4.93 8.75 If we compare Coles to its competitors in the industry which it operates we observe that Coles has got better interest coverage ratio (cash flow basis) as compared to Woolworths Metcash which means that Coles has better ability to service its debts than its counterparts. Coles also has a shortcoming in operating cash flow to dividend payment ratio, as it can be seen it has the lowest operating cash flow to dividend payment ratio. It can be attributable to the fact that it pays more dividends than it should pay. So it can be concluded that Coles needs to reduce dividend payment as it might lead Coles in to financial difficulties if some unexpected obligations turn up. In terms of operating cash flow to current liabilities we see that although it has fallen substantially for Coles in last 5 years but it is at par with its biggest competitor Woolworths greater than Metcash. 3. Prospective analysis Prospective analysis enables us to determine future performance of the firm based on historical performance of the company. Here will be determining the mean return for sales and earning before interest taxes (EBIT) . Using those mean returns we will be making a sales forecast and EBIT forecast. 3.1 Sales and EBIT forecast In determining the sales growth, I have considered the following assumptions- Past trend of sales is going to continue in the following years. Firm is not going to bring a major change in its pricing policy. The foundation for sales EBIT growth is historical sales EBIT growth and I have used mean reverting model to determine the future sales growth, in which future sales EBIT growth will be mean return of last 4 years sales growth. I have not taken the 5 year sales EBIT growth because EBIT growth rate is to high in 2002 (73%) which could adversely effect the mean return considering present situation of Coles. Table 13 Sales EBIT Growth Rate for Coles Ltd 2006 2005 2004 2003 Mean Sales growth 3.62% 2.33% 19.43% 5.17% 7.64% EBIT growth -17.07% 11.68% 34.31% 18.56% 11.87% Using the mean reverting model we are able to find out a growth rate of sales for 7.64% EBIT growth rate of 11.87%. Using these growth rates we will be able to make a sales forecast EBIT forecast. This forecast will help in proper valuation of Coles on the basis of its predicted future performance. Figure 1 Line chart for sales EBIT growth Table 14 Sales EBIT Forecast for Coles LTD 2006 2007 2008 2009 2010 Sales Forecast 34212 36825.8 39639.29 42667.73 45927.54 EBIT Forecast 875.9 979.8693 1096.18 1226.296 1371.858 Using the growth rates we can forecast the sales and EBIT for Coles which helps an analyst in a fair valuation of the company. The main reason we use the sales growth as a base for forecasting, is that the majority of firm income is derived from its supermarket business. This forecast suffers from one serious shortcoming that EBIT growth has fallen from 34.31% in 2004 to 11.16% in 2005 and then to -17.07% in 2006 but we are still predicting a growth in EBIT of 11.87% in 2007 and thereafter. 4. Conclusion I have gone through the multi-step process of ratio analysis, cash flow analysis and prospective analysis to present a report on financial analysis of Coles ltd. During the process, I have identified that Coles is operating in a mature industry with small profit margins. I have performed ratio analysis, cash flow analysis prospective analysis which would help a great deal in valuation of Coles based on its current market situation. During the Ratio analysis I was able to conclude that Coles has got good activity liquidity ratios but the major area of concern is profitability ratios. Coles needs to improve its net profitability so as survive in this competitive environment. Cash flow analysis helped us to depict that Coles has cash flow ratios at par with its competitor, Woolworths, but Coles need to reduce its dividend payout as it is too high as compared to industry counterparts. By doing a prospective analysis I am able to forecast the future sales EBIT for Coles for next 4 years. Growth rate for forecast has been calculated using the mean return for past 4 years. This helps us to understand future growth of the company. I would like to conclude by saying that although Coles is competing in a low profit margin industry but it is the 2nd biggest company in the retail industry, therefore if it brings about certain petite changes in its financing and operating activities it can add a great deal to its shareholders value.

President Bush Implements A Wave Of Legislation Help...

President Bush implements a wave of legislation to help protect the citizens of the United States. An important piece of law that was passed was an act called the Patriot Act. This Act’s is supposed to help the government find terrorists and ensuring that another attack like the September 11th attacks doesn’t happen again. However there are a number of constitutional questions that arise with regards to the Patriot Act. The Patriot Act grants the government more power than it had before the attacks of 9-11. It takes into consideration the privileges of residents to be set aside when the legislature feels that an individual may be partnered with terrorist exercises. I start by talking about the essential substance of the Patriot Act and†¦show more content†¦This statement implies that there are certain rights out there that are not specifically spelled out in the Constitution, and the Supreme Court has used this amendment by saying that the right to privacy fits in here. Finally the 3 Fourteenth Amendment which gives notion that every citizen has the right to due process. Also, the Fourteenth Amendment states, â€Å"No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States†¦Ã¢â‚¬  (Constitution of the U.S). The right to privacy is implied in the Constitution in a number of different amendments. That’s why it is so important for Congress to define terrorism in the context of the Patriot Act because if it doesn’t define it, the term is open up to a number of different definitions. Patriot Act and the Constitution The Patriot Act poses many threats to the civil liberties of individuals. There are a number of sections in the Patriot Act that seem to go against the general notion of privacy that is implied in the Constitution. In Title II of the Patriot Act, Section 201 titled, Authority to intercept wire, oral, and electronic communications relating to terrorism, the government acts against the Constitution. By looking at this section from a constitutional standpoint, there are many issues that are brought up just by this short sentence. First, terrorism isn’t really defined. This

We’ve Got Rhythm! Medtronic Corporation’s free essay sample

Pacemakers were small, battery-powered devices which, when implanted within a patient, helped a malfunctioning heart to beat in a steady, fixed rhythm. Because Medtronic was the first entrant into the pacemaker field and built a strong technological lead, it enjoyed a substantial portion (over 70%) of the market share for cardiac pacing through the 1960s. Building upon Medtronic’s legacy of leadership was not easy, however. In the face of increasing competition, rapid technological change and tightening market and regulatory demands for product quality, Medtronic saw its market share cut by more than half between 1970 and 1986. Though it had invested heavily in technology and product development over this period, much of that investment had been unproductive. Many projects failed to produce product designs that could be launched competitively, and the features and functionality of most of the products the company was able to launch, lagged the competition. Several key employees left the company, seeing greater opportunity to develop their new pacemaker product ideas in new start-ups rather than within Medtronic. These competitors proved much faster than Medtronic at developing new products that advanced the state-of-the-art in pacemaking. Medtronic was also pummeled by two major product recalls related to product quality problems. Observers felt the company would have lost even more of the market during this period, were it not for its strong worldwide salesforce and the lingering legacy of its brand reputation amongst surgeons, the primary customer group. 1 This citation was made by the National Society of Professional Engineers in 1984. Professor Clayton M. Christensen prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some of the data and names in this case have been disguised to protect the proprietary interests of the company. Copyright  © 1997 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School. 1 698-004 Weve Got Rhythm! Medtronic Corporations Cardiac Pacemaker Business Management changes which were initiated in the late 1980s, however, had sparked a dramatic reversal in the company’s fortunes, and by 1996 the company had regained its position of product and market leadership. By all accounts, it was in front and pulling away from its competitors. On a pleasant Minneapolis spring afternoon in 1996, several members of the team that managed this turn-around Steve Mahle, president of the Brady Pacing Business; Mike Stevens, general manager of the Pulse Generator Programming Systems (PGPS) Division; Bill Murray, general manager of the MicroRel component manufacturing subsidiary; Director of Marketing Paula Skjefte (pronounced Sheftee); and Director of Product Development Technology Don Deyo -gathered to assess the progress they had made since they had taken the helm of the troubled division in the late 1980s. They were also anxious to understand whether the management structure and the processes, values, and resources they had created to achieve this turn-around, were capable of maintaining the company’s successful momentum in the future. This case recounts their achievements and concerns. Medtronic’s Brady Pacing Business Medtronic’s Brady Business Unit designed and built pacemakers that delivered a rhythm of electrical impulses, to remedy a disorder called Bradycardia, in which the hearts electrical system does not generate pulses to cause the heart to beat rapidly enough to sustain the bodys normal activity, as described in Appendix 1. Amongst its other businesses, Medtronic also had a Tachy cardia Business Unit, whose products addressed the opposite malfunction when the hearts electrical system generated too many beats. Because of the prevalence of Bradycardia relative to other disorders in cardiac patients, the Brady Business Unit historically had delivered most of Medtronics revenues, and an even larger share of its profits. Consequently, the health and vitality of the Brady Business strongly affected the corporation’s overall financial performance. The Brady Business Unit worked hand-in-glove with the component divisions of Medtronic in product development efforts, as shown in Exhibit 1. The Promeon Division, for example, developed new technologies to power pacemakers. In the early years of the industry’s history in particular, battery technology had been a pivotal selling point because the battery could not be replaced: once it was depleted, a new pacemaker had to be implanted. Another division, MicroRel, designed and fabricated the critical hybrid microelectronic circuits in Medtronics pacemakers. Located in T empe, Arizona, it supplied proprietary circuitry to all of Medtronics businesses. Work with MicroRel was viewed as a crucial connection in the development of new pacemakers, because of the increasing importance that integrated circuit (IC) technology played within these devices. Perhaps the most critical division for the Brady Business was the Pulse Generators Programming Systems (PGPS), headed by Mike Stevens. Unlike the other two component divisions that shared their services and output with other parts of Medtronic, PGPS focused on developing new products for Bradycardia pacing, by translating customer and market-based inputs into product designs, and then worked closely with manufactur ing to produce the final products. This involved design and assembly of the pacemaker as well as the programming unit, which typically sat on a table in the cath lab or operating room where the implantation was performed. Programming units allowed physicians to tailor the firmware in the pacemaker so that the frequency of the pulses it generated and a number of other attributes of the device matched the needs of each individual patient. The leads which carried electrical impulses from the pulse generator to the wall of the heart were designed by a separate leads group within the Brady Pacing Business Unit, headed by Warren Watson. 2 The term â€Å"brady† derives from a Latin root meaning â€Å"slow. † The opposite cardiac pacing disorder, tachycardia, took its name from a Latin root meaning â€Å"fast. † 2 Weve Got Rhythm! Medtronic Corporations Cardiac Pacemaker Business 698-004 How the Pacemaking Leader Lost Its Rhythm Product development at Medtronic historically had been supervised by its functional managers, who were intimately involved with each development effort during the company’s early years. However, as the company grew, the functional managers became increasingly absorbed by operating responsibilities in their own functional organizations, making coordination across functions, in practice if not intent, a lower priority. The company responded by creating a group of project managers to coordinate the work of various functional groups. While this helped, most major decisions still had to be passed by the functional managers â€Å"A legacy of how decisions had been made that still lingered in the organization,† according to a long-time employee. The project managers’ job was to try and get decisions to be made by the functional leadership they only had minor authority to make decisions themselves. â€Å"Planning new products is actually a lot more difficult in a business like this than it looks,† reflected another experienced executive. â€Å"In some businesses the problem is a lack of great ideas. But in our situation with rapidly changing technological possibilities, some darned good competitors and thousands of cardiologists out there with ideas for all kinds of new features, the opposite is true: We’ve always had too many ideas for new products. In our functional organization, without a single, coordinated process or person to articulate a product plan or strategy, development projects just started everywhere. When you had a good idea, you’d mock up something either a real prototype or something on paper and carry it around with you. Then when you’d run into Earl Bakken or another powerful manager in the hall, you’d corner him, pull your idea out of your pocket, and try to get him to support it. If his reaction seemed positive, then you would use that leverage, to get a few friends to help you push it along. At some point you’d go to the engineering manager to get formal resources. â€Å"The problem with this system was not that we were working on bad ideas. Most of them were technically sound and made market sense,† commented Don Deyo, an experienced engineer and currently Director of Product Development and Technology. We were trying to do too many things, and no project got the focus and attention needed to get it done right. It was taking too long to get anything to market. We never got good at releasing new products, because you only get good at things you do a lot. Those that we did introduce often followed the lead of competitors. That’s what happens when you continually try to respond to every new idea to come along. † The problem then fed on itself,† reflected Mike Stevens, general manager. The development people would tell me that they could never get anything to market because marketing kept changing the product description in the middle of the projects. And the marketing people would say that it took so long for engineering to get anything done, that by the time they got around to completing something, the market demands would have changed. When customer requirements evolve faster than you can develop products, it becomes a vicious spiral. † In environments like that, it is very difficult to plan product families,† Stevens continued. If the company launched a product that subsequently could be modified or extended to create derivative models, it was a stroke of luck. † Because of the ad hoc way in which new product development projects were conceived, Medtronic’s project pipeline was made up of incongruous d evelopment cycles. Projects were separated according to whether they were single or dual-chamber platforms. Each new model had largely its own unique circuitry, components, testing programs, casing, and battery. Due to the high costs of developing all these parts of the pacemaker, project managers battled each other for resources. Although the company’s reputation and strong salesforce relationships with surgeons kept disaster at bay, the company’s performance suffered as a result of its disabilities in development. Between 1970 and 1986, it was almost always a competitor, not Medtronic, that introduced major new improvements to the market. For example, Cordis introduced the world’s first programmable 3 698-004 Weve Got Rhythm! Medtronic Corporations Cardiac Pacemaker Business pacemaker in 1972; Medtronic followed in 1980. Cardiac Pacemakers Inc. , a Medtronic spin-off, pioneered the first pacemaker with a long-life lithium battery in 1974. Even though the technology was available from a third-party supplier, Medtronic did not get its lithium battery-powered product out the door until 1978. Although Medtronic introduced its first dual-chamber pacemaker during this period, it did not follow it with an improved dual chamber device for another eight years. Deyo explained, â€Å"We were working on next-generation dual chamber products during all of those eight years. The problem was that just as we’d get ready to announce a new product, a competitor would come out with something better. So we’d force the funnel open again to allow for this new input, re-scope the project, and try to leap ahead of the competitor. Then just as we’d get ready with the improved version, a competitor would come in ahead of us with an even better product; and so on. † â€Å"I got so that I just didn’t want to answer the phone because I was afraid there would be a salesman on the line wanting to know when we were going to come out with a product that was comparable to something a competitor had introduced,† recalled Paula Skjefte, director of marketing. â€Å"I just couldn’t give him an answer. Field product failures compounded the problems caused by Medtronic’s long development cycle. Its Xytron pacemaker line was recalled in 1976 after several units failed following implantation. And a few years later, physicians found that the leads on some pacemakers they had implanted had disintegrated, so that the pacemaker’s output was not gett ing transmitted to their patients’ hearts. In total, Medtronic was forced to issue four different product advisories to warn that certain models were susceptible to malfunction. The result of these factors was a massive loss of share, from 70% in 1970 to 29% in 1986, as shown in Exhibit 2. Still, however, due to significant growth in the market, the company continued to report record sales and profits over this period, and for many in the company there was no cause for alarm. â€Å"Medtronic was a really nice Minneapolis company,† Don Deyo noted. This reflected in many ways the values of Medtronic’s founder, who had a genuine reverence for every employee’s contributions to the company’s success. â€Å"But somehow in the mid-1970s, Deyo noted, â€Å"This attitude got out of hand. We dominated the market, and were very profitable. Because there was so little pressure on the business, we lost our intensity and willingness to focus our efforts. A Home Run Saves the Day The company’s decline was arrested in 1986 more by good fortune than any change in management practice, however. In the early 1980s a project leader, Ken Anderson, championed an idea for a â€Å"rate-responsive† pacemaker a device which could sense when changes i n body activity required the heart to beat faster or slower, and stimulated the heart to beat accordingly. Although most cardiologists Anderson spoke to thought the idea was impractical, and despite the indifference of most of Medtronic’s staff, Anderson won the support of the general manager, and the two of them set up a dedicated team to pursue the idea. Its product, dubbed Activitrax, worked technologically and in the marketplace. Cardiologists found its single-chamber design easy to implant, and its effect was nearly as good for patients as a dual chamber pacemaker. Patients reported feeling stronger, because it would cause their hearts to beat more rapidly when they were working hard or exercising. And they reported feeling more rested in the morning, because Activitrax paced their hearts to beat more slowly when they were asleep. The dramatic Activitrax therapeutic breakthrough literally saved Medtronic, because no other new platform products were ready for introduction until 1992. It did not, however, alter the way the company developed products. 4 Weve Got Rhythm! Medtronic Corporations Cardiac Pacemaker Business 698-004 The Turnaround in Product Development Though Medtronic’s market position was helped by the success of Activitrax and by a serious product recall suffered by a principal competitor, the most dramatic changes in the company’s market position were instigated when Mike Stevens was assigned to be vice president for product development of the PGPS Division in 1987. Stevens’ career with Medtronic had begun in 1973, when Motorola decided to shut down its hybrid circuit manufacturing operation near Phoenix. Stevens and several other employees of the Motorola facility decided to continue the operation and obtained financing from Medtronic, which had been a major customer. Stevens had watched Medtronic’s struggles in product development from a supplier’s viewpoint. â€Å"Though I didn’t have a background in product development, I saw much of Medtronic’s problem as Management 101. We had very strong functional roles. People were being measured by cost centers, and there was no accountability for the delay or failure of a new product. I felt the basic values and ethics of the company were still really strong. But what needed work were its processes. I felt if we could get those straightened out, then we could bring the Brady business back to its past glory. † Stevens summarized key elements of his management philosophy as follows: 1. Commitments are sacred. The more responsibility you give to people to control their destiny, the more you can and must hold them accountable. Create a sense of urgency by contrasting the excitement of bringing new therapy to patients, versus the consequences if your competitors are there first with better solutions. Don’t waste time with excess travel or off-site meetings Are happy employees productive, or are productive employees happy? Stevens believed the latter, whereas Medtronic management had been acting as if the former were true. Do nothing that separates management and employees. Management means responsibility, not status. You only get what you measure. Focus on gaining market share. Over time, this is the most accurate measure of your success. 2. 3. 4. 5. 6. Managers in the PGPS Division got a taste of Stevens’ belief that commitments are sacred when, shortly after arriving at Medtronic, he held management to the project milestones they had agreed upon at the beginning of fiscal year 1988. Their incentive compensation was tied to these objectives, and 1988 was the first year in memory that management did not receive year-end bonuses that were tied to objectives. Measuring Product Development Performance Stevens implemented his measurement philosophy by focusing on four measures of product development performance, which corresponded to the achievements he wanted the organization to focus upon. These are described in the following table. 5 698-004 Weve Got Rhythm! Medtronic Corporations Cardiac Pacemaker Business Focus Speed Measure Cycle time Stevens’ Comments â€Å"This is the time required to get a new product into the market. If I measure this, there isn’t much else I need to measure. It forces you to do the other things right in product development, because you can’t make mistakes, and you can’t waste time. â€Å"The reason we focus on fully allocated cost, rather than just viewing functional costs or direct product costs, is that it gets you thinking about market share, and the impact that unit volumes can have on your financial success. This is healthy thinking. † â€Å"This translates into market share, pure and simple. † â€Å"In ou r business, you can’t afford a field failure because our patients count on us, and doctors can choose to go elsewhere. † Cost Fully allocated unit product costs Innovativeness Product Quality Product performance relative to competitors Field performance -defects per million Most people in PGPS welcomed Stevens’ attitude. One commented, â€Å"I was just getting started as a project manager, and Mike was a breath of fresh air. His priorities were clear; I knew where he stood. He had a very different management style: very firm, assertive, thoughtful and focused. He was execution-oriented, and really held people accountable. Processes and Practices â€Å"This isn’t a story about great management,† Stevens emphasized. â€Å"It’s a story about putting into place a set of processes that helped a great team of people be as productive as they could be. † The processes Stevens instituted had the following features: 1. Speed â€Å"Being fast to market eliminates so many other problems,† commented Steve Mahle, who took over as president of the Brady Pacing Business in 1990. â€Å"The slowest part of our process was actually in deciding what needed to be done. We used to spend lots of time debating what we should do. One of Mike’s greatest achievements was in cleaning up the front end. He did this by articulating very clearly what our strategy was, so that there was a well-defined criteria that could guide these decisions. Then he created a process to get those decisions made. † Exhibit 3 describes the process by which new products were defined. An assessment of the competitive and customer environment was combined with a technology assessment, to define the business objectives of each new product, and to clarify what the financial and competitive contributions of the new product needed to be. Stevens, who by 1991 had become division general manager, reviewed new product ideas according to their potential for meeting those business objectives. His staff, comprised of the managers of the division’s marketing, research, development, technology, finance, human resources and manufacturing functions, participated in this review with Stevens. . Platform Strategy Since product ideas in the earlier regime had originated in disparate parts of the organization and were approved and funded in independent decisions, it was quite common that products that required significant investments of time and money were not leveraged with derivative products that could extend their life and market reach. The highly successful Activitrax mod el, for example, did not spawn a single derivative product that offered different features, performance, or price points to the market. To devise an effective product line architecture built around product platforms, Mahle established a product planning team comprised of himself, Mike Stevens, Paula Skjefte, Don Deyo and Stan Myrum, Vice president and general manager of the business unit’s leads division. This team defined a platform strategy around three key elements. 6 Weve Got Rhythm! Medtronic Corporations Cardiac Pacemaker Business 698-004 The first element was that the initial platform product had to be designed to accommodate the full range of derivative models from it, without significant redesign. In other words,† Stevens explained, â€Å"We designed the highest-performance, most fully featured version of the product at the outset. † Medtronic then created derivatives by de-featuring and de-rating certain elements of that design, so that it could address other tiers of the market as well. The second element of the platform strategy was enabled by the first. Historically, Medtronic had int roduced new pacemaker features on its single-chamber models first, because they were technologically simpler to design and build. Once the features were accepted and the technology perfected in the single-chamber platform, the features were then moved up-market onto the dual chamber platform. â€Å"The effect of this,† Paula Skjefte noted, â€Å"Was to force a lot of our lead physicians to continue focusing on single-chamber devices just so they could utilize our newest features. Once we began designing the platform to accommodate the full range of derivative models we planned to spin off from it, we didn’t face the same constraint it was just as easy to put the most advanced features on the dual chamber model. This gave us a much clearer progression from basic, simple devices for the low-end of the market to high-performance, fully featured models at the high end. Skjefte continued, â€Å"The way we used to play in the low-end of the market was to discount the price of our old model, after we had introduced a new one. This was ironic. Because we were reducing the cost of our products with each generation, we sold our high-cost models at the lowest prices, and our low-cost, newest models at the highest prices. The result was that there was little incentive to maintain a strong presence in lower tiers of the market. Under the new strategy, Medtronic addressed lower price points in its market with the simplest versions of its new lower-cost platforms. Hence, even as Medtronic was assuming a leadership role in features and functionality in higher tiers of the market, it strengthened its position in the low end as well. The third aspect of Medtronic’s platform strategy was to change the way platforms were defined. Formerly, Medtronic had thought of platforms in terms of physical architecture.

The Sixties Essays (1196 words) - Counterculture Of The 1960s

The Sixties The Sixties Many social changes that were addresses in the 1960s are still the issues being confronted today. The ?60s was a decade of social and political upheaval. Inspite of all the turmoil, there were some positive results: the civil rights revolution, John F. Kennedy's bold vision of a new frontier, and the breathtaking advances in space, helped bring about progress and prosperity. However, there was alot of negative effects: student and anti-war protest movements, political assassinations, and ghetto riots excited American people and resulted in lack of respect for authority and the law. The decade began under the shadow of the cold war with the Soviet Union, which was aggravated by the U-2 incident, the Berlin Wall, and the Cuban missile crisis. along with the space race with the USSR. The decade ended under the shadow of the Vietnam war, which deeply divided Americans and their allies and damaged the country's self-confidence and sense of purpose. Even if you weren't alive in the ?60s, you know what they meant when they said, ?tune in, turn on, drop out.? you know why the nation celebrates Martin Luther King Jr.' birthday. All of the social issues are reflected in today's society: the civil rights movement, the student movement, the sexual revolution, the environment, and more controversial of all, Hippies. The sixties is also known for its rapid birth rate. Nearly 76 million children were born to this generation, and for that they are called the ?Baby Boomers.? Suprisingly, even though so many children were being born, not many parents knew how to raise them. The parents of the 50s and 60s were so concerned with the world around them that going to work was the only image children had of their fathers. Kids didn't understand why they worked so much just to gain more material possessions. Children of this generation grew up learning just about how to be free and happy. Most of the time, when thinking back to the sixties, people remember hearing about things such as sex, drugs, and racism. However, what the often tend to overlook is the large emphasis freedoms had on the era. This does not just refer to the freedoms already possessed by every American of the time. This focuses on the youth's fight to gain freedom or break away from the values and ideas left behind by the older generation. These fights were used to help push for freedoms from areas such as society's rules and values, competition, living for others first, and the older generation's beliefs as a whole. Including the freedom to use drugs. The younger generation just wanted a chance to express their own views rather than having to constantly succumb to the views of the older generation. In order to find these unique and different qualities in each other and themselves, the younger generation turned to drugs. This was another freedom which they were required to fight for since the older generation did not support drug use as a source of pleasure and creativity. This could basically be considered an out right rejection of the older society's values. Drugs were also seen as a freedom from reality. Then enable the youths to escape to a different kind of world. Because of the youths' great desire to achieve a universal sense of peace and harmony, drugs were sometimes a very important part of one's life. Sometimes, they would plan a day or evening around the use of a major drug so they could enjoy it to the fullest extent. This could almost be considered ironic in the sense that while trying to gain one freedom, the ability to use drugs, the youths appeared to have lost another freedom, the ability to live their own lives. It seems more as if their lives were controlled by the drugs and the drugs' effects than by the people themselves. The combination of the defiance, revolution, and drugs created a major hippie era. Thousands of hippies would flock to the party capitals of the world for the high of a life time. Haight Ashberry, San Francisco, was once considered hippie central for the world. Here people would just line the streets with drug use, sex, and wild music. In 1967, came the ?Summer of Love.? This period was not unlike the previous acts of hippies, just more intense. And to top off the hippie era, one of the largest concerts in the world took place in Woodstock, New York. During several days of music, sex, and drugs were abused heavily, almost to the point of complete stupor. But even though it may have seemed like Mayhem, it was one of the greatest moments of the 60s. The monumentum of the previous decade's civil rights gains led by