Competitive Analysis Questions

1) Table 2.1 (in the Grant text) compares companies according to different profitability measures.

a. Which two of the six performance measures do you think are the most useful indicators of how well a company is being managed?

The two performance measures that are the most useful indicators of how well a company is being managed are Return on Assets and Return on Equity. The less useful indicators are Market Capitalization as this calculated by multiplying the shares outstanding by the closing price of shares. The stock price may vary due to factors outside of management control making this less reliable than other indicators. This factor is an indicator of size and not of better management. Net Income is calculated by subtracting the cost of goods sold from the sales. This is also highly variable across the companies as the markets and items are quite different and making it difficult to use in direct comparisons. Further, net income could be decreased through a strategy to create initial product demand by keeping prices low. Return on sales is also highly variable by sector. It is expected the operating profits as a percent of sales revenues or margins are lower for more traditional commodity firms such as Walmart and Volkswagen. Therefore, using this as an indicator of how well a company is managed is limited. Return to Shareholders is not a good indicator of management performance. Although the return of dividends to shareholders can be deemed positive and might make the management popular, if the amount of money returned to shareholders is too high, it may have a negative impact on the company’s ability to invest in research and development, equipment or inventory which could impact future growth. Return on Assets and Return on Equity are therefore the most useful indicators of how well a company is being managed. Increases in Return on Assets and Return on Equity measure