Yeshiva of Greater Washington - Fall of 2006

Year Four Results:

All four companies made drastic changes in their businesses and were very profitable in Year Four. It’s obvious that the executives within the industry have a much better understanding of ROA (Return on Assets) and profitability than they did before the start of this simulation. For reasons that will be explained below, Year Four was won and lost due to companies’ credit terms (accounts receivables) and the relative profitability of each company’s products. This document aims to describe some of the most influential initiatives and the results the companies produced.

Heart Smart R&D (M. Katz, L. Cohen, Bates, Fink, Oxman) made the most drastic change to their business. They transformed their Heart Rate Monitor manufacturing business into a HRM Research & Development company. Their first client is a Swiss watch manufacturing company that is paying them $30,000 per month to do HRM R&D for them. Their second client is a clothing manufacturer who wants to make sports bras with a HRM built in. This second client is also paying $30,000 per month. This change in business structure allowed Heart Smart R&D to sell their manufacturing plant as well as the entire inventory within it. While their revenues and earnings may decrease due to this change, their only assets going forward will be their Accounts Receivable and their cash. Since ROA is the calculation of earnings divided by assets, this was a smart, as well as a very profitable, move for Heart Smart R&D. With this said, their initiatives weren’t enough due to their competition also taking on initiatives to relieve their assets of the manufacturing plant and their inventory. None the less, a top-notch effort from Heart Smart who finished Year Four with revenues of $21 million, Net Earnings of $3.1 million, and an ROA (Return on Assets) of 71%. Heart Smart finished the simulation with an overall average ROA of 17.4%.

My Day Inc. (Y. Katz, Hillman, Kates, Pensak, Y. Cohen) targeted the 60+ market with a high-end and a low-end product. Due to several factors including the growth of the market and the companies within the industry manufacturing fewer products than usual, all the companies within the simulation stocked-out. This includes My Day Inc. My Day made several smart moves including outsourcing their manufacturing. While My Day’s earnings were negatively affected by this new manufacturing cost, there asset base was dramatically reduced by the selling of their manufacturing plant. My Day finished the year with a very strong Profit & Loss Statement, but their balance sheet (assets) were not to pace with the competition. None the less, a great performance from My Day Inc. In Year Four, My Day Inc. had revenues of $17 million, earnings of $11.2 million, and an ROA (Return on Assets) of 260.7%. My Day finished the simulation with an overall average ROA of 84.1%: the third best Average ROA in the simulation

Healthy Heart (Schafer, Waxman, Goodman, Silverman) sold-out both their low-end and their high-end GPS products. Healthy Heart’s investment in the use of the Ironman Triathlon name and logo for both their products and several other initiatives that they took on in Year Four were extremely effective. Besides selling-out their products, they were able to increase their high-end product price by a substantial amount. They had strong sales. They had revenues of $74.1 million and Net Earnings of $59 million. Both these numbers were the highest in the industry. Like My Day, Healthy Heart outsourced their manufacturing and, as a consequence, dramatically decreased their asset base. They also decreased their credit terms to their retailers to 30 days which dramatically decreased their accounts receivables. They finished Year Four with an ROA (Return on Assets) of 970.2% and the second best Overall Average ROA with profitability of 392.6%.

Monitoring the World Inc. (Franco, Sragg, Silbiger, Sassoon) had the highest ROA in Year Four and the highest Overall Average ROA and, as a consequence, won this profitability competition. With this said, how is this possible? Healthy Heart had almost double the revenues and earnings of Monitoring the World. To add to this, both companies had the exact same cash in their bank accounts at the year’s end and they both had the exact same credit terms for their retailers: 30 day net terms. (i.e. their accounts receivables, as a percentage, is the same.) Healthy Heart has stronger revenues, stronger earnings, and their asset base is the essentially the same as Monitoring the World, yet… They come in second place!?! How is this possible? The answer is that as a percentage, Monitoring the World and Healthy Heart’s assets were 8.2% of their revenues, but as a dollar value, monitoring the World’s assets base was smaller: $6 million vs. $3.5 million. Despite Healthy Heart having stronger earnings than Monitoring the World’s earnings, Monitoring the World had stronger earnings relative to their asset base. ROA is a business metric that rewards you for your earnings relative to the size of your assets. In other words, Monitoring the World “did more with less”. Healthy Heart had the strongest revenues, the strongest earnings, the strongest cash flows, and even had the highest EVA (economic value added), but Monitoring the World had the strongest ROA which was the business metric that we were using. While Healthy Heart continued to sell their low-end product and put lots of money into their pockets, they also dragged down their ROA and profitability. Monitoring the World discontinued the sales of their low-end product, only sold their high-end product which had stronger profitability, and, as a consequence, had the highest overall ROA. Monitoring the World finished Year Four with revenues of $43.3 million and earnings of $36.5 million. They had an ROA of 1,026.2% (the highest in the industry) and finished the simulation with best Overall Average ROA with profitability of 416.6%.

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