Measurements, Meanings, & Scoring Corporate Performance & IBM Case Study

1. Welcome to Class 21 Measurements, Meanings, & Scoring Corporate Performance & IBM Case Study Pro Bowl Debate: Teams 3vs. 4 Chapters 12 & 13

2. Performance Scorecard Grading

3. There are 44 categories and you should determine a grade for most, if not all of them. You will grade the company on the basis of 1 to 5. Grade 1: Very bad Grade 2: Bad Grade 3: Don’t know? Grade 4: Good Grade 5: Very Good Try to avoid 3 because it means you have no opinion. Some 3s may be necessary but too many will make your analysis worthless.

4. Scoring Performance Reminder: There are two major measurement areas: Financial Measurements Qualitative Measurements These are divided into six (6) independent categories and each of the subcategories has multiple points of assessment. It is, of course, possible to perform well on some measurement points while performing poorly on others. JUDGE EACH POINT INDEPENDENTLY.

5. 6 categories of the Performance Scorecard: • Profit, Equity, and Share Value Management • Debt Management • Cash Management • Asset Management(effective use of non-cash assets) • Organizational Citizenship(Relationship Management) • Strategic Positioning(for continued growth)

6. The 60 Measurement points… • The 60 measurement items are divided into: • 44 Financial measurement points for most industries • 16 Qualitative measurement points • Not all of the financial measurement items will apply to every company. • If one does not apply, simply leave the cell blank in your PSC software. The program is prepared to compensate. • When assigning grades, take into consideration how well the company performed compared to the previous yearand how well it did when compared to the benchmark. • By factoring the benchmark, you effectively integrate economic fluctuations and normal business cycles.

7. When assessing… Compare each of the six categories to each other. Does one category reflect better performance than another? Does performance seem lopsided when comparing categories? For example, has the corporation performed well with the profit ratios but poorly with the cash ratios? How well are assets utilized? Is leverage a problem? Compare equity financing to debt financing.

8. When assessing… Look for linkages. Create a list of questions and search for answers. Consider: Did the TMT appear to have a clear, consistent, and successful strategy? Was strategy different from its competitors? If so, was it better or not as good as the competitors strategy? What do corporate achievements or lack thereof say about strategic effectiveness? New questions may arise as you compare the grades in each category. Search for answers to all questions.

9. You may ask questions such as: Are the grades higher in: (1) Profit, Equity, and Share Value management andlowerin: (2) Debt management? This could reveal a strategy focusing on growth and profitability while de-emphasizing the dangers of accumulating debt. What are the long-term implications of this?

10. In addition to comparing one category to another, be sure to analyze the individual elements within a category. For example, if item 4.43 (Inventory Turnover) is reflecting a poor performance whileitem 4.42 (Average Collection Period) is reflecting a positive performance it could indicate that inventory management is not a high priority but collecting outstanding customer accounts is important. In a sense this would be an externally focused strategy rather than an internally focused strategy. It might represent a “hardnosed” approach to customers and this may represent problems in the future.

11. Items in categories 5 and 6 represent qualitative performance areas and are extremely important. These will have as much influence on long-term viability as any of the financial measures. Consider each element within each category carefully. Look for connections between these and financial results. Assess the corporate culture.

12. Evaluate the relationship of the corporation with its various stakeholders. Are they harmonious or confrontational? Does the company have a well-defined mission? Is it positioning itself so that it can grow stronger and expand its reach in its chosen markets?

13. Completing the Item Analysis is simply a matter of reviewing each of the Performance Scorecard categories and assigning a grade. When assigning a grade, take into consideration how well the target company performed when compared to:  Their performance during the previous year, and  The performance of the benchmark company By factoring the benchmark, you effectively integrate economic fluctuations and normal business cycles. Very Poor Poor Average Good Very Good (1) (2) (3) (4) (5)

14. Try to avoid using the grade of “3”because it is indecisive and the more 3s you have the less valuable your report.

15. Forest through the trees… So many details sometimes make it difficult to gain an overall picture of a company’s performance. Your PSC will automatically provide you with a numerical and graphical representation of the overall performance of your target company. This will enable you to step back from the details and test your critical thinking skills as you ponder the overall performance of your target company. You will have ample opportunity to assess performance on a year-over-year basis as well as a target-to-benchmark basis. This double comparison is IMPERATIVE for an ADEQUATE ASSESSMENT.

16. You must evaluate and you must judge performance. Judge: You

17. Financial Performance

18. Grading Points

23. Qualitative Performance

24. The PSC and Qualitative Performance • Beyond the numbers... • The PSC performance assessment is more than just about numbers. • Corporate performance evaluation also includes social behavior and planning with skill and vision.

25. Qualitative Performance Grading Sheet

26. Evaluate the firm’s social behavior…

27. Evaluate the ability to plan for the future…

28. Aren’t we having fun? Debate Teams coming up… 

29. Assignment: Read Chapter 14 “Performance Reporting” Essay # 2 due soon…

30. Pro Bowl Debate Pro Bowl Debate: Team 3 vs. Team 4

31. APPENDIX IBM Financial Statements 2010 update

32. IBM A case study in the PSC arrangement of company data

33. Please See page 273 in your online Textbook for more current data • General ……….… • Balance Sheet …… • Income Statement. • Directors………….

34. International Business Machines, Corp. 1 New Orchard Road, Armonk, NY 10504 Phone: (914) 499-1900 Web: www.IBM.com Ticker: IBM Employees: 436,000 [approximation] Sector: Technology Industry: Diversified Computer Systems PSC Classification [GP1] Public Benchmark companies: Hewlett-Packard Co. [HPQ] Dell Inc. [DELL] Cisco Systems, Inc. [CSCO] Xerox Corp. [SRX] Apple, Inc. [AAPL]

35. The Board of Directors: IBM  General Characteristics of the Corporate Board  2010  Board of Directors: IBM Corp Number of directors: 12 Number of insiders on the board: 1 Number of women on the board: 2 Number of educators on the board: 2 Outside directors with accounting/finance experience: 1 CEO & COB duality: Yes Average age of board members: 63 years Oldest board member: 67 years Youngest board member: 56 years Average tenure on board: 6 years Shortest tenure: 1 year Longest tenure: 13 years

41. Cash Flow Report Year of: 2010 2009

42. Ratio Statements for: Target and Benchmark Companies Year Ended 2010

47. 2010 IBM Financial Statements Directly From Company’s Annual Report

48. BALANCE S HEET - p1 ($ in millions except per share amounts) At December 31, 2010: 20102009 ASSETS Current Assets: Cash and cash equivalents $ 10,661 $ 12,183 Marketable securities 990 1,791 Notes and accounts receivable — trade (net) 10,834 10,736 Short-term financing receivables (net) 16,257 14,914 Other accounts receivable (net) 1,134 l l1,143 Inventories 2,450 2,494 Deferred taxes 1,564 1,730 Prepaid expenses and other current assets l 4,226 3,946 Total Current Assets 48,116 48,935 Plant, rental machines and other property (net) 14,096 14,165 Long-term financing receivables (net) 10,548 10,644 Prepaid pension assets 3,068 3,001 Deferred taxes 3,220 4,195 Goodwill 25,136 20,190 Intangible assets — net 3,488 2,513 Investments and sundry assets 5,778 5,379 Total Assets $113,452 $109,022

49. ($ in millions except per share amounts) At December 31, 2010: 20102009 LIABILITIES AND EQUITY Current Liabilities: Taxes $ 4,216 $ 3,826 Short-term debt 6,778 4,168 Accounts payable 7,804 7,436 Compensation and benefits 5,028 4,505 Deferred income 11,580 10,845 Other accrued expenses and liabilities 5,156 5,223 Total CurrentLiabilities40,562 36,002 Long-term debt 21,846 21,932 Retirement & non-pension benefit obligations 15,978 15,953 Deferred income 3,666 3,562 Other liabilities 8,226 8,819 Total Liabilities 90,279 86,267 Equity: IBM stockholders’ equity: Common stock, 45,418 41,810 par value $.20 per share and additional paid-in capital Shares authorized: 4,687,500,000 Shares issued (2010: 2,161,800,054; 2009: 2,127,016,668) Retained earnings 92,532 80,900 Treasury stock, at cost (96,161) (81,243) (shares: 2010 — 933,806,510; 2009 — 821,679,245) Accum. other comprehensive income/(loss) (18,743) (18,830) Total IBM Stockholders’ Equity 23,046 22,637 Noncontrolling interests 126 118 Total Equity 23,172 22,755 Total Liabilities and Equity $113,452 $109,022 BALANCE S HEET - p2

50. INCOM E S T A T E M E N T ($ in millions except per share amounts) For the year ended December 31: 201020092008 Revenue: Services $56,868 $55,128 $ 58,892 Sales 40,736 38,300 42,156 Financing 2,267 2,331 2,582 Total revenue 99,870 95,758 103,630 Cost: Services 38,383 37,146 40,937 Sales 14,374 13,606 15,776 Financing 1,100 1,220 1,256 Total cost 53,857 51,973 57,969 Gross profit $46,014 $43,785 $45,661 Expense and other income: Selling, general and administrative 21,837 20,952 23,386 Research, development, etc. 6,026 5,820 6,337 Misc. Income (1,154) (1,177) (1,153) Other (income) and expense (787) (351) (298) Interest expense 368 402 673 Total expense and other income 26,291 25,647 28,945 Income before income taxes 19,723 18,138 16,715 Provision for income taxes 4,890 4,713 4,381 Net income $14,833 $13,425 $ 12,334 Earnings per share of common stock: Basic $ 11.69 $ 10.12 $ 9.02 Assuming dilution $ 11.52 $ 10.01 $ 8.89