Question one: Strategic profit model for Wal-Mart and Tiffany
Figure 1: Strategic Profit Model for Wal-Mart
Figure 2: Strategic Profit model for Tiffany in 2009
Comparison between strategic profit models for the two organizations
Question two:
Gross margin percentage = Gross marginNet sales
Wal-Mart: $95,086$401,200 = 23.7%
Tiffany: $1,530$2,709 = 56.5%
Expenses-to-sales ratio = Total ExpensesNet sales
Wal-Mart: 78461401244 = 0.1955
Tiffany: 11442709 = 0.422
Net profit margin after taxes = Net Profit (After taxes)Net Sales
Wal-Mart: 10939401244 = 2.72%
Tiffany: 2622709 = 9.6%
Inventory turnover = Cost of goods soldAverage inventory
Wal-Mart: 30615834511 = 8.871
Tiffany: 11791427 = 0.8262
Asset turnover = Net Sales Total Assets
Wal-Mart: 40124443994 = 9.12
Tiffany: 27093940 = 0.688
Return on Asset ratio = Net profitTotal Assets
Wal-Mart: 1662543994 = 37.79%
Tiffany: 3863940 = 9.8%
Question three
Different companies have varying levels of profits generated after an annual analysis of their financial performance. From the results show on figure 1 and 2, Tiffany records the highest gross profit margin compared to Wal-Mart. Gross profit is acquired from the ratio of gross margin to net sales. Tiffany has managed to reduce the cost of goods sold hence, recording a lower gross margin compared to Wal-Mart. According to Hill and Cronk (2013), improving the cost of goods sold without affecting sales forms a better method of increasing the gross profit margin in an organization. Wal-Mart is a bigger company compared to Tiffany making it record higher net sales and cost of goods sold.
The second ratio of importance that was calculated from the information provided for Wal-Mart and Tiffany was the expenses-to-sales ratio. The expenses-to-sales ratio forms one of the measurements of company’s performance in terms of financial health. The ratio is supported by other metrics such as price, cash flows, and the company’s overall revenue growth (Taylor, 2013). From the results, Wal-Mart indicated a lower expenses-to-sales ratio (0.1955) than Tiffany (0.422). The differences in these values show the efficiency of the two companies. A higher ratio, like that recorded by Tiffany, indicates that the company is operating less efficiently and needs to lower its expenses in relation to net sales. In addition, a lower ratio recorded by Wal-Mart shows how profitable the company is, also evidenced by a higher return on assets ratio of more than 30%.
On the other hand, the net profit margin of an organization is a show of how much a company keeps its revenue as net income.Net profit margin is achieved from the ratio of net income and net sales. From the results shown on figures 1 and 2, the net profit margin for Wal-Mart was 2.72% while that of Tiffany was 9.6%. The difference in these values was seen because Wal-Mart achieves a higher growth rate while it increases its sales with a proportionate increase in profits. In addition, the growth rate shown by Wal-Mart leads to a leads to sales growing at higher rates that expenses. From figure 1, Wal-Mart recorded net sales of 401,244 million dollars with a net profit after the deduction of taxes of 10,939 million dollars. This led to a lower ratio compared to Tiffany that had net sales of 2,709 million dollars and net profit after taxes of 262 million dollars. According to (Kotler, 2010) an organization might record lower net profit margins if its expenses are growing at lower rates compared to its sales.
Tiffany has more focus on the profit margin and this makes the company spend more on assets compared to Wal-Mart. The Tiffany & CO. brand is the most essential assets for the company because its strengths have exceeded trademark rights. The company management conducts research and survey to monitor the strength of the brand. From the above results, Tiffany customers associate this brand with high-quality gemstone jewelry made of diamond. In addition, the company practices effective product positioning compared to Wal-Mart making it achieve lower assets and inventory turnovers. Moreover, Tiffany business plan is composed of huge expenses and strategies aimed at maintaining its brand strength. The presence of elegant stores and an online environment increases capital and maintenance costs. This is clearly shown from the results of expenses-to-sales ratio of 0.4 compared to that of 0.1955 recorded by Wal-Mart.
Wal-Mart, on the other hand, has focuses more on technological advancement in order to ensure efficient asset use. The company has invested more on information systems that make operations run effectively and helps manage assets, hence; improvement in higher gross margins and lower net profit margin. The company has opened many stores in United States and other countries that make it negotiate lower wholesale prices. The introduction of the point-of-sale system improved the company’s asset management making it acquire effective profit margins and higher sales. In addition, the company has the most efficient inventory and distribution system, which makes it record higher returns on assets compared to Tiffany. The high technology systems used by Wal-Mart also promotes faster sales of goods because the system allows automatic reordering whenever there are no goods in the warehouse. This process makes the company sales move fast and effectively reducing the time and space required for inventory. Tiffany focuses more on brand positioning and targeting leading to higher ratios compared to Wal-Mart.
Question four
References
Hill, C. W., & Cronk, T. (2013). Global business today (3 ed.). North Ryde, N.S.W.: McGraw-
Hill Education (Australia).
Kotler, P. (2010). Marketing (8th ed.). Frenchs Forest, N.S.W.: Pearson Australia.
Taylor, E. (2014). What Does the Operating Expenses to Sales Ratio Indicate?. Business &
Entrepreneurship. Retrieved May 27, 2014, from:
http://yourbusiness.azcentral.com/operating-expenses-sales-ratio-indicate-10946.html
