analyzed. Small firms need to focus on facts rather than hunches and guesses.
Owner-managers need to seek out qualified professional advice and take advantage
of it. Growth for its own sake needs to be avoided, as does undercapitalization.
Lack of cash planning and managerial problems also plague small companies.
Medium and large companies are grouped together in the remainder of
chapter 5 to examine why they succeed and fail. Here, the authors find that
successful firms have written objectives and policies that cover all aspects of
a company’s operations, including its internal and external environment (92).
Companies in this size category that fail almost always have no unified sense of
direction (94). Failing companies may suffer inadequacy in one or more key
functional areas, or have people problems that cannot be overcome. These
companies may not have good controls, or may try to implement too many controls
at one time. Finally, medium and large companies that fail to operate with an
“international” mentality may well find themselves facing difficult times (100).
Chapter 6 begins a four-part section on functional areas with a discussion of
marketing. Here, Murdick, Moor and Eckhouse suggest that successful firms are
characterized by everyone in the company being marketing-oriented (103). They
also find that it is not enough for a company to understand the science of
marketing; a company and its marketing staff must be able to understand the art,
as well. Murdick, Moor and Eckhouse take a philosophical rather than mechanical
approach to marketing in order to provide the reader with a better base of
understanding that can be applied in the real world. The authors first present
the idea of a “marketing concept,” which they define as a philosophy that guides
the attitude and behavior of each employee in the organization (104). Specific
characteristics of the marketing concept include treating the customer as all-
important, pinpointing a target market, gaining a competitive edge, and focusing
on profits (105-106).
Murdick, Moor and Eckhouse also attempt to identify the characteristics
of good marketers. They find that good marketers are those who can identify the
key factors associated with their business, foresee how those factors will
behave in the future, and who can create outstanding strategies based on these
factors. Good marketers satisfy a large number of customers at a high level of
profit over a long period of time (at least ten years). Good marketers
recognize that marketing is both an art and a science, and they make the best
use of scientific information in order to enhance the art. When examining the
marketing position of a company, it is necessary to analyze the marketing
philosophy, policies, strategy and operations. Fundamentally, it is necessary
to establish that a company is following its marketing concept. Broad marketing
policies must be established. The marketing strategy of the company must be
well defined within these broad policies. Finally, marketing operations must be
carried out effectively and efficiently (109). Strategic marketing policies are
developed by top managers working from top level marketing policies. Murdick,
Moor and Eckhouse identify seven areas that may be covered by these strategic
marketing policies: morality and public service, products, markets, profits,
personal selling, customer relations and promotion (111)
The authors then turn their attention to marketing policy and find that
there are three policy options within marketing: expand sales into new classes
of customers; increase penetration in existing market segments; avoid marketing
innovations, but work to maintain present market share with product design and
manufacturing innovations. Murdick, Moor and Eckhouse are also careful to
discuss plans and tactics for keeping with the marketing concept and strategy.
In suggesting ways to analyze the marketing of an organization, the authors
suggest that companies strive to establish and maintain a competitive edge.
Marketing research is of prime importance in order that the company base its
direction on as much quantitative information as possible. Advertising and
sales promotion policies must be considered in light of the company’s customers,
industry and other environmental factors. Personal selling must be taken into
account. Distribution and pricing strategies must be reviewed and modified on a
regular basis in order to keep the company operating at maximum efficiency. The
authors conclude this chapter with a summary of the marketing mix as well as a
summary of the pitfalls that may be symptomatic of companies experiencing
marketing difficulty.
Chapter 7, which focuses on the functional area of accounting and
finance, is the longest chapter in the book; it is nearly twice as long as any
other chapter. This illustrates the importance that the authors place on
accounting and finance, and also the trepidation they believe most readers have
when it comes to these subjects. The authors concentrate on the basic aspects
of finance and accounting that can be learned quickly and that will bring the
greatest benefit when taking a strategic approach to business. Three appendices
provide review material for those readers who feel they are lacking in some area.
The appendices cover business arithmetic, break-even analysis and definitions
of accounting terms. Having recognized that there is hesitation and a general
lack of comfort among business when confronted with accounting and finance,
Murdick, Moor and Eckhouse discuss why it is important to understand financial
analysis. Chief among these reasons is the idea that financial analysis is the
most direct way to point out that a company may be experiencing difficulty.
Financial analysis can be used to establish that there is a problem, though it
may not always establish what the root cause of the problem is. Despite the fact
that the authors consider financial analysis to be key in understanding
companies, they are also careful to point out the limitations of this type of
analysis. For example, there can be a tendency to use financial analysis to
focus on the past, rather than anticipating what the historical figures may
indicate about the future. There is also an inherent danger in expecting past
trends to accurately predict future trends.
Technological changes, changes in consumer demand and other
environmental factors that are outside the realm of financial analysis can be
overlooked if there is too much emphasis on historical financial performance.
High technology companies or those in rapidly expanding industries may have
financial figures that are too uneven to provide an accurate picture of how the
company is actually performing. There is also the possibility that figures may
not (whether intentionally or not), accurately reflect the true position of the
company. Finally, the authors suggest that financial analysis is an art that is
mastered by all too few people for it to be considered the ultimate analysis
tool.
Having presented this rather lengthy discussion of the limitations of
financial analysis, the authors then counter with an equally lengthy discussion
of the advantages of using financial analysis. Foremost among these is the idea
that trends do exist and financial analysis is one of the most effective methods
for spotting them. Financial analysis can also spotlight symptoms of problems
(although not the underlying cause, necessarily). Companies seeking
outside capital to infuse into the business find that potential investors
consider financial analysis key to their decision-making process; inside
managers would do well to keep a financial picture of the company in mind to
prevent unpleasant surprises. Since financial analysis is quantitative, it can
help point up where problems exist, rather than where managers may think they
exist. Finally, and perhaps most importantly, the authors suggest that weighing
different, exclusive courses of action quantitatively provides additional tools
to managers to make strategic decisions.
The authors then provide information on how readers can obtain financial
information. General sources, such as Moody’s and Standard & Poor’s are
discussed as are ratio reports. Ratios are of particular importance to the
authors; they devote four pages of a chart to figuring ratios and a lengthy
discussion of their proper use. Murdick, Moor and Eckhouse favor comparing
performance across departments within a single organization, and across
companies within a single industry in order to arrive at the most accurate
comparison. They note that when performing industry comparisons, it is
important to compare like industries, and like companies within the industries.
Selecting the wrong category can render the value of the ratio comparison null.
At this point, the authors shift their focus from finance to accounting,
and discuss how accounting can help decision-makers. Murdick, Moor and Eckhouse
suggest that financial accounting should answer five basic questions. One, how
is the company doing overall? Two, when evaluating alternate plans, which is
most attractive? Three, what is going wrong? Where? How can it be fixed?
Four, how can activities be coordinated? Five, is the company operating as
effectively as it can in its environment (144-145)? Anticipating that readers
are curious as to how to begin their analysis, the authors suggest that they
begin by taking financial information from the most recent ten years. Any
trends that exist over this period are likely to persist, according to the
authors, because trends generally do persist barring unforeseen circumstances.
The authors suggest that the reader consider four questions when examining the
profit and loss statement. One, what is the sales trend? Two, what is the
trend of cost of goods sold as a percentage of sales? Three, what’s the trend
of operating expenses as a percentage of sales? Four, what is the trend in
profits? If the trend in sales is up, but the trend in profits is down, the
company is very likely already in serious trouble (147). Returning briefly to
ratio analysis at this point, the authors identify four key areas to examine:
profitability, liquidity, leverage and turnover. They also stress the
importance of considering any other pertinent questions that must be considered
for the specific company and industry.
Murdick, Moor and Eckhouse consider break-even analysis to be important
when: deciding whether to increase sales or advertising expenses to increase
volume; weighing the relative merits of decreasing prices to increasing volume;
determining the advisability of borrowing for capital improvements to increase
capacity; and when evaluating office automation. The first step in break-even
analysis, according to Murdick, Moor and Eckhouse, is dividing costs into fixed
(constant) and variable. Murdick, Moor and Eckhouse give several examples of
inventory valuation and the effect that changing valuation methods may have when
considering a company’s financial position. This discussion reminds the reader
that the valuation method or changing valuation may result in a company
overstating or understating its actual position. The reader is then introduced
to the funds flow concept that establishes how many funds are needed for
projects and the possible sources of those funds. The authors then discuss
budgets, which they consider to be of prime importance when evaluating a
company’s managerial performance.. Budgets assist in planning, but also indicate
how the firm has performed in the past. They indicate how well the company
expects to do, and how well the company has predicted their past performance.
They can also be used to spot difficulties and problem areas in the present, as
well as areas that became problems in the past.
Having presented a wealth of information to the reader on finance and
accounting, the authors end the chapter with a lengthy chart designed to help
the reader use his or her newly acquired skills. They also emphasize that it is
through repeated and frequent analysis that the reader is likely to improve his
or her financial analysis skills, and the tools presented in the three
appendices to this chapter are designed to assist in that improvement. Chapter 8
is concerned with the functional area of production. The authors begin this
chapter by stating that the concepts they are putting forth with regard to
production apply equally to businesses that produce tangible goods as well as
that provide service. Production, they suggest, is the “process of converting
any design of product or service into the actual product or service,” (177).