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How Your Company's Performance is Judged The Numbers on Page 1 of the Footwear Industry

Report Company Performance Scores Are Based on Two Standards The degree to which your
company meets or beats the 5 performance targets which the Board of Directors and
shareholders/investors have set for the company's new management team will be tracked both
annually and for all years completed. These 5 performance targets are as follows: • Grow
earnings per share at least 7% annually through Year 15 and at least 5% annually thereafter —
The Board of Directors believes these EPS growth targets are well within reason given that the
global footwear market is expected to grow 7-9% annually through Year 15 and 5-7% annually
in Years 16-20. Board members and shareholders believe a winning strategy should, at a
minimum, be able to deliver EPS growth at the low end of the market growth percentages. •
Maintain a return on average equity investment (ROE) of 15% or more annually. The company
had a 17.3% ROE in Year 10. Return on average equity is defined as net income divided by the
average of total shareholders' equity at the beginning of the year and the end of the year. ROE is
reported on the next page of this scoreboard, on page 5 of this report, and also on the company's
Balance Sheet (see Note 9). The company's Balance Sheet reports the change in equity
investment from the beginning of the year to the end of the year and shows the balance sheet
entries in which the change in shareholder equity occurred. • Maintain a B+ or higher credit
rating. The company's credit rating was B+ at the end of Year 10. • Achieve an “image rating” of
70 or higher. The image rating is based on three factors: (1) your company's branded S/Q ratings
in each geographic region, (2) your company's market shares for both branded and private-label
footwear in each of the four geographic regions, and (3) your company's actions to display
corporate citizenship and conduct operations in a socially responsible manner over the past 4-5
years. Your company had an image rating of 70 at the end of Year 10. • Achieve stock price
gains averaging about 7% annually through Year 15 and about 5% annually thereafter. Board
members agree that such stock price gains are definitely within reach if the company meets or
beats the annual EPS targets and pays a rising dividend to shareholders. The company's stock
price was $30 per share at the end of Year 10. Your company’s stock price is a function of
earnings per share growth, ROE, credit rating, dividend per share growth, and management’s
ability to consistently deliver good results (as measured by the percentage of these 5 performance
targets that your company achieves over the course of the BSG exercise). Your instructor has
placed weights on the relative importance of these five performance targets that translate into
some number of points out of 100 for each of the 5 performance measures, with the sum of the
points adding to 100. The points assigned to each target by your instructor are shown in the
narratives at the bottom of page 1 of the Footwear Industry Report. Using the assigned scoring
weights (or number of corresponding points out of 100), your company's performance on the 5
performance measures is tracked annually and company performance scores are calculated based
on two standards: 1. The Investor Expectations Standard. The investor expectations standard
involves calculating an annual "Investor Expectation Score" based on your company's success in
meeting or beating the five expected performance targets each year. There is also a Game-to-
Date or "all-years" Investor Expectation Score that shows your company's success in achieving
or exceeding the expected performance targets over all years of the exercise completed so far.
Meeting each expected performance target is worth some number of points based on the scoring
weight your instructor selected. For example, if the scoring weight for EPS is 20%, meeting the
EPS target earns a score of 20 on the EPS performance measure. Beating a target results in a
bonus award of 0.5% for each 1% the annual target is exceeded (up to a maximum bonus of
20%). Thus, if achieving the EPS target is worth 20 points, a company can earn a score of 24
points by beating the annual EPS target by 40% or more. Failure to achieve a target results in a
score equal to a percentage of that target's point total (based on its weight out of 100 points). For
instance, if your company earns $1.33 per share of common stock at a time when the EPS target
is $2.67 and achieving the $2.67 EPS target is worth 20 points, then your company's score on the
EPS target would be 10 points (50% of the 20 points awarded for meeting the EPS target).
Exactly meeting each of the 5 performance targets results in an Investor Expectation Score of
100. With 5 targets whose combined points add up to 100 and potential point bonuses of up to
20% for exceeding the targeted levels of performance, it is possible to earn an Investor
Expectation Score of 120. 2. The Best-in-Industry Standard. This standard concerns how well
each company performs relative to the "best-inindustry" performer on 4 measures (EPS, ROE,
image rating, and stock price) and how close each company comes to the ultimate credit rating of
A+. Again, the performance scores are based on the weights/points that your instructor assigned
to each of the 5 performance measures, with the sum of the points on the 5 measures adding to
100. The best-in-industry standard entails assigning the best-performing company a perfect score
(the full number of points for that measure) and then assigning each remaining company a lesser
number of points according to what percentage of the industry-leading performance they were
able to achieve. For instance, if ROE is given a weight of 20 points, an industry-leading ROE
performance of 25% gets a score of 20 points and a company with an ROE of 20% (which is
80% as good as the leader's 25%) gets a score of 16 points (80% of 20 points). The procedure is
slightly different for the credit rating measure—each credit rating grade is tied to the number of
points your instructor assigns to the credit rating (an A+ rating always gets a best-in-industry
score equal to the instructor's maximum, with the grades for other credit ratings scaled down all
the way to 0 for a C- rating). Each company's Best-in-Industry Score is equal to its combined
point total on the five performance measures. In order to receive a score of 100, a company must
(1) be the best-in-industry performer on EPS, ROE, stock price, and image rating, (2) achieve the
targets for EPS, ROE, stock price and image rating set by the company's Board of Directors, and
(3) have an A+ credit rating. The Performance Scoreboards on Page 1 of the FIR On page 1 of
each issue of the Footwear Industry Report, there are two industrywide scoreboards for company
performance—one showing each company's Investor Expectation (I.E.) Score and the Best-in-
Industry (B-I-I) Score for the most recent year and one showing each company's Investor
Expectation (I.E.) Score and the Best-in-Industry (B-I-I) Score for all years completed so far—
the Game-to-Date Scoreboard. The "Overall Score" Appearing on the Two Scoreboards. Both
scoreboards also have a column showing an "Overall Score" for each company and a column
showing the change in each company's Overall Score from the prior year. Each company's
Overall Score is determined by combining the Investor Expectation Score and the Best-in-
Industry Score into a single score using whatever weighting of the two scores your instructor has
chosen, usually 50-50. The instructorchosen weights used to calculate the Overall Scores for
your industry are reported in the Overall Score narrative at the bottom of page 1 of the Footwear
Industry Report. The company rankings in column 1 of the two scoreboards are based on the
Overall Scores of companies in the industry. Things to Know About Your Company's Investor
Expectation Scores Some important aspects of how the Investor Expectation Score for a given
year is calculated are summarized below: • Meeting each performance target is worth some
number of points corresponding to the scoring weights your instructor has placed on each
performance measure (see the narrative at the bottom of page 1 of the Footwear Industry Report).
• All scores are rounded to the nearest whole number. • Exactly meeting each of the 5
performance targets results in an Investor Expectation Score of 100. • Beating the EPS, ROE,
stock price, and/or image rating targets are worth point bonuses of 0.5% for each 1.0% that your
company's actual performance exceeds the expected performance for EPS, ROE, stock price, and
image rating, up to a maximum 20% bonus for each measure. Bonus points are also awarded for
credit ratings above B+, with a full 20% point bonus being given for an A+ rating. • Beating the
EPS, ROE, stock price, and image rating targets by 20% or more and earning an A+ credit rating
results in an Investor Expectation Score of 120. A score of 120 is the maximum that any
company can receive. • Failure to achieve the investor-expected target for EPS or ROE or stock
price or image rating results in a score for that performance measure between 0 and the point
maximum for that measure, with the score depending on the percentage of the target achieved.
For instance, if your company achieves a stock price of $20 at a time when the stock price target
is $50, then your company's score on the stock price target (assuming a 20% weight and thus 20
possible points) would be 8 points (40% of the 20 points awarded for meeting the stock price
target). • If your company's EPS is negative, no points are awarded toward meeting investor
expectations for EPS. • Likewise, if in a given year your company loses money and has a
negative ROE, no points are awarded on the ROE measure. • If your company achieves the B+
credit rating target, your company gets the point maximum out of 100 points that corresponds to
the instructor-assigned weight for the credit rating. If, for example, the credit rating has a weight
of .20 or 20 points, then a company with a B+ credit rating receives 20 points for meeting
investor expectations—an A+ credit rating gets a 20% or 4-point bonus and a score of 24. If the
point weighting for credit rating is 20 (which equates to a maximum of 24 points including the
bonus), then the various possible credit rating scores are as follows: A+ 24 points A 23 points A–
22 points B+ 20 points B 16 points B– 12 points C+ 8 points C 4 points C– 0 points • The sum of
your company's scores (including bonus points) on each of the 5 investor-expected targets equals
your company's annual Investor Expectation Score. What Is a Good Investor Expectation Score
for a Given Year? A company that achieves an annual Investor Expectation Score of 100 or more
is clearly demonstrating excellent or superior performance in meeting and beating the 5 targets
established by your company's Board of Directors and the performance levels expected by
investors. An Investor Expectation Score in the 90 to 100 range is definitely very good (and
certainly is not a cause for concern, despite there being room for improvement). Scores of 80-89
are good, and scores of 70-79 are fair; yet, there is plainly ample reason for company managers
to take actions to improve company performance. An Investor Expectation Score below 70 is
clearly sub-par, calling for prompt, decisive action to boost company performance and move
closer to achieving the five annual performance targets expected by investors and your
company's Board of Directors. The Game-to-Date Investor Expectation Score. A company's
Investor Expectation Score for all years completed so far is based on (1) its average EPS versus
the average of the EPS targets for each year completed, (2) its average ROE for all years
completed versus an all-year ROE average of 15%, (3) an average of its image rating for the 3
most recent years as compared to an image-rating target of 70, (4) its most recent year's stock
price versus the most recent year's stock price target, and (5) its most recent year's credit rating
versus the ongoing credit rating target of B+, as summarized below: • Game-to-Date I.E. Scoring
for EPS is based on how each company's weighted-average EPS for all years completed stacks
up against the average of the EPS targets for all years completed. Companies that meet the
allyear weighted-average EPS target receive a score equal to the EPS point weighting;
companies that beat the weighted-average EPS target receive bonus points of up to 20%, and
companies that fall short of the weightedaverage EPS target receive scores equal to the fraction
of the EPS target that was achieved. More details are provided in the Help section for p. 2 of the
Footwear Industry Report where game-to-date EPS scores are reported. • Game-to-Date I.E.
Scoring for ROE is linked to how each company's weighted-average ROE for all years
completed stacks up against the all-year ROE average target of 15%. Companies that meet the
all-year 15% average ROE target receive a score equal to the ROE point weighting; companies
that beat the 15% ROE target receive bonus points of up to 20%, and companies that fall short of
the 15% target receive scores equal to the fraction of the 15% ROE target that was achieved.
More details are provided in the Help section for p. 2 of the Footwear Industry Report where
game-to-date ROE scores are reported. • Game-to-Date I.E. Scoring for Stock Price hinges only
on each company's most recent year's stock price, not some all-year average. The latest stock
prices of companies in the industry are used to measure the game-to-date I.E. score for stock
price because a company's latest stock price is a function of EPS growth, ROE, credit rating,
dividend per share growth, and management's ability to consistently deliver good results (as
measured by the percentage of these 5 performance targets that each company achieves over all
completed decision rounds) and thus includes a heavy long-term element. Companies that meet
the most recent year's stock price target receive a score equal to the stock price point weighting;
companies that beat the most recent year's stock price target receive bonus points of up to 20%,
and companies that fall short of the most recent year's stock price target receive scores based on
the fraction of the stock price target that was achieved. More details are provided on the Help
section for p. 2 of the Footwear Industry Report where game-to-date I.E. scores for stock price
are reported • Game-to-Date I.E. Scoring for Credit Rating is keyed to how each company's latest
credit rating compares against the ongoing rating of B+. The latest year's credit rating is used to
measure the game-to-date credit rating score, as opposed to an all-year average credit rating,
because a company's latest credit rating is largely reflective of its long-term financial condition
and the overall balance sheet strength that management has engineered to date. The game-to-date
I.E. scores for credit rating are always the same as for the current-year scores because both are
based on the most recent year's credit rating. More details about the credit rating scoring are
provided on the Help section for p. 3 of the Footwear Industry Report. • Game-to-Date I.E.
Scoring for Image Rating is based on how each company's average image rating for the most
recent three years stacks up against the ongoing, every-year target of 70. A 3-year average image
rating is used to measure game-to-date performance, as opposed to an all-year average, so as not
to burden a company's performance by image ratings that may no longer be representative of the
image and reputation it has recently achieved with its strategy. Companies whose average image
rating for the most recent 3 years equals the 70 image rating target receive a game-to-date I.E.
score equal to the image rating point weighting; companies having 3-year average image ratings
above 70 receive bonus points of up to 20%, and companies having 3-year average image ratings
below 70 receive scores equal to the fraction of the image rating target of 70 that was achieved.
More details are provided on the Help section for p. 3 of the Footwear Industry Report, where
the game-to-date image rating scores are reported. Special Note: The Game-to-Date I.E. scores
are thus not equal to an average of the annual I.E. scores. The sum of a company's Game-to-Date
scores on each of the five scoring measures equals its total Game-toDate I.E. Score. Just as with
the annual I.E. scores, Game-to-Date I.E. Scores of 100 to 120 are quite excellent, scores of 90-
99 are very good, scores of 80-89 are good, scores of 70-79 are fair, and scores below 70 reflect
consistently "sub-par" results in meeting the targets that investors expect and that your
company's Board of Directors set for you to achieve starting with Year 11. Things to Know
About Your Company's Best-in-Industry Scores Some important aspects of how the Best-in-
Industry Scores for a given year are calculated are summarized below: • The best-in-industry
scoring standard is based on a maximum score of 100 points. Your instructor assigns some
number of points out of 100 to each of the 5 performance measures, with the sum of the points
adding to 100. A score of 20 points for EPS thus implies a weighting of 0.20 or 20% for EPS
performance; a score of 15 points for image rating equates to a weight of 0.15 or 15%; and so on.
To get a score of 100, your company has to be the highest performing company—termed the
best-in-industry performer—on all five performance measures during the year, meet or beat the
EPS, ROE, stock price, and image rating targets, and have an A+ credit rating. • The scores are
rounded to the nearest whole number. • After each decision round, BSG ranks each company's
performance on EPS, ROE, stock price, and image rating. The best-in-industry performer on
each of these 4 measures earns a perfect score (the full number of points for that measure as
determined by your instructor)—provided the industry leader's performance on that measure
equals or exceeds the performance target established by company Boards of Directors). Each
remaining company earns a fraction of the points earned by the best-in-industry performer that is
equal to its performance (on EPS, ROE, stock price, and image rating) divided by the
performance of the industry-leading company (on EPS, ROE, stock price, and image rating). For
instance, if ROE is given a weight of 20 points, an industry-leading ROE performance of 25%
gets a score of 20 points and a company with an ROE of 20% (which is 80% as good as the
leader's 25%) gets a score of 16 points (80% of 20 points). Likewise, if EPS is given a weight of
20 points, an industry-leading EPS performance of $5.00 gets a score of 20 points and a
company with an EPS of $2.00 (which is 40% as good as the leader's $5.00) gets a score of 8
points (40% of 20 points). Special Note: Whenever the best-in-industry performer's EPS, ROE,
stock price, or image rating is below the performance base established in Year 10, the industry-
leading company is not awarded a perfect score (the maximum number of points) but rather a
percentage of the maximum score that equals the leader's EPS, ROE, stock price, or image rating
as a % of the Year 10 performance base. This is done to prevent a company with the highest
average EPS, ROE, stock price, or image rating from being awarded a high Bestin-Industry
Score when its performance on EPS, ROE, stock price or image rating actually falls short of the
level established in Year 10. In all such instances, each remaining company will earn a fraction
of the points earned by the best-in-industry performer, with that fraction being equal to its
performance (on EPS, ROE, stock price, and image rating) divided by the performance of the
industry-leading company (on EPS, ROE, stock price, and image rating). • The procedure for
assigning best-in-industry scores is a bit different for the credit rating measure. Each credit rating
grade from A+ to C- carries a certain number of points that scales down from the maximum
number of points for an A+ credit rating to 1 point for a C- rating. If the credit rating weight is 20
points out of 100, the B-I-I point awards are as follows: A+ 20 points (or 100% of the point
weighting) A 19 points (or 95% of the point weighting) A– 18 points (or 90% of the point
weighting) B+ 17 points (or 85% of the point weighting) B 14 points (or 70% of the point
weighting) B– 11 points (or 55% of the point weighting) C+ 8 points (or 40% of the point
weighting) C 4 points (or 20% of the point weighting) C– 1 point (or 5% of the point weighting)
• All companies who lose money in any given year and end up with a negative EPS are
automatically awarded 0 points for their best-in-industry EPS score. • Similarly, a negative ROE
results in a best-in-industry score of 0 for ROE. Each company's combined point total on the five
performance measures is its score on the best-in-industry performance rankings for a given year.
The highest possible Best-in-Industry (B-I-I) Score is 100, earned only if a company is the best-
in-industry performer on EPS (with an EPS equal to or above the target), the best-in-industry
performer on ROE (with an ROE of at least 15%), the best-in-industry performer on stock price
(with a stock price equal to or above the yearly target), and the best-in-industry performer on
image rating (with an image rating of at least 70) and also has an A+ credit rating. What Is a
Good Best-in-Industry Score for a Single Year? Annual Best-in-Industry performance scores of
90-99 are excellent, scores of 80-89 are good to very good, scores of 70-79 are fair to good,
scores of 60-69 are weak to fair, and scores below 60 reflect a performance roughly 40% or more
below that of the industry leaders with scores in the 90s— which says that such companies were
outperformed by other companies in the industry by a significant margin. Companies with annual
scores below 60 should consider revising their strategies and decision entries to bolster their
competitiveness and performance vis-à-vis rival companies. The Game-to-Date Best-in-Industry
(B-I-I) Score. The Game-to-Date Best-in-Industry scores are based on all-year measures for EPS
and ROE, on a last-three-years average for image rating, and on most-recent-year measures for
stock price and credit rating, as explained below: • Game-to-Date Scoring for EPS is based on
how each company's average EPS for all years completed stacks up against the company with the
average EPS for all years completed (provided the leader has an average EPS above the investor-
expected average EPS). The company with the highest all-year EPS average is designated as the
best-in-industry performer on EPS and receives the maximum score on this measure (unless the
leader's allyear EPS average is below the all-year average of the investor-expected EPS targets,
in which case the leader's score is some lesser number based on its average EPS as a % of the all-
year average of the EPS targets established by company Boards of Directors). The scores of all
other companies are a fraction of the points earned by the best-in-industry performer, with each
company's fraction being equal to its average EPS values as a percentage of the industry leader's
EPS average. More details are provided on the Help section for p. 2 of the Footwear Industry
Report. • Game-to-Date Scoring for ROE is linked to how each company's average ROE for all
years to date stacks up against the company having the highest average ROE for all years
completed (provided the leaders' average ROE is 15% or higher). The company with the highest
ROE average is designated as the best-in-industry performer on ROE thus far and receives the
maximum score on this measure (unless the leader's average ROE is below 15%, in which case
the leader's score is based on its average ROE as a percentage of the annual 15% target). The
scores of all other companies are a fraction of the points earned by the best-in-industry
performer, with each company's point fraction corresponding to its average ROE divided by the
industry leader's average ROE. More details are provided on the Help section for p. 2 of the
Footwear Industry Report. • Game-to-Date Scoring for Stock Price hinges only on each
company's most recent year's stock price, not some all-year average. The latest stock prices of
companies in the industry are used to measure the game-to-date bestin-industry score for stock
price because a company's latest stock price is, to some important degree, a function of past-year
earnings, ROE, credit rating, and dividend payments and thus includes a long-term element. The
company with the highest stock price for the latest decision round is designated as the best-in-
industry performer on stock price and receives the maximum score on this measure (unless the
leader's stock price is below the investor-expected stock price target for the most recent BSG
year, in which case the leader's score is based on its stock price as a percentage of the investor-
expected stock price). The scores of all other companies are a fraction of the points earned by the
best-in-industry performer, where each company's fraction equals its latest stock price divided by
the industry leader's latest stock price. More details are provided on the Help section for p. 2 of
the Footwear Industry Report. • Game-to-Date Scoring for Credit Rating is keyed to how each
company's latest credit rating compares against the best rating of A+. The latest year's credit
rating is used to measure the game-to-date credit rating score, as opposed to an all-year average
credit rating, because a company's latest credit rating is largely reflective of its long-term
financial condition and the overall balance sheet strength that management has engineered to
date. Each credit rating grade from A+ to C- carries a certain number of points. If the credit
rating weight is 20 points out of 100, the number of points awarded for Game-to-Date B-I-I
credit rating scores is as follows: A+ 20 points A 19 points A– 18 points B+ 17 points B 14
points B– 11 points C+ 8 points C 4 points C– 1 points More details about the credit rating
scoring are provided on the Help section for p. 3 of the Footwear Industry Report. • Game-to-
Date Scoring for Image Rating is based on each company's average image rating for the most
recent three years stacks up against the company with the highest average image rating over the
most recent three years (provided the leader has a 3-year average above 70, which is the image
rating target for each and every year of the BSG exercise). A 3-year average image rating is used
to measure game-to-date performance, as opposed to an all-year average, so as not to burden a
company's performance by image ratings that are not representative of the image and reputation
it has recently achieved with its strategy. The company with the highest 3-year average image
rating is designated as the best-in-industry performer on image rating and receives the maximum
score on this measure (unless the leader's 3-year average image rating is below 70, in which case
the leader's score is based on its average image rating as a percentage of the average 70- point
image rating target). The scores of all other companies are a fraction of the points earned by the
best-inindustry performer, where the fraction equals a company's 3-year average image rating
divided by the industry leader's 3-year average image rating. More details are provided on the
Help section for p. 3 of the Footwear Industry Report. The highest possible Game-to-Date Best-
in-Industry Score is 100, earned only if a company is the industry leader on average EPS,
average ROE, most recent year's stock price, and average image rating for the 3 most recent
years, and also has an A+ credit rating. Game-to-Date Best-in-Industry scores of 90-99 are
excellent, scores of 80-89 are good to very good, scores of 70-79 are fair to good, scores of 60-
69 are weak to fair, and scores below 60 reflect a performance roughly 40% or more below that
of the industry leaders. Companies with scores in the 0 to 50 range are being outperformed by
other companies in the industry by a 2 to 1 margin or more; such companies need to move
without delay to implement a turnaround strategy and boost their annual performance on all 5
measures—EPS, ROE, stock price, credit rating, and image rating. Concluding Comment on the
Scores Your Company Earns Bear in mind that it is the size of your Overall Score (the combined
I.E. and B-I-I score) that matters, not where your company ranks first or third or fifth or tenth in
the indistry. Some company must necessarily be in last place, but what is truly telling is whether
it is in last place with a score of 85 (which clearly signals a strong performance and a potentially
good grade) or in last place with a score of 17 (which clearly signals an abysmal performance
and possibly a very disappointing grade). The array of information provided on the full 3-page
company scoreboard in the Footwear Industry Report (pages 1, 2, and 3) makes it easy for you to
track the performance of your company and all other companies over time. You always have all
the information you need to determine exactly how well your company is performing. You know
whether your company is in t

How Your Company's Performance is Judged The Numbers on Page 2 of the Footwear Industry
Report The scoreboard of company performance on page 2 of the Footwear Industry Report
(FIR) shows • The annual performance targets for EPS, ROE, and stock price for each year from
Year 11 through Year 20—these are located in parentheses just under the column heads for each
year (Y11, Y12, Y13, and so on). • Each company's Investor Expectation and Best-in-Industry
scores (both current year and game-to-date) for EPS, ROE, and stock price. The scoring weights
for each of these three scoring measures appear in the narratives for the three banks of data. The
purpose of this scoreboard page is to show you the details of how the scoring for your company
compared with the scoring of other companies on EPS, ROE, and stock price (details of the
scoring for credit rating and image rating appear on page 3 of the FIR). Interpreting the Earnings
per Share (EPS) Scores Earnings per share (EPS) equal net profit divided by the number of
shares of common stock outstanding at the end of the report year. Each company's EPS values
for each year appear under the column heads for each year (Y11, Y12, and so on). The numbers
in parentheses just below the yearly column heads represent the annual EPS performance targets
established by your company's Board of Directors and expected by investors. Companies having
bolded EPS numbers in each yearly column met or exceeded the investor-expected EPS target.
At the end of the yearly EPS columns, just after the column headed Y20, is a weighted average
column (labeled Wgt. Avg.). This column reports each company's weighted average EPS for all
years completed so far, where a company's weighted average EPS is equal to the sum of its net
profits for all years completed divided by the sum of its shares of common stock outstanding all
years completed. Note that this weighted average calculation is not necessarily equal to simply
the sum of a company's EPS values each year divided by the number of years—calculating a
simple arithmetic EPS average is a "weak" or "invalid" way of calculating an overall EPS
average because it fails to account for the effects of any sales and purchases of common stock
the company may have made over time (in other words, the weighted average calculation for
EPS used here accounts for stock sales and purchases and is thus a "purer" or truer all-year EPS
average. The weighted-average EPS numbers for each company are important because they are
used in determining the Game-to-Date scores for both the Investor Expectation and Best-in-
Industry standards. The Current Year I.E. Score for EPS. A company that exactly meets the
investor-expected EPS target for a given year earns an Investor Expectation (I.E.) Score for EPS
for that year exactly equal to the corresponding point weighting for EPS. Thus, if the weight for
EPS is 20 points out of 100, exactly achieving the EPS target for a year produces an I.E. Score of
20. Beating a given year's EPS target entitles a company to a 0.5% bonus for each 1.0% that the
target EPS is exceeded. However, bonus point awards are capped at 20% (that is, no bonus
points are earned once the annual target has been exceeded by 40%). For example, if your
company earns an EPS of $3.30 versus an investor expectation of $3.00 (which is 10% above the
target) and if hitting the EPS target is worth 20 points, then your I.E. Score for EPS would be 21
points (which is 5% above the 20 points earned by exactly achieving the EPS target). If your
company earns an EPS of $5.00, which is 67% above the $3.00 target, then your I.E. Score for
EPS would be 24 (which is the maximum allowed 20% above the 20-point weighting for EPS).
Failure to achieve the EPS target results in an I.E. Score for EPS between 0 and the point
maximum for EPS, with a company's score depending on what percentage of the EPS target it
achieved. For instance, if your company earns $1.63 per share of common stock at a time when
the EPS target is $3.26, then your company's I.E. Score for EPS (assuming a 20-point weight)
would be 10 points (50% of the 20 points awarded for meeting the EPS target). If a company's
EPS is negative, no points are awarded toward meeting investor expectations and the company's
I.E. Score for EPS will be 0. The Game-to-Date I.E Score for EPS. A company's Game-to-Date
(G-T-D) I.E score is keyed to how its weighted average EPS compares against the industrywide
standard for EPS (shown in parentheses below the Wgt. Avg. column head). The industrywide
standard EPS number is derived by summing the investor-expected EPS targets for the years
completed and then dividing that sum by the number of years completed—it is a fair and proper
standard for evaluating a company's Game-to-Date or average EPS performance because it
equals the average EPS value a company will attain by exactly achieving the investor-expected
levels for EPS each year. A company whose weighted-average EPS exactly equals the
industrywide standard earns a Game-to-Date I.E. Score for EPS exactly equal to the
corresponding point weighting for EPS. A company whose weighted-average EPS exceeds the
industrywide standard earns a 0.5% bonus for each 1.0% that its weighted-average EPS exceeds
the industrywide EPS standard, subject to a bonus point cap of 20%. For example, if your
company has a weighted-average EPS of $6.00 versus an industrywide average EPS standard of
$4.00 and if EPS carries a 20-point weighting, then your company's G-T-D I.E. Score for EPS
would be 24 points (because a $6.00 EPS is 50% above the $4.00 standard and qualifies for the
maximum 20% above the 20-point weighting). If your company's weighted average EPS is
below the industrywide EPS standard, then your company's G-T-D I.E. Score will be a fraction
of EPS point weighting that equals whatever percentage of the all-year EPS standard that your
company achieved. For instance, if your company has a weighted-average EPS of $3.00 versus
an EPS industry standard of $4.00 and if EPS carries a 20-point weighting, then your company's
G-T-D I.E. Score for EPS would be 15 points (or 75% of the 20-point weighting for EPS). The
Current Year Best-in-Industry (B-I-I) Score for EPS. The company with the highest EPS in a
given year is designated the best-in-industry performer and earns the maximum or full number of
points for EPS (provided its EPS is equal to or above the target for EPS established by your
company's Board of Directors—the number in parentheses just below the yearly column heads).
All remaining companies are assigned a lesser number of points tied to their EPS performance as
a percentage of the best-in-industry performer's EPS. For instance, if EPS is given a weight of 20
points and if the target EPS is $3.84, a best-in-industry performer with an EPS of $5.00 gets a
score of 20 points and a company with an EPS of $4.00 (which is 80% as good as the leader's
$5.00) gets a score of 16 points (80% of 20 points). If your company's current year EPS score
under the Best-in-Industry column is the maximum, then your company was the EPS best-in-
industry performer (or very nearly so) for the year—all scores are rounded to the nearest whole
number. If your company's score is under the maximum, then your company's current year B-I-I
Score is a fraction of the points earned by the best-in-industry performer (with each company's
fraction being equal to its respective EPS for the year divided by the leader's EPS for the year).
For example, if your company's EPS is 92% of the industry-leader's EPS, then your current-year
B-I-I score will be 92% of the points earned by the EPS leader; if your company's EPS is 73% of
the industry-leader's EPS, then your current-year B-I-I score will be 73% of the points earned by
the EPS leader; and so on. However, when the best-in-industry performer's current year EPS
performance is below the base EPS established in Year 10 ($2.50 per share), then the best-in-
industry performer is not awarded a perfect score (the maximum number of points) on EPS but
rather a percentage of the maximum score that equals the leader's EPS as a % of the Year 10 base
EPS. This is done to avoid rewarding a best-in-industry performer for an EPS performance that is
below the level established by your company's Board of Directors. All other companies receive a
scaled-down number of points for EPS as well, because their B-I-I scores are always a fraction of
the points earned by the industry leader (with each company's fraction being equal to its
respective EPS for the year divided by the best-in-industry performer's EPS for the year). The
justification for why all companies receive lower current year B-II scores for EPS when the best-
in-industry performer fails to meet the Year 10 base EPS is the resulting alarm and nervousness
among board members and shareholders when every company in the industry has sub-par
earnings per share. Is there a substantial risk that profits will be unacceptably low for perhaps
several years? How long will the competitive conditions that caused poor EPS performance last?
Could dividends be cut? Should shareholders sell their shares of stock before the stock price
declines even further? Is there any reason to be confident that company managers will turn things
around? The Game-to-Date Best-in-Industry Score on EPS. A company's Game-to-Date (G-T-D)
score for EPS on the Bestin-Industry standard is based on how its weighted-average EPS for all
years completed (shown in the Wgt. Avg. column) stacks up against the company with the
highest weighted-average EPS for all years completed. Note: As explained in the scoring for the
Investor Expectations Standard, the weighted average EPS value for a company is equal to the
sum of the company's net profits for all years completed divided by the sum of the company's
shares of stock outstanding for all years completed—each company's weighted-average EPS is
displayed in the column headed Wgt. Avg. The number appearing in parentheses below the Wgt.
Avg. column head is the "industry standard EPS average" and is equal to the sum of the EPS
targets established by your company's Board of Directors for each year completed divided by the
number of years completed. Hence, this industry standard effectively represents the game-to-date
EPS average that all companies should have attained by exactly meeting the Board of Directors'
EPS targets each year. The company with the highest weighted-average EPS for all years to date
is designated as the best-in-industry performer on EPS and receives the maximum score on this
measure (provided its weighted-average EPS is equal to or above the industry standard EPS
average shown in parentheses below the Wgt. Avg. column head). The scores of all other
companies are a fraction of the points earned by the best-in-industry performer, with each
company's fraction being equal to its EPS average as a percentage of the best-in-industry
performer's EPS average. Thus, if your company's EPS average for all years completed is 85% of
the industry leader's EPS average for all years completed, then your company's Game-to-Date
(G-T-D) B-I-I Score will be 85% of the points earned by the industry leader (rounded to the
nearest whole number). However, when the best-in-industry performer's weighted average EPS
is below the base EPS established in Year 10 ($2.50 per share), then the best-in-industry
company is not awarded a perfect score (the maximum number of points) on EPS but rather a
percentage of the maximum score that equals its weighted-average EPS as a % of the Year 10
base EPS. This is done to avoid rewarding a best-in-industry performer for an overall EPS
performance that is below the average EPS a company should have attained by exactly meeting
the EPS levels established by company Boards of Directors. All other companies are also
awarded a scaled-down number of points for EPS because their B-I-I scores are always a fraction
of the points earned by the best-in-industry performer. For instance, if the best-in-industry
performer only earns 16 out of a possible 20 points, the scores of all the remaining companies
will be a fraction of 16 points rather than 20 points (with each company's fraction in this case
being equal to its weighted-average EPS divided by the best-in-industry performer's weighted-
average EPS). Consequently, all companies have lower game-to-date B-I-I scores for EPS when
the company with the highest all-year EPS average fails to meet the Year 10 base and earns less
than the point maximum. The thesis here is that the G-T-D best-in-industry scores of all
companies should be penalized when all companies in the industry fail to achieve the Year 10
base EPS. Board member and shareholder confidence in company managers is greatly weakened
by poor industrywide profitability—in the real world, managers who fail to deliver acceptable
profitability are often asked by the Board of Directors to look elsewhere for employment.
Interpreting the Return on Equity (ROE) Scores A company's return on equity (ROE) is
calculated by dividing its net profit by the average of beginning-year shareholder equity and
year-end shareholder equity. Thus, the reported ROE for each company is really a "return on
average shareholder equity" for the year. All of the ROE scores for companies in the industry are
shown in the second section on page 2 of the Footwear Industry Report. The point weighting for
achieving the 15% ROE target is contained in the narrative for the second section of data on page
2 that reports the Return on Equity scores. Each company's Return on Equity for each year
appears under the yearly column heads (Y11, Y12, and so on). The 15% number in parentheses
just below the yearly column heads represents the annual ROE performance target established by
your company's Board of Directors and expected by investors. Companies having bolded ROE
numbers in each yearly column met or exceeded the ROE performance target. The Current Year
I.E. Score for ROE. A company that exactly meets the investor-expected ROE target of 15% for
a given year earns an Investor Expectation (I.E.) Score for ROE for that year exactly equal to the
corresponding point weighting for ROE. Thus, if the weight for ROE is 20 points out of 100,
exactly achieving the 15% ROE target for a year produces an I.E. Score of 20. Beating the
annual ROE target of 15% entitles a company to a 0.5% bonus for each 1.0% that the 15% ROE
target is exceeded. As is the case for all five of the scoring measures, bonus awards for ROE are
capped at 20% of the specified number of points for meeting the 15% ROE target (in other
words, no bonus points are earned once a company's annual ROE exceeds 21%, which is 40%
above the annual 15% target). If your company earns an ROE of 19.5% (30% above the 15%
target) and if the investor-expected ROE target carries a 20-point weight, then your company's
I.E. score for ROE for the year would be 23 points (equivalent to a bonus of 15% above the 20-
point weight for ROE). A 21% or higher ROE earns 24 points when the ROE weighting is 20
points. Failure to achieve the 15% ROE target results in an I.E. Score for ROE between 0 and the
point maximum for ROE, with the score depending on what percentage of the 15% ROE target a
company achieved. For instance, if your company attains a 10.5% ROE versus the investor-
expected target of 15%, then your company's I.E. Score for ROE (assuming a 20-point weight)
would be 14 points (10.5 % divided by 15% equals 70%, and 70% of 20 points equals 14 points).
If a company's ROE is negative in a given year, no points are awarded for the ROE scoring
component and the company's I.E. Score for ROE will be 0. The Game-to-Date I.E Score for
ROE. A company's Game-to-Date (G-T-D) I.E score is keyed to how its weighted average ROE
compares against the industry standard ROE of 15% (shown in parentheses below the Wgt. Avg.
column head). Each company's weighted-average ROE for all years completed is calculated by
summing the company's net profits for all years completed and dividing by the sum of its
average shareholders' equity in each of the completed years. Each company's weighted average
ROE is shown in the column headed Wgt. Avg. (A company's average shareholders' equity is
used in determining its game-to-date ROE average because, as stated above, a company's ROE in
any year equals its net profit divided by the average of beginning year shareholder equity and
year-end shareholder equity; thus the ROE number is really a "return on average shareholders'
equity" for the year. So to calculate any company's average ROE for all years completed, sum
the company's net profits for all years and divide by the average of the company's ending
shareholders' equity balances at the beginning and end of the year. A company whose weighted-
average ROE exactly equals the all-year standard 15% ROE target earns a Game-to-Date I.E.
Score for ROE exactly equal to the corresponding point weighting for ROE. A company whose
weighted-average ROE exceeds the all-year 15% ROE standard earns a 0.5% bonus for each
1.0% that its weighted-average ROE exceeds 15%, subject to a bonus point cap of 20% of the
point weighting for ROE. For example, if your company has a weighted-average ROE of 18%
versus the 15% standard and if ROE carries a 20-point weighting, then your company's G-T-D
I.E. Score for ROE would be 22 points (because an 18% ROE is 20% higher than the 15%
standard and qualifies for a 10% bonus point award). If a company's weighted average ROE for
all years completed is below the 15% ROE industry standard, then its G-T-D I.E. Score for ROE
will be somewhere between 0 and the point maximum for ROE, depending on what percentage
of the 15% ROE target the company achieved. For instance, if your company has a weighted-
average ROE of 7.5% and if ROE carries a 20-point weighting, then your company's G-T-D I.E.
Score for ROE would be 10 points (or 50% of the 20-point weighting for ROE). The Current
Year Best-in-Industry (B-I-I) Score for ROE. The company with the highest ROE in a given year
is designated as the best-in-industry performer and earns the full number of points for ROE
(provided its ROE is equal to or above the standard 15% target). All remaining companies earn a
fraction of the points earned by the best-in-industry performer (with each company's fraction
being equal to its respective ROE for the year divided by the best-in-industry performer's ROE
for the year). For instance, if ROE is given a weight of 20 points, a best-inindustry performer
with a ROE of 17.3% gets a B-I-I score of 20 points and a company with an ROE of 10.0%
(which is 58% of the leader's 17.3%) gets a B-I-I score of 11.6 points (58% of 20 points) or 12
points rounded to the nearest whole number. When the best-in-industry performer's current year
ROE performance is below the 15% target, the best-inindustry performer is not awarded a
perfect score (the maximum number of points) on ROE but rather a fraction of the maximum
point score that equals the leader's ROE as a % of the investor-expected 15% target for the
year—for example, an industry-leading 12% ROE would qualify for only 80% (12% divided by
15% = 0.80) of the maximum point weight. Such a smaller point award prevents a best-in-
industry performer from earning the equivalent of an A+ B-I-I score for ROE when the leader's
ROE performance is below the 15% standard. All other companies are awarded a scaled-down
number of points for B-I-I ROE performance based on their respective percentages of the ROE
points earned by the best-in-industry performer—in other words if the best-in-industry performer
earns only 16 points out of a possible 20 points for ROE, the points earned by the remaining
companies are a percentage of 16 points (instead of 20 points). Consequently, all companies have
lower current year B-I-I scores for ROE when the company with the highest ROE for the current
year fails to meet the 15% ROE target. The justification for smaller point awards across-the-
board is the general dismay and lack of confidence among board members and shareholders
regarding poor ROE performance on the part of all companies in the industry and their
heightened concerns about future company profitability and stock prices. The Game-to-Date
Best-in-Industry Score on ROE. A company's Game-to-Date (G-T-D) score for ROE on the
Bestin-Industry (B-I-I) standard is based on how its weighted-average ROE for all years
completed (shown in the Wgt. Avg. column) stacks up against the company with the highest
weighted-average ROE for all years completed. The company with the highest weighted-average
ROE for all years to date is designated as the best-in-industry performer on ROE and receives the
maximum score on this measure (provided its ROE average is above the 15% ROE standard). All
remaining companies earn a lesser number of points according to what percentage of the leader's
ROE they achieved. Thus, unless your company has the industry-leading average ROE, your
company's B-I-I score for ROE under the Game-to-Date (G-T-D) Score column will be whatever
fraction of the best-in-industry performer's point award that corresponds to your company's ROE
average for all years completed as a percentage of the B-I-I performer's ROE average for all
years completed. When the industry leading weighted-average ROE is below the all-year 15%
standard, the best-in-industry performer does not earn a perfect score (the maximum number of
points) on ROE but rather earns a percentage of the maximum score that equals the leader's ROE
as a % of the 15% target. Thus, the company with the highest average ROE cannot receive the
point maximum for ROE unless it has a weighted average ROE of 15% or better—this prevents a
company with the highest average ROE from being awarded the equivalent of an A+ game-to-
date B-I-I score when its ROE performance falls short of the 15% standard. All other companies
are also awarded a scaled-down number of points for ROE because their scores always are
whatever fraction of the leader's point award that corresponds to their weighted average ROE
divided by the leader's weightedaverage ROE. Consequently, all companies have lower game-to-
date B-I-I scores for ROE when the company with the highest weighted-average ROE is below
the 15% standard and earns less than the point maximum for ROE. Why are the G-T-D best-in-
industry ROE scores of all companies penalized when all companies in the industry have an
average ROE for all years completed that is below the investor-expected 15% average? Because
poor ROE performance industrywide over a multi-year period shakes the confidence of board
members and the owners of footwear company stock, reduces footwear company stock prices,
and raises major doubts about future industry profitability. Likewise, company Boards of
Directors become anxious about whether company co-managers can turn things around and meet
the established performance targets. Interpreting the Stock Price Scores All of the Stock Price
scores for companies in the industry are shown in the third section on page 2 of the Footwear
Industry Report. The point weighting for achieving the annual stock price target is contained in
the narrative for the third section of data on page 2 that reports the Stock Price scores. Each
company's year-end stock price appears under the yearly column heads (Y11, Y12, and so on).
The number in parentheses just below the yearly column heads represents the annual Stock Price
target established by your company's Board of Directors and expected by investors. Companies
having bolded Stock Price numbers in each yearly column met or exceeded the target. The
Current Year I.E. Score for Stock Price. A company that exactly meets the investor-expected
Stock Price target for a given year earns an Investor Expectation (I.E.) Score for Stock Price for
that year exactly equal to the corresponding point weighting for Stock Price. Thus, if the Stock
Price weight is 20 points out of 100, exactly achieving the Stock Price target for a year produces
an I.E. Score of 20. Beating the stock price target is worth a 0.5% bonus for each 1% that your
company's stock price exceeds the annual investor-expected stock price target, up to a maximum
bonus of 20%. Thus, if your company's stock price is $60.00 versus a target of $50.00 (which
exceeds the target by 20%), your company's stock price score would be 22 points if the scoring
weight for stock price was set at 20 points. Failure to achieve the stock price target results in a
stock price score between 0 and the maximum instructorassigned point total, with the score
depending on the percentage of the target achieved. Thus, if the stock price weight is 20 points
out of 100 points and if your company had a stock price of $21.00 in a year when the target was
$42.00, then your company's score on the stock price target would be 10 points (50% of the 20
points awarded for meeting the $42.00 target). The Game-to-Date I.E Score for Stock Price. A
company's Game-to-Date (G-T-D) I.E score for stock price is based solely on how its most
recent year's stock price compares against the most recent year's investor-expected stock price
target. In other words, your company's Game-to-Date stock price score depends totally on
whether your latest year's stock price is above, equal to, or below the latest year's investor-
expected stock price target—no average stock price calculation is involved in the game-to-date
scoring of stock price. This is because a company's most recent year's stock price is, to a large
degree, reflective of its past record of earnings, ROE, credit rating, and dividend payments. A
company whose latest year's stock price exactly equals the latest year's investor-expected stock
price target earns a Game-to-Date I.E. Score for Stock Price exactly equal to the corresponding
point weighting for Stock Price. A company whose most recent year's stock price exceeds the
most recent year's stock price target earns a 0.5% bonus for each 1.0% that its stock price
exceeds the investor-expected stock price, subject to a bonus point cap of 20% of the point
weighting for stock price. For example, if your company's most recent year's stock price is
$46.20 and the most recent year's investor-expected stock price is $42.00 and if stock price
performance carries a 20- point weighting, then your company's game-to-date I.E. Score for
Stock Price would be 21 points (because your company's $46.20 stock price is 10% above the
investor target and qualifies for a 5% or 1-point bonus award). Should your company's most
recent stock price be below the year's investor-expected target, your company's game-to-date I.E.
Score will be whatever fraction of the stock price weighting corresponds to your company's
stock price divided by the investor-expected stock price. For example, if your company's latest
stock price is $31.50 , the investor-expected stock price is $42.00, and stock price carries a 20-
point weighting, then your company's game-to-date I.E. Score for Stock Price would be 15 points
(or 75% of the 20-point weighting for stock price. The Current Year Best-in-Industry (B-I-I)
Score for Stock Price. The company with the highest current-year stock price is designated as the
best-in-industry performer and earns the maximum number of points for stock price (provided its
stock price exceeds the current year investor-expected stock price target). Each remaining
company earns whatever fraction of the stock price weighting corresponds to its stock price
divided by the industry leader's stock price. Thus, when stock price performance carries a 20-
point weight, a company with an industry-leading stock price of $60 receives a score of 20 points
and a company with a stock price of $40 (which is 67% as good as the leader's $60) gets a score
of 13 points (67% of 20 points rounded to the nearest whole number). In cases where the
company with the highest current-year stock price has a stock price below the base stock price
established in Year 10 ($30.00 per share), it does not earn a perfect score (the maximum number
of points) on stock price but rather a percentage of the maximum score that equals the leader's
stock price as a % of the Year 10 base stock price. All other companies are also awarded a
scaled-down number of points for stock price because the best-in-industry scoring standard
always entails (a) giving the best-performing company the highest score and (b) basing the
scores of all other companies on whatever fraction of the leader's point award that corresponds to
their performance as a percentage of the leader's performance. Therefore, if the industry leader
has a stock price of $22.50 (the Yaer 10 base stock price being $30.00) and if the stock price
weighting is 20 points out of 100 points, the leader would earn 15 points (75% of the 20-point
maximum); a company with a $15.00 stock price would get only 10 points (two-thirds of the 15
points earned by the company with the highest stock price). As was the case for EPS and ROE,
all companies have lower game-to-date B-I-I scores for stock price when the company with the
highest stock price has a stock price below the investor-expected level. The reasons are the
same— poor performance on stock price by all companies in the industry greatly erodes investor
confidence and raises doubts about whether company managers can deliver the investor-expected
levels of performance. The Game-to-Date Best-in-Industry (B-I-I) Score for Stock Price. A
company's Game-to-Date (G-T-D) B-I-I score for stock price is based solely on how its latest
year's stock price compares against the latest-year stock price of the company whose stock price
is the highest in the industry. No average stock price calculation is involved in the game-to-date
B-I-I scoring of stock price. The latest stock prices of companies in the industry are used to
measure the game-to-date B-I-I score for stock price because a company's latest stock price is, to
some important degree, a function of past-year earnings, ROE, credit rating, and dividend
payments and thus includes a long-term element. The company having the highest stock price in
the report year is designated as the best-in-industry performer on stock price and receives the
maximum score on this measure (unless its stock price is below the stock price target established
by the company's Board of Directors, in which case the leader's score is a percentage of the
maximum score that equals the leader's stock price as a % of the latest year's stock price target).
All other companies earn a fraction of the points awarded to the best-in-industry performer that
equals their respective latest-year stock prices divided by the best-in-industry performer's latest-
year stock price. Thus, unless your company has the industry-leading stock price, your
company's B-I-I score for stock price under the Game-to-Date (G-T-D) Score column will be
whatever fraction of the best-in-industry performer's point award that corresponds to your
company's latest stock price divided by the B-I-I performer's latest stock price. One thing to take
note of is that a company's game-to-date B-I-I score for stock price and current-year B-I-I score
for stock price are always the same because the latest-year stock prices are used to calculate both
scores. This would, of course, not be the case if—as in the cases of both EPS and ROE where all-
year averages come into play in the gameto-date B-I-I scoring—the game-to-date B-I-I score was
based on an all-year average stock price rather than latest-year stock price.

How Your Company's Performance is Judged The Numbers on Page 3 of the Footwear Industry
Report The scoreboard of company performance on page 3 of the Footwear Industry Report
(FIR) shows • Each company's scores for credit rating based on the Investors Expectations
Standard and the Best-in-Industry Standard. • Each company's scores for image rating based on
the Investors Expectations Standard and the Best-in-Industry Standard. • Year-by-year details of
industry expenditures for corporate social responsibility and citizenship and the range of image
rating points generated from such expenditures. If, as you look at the data on page 3, you have
any questions about the Investors Expectations Standard or the Best-inIndustry Standard, then
please consult the ?/Help screen for page 1 of the FIR, where these standards are described in
more detail. Interpreting the Credit Rating Scores All companies are expected to maintain a B+
Credit Rating each and every year. Each company's credit rating for each year of the BSG
exercise is displayed below the yearly column heads (Y11, Y12, and so on). The B+ in
parentheses just below the yearly head is there simply to remind you of the target credit rating
you are supposed to achieve each year. Bolded credit ratings indicate a company met or
exceeded the B+ target. The point weighting for a company's credit rating performance is
contained in the narrative accompanying the Credit Rating scores at the top of this page; very
often the credit rating weight is 20% or 20 points out of 100 points. Special Note: Just after the
Y20 column is a column headed "Default Risk." The low, medium, high values in this column
are based on each company's Default Risk ratio, which is an important component in determining
your company's credit rating. A company's default risk ratio is equal to its free cash flow divided
by the combined annual principal payments on all outstanding loans; free cash flow is defined as
net profit plus depreciation minus dividend payments. • A company with a default risk ratio
below 1.0 is automatically assigned "high risk" status (because it is short of cash to meet its
principal payments); it cannot earn a credit rating higher than C+. Moreover, companies
designated as "high risk" are barred from requesting or receiving 5-year and 10-year loans. •
Companies with a default risk ratio between 1.0 and 3.0 are designated as "medium risk". •
Companies with a default ratio of 3.0 and higher are classified as "low risk" because their free
cash flows are 3 or more times the size of their annual principal payments. You are provided the
information on each company's default risk status—high, medium, or low—simply as a matter of
interest. Use this information as you see fit. The Current Year I.E. Score for Credit Rating. A
company that exactly meets the investor-expected B+ credit rating earns an Investor Expectation
(I.E.) Score for credit rating for that year exactly equal to the corresponding point weighting for
credit rating. Thus, if the credit rating weight is 20 points out of 100, a B+ credit rating translates
into an I.E. Score of 20. Beating the annual B+ credit rating target always earns bonus points, up
to a maximum bonus of 20% of the point weighting. If the point weighting for credit rating is 20
(which equates to a maximum of 24 points including the bonus), then the various possible credit
rating scores are as follows: A+ 24 points A 23 points A– 22 points B+ 20 points B 16 points B–
12 points C+ 8 points C 4 points C– 0 points If your company's current-year I.E. Score for credit
rating differs from the points shown above, it is because your instructor has opted for a point
weighting other than 20. The Game-to-Date I.E. Score for Credit Rating. Game-to-Date scoring
for Credit Rating is keyed to how each company's latest credit rating compares against the best
rating of A+, not some all-year average credit rating. The latest year's credit rating is used to
determine a company's game-to-date I.E. score for credit rating because a company's latest credit
rating is, to some important degree, a product of management's entire record of finance-related
decisions and actions — a company's current credit rating, financial condition, and balance sheet
strength/weakness is usally years in the making, not something that happens overnight. As a
consequence, a company's current-year I.E. score for credit rating and its game-to-date I.E. score
for credit rating are identical because both are based on the same credit rating and point awards.
The Current Year Best-in-Industry (B-I-I) Score for Credit Rating. Best-in-industry scoring for
credit rating performance works differently than for the other four performance measures. The
"best" credit rating performance is an A+ credit rating, not so much the highest credit rating
achieved by any one company. Hence, each credit rating grade from A+ to C- carries a number
of points based on the credit rating weight designated by your instructor. And a credit rating of
A+ is required to receive the maximum number of points. If the credit rating weight is 20 points
out of 100, the number of points awarded for current-year B-I-I credit rating scores is as follows:
A+ 20 points A 19 points A– 18 points B+ 17 points B 14 points B– 11 points C+ 8 points C 4
points C– 1 points If your company's current-year B-I-I Score for credit rating differs from the
points shown above, it is because your instructor has opted for a point weighting other than 20.
The Game-to-Date Best-in-Industry (B-I-I) Score for Credit Rating. Just as was the case with
game-to-date scoring for credit rating under the Investor Expectations Standard, game-to-date
scoring for credit rating under the Best-inIndustry Standard is keyed to each company's latest
credit rating, not some all-year average credit rating. Just as was the case for the Game-toDate
I.E. score for credit rating, the latest year's credit rating is used to determine a company's game-
to-date B-I-I score for credit rating. The reasons are the same: a company's latest credit rating is,
to some important degree, a product of management's entire record of finance-related decisions
and actions — a company's current credit rating, financial condition, and balance sheet
strength/weakness is usally years in the making, not something that happens overnight. Best-in-
industry scoring for credit rating performance is based on the "best possible" credit rating of A+,
not the highest credit rating achieved by any one company. Consequently, each credit rating from
A+ to C- carries a certain point score that ranges from the maximum possible point score for an
A+ rating down to 1 point for a C- rating. If the credit rating weight is 20 points out of 100, the
number of points awarded for Game-to-Date B-I-I credit ratings scores is as follows: A+ 20
points A 19 points A– 18 points B+ 17 points B 14 points B– 11 points C+ 8 points C 4 points
C– 1 points If your company's game-to-date B-I-I Score for credit rating differs from the points
shown above, it is because your instructor has opted for a point weighting other than 20.
Interpreting the Image Rating Scores A company's image rating is based on (1) its branded S/Q
ratings in each geographic region, (2) its market shares for both branded and private-label
footwear in each of the four geographic regions, and (3) its efforts to demonstrate good corporate
citizenship and conduct its business in a socially responsible manner. All companies are expected
to achieve at least an Image Rating of 70 each and every year. Each company's image rating for
each year of the BSG exercise is displayed below the yearly column heads (Y11, Y12, and so
on). The 70 in parentheses just below the yearly head is there simply to remind you of the target
image rating you are supposed to achieve each year. Bolded image ratings indicate a company
met or exceeded the 70 target. The point weighting for a company's image rating performance is
contained in the narrative accompanying the Image Rating scores in the middle of this page; very
often, the image rating weight is 20% or 20 points out of 100 points. The Current Year I.E. Score
for Credit Rating. A company that exactly meets the investor-expected Image Rating target of 70
for a given year earns an Investor Expectation (I.E.) Score for Image Rating for that year exactly
equal to the corresponding point weighting. Thus, if the Image Rating weight is 20 points out of
100, exactly achieving an Image rating of 70 for a year produces an I.E. Score of 20. Beating the
investor-expected target of a 70 image rating is worth a 0.5% bonus for each 1% that your
company's image rating exceeds the investor-expected target of 70, up to a maximum bonus of
20%. Thus, if your company's image rating is 77 (which exceeds the investor-expected target by
10%), your company's current-year I.E. image rating score would be 21 points if the image rating
weight is set at 20 points (because exceeding the image rating target by 10% earns a 5% point
bonus, up to a maximum bonus of 20%). Failure to achieve the investor-expected 70 image
rating results in an image rating score between 0 and the maximum instructor-assigned point
total, with the score depending on the percentage of the target achieved. Thus, if the image rating
weight is 20 points out of 100 points and if your company had an image rating of 56 (20% below
the expected 70 rating), then your company's current-year I.E. score for image rating would be
16 points (80% of the 20-point weight). The Game-to-Date I.E Score for Image rating. A
company's Game-to-Date (G-T-D) I.E score for image rating is based on how its average image
rating for the most recent three years compares against the investor-expected standard of 70. A 3-
year average image rating is used to measure game-to-date I.E. performance, as opposed to an
all-year average, so as not to burden a company's performance with early-year image ratings that
may not be representative of the image and reputation it has recently achieved with its strategy.
A company whose 3-year average image rating exactly equals the investor-expected 70 rating
earns a Game-to-Date I.E. Score for image rating exactly equal to the corresponding point
weighting. A company whose 3-year average image rating exceeds the investor-expected 70
rating earns a 0.5% bonus for each 1.0% that its image rating is above 70, subject to a 20% bonus
point cap. For example, if your company's average image rating for the last 3 years is 84 (20%
above the expectation of 70) and if image rating performance carries a 20- point weighting, then
your company's game-to-date I.E. Score for image rating would be 22 points (because the 84
image rating qualifies for a 10% or 2-point bonus award). Should your company's average image
rating for the last 3 years be below 70, your company's game-to-date I.E. Score for image rating
will be whatever fraction of the image rating point weighting that corresponds to your company's
3-year average image rating divided by 70. For example, if your company's 3-year image rating
average is 64 and image rating carries a 20-point weighting, then your company's game-to-date
I.E. Score for image rating would be 18 points (64 divided by 70 = 0.914 and 91.4% of 20 points
= 19 points, rounded to the nearest whole number). The Current Year Best-in-Industry (B-I-I)
Score for Image Rating. The company with the highest current-year image rating is designated as
the best-in-industry performer and earns the maximum number of points for image rating
(provided its image rating exceeds the investor-expected rating of 70). Each remaining company
earns whatever fraction of the image rating weighting that corresponds to its image rating
divided by the best-in-industry performer's image rating. Thus, when image rating performance
carries a 20-point weight, a company with an industry-leading image rating of 80 receives a
score of 20 points and a company with a 60 image rating earns a current year B-I-I score of 15
points (60 divided by 80 = 0.75 and 75% of 20 points = 15 points). In the very rare instance
when the company with the highest current-year image rating has a rating below the investor-
expected level of 70, the best-in-industry performer does not earn the maximum number of
points but rather a percentage of the maximum score that equals the leader's image rating as a %
of the investor-expected rating of 70. The current-year B-I-I scores of all other companies will
then be whatever fraction of the leader's point award that corresponds to their respective image
ratings divided by the leader's image rating. Therefore, if the industry leader has a 60 image
rating versus the standard of 70 and if the image rating weight is 20 points out of 100 points, the
leader would earn 17 points (60 divided by 70 = 0.857 and 85.7% of the 20-point maximum = 17
points, rounded to the nearest whole number) and a company with a 56 image rating would get
16 points (56 divided by 60 = 0.933 and 93.3% of the 17 points earned by the company with the
highest rating of 60 equals 16 points). The Game-to-Date Best-in-Industry (B-I-I) Score for
Image Rating. A company's Game-to-Date (G-T-D) B-I-I score for image rating is based on how
its average image rating for the last three years compares against the every-year target of 70
established by company Boards of Directors. A 3-year average image rating is used to measure
game-todate B-I-I performance, as opposed to an all-year average, so as not to burden a
company's performance with earlyyear image ratings that may not be representative of the
reputation it has recently achieved with its strategy. The company having the highest 3-year
average image rating is designated as the best-in-industry performer on image rating and receives
the maximum score on this measure (unless its image rating is below the 70 target established by
the company's Board of Directors, in which case the leader's score is a percentage of the
maximum score that equals the leader's 3-year average image rating as a % of the 70 image
rating target). Thus, a company with an industryleading 3-year average image rating of 83 would
earn the point maximum (20 points in the image rating weight is 20% or 20 points); a company
with an industry-leading 3-year average image rating of only 66 would earn a game-to-date BI-I
score for image rating of only 19 points (66 divided by 70 = 0.943 and 94.3% of 20 points = 19
points, rounded to the nearest whole number). All other companies earn game-to-date B-I-I
scores for image rating that equal a fraction of the points awarded to the best-in-industry
performer, with their respective fraction being equal to their 3-year average image rating divided
by the best-in-industry performer's 3-year average image rating. For example, if the image rating
weight is 20 points and the best-in-industry performer has a 3-year average image rating of 78,
then a company with a 3-year average image rating of 71 will receive a game-to-date B-I-I score
for image rating of 18 (71 divided by 78 times 20 points, rounded to the nearest whole number).
Thus, unless your company has the industry-leading 3-year average image rating, your
company's B-I-I score for image rating under the Game-to-Date (G-T-D) Score column will
always be whatever fraction of the best-in-industry performer's point award that corresponds to
your company's 3-year average image rating divided by the B-I-I performer's 3-year average
image rating. Interpreting the Information Concerning Corporate Social Responsibility and
Citizenship The data grouping at the bottom of page 3 of the FIR shows industry expenditures
for corporate social responsibility and citizenship for each year and the range of image rating
points generated from these expenditures. The numbers here are pretty much self-explanatory but
the following may prove helpful: As concerns the Total and Per Pair Expenditures for Corporate
Social Responsibility and Citizenship: • The numbers in the "High" columns represent the
highest amounts that a company in the industry spent. The company is not identified for reasons
of competitive sensitivity. • The numbers in the "Low" columns represent the least amounts
spent by a company in the industry. The company is not identified for reasons of competitive
sensitivity. • The numbers in the "Average" columns represent the average expenditures of all
companies in the industry. As concerns the Image Rating Points Generated from Expenditures
for Corporate Social Responsibility and Citizenship: • The numbers in the "High" column
represent the largest number of image rating points received by a company as a result of its
spending for corporate social responsibility and citizenship initiatives. The company is not
identified for reasons of competitive sensitivity. • The numbers in the "Low" column represent
the smallest number of image rating points received by a company as a result of its spending for
corporate social responsibility and citizenship initiatives. The company is not identified for
reasons of competitive sensitivity. • The numbers in the "Average" column represent the average
number of image rating points received by companies in the industry as a result of spending for
corporate social responsibility and citizenship initiatives. Beginning in Year 14, this section will
also include announcement of a "Gold Star Award for Corporate Citizenship," given by the
World Council to Promote Exemplary Corporate Citizenship. The council's award is presented to
the company that spends the highest percentage of its revenues for corporate social responsibility
and citizenship initiatives. The council decided that its Gold Star Award should be based on
percentage of revenues spent rather than total dollars spent because a total dollar measure of
effort is "biased" in favor of companies with big revenue streams (the use of a % of revenues
measure is size-neutral and a more valid measure of "company effort"). A 2nd place Gold Star
Award will also be announced. Gold Star awards are on "honors" and do not affect company
image ratings. Tip/Suggestion: All the information in this section of the Footwear Industry
Report is intended to provide guidance to company co-managers in deciding whether to increase,
decrease, or leave unchanged their levels of spending for corporate social responsibility and
citizenship initiatives—or perhaps to spend no money at all. Use it, along with the information in
the top section of the Corporate Social Responsibility and Citizenship Decision Screen, to assess
what changes, if any, you and your co-managers should make in your company's expenditures
for the six optional social responsibility and citizenship initiatives.
How Your Company's Performance is Judged The Numbers on Page 3b of the Footwear Industry
Report The scoreboard of company performance on page 3b of the Footwear Industry Report
(FIR) shows • The accuracy of each company's projected or forecasted revenues, EPS, and Image
Rating and whether the accuracy of these projections/forecasts was good enough to qualify for a
Bull’s Eye Award. • How your company’s Average Variance from the management’s forecasts
of Revenue, EPS, and Image Rating compared against the Average Variances of other companies
in your industry and also against the worldwide company average variance for the specified year
for the past 12 months. • The current-year overall scores for each company for each completed
decision round and the industry’s Leap Frog winner, beginning with the Year 12 decision round.
What Is the Bull’s Eye Award and How Does It Work? Every regularly-scored decision period,
each company can qualify for a 1-point Bull’s Eye Award (to be added to its final overall game-
to-date performance score) if co-managers “accurately” project or forecast their company’s
actual revenues, EPS, and Image Rating. The purpose of the Bull’s Eye Award is to reward
company managers for astutely anticipating upcoming year market and competitive conditions
and crafting a strategy and set of decision entries that produces an actual performance closely in
line with the projections appearing at the bottom of all the decision screens for your final set of
decision entries. The projected/forecasted values for revenues, EPS, and Image Rating used to
determine the Bull’s Eye Awards are the revenue-EPS-image rating values that appear at the
bottom of a company’s last saved decision screen prior to each decision round deadline. For a
company to earn a Bull’s Eye Award equal to 1-bonus point to be added to their overall game-to-
date performance score all three of the following conditions must be met: (1) The company’s
actual total revenues must be within ±5% of projected/forecasted total revenues, (2) The
company’s actual EPS must be within 10-cents or ±5% of projected/forecasted EPS, and (3) The
company’s actual image rating must be within ±4 points of the projected image rating. Standard
rounding rules apply to the ±5% calculations for revenues and EPS. There are no decimal points
involved in the calculation and reporting of a company’s Image Rating. No partial bonus points
are awarded when just one or two of these three conditions are met. There are as many 1-point
Bulls Eye bonus point awards as there are companies that meet all three conditions. There is no
limit on the number of Bull’s Eye Awards a given company can receive. Hence receiving a Bulls
Eye Award for each of the various decision rounds can significantly impact a company’s overall
score While Bull’s Eye Award statistics are provided during the practice rounds for illustrative
purposes, any awards are erased after the practice rounds—in other words, any Bull Eye Awards
during the practice rounds “do not count” and will not be included in the bonus-point additions to
a company’s final game-to-date score. The total bonus points (both Bull’s Eye and Leap Frog
bonuses) accumulated by each company and the bonus-pointadjusted overall score for each
company are shown in the bottom section of page 1 of the Footwear Industry Report where the
Overall Game-to-Date company scores appear. This enables you to readily track the status and
impact of the bonus point awards throughout the simulation exercise. If a company fails or
chooses not to make and save decision entries for a given decision round (year), the company is
not eligible for the Bull’s Eye Award in that year, and the word Ineligible will appear in the
Bull’s Eye Award column for the company. The purpose of the Bull’s Eye Award is to reward
company managers for astutely anticipating upcoming year market and competitive conditions.
Interpreting the Numbers in the Bull’s Eye Award Section. The numbers displayed are
straightforward. Under the Revenue heading, each company’s forecasted or projected revenues
are shown in the first column, followed by its actual revenues for the year. The percent variance
is calculated by subtracting the forecasted revenues from the actual revenues, dividing by the
forecasted revenues, and multiplying by 100 to arrive at a percent variance. Negative variances
indicate actual revenues were below the forecast. Positive variances indicate that actual revenues
were above the forecasted value. Under the EPS heading, each company’s forecasted or
projected EPS is shown in the first column, followed by its actual EPS for the year. The percent
variance is calculated by subtracting the forecasted EPS number from the actual EPS number,
dividing by the forecasted EPS value, and multiplying by 100 to arrive at a percent variance.
Negative variances indicate a company’s actual EPS was below the company’s forecast. Positive
variances indicate that a company’s actual EPS came in above the forecasted value. Under the
Image Rating heading, each company’s forecasted or projected image rating is shown in the first
column, followed by its actual image rating for the year. The point variance (shown in the next
column) is calculated by subtracting the company’s forecasted image rating from its actual image
rating. The percentage image rating variance is calculated by dividing the point variance by the
forecasted image rating value and multiplying by 100 to arrive at a percent variance. Negative
variances indicate the company’s actual image rating was below company management’s
forecast. Positive variances indicate that a company’s actual image rating was above
management’s forecasted value. Companies meeting all three Bull’s Eye Award qualifications
are indicated with a “Yes” in the Bull’s Eye Award column and the last column on the right
reports each company’s cumulative Bull’s Eye Awards across all decision rounds. What to Do to
Improve the Accuracy of Your Projections/Forecasts. If your company’s average variances are
too large to earn a Bull’s Eye Award, then your company’s management team needs to study the
column of industryaverages in prior-year Competitive Intelligence Reports to look for trends in
the movement of the various industryaverages for price, S/Q rating, models available, advertising
budget, and so on in each region over the past couple of years to get a clue as to which direction
the industry-averages may be headed in the upcoming year. The industryaverages in the last
column of the Competitive Intelligence Reports reflect the degree/intensity of competition your
company was up against, competitive factor by competitive factor. The Competitive Intelligence
Report is absolutely the best data source for clues about how the industry averages might change
in the upcoming year. Analyze the prior trends in the industry averages and make some
judgments or “guestimates” about how much the industry averages are likely to change up or
down in the upcoming year. Then go directly to the Sales Forecasting screen and enter your best
“guestimates” in the column labeled “Your Estimate of the Industry Average.” If you are not
confident about how to wisely use the Sales Forecast screen, please read the accompanying Help
section—which is full of tips and suggestions about how to do a more accurate job of forecasting
unit sales for the upcoming year. Spending the time to make a more accurate Sales Forecast will
almost certainly lead to significant improvements in the accuracy of your Revenue-EPS-Image
Rating projections. The Line Graph in the Center Section The graph in the center of the page
provides a quick way for you to see how well the accuracy of your company’s projections for
revenues, EPS, and Image rating compare both industrywide and worldwide. The vertical bars
for each year show the industry high and industry low average variances, where a company’s
“average variance” is simply the arithmetic average of its three percentage variances for
revenues, EPS, and Image Rating shown in the Bulls Eye statistics section. The line for your
company’s average variance allows you to easily see where your company ranks relative to the
industry high and industry low average variances for each of the decision rounds. And you can
readily compare how your company’s average variances for the decision rounds compare against
the average variances of all companies worldwide over the past 12 months. You should be
pleased with your company’s forecasting accuracy when your company is consistently at or near
the low end of the industry range of variances and when your company’s average variance tends
to be below the worldwide average. Such an outcome signals that your company’s management
team is doing a commendable job of anticipating the overall changes in the competitive efforts of
rival companies and developing a strategy and set of decision entries that is producing actual
performance outcomes in line with what you expected. What to Do to Improve the Accuracy of
Your Projections/Forecasts. If your company’s average variances are trending to the high side of
the industry range and/or the worldwide average, then there is ample room for your company’s
management team to do a better job of anticipating competitive market conditions in the
upcoming years. To do so, you will need to put more thought and analysis into how the prior-
year industry averages shown on the most recent year’s Competitive Intelligence Report for
price, S/Q rating, models available, advertising budget, and so on are likely to change. The key
to improving the accuracy of your projections is to (1) spend more time evaluating and debating
whether and why the competitive efforts of rival companies will, on average, intensify or weaken
somewhat in the upcoming year and then (2) use the results of your analysis and debate to alter
the various industry averages on the Sales Forecasting screen. If you are unsure about how to
make good use of the Sales Forecast screen, please read the Help section—it contains
explanations of what this screen is all about and some useful tips and suggestions for improving
the accuracy of your sales forecasts. Spending the time to input your best (and hopefully
realistic) “guestimates of the upcoming year industry averages should produce a more accurate
Sales Forecast and lead to significant improvements in the accuracy of your Revenue-EPS-Image
Rating projections. What Is the Leap Frog Award and How Does It Work? A Leap Frog Award
of one bonus point is awarded annually to the company in the industry whose overall
performance score in the current year is most improved over the prior year (based on number of
points, rather than percentage improvement) in comparison to the score gains of all other
companies in the industry. The first Leap Frog Award is given in Year 12 (since it takes two
years of results for a company to show improvement over its prior year’s results). In case two or
more companies tie for the biggest point-improvement in overall score, each company will
receive a 1-point Leapfrog Award bonus. In the rare instance where all companies fail to
improve their current scores from one year to the next (indicated by a negative year-to-year
change in overall score for all companies in the industry), a Leap Frog bonus is not awarded. The
total bonus points (both Bull’s Eye and Leap Frog bonuses) accumulated by each company and
the bonus-pointadjusted overall score for each company are shown in the bottom section of page
1 of the Footwear Industry Report where the Overall Game-to-Date company scores appear. This
enables you to readily track the status and impact of the bonus point awards throughout the
simulation exercise. Interpreting the Numbers in the Leap Frog Award Section. The numbers
displayed require little explanation. The “Year __” column shows each company’s overall
current-year score (based on both the Industry Expectations and Bestin-Industry scoring
measures), as reported on p. 1 of the Footwear Industry Report. The Δ column reports the size of
the point-score change from the prior year (Δ is the mathematical symbol for “change”).
Highlighted numbers in the Δ column signify the Leap Frog Award winner (or winners).

Industry Overview The Numbers on Page 4 of the Footwear Industry Report This page of the
Footwear Industry Report (FIR) is full of useful information about the just completed year. The
purpose of the statistics on this page is to give you a quick way to size up overall market
conditions and to prod your thinking on what sort of overall market conditions are likely to exist
in the upcoming year. Using the Data on Materials Prices This data reflects what prices
companies paid for materials and shows any price adjustments for the percentage mix of
superior-standard materials and for capacity utilization based on the following demand-supply
conditions: • The going market prices of standard and superior materials in any one year deviate
from their respective base price whenever the percentage mix is anything other than the “norm”
of 50% for standard materials and 50% for superior materials. The going market price of superior
(or standard) materials climb by 2% for each 1% that worldwide use of superior (or standard)
materials exceeds 50%. At the same time, the global market price of standard (or superior)
materials decline 0.5% for each 1% that the global usage of standard (or superior) materials was
below 50%. Thus, worldwide materials usage of 60% superior materials and 40% standard
materials will result in a global market price for superior materials that is 20% above the
prevailing base price for superior materials and a global market price for standard materials that
is 5% below the prevailing base price for standard materials. Similarly, worldwide usage of 55%
standard materials and 45% superior materials will result in a global market price for standard
materials that is 10% above the base price and a global market price for superior materials that is
2.5% below the base price. As you can see, greater than 50% usage of superior materials widens
the price gap between superior and standard materials, and greater than 50% usage of standard
materials narrows the price gap. • Materials prices fall whenever global production levels drop
below 90% of global production capacity and materials prices rise when global production levels
rise above 110% of global plant capacity. Any time global shoe production falls below 90% of
the footwear industry's global plant capacity (not counting overtime production capability), the
market prices for both standard and superior materials drop 1% for each 1% that global shoe
production is below the 90% capacity utilization level. Such price reductions reflect increased
competition among materials suppliers for the available orders. On the other hand, when global
production levels exceed 110% of the industry’s global plant capacity (reflecting use of overtime
production), the prices of both standard and superior materials rise 1% for each 1% that global
production levels exceed 110% of global production capacity since strong materials demand
enables suppliers to exert pricing power and charge higher prices. Thus, if global production
reaches the 20% overtime maximum, the market prices of standard and superior materials will
turn out to be 10% higher than they would otherwise be. TIP: Use the numbers on materials
prices in this section of the FIR, along with the materials price numbers from the last couple of
FIRs, to spot trends in materials price changes. Use your diagnosis of any upward or downward
trend in materials prices as the basis for making projections of materials prices when you get to
the Branded Production decision screen in making decisions for the upcoming year. Using the
Footwear Production Statistics This section provides you with data showing how many pairs of
branded and private-label pairs were produced worldwide at the plants of all companies, what the
reject rates were on average, and the net production available for shipment to regional
warehouses. There’s also information showing the percentage of superior materials usage (the
remaining percentage is, of course, the usage of standards materials) and the percentage of
worldwide production capacity that was utilized. These numbers along with the commentary on
the right should be helpful in understanding the production side of the marketplace. Using the
Data on Branded Warehouse Activity The numbers here give you a solid indication of the extent
to which companies cleared out any excess inventories of branded footwear at the beginning of
the year (see the pairs cleared numbers for each region) and the number of branded pairs that all
companies had available for sale in their regional warehouses during the year. These numbers
along with the commentary on the right are intended to help you size up supply conditions across
the industry. Using the Branded Demand and Sales Statistics This section, and the accompanying
commentary, indicates whether the demand for branded footwear grew faster or slower than the
norm. Bear in mind that (1) unusually intense competition for sales among rival companies (in
the form of footwear with attractive S/Q ratings being sold at "low prices", coupled with very
aggressive marketing efforts) can spur consumer demand for footwear and result in market
growth rates above the projected levels and (2) weak competition among footwear companies (as
reflected by rising footwear prices that are out-of-proportion to S/Q ratings) can turn off
footwear buyers and result in lower-than-expected market growth rates. Such conditions exist
anytime that demand for athletic footwear grows faster or slower than the norms shown on page
4 of the Player's Guide. There are also numbers showing whether distribution warehouses across
the four regions are “overstocked” with branded pairs or whether, in the event of shortfalls, some
companies lost sales due to lack of adequate inventories. Using the Demand Forecast This
section is important because it provides you with detailed forecasts of branded and private-label
demand for each region for the next three years. All of the demand forecasts are based on the
mid-point of the expected growth range (if the market is projected to grow 5-7%, the forecast is
based on an assumed 6% growth); actual demand can therefore turn out to be 1% higher or lower
than forecast. TIP: Use the demand forecasts, along with the data in the Global Supply/Demand
Analysis section and the Plant Capacity section to help you determine whether there are market
opportunities for your company to add plant capacity or whether the industry is oversupplied
with production capacity such that selling off some of your capacity is worth considering. The
Importance of the Global Supply/Demand Analysis Section The numbers in this part of the FIR
are your best source of statistics regarding whether the industry is capacity-short or capacity-
long. The global supply numbers indicate how many pairs of branded and private-label footwear
the industry is capable of producing in the upcoming year. The global demand numbers indicate
the expected level of global demand in the upcoming year — keep in mind the forecasted
demand is based on the midpoint of the forecasted growth in demand (if the market is projected
to grow 5- 7%, the forecast is based on an assumed 6% growth). Hence, the actual growth can be
1% higher or lower than the numbers shown. The conclusion regarding the potential excess
supply or excess demand is well worth your attention. The greater the potential for excess supply
conditions to prevail, the more likely that competition in the upcoming year will be intense to
capture the available demand. Excess supply conditions signal the probability of a high degree of
rivalry among companies to win the available demand because there are too many pairs of
production capacity chasing too few pairs of market demand — with excess supply conditions,
some companies are certain to sell less than what they are able to produce. Hence, there is bound
to be disappointment at some companies regarding sales and market share in the upcoming
year—the market contest in the upcoming year is thus going to be one of which companies are
disappointed and how disappointed are they. Furthermore, the presence of significant amounts of
excess capacity sends a strong message that the industry will not need additional production
capacity to meet expected levels of market demand for several years. The greater the potential
for excess demand conditions to prevail, the less hard companies will have to compete to capture
the available demand. With excess demand, companies will not find it hard to sell all they can
produce at profitable prices — market conditions are ripe for companies to have an excellent
year in meeting target performance objectives. Moreover, excess demand or even a close
demand-supply balance signals opportunity to consider adding additional capacity to be in
position to satisfy growing market demand for athletic footwear. Using the Plant Capacity
Statistics This bank of data is your best source of information about the production capacities of
different companies in the industry and any capacity changes that companies initiated during the
past year. TIP: Use this information to track what rival companies are doing in terms of
purchasing/selling used footwear-making equipment, how much new construction particular
companies initiated during the year, and how much capacity each company will have during the
upcoming year.

Financial Performance Summary The Numbers on Page 5 of the Footwear Industry Report This
page of the Footwear Industry Report provides comparative income statement data for all
companies in the industry, selected balance sheet data for all companies, dividend data, an
assortment of financial and operating ratios for each company, and credit rating information. (In
the real world, this information is always available for companies whose stock is publicly traded
and can be gotten from company annual reports and other public sources.) This page of
information makes it easy for you to see how your company's financial performance compares
with that of any and all rival companies. Using the Income Statement Data The comparative
income statement data is primarily useful for seeing which companies are the largest and
smallest in the industry, who is earning the biggest profits, and who is probably burdened with
excessive interest costs. Each company began with same revenues and profits, so those with the
largest revenues have grown faster than those with the least revenues over the course of the
exercise. Those with the biggest net income have been able to grow their company's profits faster
than those with lesser net income. Companies with the highest interest costs either have the most
debt outstanding or weak credit ratings (which drives up the interest rates they are paying). The
data on shares of stock for each company at the end of the column is useful for tracking (1)
which companies have issued new shares of stock (which tends to dilute earnings per share, but
which may be necessary to raise equity capital, pay down debt, and protect their credit ratings)
and (2) which companies have repurchased shares (usually to boost EPS, ROE and their stock
price, all three of which are important factors in scoring company performance). It is generally
useful to scan this data each year just to stay on top of such matters. But the real meat on this
page is in the other sections. Using the Balance Sheet Data The balance sheet data in the FIR is
useful for tracking which companies have plenty of cash on hand, which ones have large
amounts of the outstanding debt in the form of 5-year and 10-year loans (and thus may be
overextended and headed for possible financial trouble), and which companies have how much
in shareholders’ equity investment and how much their total shareholder equity changed during
the year. Changes in total shareholder equity are important because higher/lower ending equity
values translate into lower/higher returns on average equity (ROE). Just as with the income
statement data, you should scan the comparative balance sheet statistics each year just to stay on
top of how well your company stacks up relative to the other companies in the industry. The
most interesting data is what is on the rest of this page. Using the Dividend Data The dividend
statistics for all the companies in the industry provide information that can help you decide: •
Whether you need to consider raising your company’s dividend, in light of the dividends being
paid by other companies in the industry. Dividend increases generally have a positive impact on
your company’s stock price (unless they involve paying out more than the company is earning —
i.e. a dividend payout ratio greater than 100%). Companies with a low dividend relative to other
companies may want to consider a dividend increase (if the company's financial condition
permits). • Whether you should consider increasing your company’s dividend on a more regular
basis. The last column of dividend statistics reports the number of times each company has
cut/increased its dividends since the end of Year 10. You can use this data as a guide in deciding
whether the number of dividend increases your company has declared measure up. A steadily
rising dividend is much preferred to a roller coaster dividend stream; thus, a decision to raise the
dividend should be made only if you think your company can afford to pay higher dividends over
the long term. Using the Financial and Operating Statistics The financial and operating ratios are
the most important pieces of information on this page of the FIR. You should make a habit of
scrutinizing these numbers carefully. The ratios relating to costs and profit as a percentage of net
revenues are of particular interest because they indicate which companies are most cost efficient
and have the best profit margins: • Lower percentages for cost of pairs sold are generally
preferable to higher percentages because they signal a bigger margin for covering all other costs
and earning a profit — the company with the lowest percentage may be the industry's low cost
producer or the company with one of the highest overall prices per pair sold. A company's cost
of pairs sold includes all production costs, any exchange rate adjustments, any tariff payments,
and freight charges on pairs shipped from plants to distribution warehouses. The lower the
percentage of cost of pairs sold to net revenues the bigger a company’s margin for covering other
expenses and earning a profit. Companies having the highest percentages for cost of pairs sold
are likely to be caught in a profit squeeze, with margins too small to cover warehouse,
marketing, and administrative costs and interest costs and still have a comfortable margin for
profit. The cost of pairs sold at such companies are usually too high relative to the price they are
charging (their strategic options for boosting profitability are to cut costs, raise prices, or try to
make up for thin margins by somehow selling additional pairs). • A low percentage of warehouse
expenses costs to net revenues is preferable to a higher percentage, indicating that a smaller
proportion of revenues is required to cover warehouse costs (which leaves more room for
covering other costs and earning bigger margins on each pair sold). • A low percentage of
marketing costs to net revenues relative to other companies signals good efficiency of marketing
expenditures (more bang for the buck), provided unit sales volumes are attractively high.
However, a low percentage of marketing costs, if coupled with low unit sales volumes, generally
signals that a company is spending too little on marketing. The optimal condition, therefore, is a
low marketing cost percentage coupled with high sales, high revenues, and above-average
market share (all sure signs that a company has a cost-effective marketing strategy and is getting
a nice return in the marketplace on the marketing dollars it is spending). • A low ratio of
administrative costs to net revenues signals that a company is spreading its fixed administrative
costs out over a bigger volume of sales. Companies with a high percentage of administrative
costs to net revenues generally need to pursue additional sales or market share or risk squeezing
profit margins and being at a cost disadvantage to bigger-volume rivals (although a higher
administrative cost ratio can sometimes be offset with lower costs/ratios elsewhere). • A higher
operating profit margin (defined as operating profits as a percentage of revenue) is a sign of
competitive strength and cost competitiveness. The bigger the percentage of operating profit to
net revenues, the bigger the margin for covering interest payments and taxes and moving
revenues to the bottom-line. • The bigger a company's net profit margin (its ratio of net profits to
net revenues), the better the company's profitability in the sense that a bigger percentage of the
dollars it collects from footwear sales flows to the bottomline. The net profit margin is
sometimes called “net return on sales” because it represents the percentage of revenues that end
up as after-tax profit or net profit. • The current ratio (defined as current assets divided by current
liabilities) measures the company's ability to pay its current liabilities as they become due. At the
least, the current ratio should be a bit greater than 1.0; a current ratio in the 1.5 to 2.5 range
provides a much healthier cushion for meeting current liabilities. • A large number of days of
inventory signals that a company “overproduced” and thus has pairs remaining unsold in the one
or more of their distribution centers over and above the minimum required inventory. The bigger
the number of days of inventory, the more likely that a company’s co-managers will consider
having inventory clearance sales at the beginning of the upcoming year to clear out excess
inventory. However, because inventory clearance sales usually result in a sizable loss on the
pairs sold at deeply discounted clearance prices, some companies with excessively large
inventories may forego the use of inventory clearance sales and, instead, opt for either of two
alternatives: 1. Curtailing production at one or more plants in the coming year in order to work
off excess inventory or 2. Increasing their marketing efforts so as to boost unit sales volumes
enough to both absorb current production and sell off some of the excess pairs in inventory.
Because the actions of companies with large “surplus” inventories can affect your company in
the upcoming year, it is always wise to monitor the days of inventory data and be on the lookout
for how many and which companies have an inventories problems that they need to deal with in
the upcoming year. Using the Credit Rating Data The statistics relating to credit ratings show
where each company stands on the three credit rating determinants, and which companies have
default risk ratio problems. These statistics are definitely worth perusing each year. Companies
with very strong numbers on the three credit rating measures almost certainly have ample
financial resources to fund aggressive strategic moves in the marketplace if they are so inclined.
Companies whose measures of creditworthiness are eroding are not only troubled financially but
also are good candidates for making fresh strategic moves aimed at improving their performance
both in the marketplace and on the bottom-line. Below are descriptions of each of the three
factors determining your company’s credit rating: 1. The debt-to-assets ratio (defined as all loans
outstanding divided by total assets—both numbers are shown on the company's balance sheet). A
debt-to-assets ratio of .20 to .35 is considered “good”. As a rule of thumb, it will take a debt-to-
assets ratio close to 0.10 to achieve an A+ credit rating and a debt-asset ratio of about 0.25 to
achieve an A- credit rating (unless the interest coverage ratios are in the 5 to 10 range and the
default risk ratio is above 3.00). Debt-to-asset ratios above 0.50 (or 50%) are generally alarming
to creditors and signal “too much” use of debt and creditor financing to operate the business,
although such a debt level could still produce a B+ or A- credit rating if a company can maintain
very strong interest coverage ratios (say 8.0 or higher) and default risk ratios above 3.00. 2. The
interest coverage ratio (defined as annual operating profit divided by annual interest payments).
Your company's interest coverage ratio is used by credit analysts to measure the “safety margin”
that creditors have in assuring that company profits from operations are sufficiently high to cover
annual interest payments. An interest coverage ratio of 2.0 is considered “rock-bottom
minimum” by credit analysts. A coverage ratio of 5.0 to 10.0 is considered much more
satisfactory for companies in the footwear industry because of earnings volatility over each year,
intense competitive pressures which can produce sudden downturns in a company's profitability,
and the relatively unproven management expertise at each company. It usually takes a double-
digit times-interest-earned ratio to secure an A - or higher credit rating, since this credit measure
is strongly weighted in the credit rating determination. 3. The default risk ratio (defined as free
cash flow divided by the combined annual principal payments on all outstanding loans; free cash
flow is defined as net profit plus depreciation minus dividend payments). This credit measure
also carries a high weighting in the credit rating determination. A company with a default risk
ratio below 1.0 is automatically assigned “high risk” status (because it is short of cash to meet its
principal payments) and cannot be given a credit rating higher than C+. Companies with a
default risk ratio between 1.0 and 3.0 are designated as “medium risk”, and companies with a
default ratio of 3.0 and higher are classified as “low risk” because their free cash flows are 3 or
more times the size of their annual principal payments. The interest coverage ratio and the
default risk ratio are the two most important measures in determining a company’s credit rating.
Thus, as long as a company is financially strong in its ability to service its debt — as measured
by the interest coverage ratio and the default risk ratio, then the company can maintain a higher
debt-to-assets ratio without greatly impairing its credit rating. However, weakness on just one of
the three measures, particularly the two most important ones, can be sufficient to knock a
company’s credit rating down a notch. Weakness on two or three can reduce the rating by several
notches.

Performance Benchmarks The Numbers on Page 6 of the Footwear Industry Report This page of
the Footwear Industry Report is especially important and should be reviewed each year without
fail — it tells you whether your company is competitive on a host of crucial cost components. On
this page you will find extremely valuable information about how your company’s materials
costs, labor costs, reject rates, manufacturing costs, overall costs of branded and private-label
pairs sold, and assorted operating expenses compare against the costs of rivals, region by region.
If your company is pursuing a low-cost provider strategy, the information here is invaluable in
determining whether you have indeed achieved lower costs than rivals or whether your strategy
needs work to further reduce costs before you can claim low-cost leadership. Note that on the
right side of the page, there are two columns of numbers for your company and that there are
numbers for each of the last two years — which allows you to spot improvements or
deterioration in your company’s cost competitiveness, item by item and region by region. Using
the Plant and Production Benchmarking Data It is strongly recommended that you go through
this section line by line, perhaps highlighting those cost components or regions where your
company appears to be in good shape on costs and definitely flagging those areas where costs are
out-of-line and management’s attention is needed. The purpose of your line-by-line assessment
should be to draw conclusions about how each one of your company’s plants stacks up on costs
against the industry low, the industry average, and the industry high—not only against plants in
the same region as yours but also in other regions (rival plants in regions different from yours
may well be shipping pairs to the same regions as your plants, thus pitting your plant’s costs
against the costs of plants in other regions). Given that there are numbers here for materials
costs, compensation, productivity, labor cost, TQM/Six Sigma, reject rates, and total
manufacturing costs, you have ample data from which to judge how the cost-efficiency at your
plants stacks up. A company driving hard to be the industry's low-cost leader should be at or
close to the “industry low” numbers in most all categories listed. Of course, there are two good
reasons why your total manufacturing costs might be higher/lower than for those of rivals even
though most other cost items appear to be in line — differences in S/Q ratings and differences in
the number of models/styles produced. • A company whose plants make footwear with a
higher/lower than average S/Q rating might well have higher/lower overall manufacturing costs.
• A company whose plants are producing a higher/lower than average number of models/styles
might well have higher/lower overall manufacturing costs. Hence there can be occasions when a
company has “legitimate” cost justifications for its manufacturing costs being higher/lower than
the industry average. Where such is the case, the company may not really have a competitive
advantage if its costs are lower and it may not really be at a significant cost disadvantage if its
costs are higher. If your company's number in a particular row matches the industry low, then
you are the low company in the industry on that measure. If your company’s number in a
particular row matches the industry high, then you are the high company in the industry on that
measure. Some points to emphasize in interpreting the benchmark data and deciding whether
your plants have a cost advantage or disadvantage: • If your company's costs for materials at one
or more plants were above average, this may reflect use of a higher percentage of superior
materials (usually because the S/Q ratings on your branded footwear are above the average for
rival companies—something you can determine from the Competitive Intelligence Reports).
However, aboveaverage materials costs for your company could also signal that your company is
at a materials cost disadvantage due to the fact that rival companies, on average, have made
greater use of best practices training and thus have gained the benefits of lower materials waste
and thus lower materials costs. • It is perfectly fine to have below-average material costs for
branded footwear if your company's strategy is to compete on the low-end S/Q end of the
branded market. Indeed, your costs should be lower. There is always the possibility that
higher/lower materials costs are caused partly by the level of spending for best practices training
— expenditures above $0.30 per pair for best practices training begin to help reduce materials
waste and thus net costs per pair for materials. • The data showing the industry-low, industry-
average, and industry-high values for total compensation should be referred to when you get to
the Compensation and Training section of the Branded Production screen in the upcoming year
and are trying to decide how much to alter your upcoming year's compensation package. How
competitive your company's compensation package is a major influence in determining worker
productivity. However, you should beware of raising compensation just to be more competitive
if the result is to raise labor costs per pair produced — low labor costs per pair are preferable to
high compensation and high productivity. It is not worth the costs to achieve higher productivity
when the result is higher, rather than lower, labor costs. • If your company's worker productivity
at a plant is subpar and if, at the same time, your company’s labor costs at that plant are above-
average, you have solid reason for taking action to improve productivity at that plant (which
should act to bring your labor costs per pair down more in line with companies having lower
labor costs). • If your company's reject rates at one or more plants are above the industry
averages, then you should consider actions at those plants to bring them down when you start
making the upcoming year's decisions. Using the Data on Operating Benchmarks Again, it is
strongly recommended that you go through this section line by line, perhaps highlighting those
cost categories or regions where your company appears to be in good shape on costs and
definitely flagging those areas where costs are out-of-line and management's attention is needed.
The purpose of your line-by-line assessment should be to draw conclusions about how your
company's costs in each of the four regional markets compare against the industry low, the
industry average, and the industry high. These comparisons establish whether your cost of
branded pairs sold, warehouse expenses, marketing expenses, and administrative costs per
branded pair are sufficiently in line with those of rivals; if your costs are “out-of-line”—
signaling a possible cost disadvantage vis-à-vis rivals, then you should consider corrective
actions in the upcoming decision period. Several comments about the operating benchmark data
are in order: • High costs for branded pairs sold usually reflect a manufacturing cost
disadvantage in one or more areas, an above-average S/Q rating, and/or above-average numbers
of models/styles. • High marketing expenses can mean (1) inefficient allocation of marketing
dollars (such that the company is not getting much return in the marketplace for the dollars it is
spending), (2) a deliberate strategy to win sales and market share by outspending rivals on
marketing efforts, or (3) a small volume of sales such that the monies spent for marketing were
spread over a smaller number of pairs sold. Any corrective actions on your company’s part
depend on the diagnosis for the high marketing costs per branded pair sold. • High administrative
costs per pair usually are an indication that your company did not have sufficient sales volume in
the report year to spread administrative costs out over more pairs, as compared to rivals. • Unless
your company has a bigger-than-average market share in a region, smaller-than-average
operating profit margins should be a signal to pursue cost-cutting and/or perhaps raise prices
somewhat to improve net profits, EPS, and ROE. • The regions with the biggest operating profit
margins should be candidates for greater strategic emphasis in the upcoming year and the regions
with smaller operating profit margins should be considered candidates for less strategic emphasis
in the upcoming year. As a general rule, your company should focus its sales and marketing
efforts on those regions/market segments where the operating profit margins are highest (or
where the margins over direct costs are biggest in the case of private-label footwear). • The
production cost benchmarks for private-label footwear are quite important in revealing whether
your company has a significant cost advantage (and thus is potentially a low-cost provider of
private-label footwear), a significant cost disadvantage (and thus is potentially a high cost
provider of private-label footwear and not well-equipped to compete profitably in this market
segment), or an average-cost provider of private-label footwear with no particular cost advantage
or disadvantage. • The sizes of the different margins over direct costs for private-label footwear
in each of the regions send a strong message about the attractiveness of competing in the private-
label segment and using production capacity to make private-label footwear for chain retailers.
“Big” numbers say this segment has appeal and merits strategic emphasis. Very small numbers
suggest going after such business should be a last resort strategy—only if more branded pairs
cannot be profitably produced and marketed at margins higher than those for private-label
footwear. • A company driving hard to be the industry’s low-cost leader should be at or close to
the “industry low” numbers in most all categories listed in the operating benchmarks section . If
such is not the case, the benchmarking data is sending a clear signal that the strategy needs work
in order to drive costs down further and achieve low-cost competitive advantage.

Celebrity Endorsements and Industry Trends The Numbers on Page 7 of the Footwear Industry
Report This page of the Footwear Industry Report presents the results of the competitive bidding
for celebrity endorsements and graphs showing industry trends for branded prices and S/Q
ratings in each of the 4 geographic regions. The information is largely self-explanatory. Several
comments are, however, in order: • You should pay special attention to the statistics on the
celebrity bids — how much the various companies bid for which celebrities. Such information
may provide clues as to how much it could take to win the bids for celebrities in the upcoming
year. • Be alert to the fact that the spending caps which rival companies may have established
and the priority rankings they put on their bids for particular celebrities can have an effect on
which companies won the bids for particular celebrities. For example, a company that ends up as
the high bidder of a celebrity with a priority 3 or 4 ranking may not be designated as the winning
bidder because such bids were withdrawn due to exceeding the spending cap. • All high and
second high bids are shown on the report even though they may have been withdrawn due to
spending cap constraints. This is so you can have a more accurate feel for the two highest bids
for each celebrity (even though they might have been withdrawn). TIP: Use the trends in branded
prices and the S/Q ratings as a basis for entering your predictions about what the industry
averages will be when you get to the Branded Sales Forecast screen in the upcoming year’s
decision.

CIR
Competitive Intelligence Report - Market Snapshot Explanations of Numbers — Suggestions
and Tips The information contained in the two sections of the Competitive Intelligence Report
for each geographic region is of the highest importance in helping you and your co-managers
make competitively astute decisions for the upcoming period. You will, almost certainly, spend
more time working with information on the Competitive Intelligence Reports than on the
screens/printouts of any other reports. The Two Sections of the Competitive Intelligence Report
There are two menu items that provide competitive intelligence: (1) a 1-page “Market Snapshot”
for each geographic region showing the competitive efforts of all companies for a particular year,
strategic group maps, and lists of your company’s competitive strengths and weaknesses and (2)
a Company Analysis breakout showing the competitive efforts for any company of interest for all
years to date and graphs of its footwear prices. • MARKET SNAPSHOT of Competitive Efforts
of All Companies for a Geographic Region (available for any year). The Market Snapshot data
shows the competitive efforts of each company in each of the four geographic markets for a
particular year — you can readily switch from region to region and year to year by using the
menus on the left of the screen and choosing what region and year you want to view. Normally,
you will want to see the data for the most recent year, but you can review the Market Snapshots
showing competitive efforts for prior years at any time it is useful. While you are primarily
interested in how your company’s competitive effort compares against the industry average (to
see whether you enjoy a competitive advantage or are at a disadvantage) on each factor that
determines unit sales and market share, you have the capability to see how every company stacks
up against the industry averages (the data in the far right column) by clicking on the Company
Letter in top right corner of the screen to change the company being compared from A to B to C
to D and so on. • COMPANY ANALYSIS: Decision Trends for Any Rival Company of Interest.
The second competitive intelligence menu item provides any company’s complete competitive
effort (prices, S/Q ratings, models, advertising, rebates, etc.) in any geographic market for all
years to date, including trend-line graphs of its wholesale prices and S/Q ratings. You'll find this
screen/report very handy in anticipating or “ guestimating” the moves your most important or
closest competitors are likely to make in the upcoming year. Becoming a shrewd “power-user”
of the Market Snapshot and Company Analysis information can help you and your comanagers
out-manage and out-compete rival companies (especially those companies whose co-managers
gloss over this information). It is well worth spending a few minutes to explore the powerful
capabilities that have been programmed into the Market Snapshot (for each geographic region)
and the Company Analysis page for any company of interest (and most especially for close
competitors). The MARKET SNAPSHOT for a Geographic Region The Internet Segment. This
section shows all of the market variables that impact internet demand and market share: retail
price, S/Q rating, number of models offered, whether or not free shipping is offered, advertising
budget, and celebrity appeal -- customer loyalty is also one of the factors impacting internet
segment demand and market share, but since customer loyalty is not measurable or reportable in
numeric terms there is no listing for it on the Market Snapshot page. The resulting online orders,
pairs sold, and market share percentages are then listed at the bottom of this section. For
accounting purposes, internet orders are filled from the warehouse first (before any wholesale
orders), so the online orders and pairs sold lines will always show identical numbers unless a
company does not have sufficient finished goods inventory to supply internet orders (which also
means that the company would not be able to supply any wholesale orders). The Wholesale
Segment. This section shows all of the market variables that impact wholesale demand and
market share: wholesale price, S/Q rating, model availability, advertising budget, rebate offer,
retail outlets utilized, retailer support expenditures, delivery time, and celebrity appeal --
customer loyalty is also one of the factors impacting wholesale segment demand and market
share, but since customer loyalty is not measurable or reportable in numeric terms there is no
listing for it on the Market Snapshot page. The resulting retailer demand generated by each
company’s marketing efforts is then shown on the next line. Each company’s relative marketing
effort generates a retailer demand (number of pairs) for their brand, but the number of pairs each
company actually sells can be higher or lower than initial retailer demand because of Sales Gains
/ Losses (due to out-of-stock conditions). A company experiences lost sales when it does not
have sufficient finished goods inventory in the regional warehouse to satisfy total retailer
demand in the region. When a company runs out of stock, pairs sold in the region will be lower
than the retail demand generated by its marketing effort. Lost sales (due to inventory shortfall)
will show on the Sales Gains/Losses line as a negative number. If one or more companies
experience lost sales due to inventory shortfall, then it is possible for one or more companies to
gain additional sales (if there is inventory available in the regional warehouse after fulfilling
initial retailer demand). Sales gains (due to out-of-stock conditions experienced by other
companies) will show on the Sales Gains/Losses line as a positive number, but can occur only if
one or more companies runs out of stock. Strategic Group Maps. In addition, this report contains
strategic group maps indicating how each company has positioned itself in the two branded
market segments (internet and wholesale). Competitive Strengths / Weaknesses. There is a list of
your company’s competitive strengths and weaknesses shown at the bottom of the report page.
You may also generate a list of competitive strengths and weaknesses for any rival company
(particularly those companies you consider to be your closest competitors) by clicking on the
company letter button at the top of the page. Using the MARKET SNAPSHOT for a Geographic
Region Step 1: Make sure that your company is the one whose competitive effort is compared
against the industry averages in the last column on the right (if your company letter is not
showing in the column head for the last column head on the top right of the boxed data, then
click on the designated area in the upper right corner until your company letter appears). Later,
you can change the company being compared and check the competitive effort of any rival
company of interest versus the industry averages. Step 2: Make printouts of this page — and then
print out a page for the other 3 geographic regions, using the menu on the left to switch from
region to region. Just viewing the information on the screen is generally not convenient, since
having a printout in front of you to refer to you make decisions regarding your company’s
competitive effort for the upcoming year will prove far more convenient. • Observe that you
have data showing your company’s competitiveness in all three market segments — the Internet
segment, the Wholesale segment, and the Private-Label segment. Step 3: It is strongly
recommended that you go down the list of competitive factors in each segment (Internet,
Wholesale, and Private-Label) item-by-item to see exactly where your competitive pluses and
minus were and whether each plus/minus was tiny, sizable, or substantial. Start with the Internet
segment and examine the size of the specific competitive advantage/disadvantage your company
had in the past year regarding price, S/Q rating, models offered, free shipping, advertising, and
celebrity appeal index. • Keep in mind here that being above/below the industry average by 20%
carries a much bigger impact than being above/below the average by 5% or less. For example, if
your company’s wholesale price in a region was $55 versus an industry average of $50, then
your company's competitive disadvantage on price is greater than if you had a price of $52
versus an industry average of $50. Or, if your company spent $5 million on advertising (shown
on the report as 5,000) and the industry average was $4 million (or 4,000), then your company’s
competitive advantage on advertising would be significantly greater than if your company spent
$5 million and the industry average was $4.9 million. The sizes of each competitive
advantage/disadvantage on each determinant of sales and market share therefore matter. • The
combined impact of how your company’s competitive effort compares against all the industry
averages determines online orders and pairs sold. • Market share is calculated on the basis of
pairs sold. • If your company has the biggest market share, then your company had the strongest
overall competitive effort visà-vis rivals. • If your company had the lowest market share, then
your company’s overall competitive effort was the weakest among all companies competing in
that geographic region during the year. • Companies with close to an average market share have
close to an average overall competitive effort, all factors considered. • If your company’s market
share was not the highest, see if you can pinpoint which factors were most responsible for why
pairs sold and market share were not higher in the Internet segment in this region. Which specific
competitive factors appear to have been most responsible in your being out-competed by rival
companies with larger market shares? Careful analysis of the various companies regarding what
size competitive advantages/disadvantages result in what size market shares will provide solid
clues as to which competitive factors count most and which count least in the Internet segment. •
Examine the two “strategic group maps” showing how your company is positioned vis-à-vis
rivals based on price and S/Q rating (the vertical axis) and the product line breadth (the
horizontal axis) in the Internet segment. The sizes of the circles are drawn proportional to each
company’s market share in the geographic region. Your company’s position on the strategic
group maps may vary from region to region, as well as being different in the Internet and
Wholesale segments (depending on your company’s strategy and the strategies of rivals). o
Those company circles that are closest together signify “strong” or “close” competitors; those
farthest apart are “weak” competitors. o Companies that are more isolated, in the sense of not
having many other company circles close to their positions, face somewhat weaker head-to-head
competition; companies whose circles are adjacent to the circles of many other rivals face
tougher competition and may find it more profitable to shift to a more isolated, less competitive
part of the market-space. • Look at the bottom of the screen/page and take note of your
company’s competitive strengths and weaknesses in the Internet segment. Your company’s list
of competitive strengths in the Internet segment show up to 7 competitive factors where your
company’s advantage versus the industry average was meaningful. Your company’s list of
competitive weaknesses show up to 7 competitive factors where your company’s effort in the
Internet segment was meaningfully weaker than the industry-average effort. • Draw conclusions
about what changes in strategy and competitive effort you may need to make to improve your
company’s competitiveness vis-à-vis rivals in the Internet segment in order to improve unit sales,
market share, and profitability. • Generally, it makes good sense to begin any effort to improve
your company’s Internet sales and market share in a region by upping your competitive effort
and narrowing the gap on those competitive effort measures where you are farthest below the
industry average. But market share gains can be made by upping your effort on any and all
competitive measures (assuming that rivals do not out-strategize you by upping their competitive
efforts by equal or larger amounts so as to preserve or enhance their own sales volumes and
market shares). Keep in mind here that BSG Online is a competition-based exercise, where your
company’s Internet sales and market share in each geographic region depend entirely on how
your company's overall competitive effort in the region (as measured by the combined impact of
all the competitive factors) stacks up against the combined competitive efforts of rivals. • Also,
be alert to the fact that increasing profitability is more important than increasing market share.
Some market share gains can be costly and actually reduce profitability. There is seldom any
glory in capturing unprofitable market share. • Repeat the analysis for the other three regions.
Step 4: Next turn your attention to the sizes of the competitive advantages/disadvantages your
company had last year in the Wholesale segment regarding price, S/Q rating, model availability,
advertising, rebate offers, retail outlets utilized, retailer support, delivery time, and celebrity
appeal index. • Again, bear in mind that being above/below the industry average by a small
percent does not carry the same impact as being above/below the average by a large percent —
the sizes of each competitive advantage/disadvantage matter. • The combined impact of how
your company’s competitive effort compares against all the industry averages determines retailer
demand. • If your company did not have sufficient pairs available to satisfy retailer demand and
still meet the minimum inventory requirements, then there will be a negative number indicating
the amount of Lost Sales. • The amount of sales lost by all the various companies then end up as
Sales Gains for other companies because retailers shift their orders to other brands. • Retailer
demand less adjustments for Lost Sales and Sales Gains result in pairs sold. • Market share is
calculated on the basis of pairs sold. • If your company has the biggest retailer demand, then your
company had the strongest overall competitive effort vis-à-vis rivals. • If your company had the
lowest retailer demand, then your company’s overall competitive effort was the weakest among
all companies competing in that geographic region during the year. • Companies with close to an
average retailer demand have close to an average overall competitive effort, all factors
considered • In assessing each company’s market share, remember that allowances must always
be made for any Sales Gains or Lost Sales, especially if the amounts are large, because the
market shares for such companies would have been lower/higher in the absence of these sales
gains/losses. • If your company’s Retailer Demand/market share was not the highest, see if you
can pinpoint which factors were most responsible for why retailer demand was not higher in the
Wholesale segment in this region. Which specific competitive factors appear to have been most
responsible in your being out-competed by rival companies with larger market shares? Careful
analysis of the various companies regarding what size competitive advantages/disadvantages
result in what size market shares will provide solid clues as to which competitive factors count
most and which count least in the Internet segment. • Examine the “strategic group map”
showing how your company is positioned vis-à-vis rivals based on price and S/Q rating (the
vertical axis) and the product line breadth (the horizontal axis) in the Wholesale segment. The
sizes of the circles are drawn proportional to each company’s market share in the geographic
region. Your company’s position on the strategic group maps is likely to vary from region to
region. o Those company circles that are closest together signify “strong” or “close” competitors;
those farthest apart are “weak” competitors. o Companies that are more isolated, in the sense of
not having many other company circles close to their positions, face somewhat weaker head-to-
head competition; companies whose circles are adjacent to the circles of many other rivals face
tougher competition and may find it more profitable to shift to a more isolated, less competitive
part of the market-space. • Look at the bottom of the screen/page and take note of your
company’s competitive strengths and weaknesses in the Wholesale segment. Your company’s
lists of competitive strengths/weaknesses in the Wholesale segment show up to 7 competitive
factors where your company’s advantage/disadvantage versus the industry average was
meaningful. • Draw conclusions about what changes in competitive effort you may need to make
to improve your company’s competitiveness vis-à-vis rivals in the Wholesale segment in order to
improve unit sales, market share, and profitability. • Generally, it makes good sense to begin any
effort to improve your company’s Wholesale sales and market share in a region by upping your
competitive effort and narrowing the gap on those competitive effort measures where you are
farthest below the industry average. But market share gains can be made by upping your effort
on any and all competitive measures (assuming that rivals do not out-strategize you by upping
their competitive efforts by equal or larger amounts so as to preserve or enhance their own sales
volumes and market shares). • Remember that going after bigger sales and market share is not
nearly as important as increasing profitability. Some market share gains can be costly and
actually reduce profitability. • Repeat the analysis for the other three regions. Step 5: Now turn
your attention to the competitiveness of your company’s price bids in this region’s Private-Label
segment. You can readily see what price each company bid, how many pairs each rival offered
for sale (a clear indication of what sales volume they were going after), and how many pairs they
sold. Companies that offered pairs for sale but sold nothing lost out in the competitive bidding to
lower-priced bidders. A company that sold only part of the pairs offered was the last company to
have their bid accepted, but the remaining demand at that point was insufficient to allow the
company to sell all it offered. • The price bids by rivals in this region, along with their price bids
in the other regions, provide good clues as to what bid it may take in the upcoming year to be a
winning bidder. • Another clue is the Global Supply/Demand information on page 4 of the
Footwear Industry Report. Generally speaking, the more oversupplied the market in the
upcoming year, the fiercer the competitive bidding will be to win private-label sales. • If one or
two companies seem to be trying to dominate the private-label market in one or more regions, go
to the Company Analysis section of the Competitive Intelligence reports to view the price bids of
each company over all years to date—this may provide better clues as to their bids in the
upcoming year. You might also find looking at the price bids of some other companies to be
helpful. • Again, you will need to repeat this analysis for all the regions. Step 6 (optional):
Consider studying the competitive efforts of close competitors more intensely (close competitors
are those companies closest to your circles on the strategic group maps). Specifically, click on
the company letter link in the top right part of the screen that allows you to change the company
being measured against the industry average. Check out the sizes of a close competitor’s
competitive advantages/disadvantages against the industry averages and view its competitive
strengths and weaknesses on the bottom part of the screen/page. Do the same for other
geographic regions. This assessment of close competitors may help you decide what actions your
company needs to take in the upcoming year.
Competitive Intelligence Report - Company Analysis Explanations of Numbers — Suggestions
and Tips The Two Sections of the Competitive Intelligence Report There are two menu items
that provide competitive intelligence: (1) a 1-page “Market Snapshot” for each geographic region
showing the competitive efforts of all companies for a particular year, strategic group maps, and
lists of your company’s (and any other company’s) competitive strengths and weaknesses and (2)
a Company Analysis breakout showing the competitive efforts for any company of interest for all
years to date and graphs of its footwear prices. • MARKET SNAPSHOT of Competitive Efforts
of All Companies for a Geographic Region (available for any year). The Market Snapshot
reports show the competitive efforts of each company in each of the four geographic markets for
a particular year — you can readily switch from region to region and year to year by using the
menus on the left of the screen and choosing what region and year you want to view. Normally,
you will want to see the data for the most recent year, but you can review the Market Snapshots
showing competitive efforts for prior years at any time it is useful. While you may be primarily
interested in how your company’s competitive effort compares against the industry average, you
have the capability to see how every company stacks up against the industry averages (the data in
the far right column) by clicking on the Company Letter in top right corner of the screen to
change the company being compared from A to B to C to D and so on. Using this feature you
can readily review the lists of competitive strengths and weaknesses for any company of
interest—particularly those companies you consider to be your closest competitors. •
COMPANY ANALYSIS: Decision Trends for Any Rival Company of Interest. The second
competitive intelligence menu item provides any company’s complete competitive effort (prices,
S/Q ratings, models, advertising, rebates, etc.) in any geographic market for all years to date,
including trend-line graphs of its wholesale prices and S/Q ratings. You’ll find this screen/report
very handy in anticipating or “ guestimating” the moves your most important or closest
competitors are likely to make in the upcoming year. Becoming a shrewd “power-user” of the
Market Snapshot and Company Analysis information can help you and your comanagers out-
manage and out-compete rival companies (especially those companies whose co-managers gloss
over this information). Using the Company Analysis Feature Just as in sports where it is
customary for every team to scout its next opponent thoroughly and develop a game plan to
defeat them, so also in The Business Strategy Game you need a scouting report on the strategies
of rivals and what moves they may take to win sales and market share away from you—the
company analysis screen provides you with a scouting report. • Select the company you wish to
study by using the menu on the left side of the screen and then clicking on the company and
geographic region you are interested in. Print a copy of the screen/report if you so wish (for
handy reference as you are making decisions). • If there are several companies you want to scout,
you may want to divide up the task by having different comanagers utilize different PCs to
perform the task of analyzing the actions of several companies in one particular region or else the
actions of one or two companies across all regions, with each co-manager responsible for
drawing conclusions about what moves the rivals in question are likely to make. Step 1: Use the
data in the Internet and Wholesale segments to spot trends/patterns in the decisions of the rival in
question and to identify the rival’s strategy. • See if the rival’s decisions over time reveal a
direction in which the company seems to be headed in this region. • What do the graphs reveal
about the company’s pricing strategy? Its S/Q strategy? • Is there a clear strategy—such as a
low-cost producer strategy or a high-end differentiation strategy (keyed to topof-the-line S/Q
ratings and wide product selection)? Does it appear to be concentrating/focusing on one or two
of the three segments—Internet, wholesale or private label? Or, is the company’s strategy
muddled and/or undergoing frequent revision as the company’s managers search, perhaps
desperately, to discover a strategy worth sticking with? • Is there any basis for anticipating what
it might do next? What moves should be expected? You may also get additional clues about what
a rival is likely to do next by reviewing its performance in the past year to see what special
problems it has or what sort of pressure it faces in trying to improve its performance in the
upcoming year. For instance, if a company raised its prices in the prior year and suffered by
losing unit sales and market share and having its EPS and ROE drop, then it is likely to reverse
course and drop price in the upcoming year. Alternatively, a company that gained market share
but suffered a decline in profitability and ROE may decide to forego some sales in return for
higher profit margins and better overall performance. The point here is that a company’s
performance in the prior year may hold clues for what moves it may make in the upcoming year.
Step 2: Repeat the analysis for the other three regions. Is the company pursuing essentially the
same strategy in all four geographic regions or distinctly different strategies? Step 3: Decide if
this company has an overall strategy (which makes it easier to anticipate its next moves) or
whether its managers are still experimenting and searching for one (which makes it harder to
anticipate the company’s next moves). Step 4: Decide what moves, if any, this company can be
expected to make next and decide what, if anything, your company should do to outmaneuver the
rival and defeat its strategy/decisions. For example, if there’s good reason to believe a key rival
will be lowering price or increasing their S/Q rating or spending more on advertising or
increasing their model offering, then you should take this into consideration in deciding how
much to alter your company’s prices or S/Q rating or advertising or models/styles. Step 5: As
part of your scouting of close competitors, you can go back to the Market Snapshot section, pick
a region, and click on the link in the top right corner of the screen where you can change the
company being measured against the industry averages and bring up the page that shows the
close competitor you have been analyzing here. Check out the sizes of the close competitor’s
competitive advantages/disadvantages against the industry averages and view its competitive
strengths and weaknesses on the bottom part of the screen/page. Go to other regions for this
competitor, as well. Now you have a full picture of this company’s actions and situation. Did
anything you see here change your opinion about what you concluded in Step 4? By looking at
the competitive efforts of key rivals for the past several years, you may spot trends in their
decisions that are likely to carry over to upcoming periods. Herein lies the value of the company
analysis menu item and the capabilities it gives you to look at the recent competitive efforts of
any company in any geographic region. The Business Strategy Game is an exercise that centers
on a clash of strategies in a competitive marketplace. For your company’s strategy to win out,
you and your co-managers will need to watch rivals' actions closely, try to anticipate their next
moves, and then craft a competitive strategy of your own aimed at “defeating” their strategies
and boosting your company’s branded footwear sales, market share, and profitability.

Ratios
I. Financial Ratios Used in BSG
Earnings Per Share (EPS) is defined as net income divided by the number of shares of
stock issued to stockholders. Higher EPS values indicate the company is earning more
net income per share of stock outstanding. Because EPS is one of the five performance
measures on which your company is graded (see p. 2 of the FIR) and because your
company has a higher EPS target each year, you should monitor EPS regularly and
take actions to boost EPS. One way to boost EPS is to pursue actions that will raise net
income (the numerator in the formula for calculating EPS). A second means of boosting
EPS is to repurchase shares of stock, which has the effect of reducing the number of
shares in the possession of shareholders—net income divided by a smaller number of
shares yields a bigger EPS.
Return On Equity (ROE) is defined as net income divided by the average amount of
shareholders' equity investment—the average amount of shareholders' equity
investment is equal to the sum of shareholder equity at the beginning of the year and
the end of the year divided by 2. Total shareholder equity at the end of the year turns
out to be larger than total shareholder equity at the beginning of the year whenever the
company's dividend payments are less than its net profits (such that some earnings are
retained in the business—all retained earnings add to the amount of shareholders'
equity). Higher ROE values indicate the company is earning more after-tax profit per
dollar of equity capital provided by shareholders. Because ROE is one of the five
performance measures on which your company is graded (see p. 2 of the FIR), and
because your company's annual target ROE is 15%, you should monitor ROE regularly
and take actions to boost ROE. One way to boost ROE is to pursue actions that will
raise net income (the numerator in the formula for calculating ROE). A second means of
boosting ROE is to repurchase shares of stock, which has the effect of reducing
shareholders' equity investment in the company (the denominator in the ROE
calculation), thus producing a higher ROE percentage.
Operating Profit Margin is defined as operating profit divided by net revenues (where net
revenues represent the dollars received from footwear sales, after exchange rate
adjustments). A higher operating profit margin (shown on p. 5 of the FIR) is a sign of
competitive strength and cost competitiveness. The bigger the percentage of operating
profit to net revenues, the bigger the margin for covering interest payments and taxes
and moving dollars to the bottom-line.
Net Profit Margin is defined as net profit (or net income or after-tax income, all of which
mean the same thing) divided by net revenues, where net revenues represent the
dollars received from footwear sales after exchange rate adjustments. The bigger a
company's net profit margin (its ratio of net profit to net revenues), the better the
company's profitability in the sense that a bigger percentage of the dollars it collects
from footwear sales flow to the bottom-line. A company's net profit margin represents
the percentage of revenues that end up on the bottom line.
Operating Ratios (as reported on the Comparative Financial Performances page of the Footwear
Industry Report)
The ratios relating to costs and profit as a percentage of net revenues that are at the
bottom of page 5 of the FIR are of particular interest because they indicate which
companies are most cost efficient and have the best profit margins:
Cost of pairs sold as a percent of net revenues. This ratio is calculated by dividing total
costs of goods sold by net sales revenues. A company's cost of pairs sold includes all
production-related costs, any exchange rate adjustments on pairs shipped to distribution
warehouses, any tariff payments, and freight charges on pairs shipped from plants to
distribution warehouses. Net sales revenues represent the dollars received from both
branded and private-label footwear sales after exchange rate adjustments. Low
percentages for the cost of pairs sold are generally preferable to higher percentages
because they signal that a bigger percentage of the revenue received from footwear
sales is available to cover delivery, marketing, administrative, and interest costs, with
any remainder representing pre-tax profit. Companies having the highest ratios of
production costs to net revenues are candidates for being caught in a profit squeeze,
with margins over and above production-related costs that are too small to cover
delivery, marketing, and administrative costs and interest costs and still have a
comfortable margin for profit. Production costs at such companies are usually too high
relative to the price they are charging (their strategic options for boosting profitability are
to cut costs, raise prices, or try to make up for thin margins by somehow selling
additional units).
Warehouse expenses as a percent of net revenues. This ratio is calculated by dividing total
warehouse expenses by net sales revenues. Net sales revenues represent the dollars
received from both branded and private-label footwear sales after exchange rate
adjustments. A low percentage of warehouse expenses to net revenues is preferable to
a higher percentage, indicating that a smaller proportion of revenues is required to
cover the costs of warehouse operations (which leaves more room for covering other
costs and earning a bigger profit on each unit sold).
Marketing expenses as a percent of net revenues. This ratio is calculated by dividing total
marketing costs by net sales revenues. Net sales revenues represent the dollars
received from both branded and private-label footwear sales after exchange rate
adjustments. A low percentage of marketing expenses to net revenues relative to other
companies signals good efficiency of marketing expenditures (more revenue bang for
the buck), provided unit sales volumes are attractively high . However, a low percentage
of marketing costs, if coupled with low unit sales volumes, generally signals that a
company is spending too little on marketing. The optimal condition, therefore, is a low
marketing cost percentage coupled with high sales, high revenues, and above-average
market share (all sure signs that a company has a cost-effective marketing strategy and
is getting a nice bang for the marketing dollars it is spending).
Administrative expenses as a percent of net revenues. This ratio is calculated by dividing
administrative costs by net sales revenues. Net sales revenues represent the dollars
received from both branded and private-label footwear sales after exchange rate
adjustments. A low ratio of administrative costs to net sales revenues signals that a
company is spreading administrative costs out over a bigger volume of sales.
Companies with a high percentage of administrative costs to net revenues generally
need to pursue additional sales or market share or risk squeezing profit margins and
being at a cost disadvantage to bigger-volume rivals (although a higher administrative
cost ratio can sometimes be offset with lower costs/ratios elsewhere).
Credit Rating Ratios (as reported on the Comparative Financial Performances page of the Footwear
Industry Report)

Three financial measures are used to determine your company's credit rating:
The debt-to-assets ratio is defined as all loans outstanding divided by total assets—both
numbers are shown on the company's balance sheet. All loans outstanding include (a)
1-year loans outstanding, (b) long-term bank loans outstanding, (c) the current portion
of long-term loans that are due and payable, and (d) any overdraft loans that are due
and payable—all these amounts are reported on the company's balance sheet, as is the
amount of total assets (total assets is also reported on page 5 of the FIR). A debt-to-
assets ratio of .20 to .35 is considered “good”. As a rule of thumb, it will take a debt-to-
assets ratio close to 0.10 to achieve an A+ credit rating and a debt-asset ratio of about
0.25 to achieve an A– credit rating (unless the interest coverage ratios are in the 5 to 10
range and the default risk ratio is above 3.00). Debt-to-asset ratios above 0.50 (or 50%)
are generally alarming to creditors and signal “too much” use of debt and creditor
financing to operate the business, although such a debt level could still produce a B+ or
A– credit rating if a company can maintain with very strong interest coverage ratios (say
8.0 or higher) and default risk ratios above 3.00.
The interest coverage ratio is defined as annual operating profit divided by annual interest
payments. Operating profit is reported on the Income Statement and on p. 5 of the FIR;
interest payments are reported on the Income Statement. Your company's interest
coverage ratio is used by credit analysts to measure the “safety margin” that creditors
have in assuring that company profits from operations are sufficiently high to cover
annual interest payments. An interest coverage ratio of 2.0 is considered “rock-bottom
minimum” by credit analysts. A coverage ratio of 5.0 to 10.0 is considered much more
satisfactory for companies in the footwear industry because of earnings volatility over
each year, intense competitive pressures which can produce sudden downturns in a
company's profitability, and the relatively unproven management expertise at each
company. It usually takes a double-digit times-interest-earned ratio to secure an A– or
higher credit rating, since this credit measure is strongly weighted in the credit rating
determination.
The default risk ratio is defined as free cash flow divided by the combined annual
principal payments on all outstanding loans. Free cash flow is equal to net profit plus
depreciation minus dividend payments. This credit measure also carries a high
weighting in the credit rating determination. A company with a default risk ratio below
1.0 is automatically assigned “high risk” status (because it is short of cash to meet its
principal payments) and cannot be given a credit rating higher than C+. Companies with
a default risk ratio between 1.0 and 3.0 are designated as “medium risk”, and
companies with a default ratio of 3.0 and higher are classified as “low risk” because
their free cash flows are 3 or more times the size of their annual principal payments).
A company is considered more creditworthy when its line of credit usage is small (say
5% to 15% of the total credit available) because it has less debt outstanding and greater
access to additional credit should the need arise. A company's creditworthiness is called
into serious question when it has used 80% or more of its credit line, especially if it also
has a long debt payback period, a relatively high debt-equity ratio, and/or a relatively
low times-interest earned ratio. Generally speaking, credit analysts like to see
companies using only a relatively small portion of their credit lines over the course of a
year (there's no problem of borrowing more heavily to finance the typically double
production levels of the third quarter so long as most of these borrowings are repaid in
the fourth quarter when the cash from high third-quarter sales is received). What
troubles credit analysts most is a company that calls upon 50% or more of its credit line
quarter-after-quarter, year-after-year and seems constantly on the verge of struggling to
pay its debt outstanding. Companies that utilize only a small percentage of their credit
lines are viewed as good credit risks, able to pay off their debt in a timely manner
without financially straining their business.
The interest coverage ratio and the default risk ratio are the two most important
measures in determining a company's credit rating. Thus, as long as a company
is financially strong in its ability to service its debt—as measured by the interest
coverage ratio and the default risk ratio, then the company can maintain a higher
debt-to-assets ratio without greatly impairing its credit rating. However, weakness
on just one of the three measures, particularly the two most important ones, can be
sufficient to knock a company's credit rating down a notch. Weakness on two or three
can reduce the rating by several notches.
Other Financial Ratio Measures (as reported on the Comparative Financial Performances page of the
Footwear Industry Report)
The current ratio equals current assets divided by current liabilities. It measures the
company's ability to generate sufficient cash to pay its current liabilities as they become
due. At the least, your company's current ratio should be greater than 1.0; a current
ratio in the 1.5 to 2.5 range provides a much healthier cushion for meeting current
liabilities. Ratios in the 5.0 to 10.0 range are far better yet. A bolded number in the
current ratio column designates the company with the best/highest current ratio;
companies with shaded current ratios need to work on improving their liquidity if the
number is below 1.5
Days of inventory equals the number of branded pairs in inventory divided by the number
of branded pairs sold times the number of days in the year. In formula terms, this
equates to: [number of branded pairs in inventory ÷ number of branded pairs sold] x
365. Fewer days of inventory are usually better up to a point (but keeping too few pairs
in inventory impairs the delivery times to footwear retailers and runs the risk of not
having enough pairs in inventory to fill retailer orders should sales prove to be higher
than expected).
The dividend yield is defined as the dividend per share divided by the company's current
stock price. It shows what return (in the form of a dividend) a shareholder will receive on
their investment in the company if they purchase shares at the current stock price. A
dividend yield below 2% is considered “low” unless a company is rewarding
shareholders with nice gains in the company's stock price price. A dividend yield greater
than 5% is “considered “high” by real world standards and is attractive to investors
looking for a stock that will generate sizable dividend income. In GLO-BUS, you should
consider the merits of keeping your company's dividend payments high enough to
produce an attractive yield compared to other companies. A rising dividend has a
positive impact on your company's stock price (especially if the dividend is increased
regularly, rather than sporadically), but the increases need to be at least $0.05 per
share to have much impact on the stock price. However, as explained below, you do not
want to boost your dividend so high (just for the sake of maintaining a record of
dependable dividend increases) that your dividend payout ratio becomes excessive.
Dividend increases should be justified by increases in earnings per share and by the
company's ability to afford paying a higher dividend.
The dividend payout ratio is defined as total dividend payments divided by net profits (or
the dividend per share divided by earnings per share—both calculations yield the same
result). The dividend payout ratio thus represents the percentage of earnings after taxes
paid out to shareholders in the form of dividends. Generally speaking, a company's
dividend payout ratio should be less than 75% of net profits (or EPS), unless the
company has paid off most of its loans outstanding and has a comfortable amount of
cash on hand to fund growth and contingencies. If your company's dividend payout
exceeds 100% for more than a year or two, then you should consider a dividend cut
until earnings improve. Dividends in excess of earnings are unsustainable and thus are
viewed with considerable skepticism by investors—as a consequence, dividend payouts
in excess of 100% have a negative impact on the company's stock price.