The key performance indicator in the MikesBikes Introduction and MikesBikes Advanced simulations is Shareholder Value.
What is Shareholder Value?
Shareholder Value (SHV) is the value to an investor of owning a single share in your company.
SHV = Share Price (the value of one share in your company) + Dividends (all past dividends paid including interest).
The success of your company will be measured by the amount of SHV you can create in comparison to your competitors. So, the primary goal in MikesBikes is to should be to increase and maximize SHV.
How do I increase Shareholder Value?
To increase your Shareholder Value you must:
- Maximize Profitability;
- Minimize Shareholder Investment;
- Minimize Debt; and
- Pay Dividends.
Profitability
Increasing your company’s profit requires a combination of increasing sales revenue while decreasing your costs.
Strategies to increase sales revenue:
- Optimize your Retail Price: Is your Retail Price balanced between maximizing profit while remaining competitive?
- Increase productivity of your factory.
- Launch a New Product.
- Find new customers through a better targeted marketing strategy: Profit is maximized through the efficient use of resources to deliver desirable products.
Strategies to decrease costs:
- Decrease inventory.
- Reduce the Prime Cost of your Product(s).
- Decrease wastage in production.
- Focus on your more profitable products.
Earnings Per Share (EPS)
Earnings Per Share (EPS) is calculated using your Net Earnings (Profit) divided by total Outstanding Shares.
Example 1: Firm A has 2 million shares issued and made $1 million profit, EPS = $0.50
Example 2: Firm B has 20 million shares issued and made $10 million profit, EPS = $0.50
Example 3: Firm C has 2 million shares issued and made $2 million profit, EPS = $1.00
Debt to Equity (D/E) Ratio
A higher D/E ratio means higher risk which results in a lower share price and SHV.
Dividends
A dividend is a payment by a company to its shareholders, once they are sufficiently profitable, to allow shareholders to make a return on their investment. So dividends increase the value in owning your shares, therefore, dividends have a positive impact on your Shareholder Value.
Note: MikesBikes restricts the maximum size of the dividend payment that you are allowed to make based on your average earnings per share to stop you accidentally bankrupting your company.
Strategy
To do well in MikesBikes you must develop a long-term strategy. In the 1980’s, Michael Porter did considerable work in defining three types of strategies that “fit” a business unit into its environment. These are called differentiated, cost and focus strategies. These are especially pertinent in the MikesBikes scenario. For further information see Michael Porter’s Ideas on Strategy.
Related: How do I win MikesBikes?