ABSTRACT QUANTITATIVE METHODS OF MEASURING MERCHANDISING PERFORMANCE IN SELECTED DEPARTMENT STORES by Douglas J. Dalrymple Retailers have at their disposal a wide variety of quantitative control factors that can be used to direct merchandising operations. In recent years the traditional control factors such as profits as a percent of sales, gross margin, and markon have been augmented by newer measures such as contribution profits, contribution profits per dollar of inventory, and return on investment. The primary purpose of this study was to investigate the use of these quantitative control factors with the objective of finding ways to improve mer- chandising efficiency. The large number of measures that are available to retailers and the wide differences among the factors suggest several problems for investigation. Important questions include: What are the con- trol factors that are currently being used to direct merchandising operations ? Are these control factors common to all firms and do executives at different managerial levels use the same performance measures ? To what extent have the more recently deve10ped con- trol factors been integrated into retail operations and how does the emphasis on performance measurement change over time?‘ What influence dothe merchandising and salary systems have on the activities of individual merchandising executives ? This research study sought to resolve these issues. Douglas J. Dalrymple The research procedure began with a review of the literature which provided the author with an appreciation for retail control systems and led to the development of a set of working hypotheses. Empirical data to test the hypotheses was collected during per- sonal interviews with department store executives. Department stores were used because of their well deve10ped merchandising control systems and the availability of previously published research. The individual firms included in the study were drawn from the three major California metropolitan areas of San Francisco, Los Angeles, and San Diego. A total of 11 firms agreed to cooperate in the study and interviews were subsequently conducted with 111 mer- chandising executives. The firms in the study ranged in size from about $5 million to over $100 million in annual sales. The data collected in the study provided support for the following conclusions: (1) The eleven firms exhibited a high degree of conformity in the use of merchandising control factors. (2) Exe- cutives at three different managerial levels allused the same performance measures. (3) The size of the firm and the type of merchandise handled had little influence on what control factors were employed. (4) Executive behavior was directly influenced by the salary system and by the’emphasis placed on particular merchandising control factors. (5) Markon appeared as one of the most frequently used factors in making merchandising decisions. (6) Stock turnover, contribution profits, and return on investment were rarely considered. (7) Traditional merchandising control factors dominated the thinking of the department store merchandising executives interviewed in this study. ii QUANTITATIVE METHODS OF MEASURING MERCHANDISING PERFORMANCE IN SELECTED DEPARTMENT STORES by Douglas JO.) Dalrymple A Thesis Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF BUSINESS ADMINISTRATION Department of Marketing and Transportation Administration 1964 Copyright by National Retail Merchants Association '1965 iv ACKNOW LEDGEMENTS The author would like to acknowledge the assistance of the following individuals and groups whose support made this study possible. I am particularly indebted to Professor Stanley C. Hollander who first encouraged the development of this study and who later served as chairman of my dissertation committee. Professor Hollander's encouragement and guidance throughout the research process proved to be invaluable. Moreover, Professor Hollander's high standards of scholarship and dedicated research efforts were and will continue to be a constant source of inspiration. I am also indebted to Professor Gardner Jones and Paul E. Smith who served on my dissertation committee and provided valuable assistance in the design of the study and in the preparation of this manuscript. This study would not have been possible without the generous and enthusiastic cooperation of the eleven department stores which participated in the study. I would like to express my appreci- ation to all of the executives in these organizations who contributed their time to make this project a success. Particular thanks go to Mr. Alfred Eisenpreis, Research Di- rector of Allied Stores Corporation, for his help in obtaining the interest and support of the National Retail Merchants Association. The NRMA, through its Retail Research Institute, provided needed research funds and obtained the cooperation of many of its member stores. I am indebted to Miss Ethel Langtry, Director of the Retail Research Institute, for her help in obtaining the cooperation of the stores and for handling the financial arrangements for the study. V I would also like to acknowledge the use of the services and facilities of the Western Data Processing Center, Graduate School of Business Administration, University of California, Los Angeles. My appreciation is extended to the many other unnamed individuals whose suggestions and criticisms have contributed to the success of this study. Finally my thanks to Nancy and Jill whose help and understand- ing cannot be measured. Douglas J. Dalrymple vi TABLE OF CONTENTS Page ABSTRACT OF THE DISSERTATION . . . . . . i ACKNOWLEDGEMENTS . . . . . . . . . v LIST OF TABLES . . . . . . . . . . vii LIST OF ILLUSTRATIONS . . . . . . . . xiv CHAPTER I -—INTRODUCTION . . . . . . . 1 Purpose of the Study . . . . . . . . . 1 Need for Research . . . . . . . . . 2 Problems with Profit Margins . . . . . 3 Deficiencies in Retailers' Returns on Capital . . 6 Hypotheses to be Tested . . . . . . . . . 8 Assumptions of the Study . . . . . . . . 9 Terms and Definitions . . . . . . . . 10 Limitations of the Study . . . . . . . . 12 Possible Contributions . . . . . . . . 13 Order of Presentation . . . . . . . . 15 CHAPTER II -REVIEW OF PERFORMANCE MEASUREMENT METHODS . . . . 17 Introduction . . . . . . . . . . 17 The Retail System ofMerchandise Accounting . . . 17 How Does the System Work? . . . . . . 17 Net Sales as a Measure of Performance . . . 1‘) Gross Margin and Markon as Merchandising Factors 21 Profit Margins as a Measure of Merchandising Performance . . . . . . . . . 23 Stock Turnover as a Measure of Performance . . 26 vii Page Expense Control as a Measure of Merchandising Performance . . . . . . . . . 29 Merchandise Management Accounting . . . . . 31 Calculating Controllable Profit . . . . . 32 Criticisms of Merchandise Management Accounting 33 Relating Merchandising Performance to Assets Employed 37 Sales per Unit of Space . . . . . . . 38 Gross Margin Return on Assets . . . . . 39 Net Profit Contribution of Individual Items . . . 41 Return on Net Worth as a Measure of Merchandising Performance . . . . . 42 Returns to Capital as a Measure of Performance . 43 Contribution Return on Inventory Investment . . 49 Summary . . . . . . . . . . . 52 CHAPTER III RESEARCH TECHNIQUES . . . . . 54 General Research Procedure . . . . . . . 54 Development of the Working Hypotheses . . . . 55 Design of the Study . . . . . . . . . 59 Developing and Pre-testing the Questionnaire . . 6O Interviewing Department Store Executives . . . 61 Selection of Participating Retailers . . . . . 62 Selection of Individuals to be Interviewed . . . . 64 Statistical Procedures . . . . . . . . 65 Summary . . . . . . . . . . . 66 CHAPTER IV —RESEARCH RESULTS . . . . . . 67 Research Results - Hypothesis 1 . . . . . . 67 viii ‘Department Store Goals as Stated by Merchandising Personnel Measures of Performance Used by Merchandising Executives Summary of Data on Hypothesis 1 . Research Results —Hypothesis 2 Tabulation of Question 3 by Job Level . Results of Question 6 by Job Level Comparison of Answers to Questions 3 and 6 Tabulation of Question 7 by Job Level . Summary of the Data on Hypothesis 2 Influence of Merchandise Lines on the Use of Control Factors Research Results —Hypothesis 3 Research Results —Hypothesis 4 Executive Compensation Plans Payment Methods and Performance Measurement Additional Data on the Salary Hypothesis Summary of the Data on Hypothesis 4 . Research Results -—Hypothesis 5 Research Results -Hypothesis 6 Executive Duties and Re5ponsibilities . Merchandising Control Factors Mentioned by Executives . . . . Preferences for Selected Control Factors Using Variable Selling Costs in Pricing Summary of the Data on Hypothesis 6 . Control Factors and Executive Behavior ix Page 67 71 79 79 79 82 84 88 89 90 94 97 98 98 100 105 105 106 106 106 108 111 117 Merchandising Re3ponsibilities and Executive Action Changes in Performance Measures and Executive Behavior Pricing Procedures and Executive Behavior Summary of Data on Executive Behavior 'Sales and Profit Orientations and Executive Action Trading Up and Executive Action Markdowns and Executive Behavior Other Research Results Research Data Concerned with Stock Turnover . Additional Pricing Data Qualitative Merchandising Control Factors Time Available for Quantitative Control Procedures Suggested Improvements in Merchandising Control Systems CHAPTER V — CONCLUSIONS Evaluation of the Hypotheses . Hypothesis 1 Hypothesis 2 Hypothesis 3 Hypothesis 4 Hypothesis 5 Hypothesis 6 Other Conclusions of the Study Control Factors and Executive Behavior Importance of Stock Turnover Page 117 118 119 127 128 134 136 139 139 141 142 143 145 147 147 147 148 148 149 149 150 150 150 151 Executives Are Satisfied with the Present System Using Quantitative Control Factors ' Recommendations for Further Research . . . Stock Turnover and Profits Organizational Problems . Physical Handling of the Merchandise . Summary APPENDICES Appendix A —Survey Questionnaire . Appendix B —Empirica1 Survey Data . . . Appendix C -Computation of Chi Square Values BIBLIOGRAPHY xi Page 151 152 153 153 153 154 154 156 160 184 190 Table 10 11 LIST OF TABLES Page Rankings of Overall Company Goals by Merchandising Executives in Eleven Department Store Organizations . 68 Preferences of Department Store Executives for Paired Merchandising Control Factors . . . . 72 Rankings of Merchandising Control Factors by Execu- tives in Eleven Department Store Organizations . . 74 Performance Factors Stressed to the Subordinates of Merchandising Executives in Eleven Department Store Organizations . . . . . . . . 83 Agreement Between Buyers and Division Merchandise Managers on the Use of Performance Factors in Eleven Department Store Organizations . . . . 85 Agreement Between Divisional Merchandise Manager s~ and General Merchandise Managers on the Use of Per- formance Factors in Eleven Department Store Organizations . . . . . . . . . . 86 Ranking of Merchandising Control Factors by Hard and Soft Goods Buyers in Eleven Department Store Organizations . . . . . . . . , . . 91 Rankings of Merchandising Control Factors by Men and Women Buyers in Eleven Department Store Organizations 93 Changes in Performance Measures Reported by Merchan- dising Executives in Eleven Department Store Organizations 95 Bonus Plans Used to Pay Merchandising Executives in Eleven Department Store Organizations . . . . 99 Rankings of Merchandising Control Factors by Executives in Firms Using Different Executive Incentive Plans . . 101 xii Table Page 12 Suggested Improvements for Salary Systems Mentioned by Executives from Eleven Department Store Organizations 103 13 Primary Duties and ReSponsibilities Reported by Mer- chandising Executives in Eleven Department Store Or ganizations . . . . . . . . . . 10 7 14 Miscellaneous Unsolicited Remarks Recorded During In- terviewed with Merchandising Executives in Eleven Department Store Organizations . . . . . . 112 15 The Influence of Expenses on Pricing Procedures as Re- ported by Executives in Eleven Department Store Organizations . . . . . . . . . . 1 1 (r 16 Pricing Policies and Methods of Merchandising Executives in Eleven Department Store Organizations . . . 120 17 suggested Improvements in Operating Procedures Mentioned by Merchandising Executives in Eleven Department Store Organizations . . . . . . ' . . . . 124 18 Primary Responsibilities of Sales and Profit Oriented Mer- chandising Executives in Eleven Department Store Organizations . . . . . . . . . . 129 19 Changes in Performance Measures Reported by Sales and Profit Oriented Merchandising Executives in Eleven De- partment Store Organizations . . . . . . 131 20 Pricing Policies of Sales and Profit Oriented Merchandis- ing Executives in Eleven Department Store Organizations . 132 21 Price Policies for Sale Merchandise Mentioned by Execu- ' tives from Eleven Department Store Organizations . . 137 22 Time Allocations of Merchandising Executives in Eleven Department Store Organizations . . . . . 144 xiii Figure LIST OF ILLU STRA TIONS Pa ge Rankings of Profits, Sales Growth, and Customer Ser— vice as Company Goals by Merchandising Executives in Eleven Department Store Organizations . . . 70 Rankings of Sales, Stock Control, and Promotions as Merchandising Control Factors in Eleven Department Store Organizations . . . . . . . . 76 Rankings of Profits, Markdowns, and Markon as Mer- chandise Control Factors in Eleven Department Store Organizations . . . . . . . . . 77 Ranking of Merchandising Control Factors by Different Management Levels in Eleven Department Store Organizations . . . . . . . . . 80 Chapter I INTRODUCTION Purpose of the Study The effective design and operation of merchandising control systems1 are essential to the profitable operation of retail organi- zations. Retailers have used and are using many different measuring devices to evaluate their merchandising performance. Stock turnover, sales per employee, gross margin, sales per square foot, markon, controllable margin, and profits as a percent of sales are only a few of the many ratios that can be used to guide the efforts of retailers. The extreme variety of measures available and the subtle differences between them have raised several pertinent questions. Are some of the measures more important than others? Are some measures more appropriate to particular situations or firms? What are the factors that influence the choice of measures? How do the measures influence executive behavior? Will merchandisers who are evaluated on a gross profit basis make the same decisions as merchandisers who are evaluated on a net profit basis? Do any of the commonly used control measures provide outdated, inaccurate, or inappropriate data? These are some of the problems that need to be answered before improvements can be made in the control of merchandising operations. 1 The expression "merchandising control systems" is defined on page 10. This dissertation will report the findings of a study designed to answer these and other questions relating to the measurement of merchandising performance in department stores. The primary concern of the study is to provide some basic data on what control systems are being used and how these systems operate in a department store environment. Need for Research The importance of additional research on retail control systems can be emphasized by examining some recent retailing trends. The rapid growth of discount stores2 and other aggres- sive merchants has led to a re-examination of the traditional pricing procedures of the established retailers. The use of high markons on some lines of branded merchandise has been challenged by new merchants offering lower prices and fewer services. 3 The new competition has tended to stress smaller profit margins and 2The term discount store is difficult to define precisely and estimates of the growth of these stores is therefore subject to con- siderable error. One text uses a definition of discount stores similar to that used in this thesis and estimates a 50 percent annual growth rate in the sales of these stores in 1961 and 1962 (Delbert J. Duncan and Charles F. Phillips, Retailing Principles and Methods [Homewood Illinois: Richard D. Irwin, Inc., 1963] , p. 14). It is impossible to know how much of this "growth" is from the opening of new stores and how much is the renaming or relocation of existing firms. 3The tendency of innovations in retailing to appear as low— status, low-margin, and low-price operators is well documented by Stanley C. Hollander in his article "The Wheel of Retailing, " Journal of Marketing, Vol. 25 (July, 1960), pp. 37-42. higher turnover rates4 than the traditional department store merchants. Aside from creating competitive problems, these aggressive merchants have challenged the traditional markon system of mer- chandise pricing and control. Their low prices have broken some of the old cost and retail relationships and have made it much more difficult to use markon to evaluate the performance of merchandis- ing executives. Is the buyer who obtains the highest gross margin percentage doing a better job than the buyer who obtains a high con- tribution in gross margin dollars ? Further, how should the buyer balance markon against stock turnover to achieve his sales and profit objectives ? A careful study of the influence of markon on the management of the merchandising operations in department stores will be a central consideration of this study. Problems With Profit Margins For many years there seems to have been a decline in profit margins in American industry. 5 Department stores have followed this trend and one study indicated that profits after taxes declined 4One study has shown that profit margins averaged 2.9 per- cent of sales for discount stores and 5.4percent for department stores (David J. Rachman and Linda J. Kemp, "Retail Sales Up, Profits Down, .. Journal of Retailing, Vol. 39 (Fan, 1963] , p. 12). Stock turnover rates in department stores in 1962, avera ed 3.58 times ("Management Matters, ” Stores, [September, 1963 , p.25). Stock turnover in discount stores has been estimated at about 6 times per year (Duncan and Phillips, p. 13). 51nterna1 revenue service data shows a decline from about 6 percent of sales in 1947 to 3 percent 1959. Reported in Rising Depreciation of Assets in Agricultural Marketing Firms (Washing- ton: U. S. Dept. of Agriculture, Economic Research Service, Agricultural Economic Report No. 47), p. 25. 4.2 percent of sales in 1948 to 2.3 percent in 1960. 6 While profit ratios have fallen in American industry, depreciation expenses as a percent of sales have increased. 7 Depreciation expenses have also increased as a percent of sales in department stores. 8 The in— creases in deprecation rates appear to have contributed to the gen- eral decline in profit ratios and also to the stabilization of cash flow rates (profits after taxes plus depreciation). While accelerated de- preciation charges help explain the decline in profit margins, the 1 fact remains that the decline in the profit ratio has made it more difficult for department stores to make effective use of this ratio in the control of merchandising operations. Although net profits as a percent of sales is a widely used ratio to measure retail merchandising efficiency, it is a device that must be handled carefully if meaningful comparisons are to be made. A hint of some of the other problems involved can be shown by some 6Ma1colm P. McNair and Eleanor G. May, The American De- partment Store 1920—1960(Boston: Harvard Business School, Divi- sion of Research, Bulletin No. 166, 1963), p. 25. 7Rising Depreciation of Assets in Agricultural Marketing Firms, p. 25. 8In 1948, depreciation in department stores amounted to 0.4 percent of sales and in 1960 it had increased to 0.75. These figures do not include depreciation on real estate. Since real estate ex- penses, including depreciation, have increased from 2.35 percent of sales in 1948 to 3.25 percent in 1960, it is possible that some of this increase may also have been due to higher depreciation. Malcolm P. McNair, Operating Results of Department and Specialty Stores in 1948 (Boston: Harvard Business School, Division of Re- search, Bulletin No. 130, 1959), pp. 3, 48. Malcolm P. McNair, Operating Results of Department and Specialty Stores in 1961 (Boston: Harvard Business School, Division of Research, Bulletin NO. 163, 1962): P. 9. recent performance data from Sears, Roebuck and Company and Safeway Stores, Inc. In 1962, Sears had a net profit of about 5 per- cent of sales, and Safeway produced a profit of about 1.5 percent of sales. 9 It might appear to the uninitiated that Sears did a better retailing job, but there are other factors to be considered. One important factor is the amount of capital used by each firm. Efficiency in the use of capital can be compared by dividing sales by invested capital to produce a capital turnover ratio. This ratio was 2.7 for Sears and 8.7 for Safeway. The combination of the profit margins and the capital turnover ratios produced returns on invested capital of 13.7 for Sears and 13.5 for Safeway. 10 Thus both firms produced about the same return on net worth with de- cidedly differing profit and capital turnover ratios. Profits as a percent of sales may give some indication of merchandising effi- ciency, but it ignores the turnover of assets. Specifically, it fails to consider the stock turnover rate which has an important in- fluence on the rate of capital turnover. This study will examine in some detail how stock turnover is utilized as part of the merchandise control system in department store organizations. 9 "The Fortune Directory, " Fortune, Vol. 63 (August, 1963). p. 146. 10 While the returns on invested capital were about the same for the two firms, the inclusion of borrowed funds and the capital- ized value of leased assets in the base of the ratio might produce differences in overall performance. A discussion of the desir— ability of including borrowed funds and leased assets appears on pages 45 and 47.. Deficiencies in Retailers‘ Returns on Capital Rather significant differences in returns to capital can be observed among different types of retail firms. One study reports average returns on capital11 for thirty-three industries including five classifications of retail firms. 12 The retail categories in- cluded groups of department stores, variety stores, chain grocery stores, mail order houses, and apparel and accessories chains. 13 Average returns on capital for the stores in these groups ranged from a high of 14.3 percent for the apparel and accessories chains to a low of 7.5 percent for the department stores. Mail order firms achieved a return on capital of 11.0 percent which was about average for the thirty-three industries. The return on capital for the chain grocery stores and variety stores of 8.7 percent was below the av- erage for the study. While this data only represents the average performance of large firms, it does suggest that some retail firms have produced comparatively low returns while others have pro- duced high returns to capital. 11 Capital was defined as the sum of common stock equity, pre- ferred stock, all noncurrent debt, any subsidiary debt and preferred stock, and minority interest in the common stock. 12Sidney Cottle and Tate Whitman, "20 Years of Corporate Earnings, "Harvard Business Review, Vol.36(May,1958). pp. 105-108. 13The department stores used were Allied Stores, Corp. , Associated Dry Goods, Corp. , City Stores Corp. , Federated De- partment stores, Inc. , Gimbel Brothers,Inc. , Marshall Field and Company, and the May Department Stores Co. The variety stores in- cluded W. T. Grant Co. , S. S.Kresge Co. , G. C. Murphy Co. , and F. W. Woolworth Co. The grocery stores used were Acme Stores Company, First National Stores, The Kroger Co. , and Safeway Stores,Inc. The mail order houses included Montgomery Ward and Co. , and Sears, Roebuck and Co. and the apparel and accessories chains included Bond Stores,Inc. , Grayson-Robinson Stores Inc. , Lerner Stores Corp. , and the J. C. Penny Co. The data from the Cottle and Whitman study also showed an increase in the average return on capital in American industry from 8 percent in 1935-1939 to 11.7 percent from 1951-1955. While the general trend was to higher rates of return on capital, some retail organizations registered declines. The general increase in returns to capital in the face of declining profit margins can be ex- plained by an 89 percent average increase in the capital turnover rate in the postwar period. The five retail groups in the study, however, achieved an average increase in their capital turnover rate of only 37 percent. 14 The slow growth in the capital turnover rate appears to be a major reason why retailers have generally failed to improve their returns on capital. The extreme differences between retailers on their rates of return raises the question as to what extent the merchandise control system may influence differences in overall performance. The comparatively small improvement in capital turnover rates in re- cent years in the retail trade poses the question whether this factor has received sufficient attention by retail executives. Further, what is the role of the return to capital concept in measuring the efficiency of merchandising operations at the buyer level? Also, is the traditional emphasis by retailers on profit and expense per- centages related to their low returns to capital? A more basic question asks what role should merchandising control systems play in the overall management of retail firms ? 14Come and Whitman, p. 111. This section has discussed some of the problems and questions that have led to the development of this study. It is the objective of this investigation to answer some of these questions and in the pro- cess to critically examine the measurement and control systems used by department stores. Hypotheses to be Tested The following set of hypotheses have been developed from an analysis of published materials on merchandising performance measurement and from preliminary interviews with department store buyers. These hypotheses do not represent an exhaustive listing of all unsolved problems in the area of performance mea- surement, but they do represent a list of consistent and testable statements worthy of research effort. The hypotheses are: 1. Different firms strive to achieve similar goals while using substantially different measures of merchandising performance. 2. Merchandising executives at higher levels tend to use broad, long run performance measures, such as return on capital, whereas merchandising executives at lower levels tend to use short run measures such as expense and markdown percentages. 3. Department stores are currently stressing different measures of merchandising performance than have been stressed in the past. 4. The methods used to pay merchandising personnel influence the performance measures that are used by these executives. 5. Firms with centralized rather than decentralized buying are more likely to use the newer performance measures such as controllable profits per dollar of inventory. 6. Department stores are currently making only limited use of the newer measures of merchandising perfor- mance that emphasize returns to capital and the use of incremental costs to set prices. These hypotheses will be tested by means of data gathered from merchandising executives in selected department store organ- izations. Since the buyer and his superiors make the basic profit producing decisions concerning what merchandise to buy, what prices to use, and how to promote the items, it is felt that these individuals are in the best position to explain the operation of the department store merchandising control systems. Assumptions of the Study A basic assumption of this study accepts the profit goals of the retail firm as the guiding philosophy upon which merchandising performance is to be judged. The study does not measure the per- formance of the firm against standards of social efficiency. Maxi- mizing the efficient use of land and labor inputs will not be a cen- tral issue of this study except as the control of these factors lO contributes to profit maximization of the firm. For example; it might be in the best interests of the firm to raise markons to increase profits, yet the consumer would probably have to pay a higher proportion of his disposable income for distribution costs. The affects of such managerial decisions on the overall efficiency of the distribution system will not be considered. In this study, measures of performance that help maximize returns to the firm will be judged to be the most efficient. Terms and Definitions Quantitative Methods — Techniques making use of numbers and numerical ratios to measure merchandise performance (contrasted to subjective evaluations of the buyers.) Merchandising Performance - Refers to the efficiency of the buying and selling functions in retail stores. Performance Measures (Measures of Performance) - The criteria by which satisfactory performance is judged. Merchandising Control Systems - The formalized and integrated collection of performance measures used by a retail firm to manage its buying and selling functions. Department Store - A large retail organization with a wide variety of merchandise, organized by departments, offering large amounts of services, and operating with fairly high expense ratios (33-35%). 11 Discount Store — A retail establishment with a large selection of branded and unbranded merchandise at low markons, uses extensive advertising, has relatively limited services, relatively inexpensive buildings, fixtures and sites, uses a minimum of clerk service and Operates with a fairly low expense ratio (18 to 25%). Long Run Performance Measure - Factors or ratios that reflect the company's success which are based on more than one year's results . Short Run Performance Measure — Numerical ratios that show results based on data from one year or less, such as markup and markdown percentages . Net Worth - The sum of capital stock, surplus, and retained earnings. Total Capital - The sum of net worth and long term debt. Centralized Buying - A single group of buyers does the purchasing for a group of stores. Decentralized Buying - Each store buys most of its own merchandise. Purchase Outlay - The invoice price of merchandise to the buyer I less cash and other discounts. Rate of Return on Capital - The ratio of income to capital. Capital usually refers to either invested capital, invested capital plus debt. or to total assets. Capital can be defined in a variety of. ways depending on how the ratio is to be used. Income normally refers to net profit. May be abbreviated as Rate of Return. 12 Net Sales — Gross sales less returns and allowances. Stock Turnover - The ratio of net sales to the average merchandise inventory, usually calculated on an annual basis. Capital Turnover - The ratio of net sales to capital. Capital usually refers tO either invested capital, invested capital plus debt, or to total assets, however, it may be defined in a variety of ways. Gross Margin - Net sales less the cost Of goods sold. Usually expressed as a percentage of net sales. Markon - Dollars added to the cost of merchandise to determine the initial retail price. Normally expressed as a percentage Of the retail price. Includes allowances for markdowns, shortages, and for employee discounts. Limitations of the Study This study has been restricted to an evaluation of the systems used to measure merchandising performance. Other areas Of re- tail store operations such as those concerned with record keeping, the management of real estate, and the physical Operation of the . stores have not been included in the study. While these areas are important to the overall Operation of the firm, the major profit center is the incomegenerated by the buying and selling Operations. The study has focused on this Operation in an effort to learn how the system can be improved. It is felt that the concentration of re- search effort on a relatively narrow area would help produce more meaningful results. 13 The study has been restricted to an evaluation of the merchandising control systems Of department store organizations in the state of California. It has further been restricted to depart- ment stores located in the San Francisco, San Diego and LosAngeles metropolitan areas. The empirical data collected from these three areas was limited to 111 interviews with executives from 11 differ- ent department store organizations. The sample represents only a limited proportion of the firms and individuals engaged in depart- ment store merchandising activities in the three metropolitan areas. Also, the selection of the executives interviewed in each company was made on a non-random15 basis. This provided an additional source Of sample bias. It is possible that the firms who declined to participate in the study represent different characteristics of Operation from those included in the study. It is felt, however, that any sample bias that might occur would be offset by the greater depth that was obtained by interviewing executives in a small sample of firms. This study also had the general limitation common to all research as to the unknown accuracy of the information that the participating execu- tives were able to provide about their Operations. PO ssible Contributions This study will compare and evaluate the systems of measur- ing merchandising performance of a sample of department store 15 The sample was non-random because all executives did not have an equal Opportunity to be included in the study. The methods used to obtain the sample of executives are explained in Chapter III. 14 firms. Possibly the most useful result of this study will be the generation of some basic empirical data on how department stores actually measure their performance. The available information on this subject is scattered, dated, and based on very restricted field research. It is expected that this study will reveal significant vari- ations in the types of control systems used in different department stores and in the operational effectiveness of these systems. The study should also show the effects of the merchandising control sys- tems on the behavior of the executives who function within the systems. Careful study of the different methods of evaluation should help explain why retail profit performance varies so widely between firms. Also the study should reveal ways to improve present mea- surement and control techniques. Even if some methods cannot be proven to be better than others the study should be very useful as a point of departure for merchants who wish to review their present system of merchandising performance measurement. It is expected that the study will clarify some problems Of communications with respect to what performance measures are being used and empha~ sized. This study should also help to identify the most appropriate measuring tools to facilitate the achievement Of retail sales and profit goals. Further, the study should provide a stimulus for fur- ther research into an area that has not received as much attention as perhaps it should. 15 Order of Presentation The first chapter Of this thesis has sought to introduce the reader to this particular research project on merchandising per- formance measurement. It has pointed out some of the problems and questions related to performance measurement that have been emphasized by recent trends in retailing. It has presented a set of working hypotheses which will be tested against empirical survey data in Chapter IV. The chapter also has defined some of the basic terms that will be used in the dissertation. The limitations of the research study have also been discussed. The chapter concludes with some suggestions as to possible contributions of the research project. Chapter II is an analysis of existing and proposed methods of evaluating merchandising performance. This material provides necessary background so the reader will be able to understand the deveIOpment and testing of the hypotheses. The third chapter explains how the study was organized. The selection of the par- ticipating retailers, the development and testing of the question- naires, and the statistical procedures are explained in detail. The results of the interviews with store personnel are pre- sented in Chapter IV. The survey data are organized to facilitate the discussion of each of the experimental hypotheses. The results of the study are also analyzed in relation to the previously men- tioned published materials on retail control. The final chapter discusses the amount of agreement between the experimental hypotheses and the empirical survey data. Arguments are 16 proposed to support the acceptance or rejection of each Of the hypotheses. Consideration is also given to other implications Of the study. The chapter concludes with a review Of suggested avenues for further research. CHAPTER II REVIEW OF PERFORMANCE MEASUREMENT METHODS Introduction Over the past few years there have been a considerable number of articles published concerning the evaluation of merchandising per- formance in retail organizations. It is the author's objective in this chapter to review and analyze some of this material. The appraisal will provide necessary background so that the reader will be able to understand how the present study is related to existing research in this area. The review will also help to explain how the experimental hypotheses were deve10ped from the literature on performance mea- surement in retail environments. The Retail System of Merchandise Accounting The most widely used system of control in large retail stores 16 is the retail system of merchandise accounting. This system has been developed over a period of years to the point where it is deeply ingrained in the thinking of retail executives. The method will be explained in detail and the principal deficiencies will be noted. How Does the System Work? The retail system of merchandise accounting developed from accounting techniques designed to produce frequent profit and loss 16Many small stores still use the cost method of control. 17 18 statements without the bother of taking physical inventories. 17 The closing inventory is necessary for profit calculations and it is com- puted from records maintained by the retailer. The retailer totals purchases, inbound freight, additional markons, and the Opening inventory to obtain a figure for the goods handled. The sum of sales, markdowns, employee discounts, and estimated shortages yields deductions from stock. The closing inventory at retail is then simply the difference between the total goods handled and stock deductions. The closing inventory is converted to a cost base by the use of the cost compliment of the average markon. 18 The cost of the goods sold for the particular period is calcu- lated by subtracting the closing inventory from the sum of the opening inventory, purchases, and inbound freight at cost. Gross margin in dollars can then be computed by subtracting the cost of goods sold from net sales. The gross margin is an important figure because this is the amount Of money the retailer has available to cover his expenses and hopefully to produce a profit. Expenses and profits in retailing are normally expressed as a percentage of sales in order to facilitate comparisons between firms. Gross margin and markon, which were originally expressed as a percent of cost, 17Robert 1. Jones, "Objectives and Basic Principles Of M.M.A., ”Journal of Retailing, Vol. 34(Spring, 1958), p. 9. 18William R. Davidson and Paul L. Brown, Retailing Manage- ment (New York: The Ronald Press Co. , 1960), pp. 690-696. 19 have shifted over time to a percentage Of sales as have almost all other retail performance ratios. 19 Net Sales as a Measure of Performance The basic objective Of a retail firm is to make a profit on the purchase and resale of merchandise. A profitable level of retail operations depends on the achievement of certain minimum volumes of business. The net sales figures measure how well the merchant has accomplished this basic goal. The frequent availability of sales figures also makes them useful in making day-to-day adjustment in the merchandising program. A second important retail Objective is to be able to achieve increases in sales. These increases in volume are necessary to counteract the nagging problem of the growth in the expenses of operating retail firms. 20 The ability of a firm to increase its sales continuously is so important that some organizations have their buyers' bonuses tied to increases in sales. 21 The importance of 19Malcolm P. McNair and Eleanor G. May "Pricing for Profit," Harvard Business Review. Vol. 35 (May-June, 1957), pp. 105-106. 20In 1946, the Harvard figures showed department store ex- penses to be 28.65 percent Of sales. By 1960, this had increased to 35.95 percent of sales (Malcolm P. McNair and Eleanor G. May, The American Department Store 1920-1960 [Bostonz Harvard Business School, Division of Research, Bulletin No. 166, 1963] , p. 24, 25). 21Conversation with department store buyer during pre—test of the survey questionnaire. 20 increased sales to retail firms is reflected by one Observer22 who feels that sales must increase 5 percent per year just to maintain profits at their previous level. Many buyers feel that if they can achieve sufficient sales volume, other problems such as markdowns and expenses will take care of themselves. Net sales has certain inherent limitations as a measure of retail performance. One problem is how to appraise a net sales figure for a particular store at a particular time. Net sales are reported in dollar amounts which do not lend themselves to simple interpretation. This problem is normally solved by comparing sales with results for previous periods, with planned sales, and with the results of competitors. Because of the many variables influencing sales, comparisons of this sort are not always reliable. Net sales gives an overall measure of retail performance, but it does not measure the internal efficiency of a retail firm. It is possible for a firm to have an excellent record of sales growth and to Operate with low profits or at a loss. 2'3 Net sales are not the end goal of retail firms, but they are an important intermediate step in the production of profits. The actual creation Of profits out of sales volume will be discussed in the subsequent sections dealing with gross margin and net profits. 22Malcolm P. McNair, reported in "Too Little Growth, ” Forbes (May 15, 1959), p. 19. 23This possibility can be substantiated by the bankruptcy Of some high volume discount stores. 21 Gross Margin and Markon as Merchandising Factors The primary objective in the use of gross margin calculations is to focus the attention of the merchandising executives on the por- tion of the sales dollar that is available to pay expenses and to pro- vide profits for the firm. The gross margin percentage provides a useful overall measuring stick for judging performance in the buy- ing and selling of merchandise. The gross margin percentage is also an important planning device. The merchandising budget is designed to achieve a particular gross margin percentage which in turn is made up of planned expense and profit ratios. Knowing the planned gross margin, the merchandising executives can compute the initial markon percentage24 that is needed to return the desired gross mar- gin. The markon calculation is based on the amount of markdowns, employee discounts, and stock shortages which have historically been required for the particular merchandise under consideration. The use of gross margin as a guide to the production of mer- chandising profits means that such factors as markon, markdowns, shortages, cash discounts, and workroom costs which directly influence the size of gross margin, become important secondary performance factors. The Objective in using these items is to try to improve on past achievements or at least to be able to maintain the current levels of performance. Calculating Gross Margin - Gross margin is the difference between the actual cost Of merchandise to the retailer and the amount 24Markon is defined on page 12. 22 received from the customers for the merchandise. For convenience, it is normally expressed as a percent of sales. Two adjustments are made in the cost of the merchandise during the calculation Of the gross margin. The basic cost of the merchandise is increased by the amount of workroom costs and decreased by the amount of the cash discounts Obtained from suppliers. The gross margin does not include such items as markdowns, shortages, and employee discounts. The extra margin necessary to allow for these retail reductions is included in the markon. Markon is the amount added to the cost of the merchandise to produce the initial retail price. It is usually expressed as a percentage Of the retail price and it is normally larger than the planned gross margin. Deficiencies with Gross Margin - There are several problems associated with the use of gross margin and markon to control mer- chandising activities. Possibly the most frequently mentioned criticism is the tendency of buyers to apply average markon percent- ages to broad classes of merchandise. 2'5 This policy ignores the possible benefits to be gained by varying the markon depending on the customer's price sensitivity on each item. A second problem is that in their efforts to achieve a planned gross margin percentage, buyers tend to ignore or to de-emphasize merchandise that carries margins lower than average, 26 regardless of the volume of business that may be involved. 25Robert I. Jones, p. 5. 26Malcolm P. McNair and Eleanor G. May, “Pricing For Profit, " p. 108. 23 The use of gross margin as a measure of the performance of merchandising executives has naturally led to a search for methods that can be used to increase the gross margin percentage. One method available to merchandising executives is to simply raise their markon. This might appear to be a simple administrative pro- cedure, but in a competitive market situation the buyer has the very real problem of trying to raise his markon and to maintain his sales volume at the same time. One solution is to raise the markons on noncompetitive merchandise. A second possibility is to raise prices on competitive items in the hope that your competitors will follow your lead Or that your customers will not notice the difference. A third possibility is to agree with your competitors to raise prices. The use Of this last method Of raising markon is Of course illegal and it could lead to a variety of administrative problems. Profit Margins as a Measure of Merchandising Performance The primary purpose of the profit ratio is to focus the atten— tion of the merchandising executives on the portion Of the sales dollar represented by profits. The profit ratio converts dollar profits into a numerical form that is useful for comparing performance in different department stores. Profit ratios make it possible to com- pare different merchandising operations without revealing the actual sales or profits themselves. Computation of Profit Ratios - The retail accounting system incorporates two different profit ratios. One is the ratio of mer- chandising profits to net sales, where merchandising profits are 24 the difference between the gross margin and operating expenses. The second ratio is the sum of merchandising profits and other- income compared to net sales. In recent years there has been a downward trend in the mer- chandising profit ratios in department store firms. In 1954, profits on merchandising activities were 1.75 percent of sales and by 1960 they had declined tO only 0.45 percent Of sales. At the same time the other-income category became more important. In 1954 it amounted to 3.55 percent of sales, and by 1960 it was 4.15 percent Of sales. 27 This other—income was made up primarily of profits from carrying charges on credit sales and an imputed interest charge on retained earnings invested in the business. Starting in 1961, the Harvard operating reports reorganized the treatment Of carrying charge income. Instead Of treating it as other income, it is now subtracted from expenses. This has the affect of increasing the profit ratio. In 1962, the Harvard data reported the new profit figure, now called net economic profit, to be 2.46 percent of sales. This figure was in effect made up of 1.96 percent from carrying charge income and 0.5 percent from profits on merchan- dising Operations. 28 Two changes in the Controller's Congress Accounting Manual help explain this reorganization of the net profit calculations. One 27Malcolm P. McNair and Eleanor G. May, The American De- partment Store 1920-1960, p. 25. 28Malcolm P. McNair, Operating Results of Department and Specialty Stores in 1962 (Boston: Harvard Business School, Division of Research, Bulletin No. 165. July, 1963), pp. 3,9. 25 change proposes that service charge income be deducted from total ex- penses rather than including this item in other-income. This change is suggested because the cost of granting credit pervades the entire retail expense structure.29A second change suggests the elimina- tion of the imputed interest charge as an expense and the exclusion of imputed interest from other-income. Imputed interest was first used in the 1920's to charge retailers for the use of capital. The manual proposes that this objective be met in the future by a calcu- lation of the rate of return on the capital employed in the business. Because of technical problems still to be solved the current manual does not provide for a shift to this new control device. 30 The net result of these two changes will be to reduce the expense ratio and increase merchandising income at the expense of the other-income category. While net profits will be the same under the new system, it is possible that the reduction in the expense ratio may influence the merchandiser in his choice of merchandise and markons. It appears that these changes were influenced by the trend toward the elimination of merchandising profit that was occurring under the old accounting system. Under the new rules the merchan- dising profit will be larger and more useful. A merchandising pro- fit ratio of only 0.45 percent does not allow variations and it there- fore loses some of its value as a control device. Imperfections Of Profit Ratios - Profit ratios have certain de- ficiencies that hamper their use as measures of merchandising 29Herman Radolf, "Will N. R.M.A. 's New Accounting Manual Lower Markons?" Journal of Retailing, Vol. 39 (Fa11,1963), p.25. 30 Ibid. . p. 26. 26 performance. First, it is difficult to isolate the profits produced by the merchandising activities from profits produced by other parts of the business. This is shown by the recent changes that have had to be made in the accounting rules. Another serious deficiency is that profit data is not available frequently enough to be used to make day- to-day decisions on merchandising problems. Another problem is that profit ratios do not measure efficiency in the use of capital. Comparisons of the profit ratios of different departments or stores may not be meaningful if there are differences in the rate of capital turnover. Profit ratios do not consider the turnover of stock and other assets and are therefore only partial measures of merchandi- sing performance . Stock Turnover as a Measure of Performance The stock turnover ratio is used by retail firms to measure the rate at which merchandise inventories are sold. The ratio provides a convenient numerical measure which can be used for planning and control purposes. Retailers typically seek to sell their stock as frequently as possible so that profits in relation to their investment in inventory will be maximized. Increases in stock turnover pro- vide retailers with one method of increasing their return on capital. The stock turnover ratio may be calculated by dividing net sales for a given period by the retail value of the average inventory. It may also be calculated by dividing sales at cost by the average inventory at cost, or by dividing the units sold by the average 27 inventory in units. 31 The ratio is typically reported as an annual rate although it can be calculated for shorter periods of time. Problems with Stock Turnover - The use of stock turnover as a control device in department stores has been complicated by the decline in the ratio in recent years. In 1962, stock turnover reached its lowest point in the past twenty years. 32 This decline may be the result of the growth of inventories associated with the opening of new suburban branches. It may also be related to a failure on the part of the merchandising executives to control the number of the items stocked. A third possibility is that the stock turnover ratio has not received sufficient emphasis by the retail system of merchandise accounting. The extreme variation in stock turnover rates that exists be— tween different items, departments, and stores makes it difficult to intelligently evaluate turnover rates. 33 The practice of compar- ing turnover rates for a firm with the average turnover rates for the industry appears particularly hazardous. This procedure does not take into account the unique character of the merchandise or the merchandising program of an individual organization. Further, the most desirable stock turnover rate for the individual firm is the one 31John W. Wingate and Elmer O. Schaller, Techniques of Retail Merchandising (Englewood Cliffs, New Jersey: Prentice Hall, Inc. , 1956), p. 277. 3‘2“Management Matters, " Stores (September 1963) p. 25. 33One study shows stock turnover ranging from a low of 2.8 times per year for men's and boy's clothing stores, to a high Of 26.4 times for independent grocery stores ("14 Important Ratios in 12 Retail Lines, " Dun's Review and Modern Industry, (November, 1963) p. 39). 28 that produces the highest profits. This rate may or may not be related to the average stock turnover achieved by other firms. Other complications develop from attempts to increase turn- over. Stock turnover can be increased by expanding sales without raising inventories. This might be accomplished by enlarging the advertising budget. Stock turnover would increase, but this would not produce an economic gain if the increased advertising expenses lowered total profits. Sales could also be increased by lowering prices. Again the firm would not be better Off if stock turnover rose and profits declined. A better method from the standpoint of the firm might be to maintain sales on a smaller inventory. This could be done by elim- inating slow moving items and by cutting the stocks Of some items. The danger with this procedure is the possibility Of losing sales due to out-of—stock. A more precise method of reducing inventories and increasing stock turnover is to reduce the size Of the order quantity and order more frequently. Since the average inventory is a function of the order quantity, when the order size is reduced the average inventory declines and stock turnover increases. Out-of-stock con- ditions do not have to increase if careful attention is paid to the size of reserve stocks and to accurate forecasts of consumer demand. Turnover Can Be Too High! - While retailers typically need to increase their stock turnover rate, it is possible to have a stock- turn that is too high. In this situation the retailer is not carrying a large enough inventory in relation to his sales. This could occur where a retailer reorders his merchandise in very small quantities. 29 Under such conditions he pays excessive ordering, transportation, and handling costs for the small quantities he receives. He also runs a serious risk of out-of-stock due to the normal variation in demand. Retailers can achieve an Optimum stock turnover level by the use of the economic order quantity formula34 for items which have relatively stable demand patterns. This formula minimizes the costs of procuring and carrying merchandise inventories and gives the retailer an optimum reorder quantity. The high proportion Of seasonal and fashion merchandise makes it difficult to apply this formula in department stores. Many items are ordered only once for an entire season and there are frequently no opportunities for reorders. DeSpite these handicaps, the operations research specialists have begun to propose solutions to the problems of the control of style goods inventories. 35 Expense Control as a Measure of Merchandising Performance The primary purpose of expense ratios is to provide executives with a standard of performance that can be used for control purposes. Since retail profits are the difference between the gross margin achieved and expenses, effective expense control is vital to the pro- duction of satisfactory profits. The Operation of the store is planned to allow a certain percentage of the sales dollar for the various 3’ZirThomas M. Whitin, The Theory of Inventory Management (Princeton: University Press, 1953), pp. 32-33 3513.13. Hertz and K. H. Schaffir, "A Forecasting Method for Management of Seasonal Style-Goods Inventories, " Mathematical Models and Methods in Marketing, ed. Frank M. Bass et. a1. , (Homewood, Illinois: Richard D. Irwin, Inc., 1961), pp. 461-477. 30 expense categories and then it becomes the Objective of store personnel to keep actual expenses within the budget. The control of expenses is simplified by expressing them as a percentage of sales. The classification Of expenses into "natural" divisions such as payroll, advertising, and rent has been supple- mented in recent years with a more detailed system called expense center accounting. This system identifies expenses with Specific work areas so that closer control can be maintained. With this sys- tem the manager is able to pinpoint areas for improvement by the use of productivity ratios. 36 Expense control is important to the profitable Operation of retail stores but is typically not a vital issue to merchandising ex- ecutives. This occurs because merchandising executives typically do not have control over a large proportion of the expenses that may be charged to them. As far as the buyer is concerned, rent, labor, and many other expenses are fixed in the short run. It is true that some buyers can control sales expenses by careful scheduling of sales help, but the decision on how many sales people are needed is dictated by store policy. Also wage rates and bonus plans are not under the control of the buyer. Since so many of the retailer's ex- penses are built into the system, buyers tend to accept the expense structure as given and to operate the buying and selling functions around them. Another factor accounting for this attitude on expenses is the trend toward the separation of buying from selling activities. 3'é'Malcolm P. McNair and Eleanor G. May, ”Department Store Expense Control, " Harvard Business Review Vol. 31 (May— June, 1953), pp. 113—127. 31 The growth of the buyer's reSponsibilities as a result of increased branch store operations appears to have forced department stores to Split the buyer's job. The control over Operating expenses has been given to sales supervisors in the stores and the buyers have been allowed to concentrate their efforts on staff oriented merchandising activities. Merchandising Management Accounting Merchandise management accounting is the name that has been given to a proposed new approach to the control of retail merchan- dising operations. This new system will be discussed in detail be- cause it represents a signficant departure from the current systems of merchandising accounting. The purpose Of the merchandising management accounting sys- tem is to maximize an intermediate income figure called controllable profit. This is basically gross margin less the direct expenses of selling merchandise. The merchandising management accounting system is a procedure used to identify the variable selling costs of specific products so that more effective and more profitable mer- chandising decisions can be made. 37 The system seeks to move away from average markon procedures which do not consider varia- tions in the costs of handling different items. The system focuses on the control of the direct expenses under the control of the mer- chandising executive rather than on the fixed overhead expenses. 37Kenneth P. Mages, "Item Profitability in Merchandise Accounting, " New York Certified Public Accountant, Vol. 28 (July, 1958). p. 497. 32 Calculating Controllable Profit The merchandising management accounting concept emphasizes the calculation of an estimated controllable profit for each item be- fore the merchandise is actually sold. The system is based on dol— lar and percentage estimates of direct costs of handling and selling particular items. Experience in developing these costs has shown that it is not necessary to calculate them for every item because the costs have a tendency to follow similar cost patterns for different items. 38 Fixed costs to the departments such as buying, advertis- ing, and displays are allocated to particular items as a percentage of invoice costs. In order to simplify the calculation of estimated controllable profits for buyers, tables showing controllable profits for items selling at different retail prices with different markons have been constructed. To avoid the use of markon, another author suggests the use of preprinted work sheets to estimate the amount of contribution for 39 each item. Using this form the buyer estimates the various costs of handling the product on the basis of so many cents per item or as a percentage of the invoice cost. Estimates are also made for markdowns, shortages, and employee discounts. The buyer picks 38 Only twelve different cost patterns were necessary for all the items in a major appliance department (Harvey E. Kapnick Jr. , "Merchandise Management Accounting, " Explorations in Retailing, ed. Stanley C. Hollander, [East Lansing, Michigan: Michigan State University Bureau of Business Research, 1959] , p. 337). 39Maleolm P. McNair and Eleanor G. May, "Pricing For Profit," p. 112. 33 a tentative selling price and then subtracts estimated reductions, invoice cost, and expenses to produce an expected contribution in dollars. The buyer then must decide whether the contribution is sufficient in relation to the risks involved, whether the item can carry a higher markon, or whether the item should be dropped. Contribution profits are apt to be difficult to evaluate because contribution is measured in dollar amounts. One recommended solution is to compare the expected contribution tO the amount of money invested in the initial purchase Of the item. This return on purchase outlay is a crude return on investment figure. This ratio can be improved if the average investment in the merchandise is considered instead of the initial purchase outlay. The calculation should also consider the turnover factor in order to make the rate of return an annual rate. Criticisms of Merchandise Management Accounting The proponents of merchandise management accounting were quite precise in the identification of the elements Of variable costs that were used in the system, but they were vague with regard to the influence of stock turnover and demand elasticity. If a buyer were to look at some of the tables of contribution profits that have been developed to assist buyers in the use of the system, he would notice that the items with the highest prices and the highest markons produced the highest contributions. 40 This might suggest to the 40Harvey E. Kapnick Jr., p. 339. 34 buyer that he should trade-up and use higher markons to improve his contribution regardless of what might happen to stock turnover. The importance of stock turnover was recognized by the orig- inators of the merchandise management accounting system as shown by a statement made in 1958: Although retailers have always stressed the importance of good turnover, this factor has never been adequately integrated into their financial thinking. Consequently, profit experience, particularly at the buyer level, has traditionally been viewed in relationship to sales price alone. From an economic standpoint, however, real profit may be prOperly measured only in terms of earning power on invested capital. To accomplish this, the profitability in relation to sales price must be combined with the turnover factor. 41 While turnover was associated with the return to capital it was not adequately—integrated into the merchandise management accounting system. While some effort was made to show how turnover could be used to convert the ratio of contribution return on investment to an annual rate, this part of the system was not developed sufficiently to allow its use by merchandising personnel. One article discussing MMA includes a chart showing the total contribution produced by the sale Of different quantities of an item at different prices. 42 MMA does not offer any help to the buyer on how he should calculate the expected sales figures. Yet these 41Robert I. Jones, p. 7. 42The chart is attributed by Gordon B. Cross to "the accoun- tants. " This probably refers to the accounting firm of Arthur Andersen and Company who helped develop MMA. This chart appears in Cross' article "A Critical Analysis of Merchandising Manage- ment Accounting, " Journal of Retailing, Vol. 34 (Spring, 1958), p. 26. 35 demand projections are vital to the accuracy of the expected contributions of the different items. The treatment Of demand causes one critic to say that: MMA has been focused so firmly on cost that results caused by variations in demand have scarcely been considered. 43 A second author who studied the use of MMA in detail also found the system deficient in its treatment of demand and came to the follow- ing conclusion: No simple method has been designed to take into account demand elasticities and turnover so there is little guar- antee that MMA will always lead to profits greater than those yielded by current procedures in the hands of skillful buyers. 44 While MMA has not treated turnover and demand elasticity ade- quately, these factors are not sufficient to explain why MMA has failed to gain any measure of acceptance. There appear to be several factors which detract from the system and have prevented its acceptance. One set of problems arises from the use Of MMA as a pricing guide. Using this system to set prices might require raising the prices on some items that were not generating sufficient contribu- tion. Because of the competitive nature of the department store industry, buyers are reluctant to be priced higher than their com- petitors on identifiable items. Further, many nationally advertised 43Ibid. . p. 28. 44Peggy Heim, "Merchandise Management Accounting: A Retailing Experiment in Marginal Calculation, " Quarterly Journal of Economics, Vol. 77 (November, 1963), p. 675. 36 and branded items are either fair traded or priced according to the manufacturer's suggested list. For these items MMA could only be used as a guide in stocking and in promotional decisions. In one department store still using the system, the contribution data is used to determine which items should receive the most promotional emphasis. 45 A second set of problems arises from the human problems involved in introducing MMA as a new control device. In two Of the stores studied by Heim, buyers resisted the new technique and it is no longer used. Experience with the system has shown that the cost data on particular items is expensive to collect, and even the merchandising personnel who helped collect the information would not accept the accuracy of the data. It has also been suggested that MMA may have been resisted by merchandising personnel be- cause the system would have required the elimination of familiar old methods and the "establishment Of new standards for the evaluation Of departmental performance. "49 It appears that the advantages Of this new system have not been sufficient to overcome the natural resistance to change. Another possible explanation for the slow acceptance of MMA is that buyers' salaries were not tied to the new contribution system. 47 45Ibid., p. 673. 461bid., p. 675. 47Kenneth P. Mages, "M.M.A. Should Supplement Expense Center Accounting, " Journal of Retailing, Vol. 34 (Spring, 1958), p. 34. 37 Another type of problem occurs when one set Of standards is substituted for another. Contribution profit as a percent of average investment is probably a better control device than gross margin percentages and markon, yet both can be used incorrectly. If the contribution return on capital is used as a measure of merchandis- ing performance, it can be expected that an average figure will be developed to use as a guide. The buyer may tend to accept only those items that have expected returns above the average and to reject items with low rates of return. This procedure would tend to raise the average rate of return and might impair its usefulness if the average becomes unattainable. 48 It appears that average markon figures have been used in this manner in the past. Relating Merchandising Performance to Assets Employed The evaluation of managerial performance by comparing re- turns produced to the assets employed has gained wideSpread accep- tance in American industry. 49 Increasingly the concept has been proposed for use in evaluating retail merchandising performance. The basic Objective of return on asset ratios is to focus the re- tailer's attention on efficient utilization of his capital resources. The present system of retail accounting provides a good measure of a retailer's ability to control expenses and achieve a net profit percentage, but it does not adequately incorporate the turnover 48Gordon B. Cross, p. 28. 49 "Return on Capital as a Guide to Managerial Decisions, " N. A.A. Bulletin, (December, 1959), p. 34. 38 factor. Return on asset ratios emphasize the interaction between profit percentages and turnover to provide a more complete mea- sure of overall managerial performance. The different return on asset ratios that have been developed will be examined to see how well they are adapted to the retail environment. Sales Per Unit of Space The ratio of net sales to the square feet of floor space in a retail store is a crude measure of the retailer's return on his assets. Sales are a rough measure of the retailer's return and the amount of floor Space can represent his investment. Sales per square foot is normally calculated on an annual basis and would appear to be particularly suited to making Space allocations be- tween products and departments. A basic question that must be answered is whether the ratio of sales to floor Space should be maximized in a retail firm. There appear to be minimum sales to space ratios for different stores which represent a break-even volume. The ratio thus provides a convenient and quick measure of whether a store is producing suffi- cient volume in relation to its size. Although there would appear to be a minimum value for sales to Space ratios, there is obviously no reason to maximize this ratio in the long run. An extremely high sales to Space ratio would simply imply that too little Space was being used and that total sales might be increased by the use Of more Space. Sales to space ratios are difficult to use for compara- tive purposes because of the many other variables that influence the 39 rate of sales Of products. Also sales volume does not reflect the variations in the costs of achieving sales Of different items. Finally Space is only a crude measure of a firm's investment in inventories. There are other more accurate return on asset ratios that can be used and these are discussed in subsequent sections. Gross Margin Return on Assets The sales to Space ratio could be improved by subtracting the cost of goods sold from net sales to produce a gross margin return on Space. A further refinement could be made by relating gross margin to the dollars invested in the average merchandise inventory. This ratio measures efficiency in the use of the inventory invest— ment. The ratio also shows the interaction of the gross margin percentage and the stock turnover rate. For example, departments such as millinery which have high gross margins (49 percent) and high stock turnover (9.4), produce very high ratios Of gross margin to inventory (9.0). Other departments such as toys with relative low gross margins (34 percent) and stock turnover rates (3.2), have a fairly low gross margin to inventory ratio (1.62). 50 The gross margin to inventory ratio has been available for use by department stores for many years, but it does not appear to be widely employed. The lack of emphasis on this ratio is suggested by the decline in the ratio from a high of 3.08 in 1945 to a low of 1.86 in 1960. This decline in inventory productivity parallels a 50 Sam Flanel, "The Unproductive Inventory Dollar, " Stores, (September, 1961), p. 7. 40 decline in stock turnover rates (from 4.9 in 1945 to 3.3 in 1960). 51 It appears fairly obvious that the ratio of gross margin to inventory could not have received any serious attention from merchandising executives if it was allowed to decline 39 percent over a fifteen year period. The fact that the gross margin percentage did not change during this period suggests that merchandising executives placed greater emphasis on the control Of this factor. A slightly different approach to gross margin is Offered by Wayne Lee who hypothesizes that gross margin dollars will be maximized when the marginal returns to Space are equal for all items stocked. This means that the addition ofa shelf facing to product "A" would increase gross margin by the same amount as an addi- tional facing for item "B.." Marginal returns to Space are calcu- lated by multiplying the profit capacity Of an additional facing times the expected frequency of additional sales. The probability that additional sales would be made would be determined by the out—Of- stock frequencies with existing Space allocations. 52 Lee is pri- marily concerned with the allocation of existing Space as it may effect total gross margin. Lee's analysis is much too complicated to be used by retail stores for merchandising decisions and the emphasis on gross margin maximization ignores variations in the costs of selling. 511bid., p. o. 52 Wayne Lee, "Space Management in Retail Stores and Implications to Agriculture," Marketing Keys to Profits in the 1960's, ed. Wenzil K. Dolva, (Chicago: American Marketing Association, 1960), pp. 523-533. 41 Net Profit Contributions of Individual Items Realizing the deficiencies of gross margin figures, an attempt has been made to generate net profit figures for individual grocery products. The technique was based on the division of store costs into fixed and variable components. Variable costs (mostly labor) were allocated to items on the basis of so many cents for each case of the product that was handled. The fixed expenses were allocated to the items on the basis of the cubic volume of inventory of each item carried in the store. 53 The net profit figures generated could be used for space allocations and advertising purposes. The sys- tem resembles MMA in its emphasis on the costs of selling different merchandise. The accuracy of the net profit figures produced by this study is subject to serious doubt because of the necessarily crude and arbitrary nature of the expense allocations. In addition the net profit figures generated by this system were in dollar amounts which hampers their use in comparative evaluations. Also profits were not related to the capital invested in inventories, although it would appear that the calculations could have been extended to in- clude this ratio. Finally the orientation of the System to standard- ized grocery products raises doubt whether this system could actually be adapted to department store merchandise. 53 "Study Guides Retailers to Improved Cost and Profit Picture," Food Topics, (May, 1961), pp. 6-16. 42 Return on Net Worth as a Measure of Merchandising Performance The ratio of net profits to net worth measures profits in relation to the stockholders' equity. The ratio appears to have been deve10ped primarily for use by stockholders, stockbrokers, and other financial analysts. Capital included in the denominator Of one version of the ratio includes all preferred stock, common stock, and earned surplus less intangible assets such as goodwill, patents, and 54 The ratio is typically computed on an annual basis. COpyrights. There are several types Of problems with measuring merchan- dising performance with a net worth ratio. One complicating factor is that returns to the net worth of retailers have been declining in recent years as a result of declining profit margins and a fall in the rate of stock turnover. 55 The comparative value Of the net worth ratio is also subject tO some reservations. Studies have shown that discount stores have high returns on net worth and high capital turn- over ratios. 56 What is often ignored is that discount stores may have large prOportionS of debt capital which are not included in the return to net worth ratio. More realistic comparisons could be made if the differing capital structures of different retailers could be 5‘4‘“14 Important Ratios in 12 Retail Lines, " Duns Review and Modern Industry, Vol. 82, (November, 1963), p. 39. 55 Since 1947, profit margins for department stores have de- clined from 7.3 percent of sales to 4.6 percent, stock turnover rates have declined from 4.85 to 3.8 times per year, and returns on net worth have declined from 25.5 percent to 11.5 percent (Malcolm B. NcNair and Eleanor G. May, The American Department Store 1920- 1960. pp. 24-25). 56Modern Retailer, (January 26, 1962), p. 11. 43 converted into some common basis for calculating rate Of return on investment. The most serious deficiency of the net worth ratio is that it iS a measure of the overall performance of the firm. It is too broad to be used to evaluate the merchandising activities within a firm. It also is not available frequently enough to be particularly useful to me rchandising executive 3. Returns to Capital as a Measure of Performance The ratio of net profits to capital provides a measure of a manager's ability to create profits with the financial resources placed at his diSposal. The ratio stresses the interaction between the profit ratio and the capital turn ratio to produce a return on capital. The return to capital ratio is the end result of the inter- action Of many control factors that have been discussed and it pro- vides in one number a measure of many aspects of managerial performance. Calculating Returns to Capital - The return on capital ratio was first popularized by the DuPont Company who organized its planning and control procedures as early as 1919 to produce an annual return on investment of 10 percent. 57 The basic computation was based on multiplying the ratio of profits to sales times the ratio of sales to capital to yield a return on capital. 58 57Porrin Stryker, "P&C for Profit, " Fortune, Vol. 45 (April, 1952), p. 129. 58Robert A Lineberger, "A Method of Determining Return on Investment, " N.A. A. Bulletin, Vol. 42 (June, 1961), p. 55. 44 Profits x Sales ___ Profits Sales Capital Capital Sales cancel out leaving a ratio of profits to capital. The profit ratio and the capital turn ratio are both calculated and multiplied together to help Show their interaction. If, for example, sales of a store were $10 million, profits were $51 million, and total capital 85 million, the return on capital would be: 31 m Profits $10 m Sales : 10% Profit Margin X = 20% Return on Capital 55 10 m Sales $5 In Capital 2 Capital Turnover This system points out that a high return on capital may be the result of a high profit margin (like Sears) or a high turnover Of capital (Safeway Stores). The income figure used in return on capital calculations may be before or after taxes. Many companies calculate both ratios. The before tax return would be of more interest to Operating man- agement and the after tax return of more interest to stockholders. 59 Since the tax rates are subject to change, it would appear desirable to have the return figure before taxes so that time series compari- sons would be more meaningful. The capital base of the return to capital ratio can be calculated in a variety of ways. It may be restricted to invested capital or it 59Return on Capital as a Guide to Managerial Decisions (New York: National Association of Accountants, Research Report No. 35, December, 1959), pp. ‘19-23. 45 may include invested capital plus long term debt. An alternative procedure is to sum the assets such as cash, government securities, receivables, inventories, prepaid expenses, real estate, equipment, land, capitalized values of leased assets, 60 intangibles and subtract Short term liabilities. A ratio using this base ignores the sources of capital and concentrates on how well the capital is being used. The particular types of capital that are included in the bottom Of the return to capital ratio influence the calculation of the income that appears in the numerator. If the ratio is only concerned with the productivity of invested capital, then income after interest ex- pense would be used. However, if the return to capital ratio seeks to evaluate the productivity Of borrowed as well as invested capital then income before interest expenses would be used. This figure would include all of the income produced by the borrowed capital and not just earnings in excess of the cost of borrowing the funds. The same reasoning applies if the capitalized value of leased assets are included in the base of the return to capital ratio. Income before lease expense would be used, because it includes all of the earnings produced by the leased asset. Problems of Evaluating Assets - Inflation becomes a problem with return on capital ratios when they are used as a time series. Assets purchased in the past have lower book values than the same equipment purchased in later periods. Thus, an investment in an Old store could be producing a high apparent rate Of return compared 60The desirability of including the capitalized value Of leased assets in the base of the return to capital ratio is discussed on page 47. 46 to a new facility, whereas conversion to equivalent dollar values would make the rate of return the same. Most firms, however, do not correct for price inflation because of the small differences it would make in year to year results. The treatment of depreciable tangible assets is subject to widely varying interpretation. In a study mentioned previously, eighteen of twenty-eight firms deducted the depreciation from the gross asset value. The problem with net asset value is that the rate of return has a tendency to increase over the life of an investment. Assuming income constant, the asset base for the return on capital calculation declines each time an allowance for depreciation is deducted. Thus, while the income is the same, the asset appears more productive when actually its usefulness to the company is de— clining. If the original cost is used as a base, the rate of return per year will be the same as long as the income does not change. With this system the declining earnings at the end of an asset's useful life will be reflected in lower return on investment instead of an unrealistically high return on a very small asset base. The conflict between the two methods can be partially resolved by considering the size of the unit for which the return on capital is being calculated. For a return to the company as a whole, the de- preciated value would appear to be the best base. The net asset base reflects the tendency for capital generated by one asset to be reinvested in other assets. Thus, depreciation on some assets is offset by new investment in other assets, with the result that the 61 Return on Capital as a Guide to Managerial Decisions,p. 18. 47 rate of return would not have a tendency to rise unless no new investment was being made. Where the concern is for a separate division or store, the return on original investment would be the best method because the rate of return would be unaffected by time. A serious problem with asset base determination occurs when leased assets are important to a firm. Retailing is one industry where leasing is an important source Of capital. Retail store leases are typically long lasting and can be called financial leases in con- trast to short term equipment leases. Several authors have said that the long term lease is strictly a way of raising money. 62 The question whether to finance a transaction by means of a lease or by borrowing is a matter of the costs associated with each method in relation to the financial position of the firm. Whether to lease or not is thus a financial decision to those retail firms who must decide whether to build their own facilities or to lease Space for their stores. If the lease is a method of raising capital, its capitalized value Should be treated the same way debt is treated and included in the asset base for return on investment calculations. The use of capitalized values Of leased property would assume important stature if meaningful comparisons were to be made between firms that followed different policies about leasing. A recent USDA study considered this issue when it evaluated the impact Of leased assets on the returns to capital for large food retailers and 62Robert J. Anthony, "Some Fallacies in Figuring Return on Investment," N.A.A. Bulletin, Vol. 42 (December, 1960), p. 12, Donald R. Gant, "Illusion in Lease Financing, " Harvard Business Review, Vol. 37 (March-April, 1959), p. 123. 48 processors. In this case, leased assets comprised 39 percent of the retailer's capital, but only 4 percent of the processor's capital. On the basis of invested capital alone, the retailers had a signifi- cantly higher rate of return. When the return was calculated on total assets, the retailers still achieved a higher rate of return, but the difference between the two groups was reduced. When the capitalized63 values of leased assets were included, the processing firms achieved a rate of return of 12.0 percent and the retailers only 9.6 percent. 64 This study suggests that failure to consider all sources of capital may lead to unrealistic return on capital comparisons. Limitations to Return on Capital - The return on capital ratio is a valuable overall measure of managerial performance. It is particularly well suited to measuring the performance of company presidents and division managers who may be responsible for pro- ducing profits with the assets placed at their diSposal. The measure is deficient when attempts are made to measure the performance Of merchandising personnel in subordinate positions in the firm. The concept of return on capital is useful to retailers, but there are serious computational problems when attempts are made to calculate return to capital ratios for departments and divisions. The most serious problem is the accurate identification Of income and capital 63Leased assets capitalized at 10 percent. 64Stephan J. Hiemstra, "Lease-Financing and Returns to Capital of Food Marketing Firms, " Agricultural Economics Research, Vol. 14, No. 1 (January, 1963), pp. 20-26. 49 by divisions and departments. 65 The use of return on capital to measure merchandising performance appears to be hampered by the lack of simplified procedures to integrate the control measure into the accounting system. It is possible that greater use of elec- tronic data processing equipment in department stores will even- tually simplify the introduction of this concept. A simplified return on capital calculation that is currently available may help introduce the rate of return concept to retailing executives. This ratio com- pares contribution profits to inventory investment and is discussed in detail in the following section. Contribution Return on Inventory Investment Currently the most appealing single ratio to measure the performance of merchandising executives is the ratio of contribution profits to the dollars invested in merchandise inventories. This ratio provides a measure of a merchant's ability to generate contri— bution margin with the funds at his disposal. The ratio is of parti- cular merit because it reflects the rate of sale, the turnover rate, gross margin, the direct costs of handling merchandise and the dollars invested in inventory. Also the maximization of contribution returns on investment is directly related to the maximization Of 66 profits for the firm. 65C. Robert McBrier, "Basing the Buyer's Bonus on Return on Investment," Retail Control, (March, 1960), p. 54. 66Richard H. Holton, "A Simplified Capital Budgeting Ap- proach to Merchandising Management, " California Management Review, Vol. 3, (Spring, 1961), pp. 86-87. 50 Contribution return on inventory investment for a single item is calculated by dividing the item contribution by the average in- vestment, and multiplying by the annual turnover. This procedure is similar to the MMA technique mentioned earlier except that this method incorporates the turnover factor directly in the computation. Tables of expected rates of return for different selling prices and rates of turnover can be constructed to assist the buyer in his pricing and promotion decisions. The ratio of contribution margin to inventory investment is critized by one author because it fails to consider investments in accounts receivable and real estate. 67 This author estimates that inventories represent about 15.percent of sales, accounts receivable 16 percent, and real estate 30 percent. A rate of return ratio that does not consider investments in accounts receivable or realestate would, therefore, measure the use of only part of a retailer's total capital. The author proposes to consider all three capital investments by calculating a ratio Of contribution margin to Space and charging the various departments for the use of capital invested in inventory and accounts receivable. Holton offers a simpler solution in his calculation of the contribution ratio. He includes the accounts receivable investment with the inventory investment and takes up 68 space efficiency as a separate problem. If a retailer is willing to make adjustments in his Space allocations, Holton suggests that 67Robert Kahn, "Controllable Margin, " Stores, (October, 1957), pp. 13-15. 68Richard H. Holton,pp. 97, 103. 51 profits can be maximized when contribution margins per square foot of Space are equal for all departments. Holton's capital budgeting approach presents several practical problems which detract from its theoretical appeal. The calculation of contribution returns on inventory investment for particular pro- ducts depends on the accurate identification of selling costs by individual items. This is an expensive and difficult task at best and there is some doubt among retail executives whether the costs that are obtained are meaningful. There is also the problem of how to convert merchandising executives to an entirely new set performance standards to evaluate merchandise and departmental performance. This must be accomplished deSpite the fact that there is no evidence that the prOposed new system will lead to better results than those being achieved by the present retail system of merchandise accounting. The contribution return on inventory investment is an improve- ment on many of the other measures of merchandising performance that have been discussed. This ratio, however, is not a panacea for problem solving at all levels in the retail organization. It could be a valuable tool for decision making in the merchandising divisions, but it is not suited to the evaluation of total store operations or to comparisons of different retail organizations. The ratio appears particularly useful in situations where the executive has control over both the direct expenses of operating his department and the amount of the inventory investment involved. Where buying and selling re8ponsibi1ities are being separated (as in many department stores) the buyer no longer has control over direct expenses or inventory 52 levels. When the buyer only has the staff responsibility of acquiring and pricing merchandise, contribution return on inventory has little application as a measure of his performance. The contribution return on inventory figures could still be used, however, to evaluate the performance of the executives charged with selling the mer— chandise in the stores. Summary This chapter has discussed some of the various types of control factors that can be used to control and evaluate retail mer- chandising activities. The approach has been purposely critical so that the reader may better understand the problems involved in the measurement Of merchandising performance in retail stores. The analysis indicates that there is no single control factor that can be used under all circumstances. All of the performance measures that have been discussed have their own particular advantages that make them useful in particular situations. Two of the control factors discussed did have a combination of elements not available in the other ratios that made them particu- larly attractive. For overall evaluation of managerial performance at high levels, return on assets appears to be a desirable measure. For comparisons of departments and divisions within a store the contribution return on inventory investment has definite advantages. These two ratios are favored because of their stress on the inter- action between profit margins and stock turnover. 53 The literature reviewed in this chapter has shown a definite shift away from the traditional markon approach to a consideration of contribution profits, turnover rates, and comparing profit per- formance to the assets employed. One of the Objectives Of this study will be to investigate the extent to which these newer control pro— cedures have been accepted and utilized by merchandising executives in today's department store organizations. The issues and problems that have been discussed in this chapter had an important influence on the development of the experimental hypotheses. The procedures that were used to test these hypotheses will be described in the following chapter on research techniques. CHAPTER III RESEARCH TE CHNIQUES General Research Procedure In this section the methods that were used to collect and analyze the survey data will be described briefly. Discussion under succeeding headings will explain the research procedure in greater detail. The basic background materials for this study were assem- bled from a review of the literature concerned with retail perfor- mance measurement. Several hundred articles and books were examined to obtain an appreciation of the methods and problems involved with controlling merchandising Operations. The results of this investigation have been summarized in Chapter II. The review of the published materials on performance measurement fostered the development Of a set of tentative hypotheses. A research program was then developed to assure that the data necessary to test the hypotheses would be collected. Following a discussion of different possible research methods, it was decided that personal interviews would provide the most accurate and reliable data. The adoption of this tech- nique called for the use of an interview questionnaire. An inter- view schedule was subsequently designed and field tested. The author's experience with the questionnaire in the pre-test sug- gested several revisions in the questionnaire and in the tentative 54 55 hypotheses. After these changes had been made, a list was prepared of potential retailers that might be included in the study. A sample of firms was selected from this list and initial contacts were made by the National Retail Merchants Association. Dis- cussions were held with the firms expressing interest in the study and interviews were later conducted with executives from eleven firms. The executives' responses were coded and the data trans- ferred to IBM cards. The final step in the research process was the interpretation and analysis of the survey data. Development of Working Hypotheses Hypothesis 1 states that different firms use different meas- ures of merchandising performance to control their merchandising operations. This hypothesis deve10ped from the assumption that although retail firms may have similar profit goals, the unique character of each firm is represented in its merchandising con- trol system. Also it was felt that the broad selection of retail performance measures that can be used to control retail opera- tions would prompt retailers to combine these factors in a wide variety of operational patterns. The second hypothesis prOposes that the utilization of various retail performance measures changes with the job level of the merchandising executive. Executives at the buyer level, for example, would be expected to use Short-run control measures such as sales volume, while executives at higher levels would tend to use broad long-run measures such as return on capital. This 56 hypothesis developed from the belief that the job functions and the aspirations of the buyers differed from those of their superiors. Buyers were thought to be primarily interested in advancement which would probably be based on short—run performance. Their superiors, having advanced to higher levels Of management, might be expected to have a broader view of the managerial function and a better understanding of long-run performance measures. Hypothesis 3 suggests that department stores are currently stressing different measures of merchandising performance than have been emphasized in the past. This hypothesis is a result of the continuous development of new methods to regulate retail per- formance and the conviction that some Of these techniques are being integrated into retail control systems. In addition, a study of the changes in control factors would help measure the rate of acceptance of new procedures and to predict the future development of retail performance measurement systems. The methods used to compensate merchandising personnel have been associated in hypothesis 4 with the performance meas- ures used by these executives to control merchandising activities. The existence of this relationship has been proposed by one author as a reason why markon and gross margin have become important 69 merchandising control factors. Also, the failure of the mer- chandise management accounting to gain any measure of acceptance 69Malcolm P. McNair and Eleanor G. May, "Pricing For Profit, "p. 108. 57 has been linked to the absence of emphasis on MMA in the salary system. 70 The possibility that personal financial gain may influ- ence merchandising executives in their choice and utilization Of control factors appears to be a reasonable assumption considering the relatively low wages paid to some merchandising personnel. This study will attempt to measure the strength Of the relationship between the salary systems and the use of performance measures by executives in department stores. The fifth hypothesis suggests that centralized rather than decentralized buyers are more likely to use the newer performance measures such as controllable profits. This hypothesis developed from the belief that changes in methods could be more easily introduced to a small group of central buyers than to a larger group of decentralized buyers. Also firms that have adopted the chain system Of central buying may have modified their control system compared to the firms who have kept the traditional department buyer organization. This hypothesis seeks to find out whether centralization is an important determinant of the per- formance measures that are being used in department stores. The proposition that department stores are currently making only limited use of the newer measures of merchandising perfor- mance is suggested by hypothesis 6. This hypothesis is the result 70Kenneth P. Mages, "M. A.A. Should Supplement Expense Center Accounting, " p. 34. 71When the buyers interviewed in this study were asked what changes they would suggest in their salary system, the most frequently mentioned answer was that they felt underpaid. 58 of the researcher's experiences during the pre-test of the questionnaire. The executives that were interviewed demonstrated an apparent lack of appreciation for some of the newer control procedures that have been described in Chapter II. This raised the question about the extent of the resistance among merchandising executives to the newer control techniques and tO changes in gen- eral. Careful testing of this hypothesis might reveal weaknesses in the new techniques that could help explain their current slow rate of acceptance. An additional hypothesis stating that the reported rate of return to capital was influenced by the choice of performance measures was originally proposed for this study. This hypothesis has considerable research merit, but it presents several testing problems. First, the small sample of firms that was used would have seriously limited the accuracy of any profit comparisons. Considering the large number of variables that influence profits, it is probable that a large sample Of firms would have been neces- sary to provide a precise evaluation of this hypothesis. Other problems were the impracticality of obtaining profit data from privately owned firms and the difficulty of isolating the effects of performance measures on profits. Because Of the serious prob- lems of data collection, sample Size, and testing, this alternative hypothesis was not included in the study. 59 Design of the Study Following the formulation of the hypotheses, a Specific research program was prepared to collect the research data. It quickly became apparent that Sufficient secondary data to test the experimental hypotheses were not available. This indicated the need for a field survey to gather information directly from mer- chandising executives. The mail questionnaire and the personal interview were two alternative procedures considered to obtain the necessary data. The use of a mail questionnaire would have allowed the inclusion of a large sample Of firms and the data could have been obtained quickly at relatively low cost. Gathering the data by personal interviews would have been more expensive, slower, and would have limited the study to a small number Of firms. The interview procedure had several other advantages, however, that prompted its adoption in the study. It was felt that the interviews would produce more complete and accurate answers to the survey questions. The mail ques- tionnaire might have encouraged superficial and hurried re5ponses to the questions. Interviews allowed the researcher to explain the study and the questions in detail and to follow up on individual responses. Personal interviews also provided the author with a "feel" for the problem by allowing him to talk to the respondents and to Observe their individual reactions to the questions. This technique also allowed the tabulation of aside comments that would have been lost if the mail questionnaires had been used. It was expected that the unsolicited remarks would be quite valuable in 60 providing insight into the workings of the merchandising control system. The interviews utilized a prepared questionnaire to help guide and structure the individual discussions. The use Of the questionnaire assured that the same questions would be asked of all Of the respondents in a standardized manner. The questionnaire also made it easier to code, tabulate, and analyze the data. Except for question 7, all the responses to the questions were personally recorded on the questionnaire by the interviewer. Question 7 required the executives to choose between matched pairs Of per- formance measures and it proved to be the most difficult survey question. The executives were allowed to read this question and to select their answers from the pairs Of performance measures. Developing and Pre-Testing the Questionnaire The first step in the preparation of the questionnaire was the accumulation Of a list of all Of the information that would be needed to test the experimental hypotheses. Questions were formulated to supply this information and then combined into an interview sched-_ ule. This preliminary interview schedule was tested in interviews 72 Some with executives in a Los Angel'es area department store. of the questions were difficult for the executives to understand and the questionnaire was awkward to administer. The responses provided by the executives in the pre-te st stores were similar to those provided by the executives in the stores used in the study except that the executives in the pre-test stores appeared to be somewhat more concerned with return on capital. 61 Revisions were made to simplify the questions and to make them more closely related to the jobs being performed by the execu- tives. It was felt that the executives would be better able to discuss the merchandising control System when it was related to the activities performed in their jobs. The revised questionnaire was tested in a second department store and proved to be a satisfactory data collec- tion instrument. The department stores and the data collected during the pre-test of the questionnaire were not included in the study. Interviewing Department Store Executives The interviews were restricted to executives in department store organizations. The selection of department stores as the basic source of data for the study was favored by the well developed merchandising control Systems which are used by these organizations. The use Of an established merchandising operation with definite lines of authority and reSponsibility would allow research that would be impossible with less formally organized firms. The selection was also influ- enced by the availability of previously published research work on merchandising control systems in department stores. An equally im- portant reason to use department stores was the interest and financial support of the National Retail Merchants Association. The association solicited and obtained the cooperation of many of its member depart- ment stores. It is doubtful that the study would have been as suc- cessful without the support of this department store trade association. Within the department store organization the study focused its attention on the buyer and his superiors because of their stra- tegic position in the operation of the merchandising function. These 62 individuals make the day-to-day decisions on what merchandise is bought, how it is priced, and how it is diSplayed and promoted, which are basic tO profitable merchandising operations. The buyer who makes these decisions is therefore in an excellent position to describe and evaluate the workings of the merchandise control system. The interviews were scheduled during the summer since this was a slow season for the stores and it was a free period for the interviewer. The interviews were completed during the four month period from June through September, 1963. The collection of data beyond September was impractical due to the extremely busy Fall schedules Of merchandising executives in department Stores. Selection of Participating Retailers The procedure used to select the companies in the study will be explained in detail at this point. The total number of firms included in the study was restricted by the desire of the researcher to conduct the interviews personally and by the limits of the time available to collect the data. All of the firms included in the sam- ple were from the state Of California. The large number of department stores in California made it possible to Obtain a rep— resentative sample of firms without going to other areas. It was felt that the extension of the study to nearby states would not have improved the accuracy of the data collected. Also, if stores from other states had been included, travel expenses would have quickly exhausted the funds available for the study. 63 The sample Of firms was restricted to department stores in the three major metropolitan areas of San Francisco, LOS Angeles, and San Diego. This restriction did not seriously bias the sample because these three areas include the major department stores in the state and a generous sample of smaller firms. The use of the three metropolitan areas simplified travel to the stores and allowed greater efficiency in the collection of the data. The specific department stores to be included in the study were selected with the help of department store directories. A basic list of forty-four California firms with assets in excess of $1 million was selected from the directories. From this list twenty-seven firms were selected for initial contacts. The list of twenty-seven firms included the largest firms in the state and a sampling Of the smaller firms. Letters Of introduction were then sent by the National Retail Merchants Association to the firms that were members of the association. These were followed by letters of inquiry from the researcher soliciting cooperation in the study and requesting an opportunity to explain the study in greater detail. Six of the twenty-seven firms did not reply to the letters of inquiry, and seven others declined to participate in the study for a variety of reasons. Fourteen firms agreed to cooperate in the study and interviews were subsequently conducted with executives from eleven firms. The eleven different firms included in the study represented a variety of sizes and organizational types. The firms ranged in size from about $5 million to over $100 million in annual Sales. 64 Five of the firms might be described as relatively large organizations and six Of the firms might be classified as small to moderate in size. Selection of Individuals to be Interviewed The individual executives that were interviewed were selected on a nonrandom basis. Only those executives who were in their offices on the days when the interviewer visited the companies had an opportunity to be included in the study. Buyers and merchandise managers who were out of town on buying trips, on vacation, or at one of the branch stores were eliminated from consideration. The visits of the interviewer were scheduled so that a miximum number of buyers would be in town but it was not possible to pick a time when everyone could be available. The researcher requested that the buyers and merchandising managers who were selected for the study represent a variety of merchandise lines. The actual selection of the persons to be inter- viewed was done in most cases by the management of the partici- pating stores. There is some evidence to believe that the managers directed~ the interviewer to their more articulate and alert execu- tives. This was shown on several occasions when the interviewer selected executives to be interviewed and found them to have greater difficulty understanding the questions and in communicating about their jobs. The selection of better than average executives for the 65 interviews appears to have been a normal reaction on the part of the stores to create as good an impression as possible. The study was helped by this activity Since data was Obtained from those who had the best understanding of the merchandising operation. The sample Of executives that was obtained, however, would not appear to be entirely representative of the average depart- ment store buye r. Statistical P rocedure S The data from the completed survey questionnaires were coded and punched onto IBM cards. This facilitated the tabulation Of the results and made it possible to manipulate the data in a variety of ways. Differences in responses were studied by sorting the answers to the questions by firms, by job type, by the type of merchandise bought, and by the sex of the buyers. Answers to the open end questions were summarized by the use of counts, rank orders, and percentages. Question 7 was the only question that lent itself to the use of statistical tests of significance. In this question the executives were asked to choose between two measures of merchandising performance. If there had been no real difference between the two measures, each would have been chosen about fifty percent of the time. The executives did show preference for some of the measures and the chi square test was used to see if these differences were greater than what chance along would eXplain. 66 Summary This chapter has reviewed the research procedures that were used to gather the empirical data for this study. The development of each of the research hypotheses has been discussed in detail. Also an explanation of the questionnaire and interview procedure was presented and a description was given of the methods used to select the firms and the individuals included in the study. The data that were collected by these procedures are summarized in the following chapter . CHAPTER IV RESEARCH RESUL TS Chapter IV will present and discuss the survey data collected to test the working hypotheses. Consideration will also be given to the survey results related to the influence of merchandising control systems on executive behavior. The chapter Will conclude with a discussion of additional data that was obtained during the interviews. Research Results - Hypothesis 1 The first part of this hypothesis states that different firms strive to achieve similar goals. This proposition will be analyzed using data from question 5 on the interview schedule. The execu- tives were asked what they felt were the three or four most im- portant overall objectives of their company and their answers were compared among the eleven firms in the study. The last part of hypothesis 1 states that different firms use substantially different measures of merchandising performance. Interfirm comparisons of answers to question 3 will be used to test this part of the hypothe sis . Department Store Goals as Stated by Merchandising Personnel Profit was the organizational goal most frequently mentioned by the merchandising executives in this study. It was cited by 70 of the 111 executives interviewed (Table l). Ranking second among the organization goals was sales growth mentioned by about one 67 68 TABLE 1 RANKINGS OF OVERALL COMPANY GOALS BY MERCHANDISING EXECUTIVES IN ELEVEN DEPARTMENT STORE ORGANIZATIONS Number of Ranking Stated Company Goals Mentions 1 Profits 70 2 Sales growth 54 3 Customer service 49 4 Development and maintainance of store image 32 5 Fashion emphasis 22 6 Community service 14 7 Trade up 10 8 Greater share of market 10 9 Integrity and reliability 9 10 Good value 3 11 Broad lines of merchandise 6 12 Responsibility to employees 5 13 Higher markon percentage 5 14 Right merchandise 4 15 Fewer markdowns 4 16 Proper stock turnover 4 69 half of those interviewed. Customer service was a close third with forty-one mentions. Rankings of these three frequently mentioned goals have been tabulated by individual companies (Figurel). It would appear from this analysis that there was fairly close agree- ment among executives of different firms with regard to their per- ceptions of company objectives (Figure 1). This was particularly true with respect to profits. This factor ranked as the most fre- quently stated goal by executives of six firms and was the second most frequently mentioned goal in four other firms. Executives from one company ranked profits fourth behind customer service, sales growth, and fashion leadership. This may mean that this firm had already achieved satisfactory profit levels, and in fact .it was one of the most profitable firms in the study. There was less agreement among executives of the eleven firms concerning the relative importance of sales growth and customer service. In one firm sales growth ranked as the most frequently mentioned goal, in five firms it was second, and in two firms it was in third place. Customer service Showed a pattern similar to that of sales growth. It was ranked as the most impor- tant goal of four firms, it ranked third in one firm, and fourth in three other firms. One firm did not mention customer service as a goal and in two others it ranked in sixth place. The relative rankings of these goals appeared to be influenced by the Size of the firm. The largest firms showed more agreement as to the relative importance of the stated goals than did the smaller firms. The ranking of overall company goals that was compiled as a result of the answers given by the executives to question 5 is 70 m >cmanu mo moiuoooxm of >3 pocoflcoapocnmkr outflow uoEOumdUs L. o L L IIIII. fiuBouU mome LL L L L L m L L L L L L L L L “v \I II II II- IL L L \\ L L L \ L L L \ L L L m \ / L L L \ L L LL L \ L L L L N x L I 330nm \ L L \ / / L L v L L x < L L llll woof/pom HOEOHmSU woflcmm 2 L: o m L. o m w m N L de00 eacmafiou mowcmmgou monHm4m 7: mmZHDOMxm ozfifizsmommz am @360 SZLEEOO m... mogmmm mmanwoo oz... .me Bomo madam .3395 so mozgzfia , a Ham DUHh 71 partially substantiated by the answers given to question 7 (Table 2). In this question the executives were asked to choose between matched pairs of performance measures. Four of the factors that appeared as answers to question 5 were included in the comparisons in question 7. These were profits, sales growth, stock turnover, and gross margin. 73 The executives Significantly preferred pro— fits when it was paired with gross margin. Gross margin in turn was significantly favored over stock turnover. Since profits and sales growth were also preferred to stock turnover, the four factors were evaluated in almost the same order as they were ranked in question 5. Measures of Performance Used by Merchandising Executives The hypothesis that merchandising executives use different measures of performance will be examined using data from ques- tion '3. The executives interviewed in this study mentioned a wide variety of merchandising control factors in reSponse to this question. Sixty-four different answers were recorded (Table 3-Q, Appendix B). The answers were concentrated on a few responses, however, and eight factors received about 60 percent of the mentions. Sales volume was clearly the most frequently discussed control factor and it was. mentioned by 59 of the 111 executives interviewed (Table 3). The five next most frequently mentioned factors were cited by thirty-five to forty-six of the executives interviewed. 73For the purposes of this comparison gross margin and markon are judged to be similar. 72 Lo>oL Lo . so: on .833 Louucoo LummenL OL pouuoLoud KALLGMOCLGwLm o. Lo>OL Loo. mg on nouomw LOSGOO @93an on pouuoLoua EucdoLficmLm .m m C O m .ngmg oz 0 o o o mucouOLoan OZ 3 L m am 3:98 poLmOLEL LO Laoouom .m mm muLmOnnL LoZ poo o SL pm mome .LO unmouom .m mm 330nm qu Le LV 0 0 LV non/mg OZ L o o L mucouOLOHnL OZ MW N 0 mm H0>OGH5H MUCH—m om m 3 Ln new? moot/mum LO usoouom .m we mmLOm m N o 0 LV non/moan OZ «a O .L . 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Hoe/mad» OZ L o L o mononmmoum OZ Lm N o MN LAMOLGOLEL B LO umLLOQ pom muLwounL oanLLOuLCOO nLNo m mL is LAMOLCOZLL Lo .3200 .HonL mLLLOunL qu o L. o o L» .8399. OZ “a o N N oocmuOLounL OZ SN 0 o LN no>ocudH #095. amp L. NL we ommucoouom chumLL/L mmouO UONLLmom m 33 L: SE LE mo>LLdooxmL mumwmcmz mnowmcmz LL< mchchmeLOLOLZ wchchmsouoLz muoxdm L808 Lou ocoo LOGOSSLQ muoobmh LOSGOO HOLESZ . . . wchchmaouoSL pouLan .HLOnL nouomh Loom wcLuuoLounL mo>Ludooxm mo mumnEdZ LOOHLGLOGOU .l N MAMdAH 74 TABLE 3 RANKINGS OF MERCHANDISING CONTROL FACTORS BY EXECUTIVES IN ELEVEN DEPARTMENT STORE ORGANIZATIONS Number of Ranking Control Factor Mentions 1 Sales volume 59 2 Stock control 46 3 Promotions 44 4 Markdowns 40 5 Profits 36 6 Markon percentage 35 7 Stock turnover 23 8 Expense control 20 9 Fashion 15 10 Merchandise diSplay 13 11 Gross margin 13 12 Merchandise lines and items ll 13 Sales planning 10 14 Company policies 9 15 Basic in—stock position 8 75 Differences in the use of these control factors were examined by tabulating the data from question 3 by separate companies (Figure 2). This analysis showed that there were few differences among the eleven firms with regard to the ranking of sales as a control factor. Sales was the most frequently mentioned factor in five of the firms, it was second in five other firms, and it ranked third in one firm. Agreement on Secondary Factors - The extent of the agree- ment on the factors ranking second through Sixth can be seen by reference to the relative rankings of these factors in each firm (Figures 2 and 3). There was considerable agreement among the firms on the general importance of these five factors, yet exact positions in the rankings varied somewhat between firms. Stock control was the second ranking control factor overall and it varied in ranking from first to seventh place among the eleven firms. Promotions showed an even more erratic pattern. It ranked as the most important factor in two firms, it ranked eighth and ninth in two other firms, and it was not mentioned at all by a fifth firm. Markdowns, profits, and the markon percentage which ranked fourth, fifth, and sixth for all firms also showed some variation among firms. Each of these three control factors were ranked in first place by one firm and in ninth or tenth place by other firms. Other Findings - Another unique result was that while profits were the most important overall goal as seen by merchandising executives, sales volume was the most frequently mentioned mea- sure used to control merchandising operations. Profits ranked 76 L >cdeOo LO 035088 of L3 HOLOOL Louucoo m we Orson—cor: you one? mcoLLOEOHan o L L L w LL >L LL LL LL N. \/ L L \ III- LOSCOO vLooum o m Lu m N IIIII smcofloccounw L oEdLo> mome LL 2 o m b o m Le m N L wagedm moLcmanO muopomh LOSCOO mZOHBH1LH ZH mmOBOflsOoxo 65 ho. nOuodL Louuooo .m mm @953de LOZ n a Loud L mmLcdmaoo CL mo>3500x0 05 >3 non—odm Loan—coo o no LOOGOLn—cog «OZ ,m oL o w L. 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N uLooum LuLO Lao 252 m owmucoouom GOVLHMLLLL o N moLmom do uLooLwtdL m muLmoum m N omflcoouom GOVLHmLLLL o mHBOLVVLHmLLLL Lu N oEdLO> mOme L. chLuOEOHnL m m HOLLOGHSH vLOOum o LOHEOU VLOOum N Lu LOHEOD #095 o 0530.? mome L empowmadLLLL homemade/L OmchdLLouoLLLL mmLLEQLOHOLLLL Ldnosoo fig». moOLusOLLLL meOLmLLwLQ Ou muomdnmLLLL meLLGoZ . . pommSOanL mdLon mm mummmGdLZ mGLvLcsm LO mmLLochLouoLZ LduoaoU >0. .Lo one as one Lgoamcfi LL . ponEdZ Loommofim muOoosm oocmEuOLuom MOLESZ .p L L>L . . .Q n podoLLdoLLLL mnOLowh ooGoEuOLnonL mZOLHmL1LH ZL mMLOHUmeL mLOZLWSLMLOhMLanL .mO numb MLLH. ZO mmmoaqtg MmLQZLwZUMLmLSL AémZmO QZ< mmmodeg HmHQSUMLHZ 1HHQ ZHMLSHHQ .HZHZMQMOLN e Hdmaofl”. 87 The agreement between divisional merchandise managers and general merchandise managers as to what factors were being stressed (Table 6) is weaker than at the buyer-divisional merchane, dise manager level (Table 5). The first four factors mentioned by the general merchandising managers, stock control, stock turn- over, sales, and markon percentage were all mentioned by the divisional merchandise managers. Promotions, markdowns, and profits which were mentioned by the divisional merchandising managers did not appear as factors mentioned by the general mer- chandise managers. This smaller amount of agreement may have been related to the small number of general merchandise managers that were included in the study (7). Another factor that may explain the lack of complete agreement was the generally lower response given to question 6 as compared to question 3. In question 3 the first eight reSponses received a total of 303 mentions and in ques- tion 6 the first eight responses received only 153 mentions. It appeared to the interviewer that some of the executives interpreted question 6 as a repeat of question 3, and as a result they did not give complete answers. The small number of executives together with the small number of factors mentioned by each executive provided only limited data on the factors stressed by general merchandise man- agers. The fact that four of the most frequently mentioned factors stressed by general merchandise managers were reported by the divisional merchandise managers supports the view that the same factors are important to the different managerial levels. 88 Tabulation of Question 7 by Job Level Question 7 was a forced choice question asking the respondents to pick one of two paired performance measures. Possible differences in the importance of the selected control factors between managerial levels can be Observed by sorting the data by job categories (Table 2). An inspection of the data Shows that in general, the buyers agreed with the divisional and general merchandise managers on the relative importance of the perform— ance measures. Buyers' preferences corresponded with their superior-S' choices in seven of the eight pairs of performance measures. In the fourth pairing the buyers agreed with the divi- sional and general merchandise'managers as to which of the mea- sures was most valuable, but the buyers' preference was not as strong. In this pairing, 56 percent of‘the buyers preferred profits as a percent Of sales to profits as a percent Of invested capital. DiviSlonal and general merchandising managers, however, picked profits as a percent‘of sales 85 percent of the time. In the third pairing, buyers showed a slight preference for stock turnover; and the divisional and general merchandise managers picked sales growth 70 percent of the time. The observed agreement between the managerial levels con- cerning the importance of the selected control factors was sub- stantiated by the use Of a chi square test Of significance. Because of the small number of general merchandise managers that were included in the study, their answers were combined with those of the divisional merchandise managers for the purposes of this test. 89 The test evaluated the null hypothesis that managerial level had no influence on executives' preferences for control factors. The values of the test statistics that were Obtained for six of the eight com- parisons were not large enough to reject the null hypothesis at the 5 percent level.74 In the fourth pairing the merchandise managers' very strong preference for the profit ratio was significantly different from the buyers' preference for this same ratio. In Spite of this difference the fact that both groups preferred the profit ratio supports the argument that different managerial levels use the same control factors. The third pairing was the only comparison where'buyers and the merchandise managers preferred different control factors. In this comparison the merchandise managers' preference for sales growth was Significantly75 different from the buyers' preference for stock turnover. Summary of the Data on Hypothesis 2 The executives interviewed in this study used the same control factors at the buyer, divisional merchandise manager, and general merchandise manager levels. This was Shown by the analysis of the respOnses Obtained to questions 3, 6, and 7. The fact that the three levels Of executives showed close agreement on the use of control factors in three separate questions is strong evidence that all the executives had the same attitude on merchandising perfor- mance measures. 74‘The calculation of the chi square values is shown in Appendix C, page 184. 75At the . 05 level. 90 Influence Of Merchandise Lines on the Use of Control Factors Relatively few differences have been observed in the use of merchandising control factors among firms or between managerial job levels. An additional question that might be raised is to what extent does the type of merchandise handled influence the usage of the merchandising control devices ? To explore this problem the buyers were divided into hard and soft goods categories and their answers to question 3 were tabulated separately (Table 7). It is readily apparent that hard and soft goods buyers used almost exactly the same control factors. The seven most frequently mentioned control factors suggested by hard goods buyer were also the seven most frequently mentioned by the soft goods buyers. Several shifts in relative rank positions between the two groups did occur that deserve comment. The most obvious shift was the change in the ranking of profits from second place with the hard goods buyers to sixth place with the soft goods buyers. This change may be related to the more aggressive price competition that department stores face on hard goods from discount stores, supermarkets, and other stores. Price competition would tend to. lower the markon percentages that could be used and make it more difficult to produce profits. This chain of events would naturally increase the emphasis on profits as a control device. Soft goods in department stores, however, have a strong fashion element that tends to Obscure price comparisons. Also the branded lines Of soft goods in department stores appear to have more resale price maintenance than do most hard lines. 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H0 0030000 >000000H BoHHonH m 0003002 00H 030m w0H 000nm 000300H>H 000030nH w0H030nH m0§00~H 00 00300002 m0 0030002 a : 00>3000xm 00000H0O 0300mm 82 000003000me 0000300 00H0m UMHHQHH000 u 0N HAQJAH 134 seventh place and the sales group had it in twenty-first place. Aside from these minor differences sales and profit oriented executives gave virtually identical reSponses. It is possible that sales and profit oriented executives react differently to the merchandise control system used in department stores, but this study did not reveal any evidence to support this hypothesis. The data that was available suggests that both groups use the same factors and react in the same ways. This may mean that sales and profits are so closely related in the minds of department store executives that analyzing responses on a separate basis is meaningle s s . Trading Up and Executive Action In response to questions 8 and 9 several buyers mentioned that part of their pricing policy was to trade up to higher priced merchandise. Trading up was also mentioned as a response to questions 1, 3, 4, and 5 and it may represent a desire to upgrade the quality of department store merchandise. What may be more likely is that this simply represents a desire to obtain the higher markon percentages that are available on higher priced merchan- dise. The desire for higher markon percentages seems to be a reasonable explanation for trading up considering the stress placed on markon and gross margin by the retail system of merchandise accounting. The stress on trading up raises the question whether the executives emphasizing this factor believe that expenses are a function of prices. If expenses change with prices, then higher 135 prices would mean higher expense ratios and under these conditions the only reason to trade up would be to change the merchandise mix. If expenses are relatively fixed, however, trading up to higher priced merchandise could produce higher profits. The attitudes of the executives who mentioned trading up were analyzed by sorting the answers these executives gave to question 11. This question asked the executives if they considered expenses when setting prices. Forty-nine percent of all the executives interviewed said they considered expenses when pricing, whereas only 35 percent of the executives that stressed trading up said they considered expenses. This lack of concern for expenses among merchandising executives suggests that expenses and prices are relatively independent. The statement by one executive that a consideration of expenses would lead to noncompetitive prices (Table 15) also supports this appraisal. Even among those who said they considered expenses when pricing, expenses were handled in a superficial manner. The most frequent comment in response to this question was a statement that expenses were known on a percentage basis and were included as part of the markon percentage. Expenses were not identified by item and only in unusual 'cases was any consideration given to their influence on prices. In several of the companies in the study, selling expenses were under the control of sales supervisors. Under these circumstances the buyers probably would be even less concerned with the effect of selling expenses on prices. In general there was no indication that the executives gave much thought to 136 the possibility that higher priced merchandise would cost more to selL Markdowns and Executive Behavior The importance of markdowns in department store operations was vividly illustrated by one of the buyers interviewed in the study. He referred to a company that was experiencing financial troubles and indicated that part of the problem was that management had instructed the buyers to keep markdowns within a certain fixed percentage. This was accomplished by simply not taking as many markdowns as perhaps were needed. Stock that should have been cleared out was kept in the store with the result that when it was finally sold, extremely large markdowns were required. Most of the buyers in this study realized the necessity of taking markdowns quickly. They looked upon merchandise that had to be marked down as an example of a buying error. Their attitude was to take a fairly substantial initial markdown to move the items out so that the money invested in the goods could be reinvested in new merchandise that might offer greater sales potential. Addi- tional data on the influence of markdowns on executive behavior was obtained from the second part of question 9. This question asked the executives how they arrived at prices for sale merchandise (Table 21). It was apparent that there were basically three types of merchandise used for sales. First there were items bought at special prices. This merchandise might carry lower, regular, or higher markons depending on acquisition cost. A second type of merchandise was the standard items that the store 137 TABLE 21 PRICE POLICIES FOR SALE MERCHANDISE MENTIONED BY EXECUTIVES FROM ELEVEN DEPARTMENT STORE ORGANIZATIONS Number of Ranking Pricing Policies Mentions 1 Sale merchandise bought cheaper 67 2 Smaller markon percentage used on sale merchandise 57 3 For clearance use one third off 29 4 For clearance use one half off 19 5 Use regular or higher markon percentage for sales 16 6 Buy from regular suppliers for sales 8 7 What is needed to sell the item 6 8 First markdown is the cheapest 6 9 Try not to sell below cost 4 10 Follow standard dollar markdowns 2 11 Twenty percent or more off for clearance 2. 12 Sell at cost 1 138 carried at all times which were occasionally marked down for sales. Several buyers said that they did not think that this was a good policy since the merchandise could be sold without any trouble at standard markon percentages. A third type of sale merchandise was clearance items which for one reason or another had not been sold. Markdowns were used to sell this merchandise and twenty-nine buyers indicated that they started with a 33 percent reduction. Another group of buyers started with 50 percent and two buyers used an initial markdown of 20 percent. A question might be raised concerning the buyers' use of advertising as an alternative to taking markdowns. Buyers appeared to be very careful in the use of their limited advertising funds and they attempted to pick the best possible items for promotions. They typically spent a great deal of time looking for items for ads and the items selected normally had some special features or fashion elements and frequently represented a special price. One popular type of item was a special purchase of a well known brand. This type of item became an easily identifiable value to the cus- tomer. Promotions did not appear to be used to encourage the sale of slow moving merchandise. Items were typically promoted when they first came in and if they did not sell, markdowns were then used to move the merchandise out. Ads were sometimes used in conjunction with markdowns of staple or clearance merchandise, but ads and markdowns did not appear to be used as substitutes for each other. It appeared that in general the buyers preferred mark- downs to clear out slow moving merchandise and used ads for new and special purchase merchandise. 139 Other Research Results This section will discuss the survey data that pertains to some of the general problems related to the implementation of merchandise control systems. The data that is used is drawn from some of the questions that have been discussed earlier and from the unsolicited remarks recorded during the executive interviews. Research Data Concerned with Stock Turnover It was clear from the survey data that stock turnover was only of secondary importance to merchandising executives in department store organizations. Although stock turnover appeared as an answer to questions 1, 3, 4, 5, 6, 7, 8, and 9 it received so few mentions it could not be considered an essential control factor. In question 1 concerning duties and responsibilities, turnover ranked fifteenth among the answers given and it was mentioned by only 12 executives. In question 3, which was the most productive survey question concerning control factors, stock turnover ranked seventh and was mentioned by only 23 of the 111 executives inter- viewed in the study. Among changes in performance measures recorded in ques- tion 4, "more emphasis on stock turnover" ranked sixth with nine mentions. Question 5 was concerned with the executives' inter- pretation of company goals. Stock turnover ranked twentieth among the answers given to this question with only four mentions. In question 6 stock turnover did somewhat better and it was the second most frequently stressed factor mentioned by general merchandising managers. With divisional managers it ranked seventh and it was 140 nineteenth among factors stressed by buyers to their subordi- nates. In question 7, the executives were asked to indicate their preferences between two paired performance factors. Stock turnover was matched with sales growth, gross margin percen- tage, and with the net profit ratio and it was not preferred by the executives in any of the pairings. In fact, gross margin percen- tage and the net profit ratio were significantly preferred to stock turnover. The pricing questions and the unsolicited remarks provided some support for stock turnover as an important control factor. Nine buyers in budget and small appliance departments said that they would buy low markon merchandise if the item had a potential for high turnover. One other buyer said that volume could not make up for low markon and he preferred the markon percentage to turnover as a guide in making his merchandising decisions. Among the miscellaneous remarks, nine merchandising executives said that turnover is where you make your money (Table 14). One indicated that competitors prevented increases in markon percen- tages and that more turnover was the only way to increase profits. Several other buyers indicated that the "dissection" reports were important profit tools because they allowed the buyers to identify high turnover merchandise areas so that additional money could be invested in these areas. The fact that nineteen executives expressed a desire for faster and more detailed merchandising reports (Table 17) suggests that these executives were also concerned with the stock turnover rate of their merchandise. It would appear that 141 a small minority of the merchandising executives interviewed in this study believed that stock turnover was an important control factor, but to most executives it was only a vague concept of secondary consequence. Additional P ricing Data The pricing questions that were included in this study were designed to study markon procedures and to determine if the pricing procedures suggested by MMA were being employed. The study was not designed to obtain data on the competitive pricing practices of department store firms. However, a few responses from the pricing questions deserve consideration. There was considerable interest among merchandise exec- utives interviewed in this study to follow manufacturers‘ suggested list prices. This may reflect an interest in obtaining the usually good markon percentage suggested by the manufacturer or it may reflect a tacit understanding among the stores to reduce price competition. Additional information on the use of suggested list prices was provided by several executives who said that in some cases they ask the manufacturer to raise the suggested list price on an item to allow higher markon percentages. They pointed out that other firms would follow changes in the manufacturer's sug- gested list where they might not follow an individual store in its quest for a higher markon percentage. Several other remarks made by the merchandising executives also implied that some department stores did not try to compete on a price basis. This 142 limited data on inter-firm pricing practices would appear to sug- gest that pricing is not an entirely independent activity. Qualitative Merchandising Control Factors One of the main uses of merchandising control factors is to measure the achievement of company goals. Quantitative control factors such as sales, profits, markdowns, and stock turnover would appear fairly well suited to measure the achievement of company financial objectives. Many of the responsibilities men- tioned by merchandising executives as part of their jobs, however, do not lend themselves to evaluation by quantitative control tech- niques. Question 1 asked the executives to name their most impor- tant duties and responsibilities and the most frequently mentioned duty was the selection of merchandise (Table 13). Successful performance of this job can be partially evaluated by subsequent sales and markdown records, but these will not tell how well the buyer is getting along with his suppliers or how well he is cover- ing his market. Training and supervision of subordinates was a frequently mentioned executive responsibility that also does not lend itself to evaluation by quantitative techniques. Other responsibilities mentioned in question 1 that require subjective evaluation include sales planning, store image, selec- tion and scheduling of help, display, fashion sense, customer service, employee relations, leadership, and stimulation of sub- ordinates. The many factors that have been mentioned by mer- chandising executives which require subjective evaluation suggest 143 that quantitative control factors cannot be used as the sole measure of the performance of merchandising executives. Time Available for Quantitative Control Procedures The number of executive working hours devoted to the use of quantitative control devices can be approximated by analyzing the executives' answers to question 2 (Table 22). This question asked the executives how they divided their time among their present activities. The largest proportion of the merchandising execu- tives' time (32 percent) was spent supervising selling activities in the stores. This reflects the strong desire of merchandising people to find out what is happening on the selling floors. It also indicates the amount of control some buyers still exert over sell- ing activities. Twenty-four percent of the executives' time was devoted to merchandise selection and this was about equally divided between buying trips and salesmen's store calls. Meetings, advertising coordination, telephoning, inventory, and other miscellaneous activities accounted for 21 percent of the available time. The remaining 22 percent of the executives' working hours were devoted to office work concerned with writing orders, making plans, pricing merchandising, and reviewing item performance. It would appear that merchandising personnel devote relatively small amounts of their time to the quantitative decision process advocated in the discussion on MMA. Most of the executives' time is presently spent acquiring merchandise and supervising its 144 TABLE 22 TIME ALLOCATIONS OF MERCHANDISING EXECUTIVES IN ELEVEN DEPARTMENT STORE ORGANIZATIONS Average Percentage Executive Functions Hours of Total Per Week Hours Direct supervision of 14.9 31.7 merchandising activities in the stores Office work; writing orders, 10.4 22.2 planning and reviewing item performance Buying trips 5.9 12.5 Meeting salesmen in own office 5.6 11.9 Meetings with subordinates 2.6 5.4 Telephone time 2.5 5.3 Advertising; planning and 2.2 4.7 coordination Meetings with superiors 1.8 3.9 Checking inventories and receipts 0.6 1.3 Other activities 0.5 1.0 Totals 48.4 99.9 145 sale and not in manipulating prices and margins to maximize contribution in relation to inventory investment. Suggested Improvements in Merchandising Control Systems Question 15 was included in the questionnaire to solicit the executives' ideas on how to improve the present merchandising control systems. Of the 111 executives interviewed, 86 felt that changes could be made to increase efficiency. Careful study of the suggested responses shows that most prOposed changes were in operating procedures rather than in the merchandising control system itself (Table 17). The most frequently mentioned changes were related to stock control. Nineteen executives expressed a desire for faster and more detailed merchandising reports. Seventeen others mentioned a need for electronic inventory control and five buyers wanted more efficient stock control. A second problem area appeared to be the physical handling of the merchandise. Thirteen executives suggested that receiving and marking could be made more efficient and seven others wanted better warehousing. Several buyers said that the physical handling needed improvement and two buyers thought that merchandise could be moved to the floor faster. One buyer thought the problem of moving goods through the warehouse and receiving rooms was due to poor com- munications. Several answers to question 15 showed some dissatisfaction with the organizational relationships between the buyer and his superiors. Three buyers suggested that fewer bosses would 146 increase efficiency. Other buyers said they would like more clearly defined responsibilities and less control from the top. One executive went so far as to indicate that divisional merchan- dising managers were not needed. The growth of branch store operations among department stores is increasing the work load of the buyers. Six buyers sug- gested increased separation of buying from selling was needed to ease the work load on the buyers. Typically this would mean hiring sales supervisors for departments located in the main store which are currently being managed by the buyer. Two of the firms in the study had achieved considerable separation of buying from selling and several of the other stores were moving in this direction. Most of the suggestions to improve merchandising operations made by the executives interviewed in this study were limited to operational changes. Buyers were concerned with getting better handling for their merchandise and in receiving faster and more detailed merchandising reports. Very little attention was directed at changing the control system istelf. CHAPTER V CONCLUSIONS This final chapter will discuss the agreement between the survey data and the working hypotheses. It will also suggest addi- tional conclusions that can be drawn from the data collected from the merchandising executives. The chapter will include a discus— sion of proposals for further research and it will end with a summary of the results of the study. Evaluation of the Hypotheses Hypothesis 1 Hypothesis 1 states that different firms strive to achieve similar goals while using substantially different measures of mer- chandising performance. The first part of this hypothesis indicat- ing that different firms strive for similar goals was supported by the survey data presented in Figure l. The second part of the hypothesis concerned with the use of different control factors in different firms was not substantiated by the survey results. Instead of differences, the information presented in Figures 2 and 3 shows fairly close agreement among the firms concerning the performance factors that were being used to control merchandising Operations. The survey data failed to support this hypothesis and the hypothesis is rejected. 147 148 Hypothe sis 2 This hypothesis states that merchandising executives at higher levels tend to use broad long run performance measures, such as return on capital, whereas, merchandising executives at lower levels tend to use measures such as expense and markon percentages. Survey data presented in Figure 4 and Tables 3 and 4 failed to support this hypothesis. The data showed instead that the three levels of merchandising executives exhibited fairly close agreement concerning the use of merchandising control factors in department stores. Since the survey data failed to support this hypothesis, the hypothesis is rejected. Hypothesis 3 Hypothesis 3 states that department stores are currently stressing different measures of merchandising performance than have been emphasized in the past. This hypothesis was tested with data gathered from a question which asked execu- tives if they had observed any changes in performance measures (Table 9). While a majority of those interviewed believed that changes had occurred, the only response that received a signifi- cant number of mentions was that higher markon percentages were needed. It is difficult to decide whether this represents an actual change in emphasis or just a change in the amount of markon that is acceptable. The frequent mention of increased expenses sug- gests that the quest for higher markon percentages was only a change in the amount of markon that was needed. The survey data were inconclusive with regard to hypothesis 3 and this hypothesis 149 is neither accepted nor rejected. It would appear that the only accurate procedure to test this hypothesis would be the use of time series data. Hypothesis 4 This hypothesis states that the methods used to pay merchan- dising personnel influence the performance measures that are used by these executives. The hypothesis is supported by survey data showing close agreement between the factors used to calculate executive bonuses and the control factors used by these executives (Tables 3 and 10). The influence of the factors used in the salary plans on the executives rankings of profit and gross margin also supported the hypothesis (Table 11). In addition, answers given to question 13 on methods to improve the salary system showed that buyers' actions were influenced by the salary system (Table 12). Based on the data shown in these four tables, hypothesis 4 is accepted. Hypothesis 5 Hypothesis 5 states that firms with centralized rather than de- centralized buying are more apt to use the more recently deve10ped performance measures suchas controllable profits. Data from the surveyindizcated that no major differences existed between the one decentralized company and the otherfirms in the use of merchandis- ing control factors. With only one decentralized firm includedin the study there was not enough data to adequately test this hypothesis. Therefore, the hypothesis is neither accepted nor rejected. 150 Hypothesis 6 This hypothesis states that department stores are currently making only limited use of some of the more recently developed measures of merchandising performance that emphasize returns on capital and the use of incremental costs to set prices. The hypothesis is supported by the almost complete absence of these control factors in the executives' answers to questions 1, 3, 4, 5, 6, 8, 9, and 11 (Tables 1, 3, 4, 9, 13, 15, and 16). Also in question 7 the executives were asked to choose between pairs of performance measures and the executives preferred traditional performance measures in six out of seven pairings (Table 2). The survey data in these eight tables sustains hypothesis 6 and the hypothesis is accepted. Other Conclusions of the Study Control Factors and Executive Behavior The survey data supports the prOposition that. the use of particular merchandising control factors by department stores directly influences the behavior of merchandise executives. This relationship was shown particularly well by the activities of the buyers in response to the emphasis on markon and gross margin percentages. So much interest in markon percentages was gen- erated that the amount of markon available determined which items were bought, promoted.or eliminated (Table 16). The drive for markon prompted fifty-five buyers to use higher markon percent- ages on confined, imported, or private label merchandise where 151 customers lacked pricing knowledge. The effects of stressing markon were also reflected by the buyers whohad items redesigned to allow higher markon percentages and other buyers who asked manufacturers to raise suggested list prices so that higher markon percentages would be obtained. The survey data left no doubt that control criteria influenced the every day operations of merchan- dising executives . Importance of Stock Turnover This study has shown that the stock turnover factor was only ofsecondary importance to merchandising executives in the depart- ment stores included in this study. This conclusion is substantiated by the low ranking of stock turnover among the answers given to all of the survey questions. When stock turnover was matched directly with other control factors in question 7, stock turnover was not preferred on a total basis in any of the pairings. The subordinate status of stock turnover was also shown by the fact that when department stores were confronted by higher expenses the great majority of executives emphasized higher markon per- centages rather than increased stock turnover. The typical attitude was shown by the' remarks of one buyer who said he found stock turnover too difficult to use in making merchandising de- cisions. He felt that the markon percentage was more dependable than stock turnover in controlling merchandising operations. Executives are Satisfied with the Present System Merchandising executives appear to be well satisfied with the present system of merchandising control. When they were 152 asked to suggest changes to improve the system almost all of the answers called for improved stock control methods and for better physical handling of the merchandise. None of the executives sug- gested a change to merchandising management accounting or to the use of the ratio of contribution profits to inventory investment. Despite the widespread discussion of MMA for the past seven years there was no evidence that any of the ideas from MMA have been accepted by merchandising executives in department stores. It wouldalso appear that the retail system of merchandise accounting is firmly embedded in the thinking of department store executives and that any basic changes in the system are likely to be accepted slowly. Using Quantitative Control Factors Quantitative methods of measuring merchandising performance do not accurately measure all the duties and responsibilities of merchandising executives. Subjective evaluation is still needed to evaluate an executive's performance in the selection and training of help, in the deve10pment of the store image, in the maintenance of supplier relations, and in the many other duties merchandising personnel are called on'to perform. Quantitative control factors are a useful set of tools and gauges that can be used to guide and evaluate merchandising operations. They are not ends in them- selves, but they do provide a measure of how well an executive is achieving the financial goals of the firm. 153 Recommendations for Further Research Stock Turnover and Profits The fact that stock turnover was of secondary importance to merchandising executive's suggests that additional research is needed to determine exactly how this factor influences the profits of department stores. Department store executives' preoccupation with the markon percentage may be entirely justified, but increased emphasis on stock turnover might increase the rate of return on capital for the firm. If additional data were available that showed how stock turnover influenced profits, it is possible that stock turnover might become more important as a merchandising factor. ,It is entirely possible that stock turnover is not important to the successful operation of department stores, but the validity of this statement should'be established by research rather than by the accidental design of the retail system of merchandise accounting. Organizational P roblems The trend towards the division of buying from selling activ- ities in department stores suggests that there isa need for research into the role and duties of buyer supervisors. The statements of some buyers that they received too much supervision indicates that more attention should be centered on the type of controls that are needed. The fact that seven of the firms in this study were able to operate with only one level of merchandising supervision above the buyer shows that this change in organization is feasible. 154 Physical Handling of the Merchandise The executives interviewed expressed an almost universal concern for improved methods of handling merchandise. The executives did not like present inventory control procedures, ware- housing methods, or the poor communications between the receiv- ing room and the selling floor. The wide variety of bitter remarks made about the physical handling of merchandise indicates that department stores could gain substantial benefits from additional research on these problems. Summary This research project was designed to study the utilization of quantitative merchandising control factors in department stores. It was expected that the investigation would show that different per- formance measures were being used by different firms and that executives at different job levels emphasize separate factors. (It was found, however, that the department stores in this study all used the same control factors and the factors were employed at all three levels of management studied. Differences in the type of merchandise and the sex of the buyers had little influence on the use of merchandising control factors. It was anticipated that the factors emphasized by the salary system would influence executive behavior and the research data supported this hypothesis. It was also expected that the newer con- trol factors described earlier would not be widely used by mer- chandising executives. The study showed the new measures were not used at all and that traditional control factors dominated the 155 thinking of merchandising executives. The data revealed analmost universal reliance on the markon percentage as the most discrim- inating guide to executive action. Even though the executives said that profits and sales volume were important, the markon percent- was clearly one of the most frequently used factors in making mer- chandising decisions. The size of the markon percentage determined what items were bought, what items were promoted, and what items were dropped. The markon percentage also influenced the propor- tions of private-label and imported merchandise that was included in the merchandise mix. Stock turnover, in comparison, was almost completely ignored in making merchandising decisions. The possibility that sales volume was related to price was typically not considered. The widespread use of traditional merchandising control fac- tors in department stores may indicate that these factors are the most important considerations in the achievement of retail profit goals. This study would suggest that conformity in the use of these factors may be related to the organization of the retail system of merchandise accounting. There is not enough information available, however, to draw a firm conclusion on this issue. It should, there- fore, be the objective of future research to identify precisely the role and importance of all merchandising performance factors. Only when the merchandising executive knows the relationship be- tween the control factors and his company's profit objectives, will he be able to produce an optimum solution to the problem of how to effectively utilize quantitative decision criteria. APPENDIX A SURVEY QUESTIONNAIRE METHODS OF MEASURING MERCHANDISING PERFORMANCE A STUDY SPONSORED BY NRMA DOUGLAS J. DALRYMPLE GRADUATE SCHOOL OF BUSINESS ADMINISTRATION UNIVERSITY OF CALIFORNIA CONFIDENTIAL EXECUTIVE INTERVIEW SCHEDULE Name of person interviewed Position Company Location 1. WHAT WOULD YOU SAY ARE THE MOST IMPORTANT DUTIES AND RESPONSIBILITIES OF YOUR JOB? .O" 93 0.0 0‘00:th 2. ABOUT HOW MANY HOURS DO YOU PUT IN ON YOUR JOB EACH WEEK? How is this time divided between your different reSponsibilities? a._; Direct supervision of activities in the stores b..._ Office calls by salesmen c.__ Buying trips d.__.. Working on newspaper advertising e.__. Meetings with superiors f. _ Meetings with subordinates g...__.. Office work concerned with budgets, pricing, and reviewing item performance h..____ Telephone conversations with suppliers i. __ Travel between stores and offices j. —_ Other k. 156 157 SURVEY QUESTIONNAIRE — PAGE 2 3. WHEN YOU TALK WITH YOUR BOSS, WHAT THINGS DOES HE REPEATEDLY STRESS AS BEING IMPORTANT TO SUCCESS IN YOUR JOB? a. e b. f c. g. d. h. 4. HAVE PERFORMANCE MEASURES BEEN STRESSED IN THE PAST BY YOUR COMPANY THAT ARE DIFFERENT FROM THOSE BEING EMPHASIZED TODAY? No __Yes Which? 5. WHAT DO YOU FEEL ARE THE THREE OR FOUR MOST IM- PORTANT OVERALL OBJECTIVES OF YOUR COMPANY? a. d. 6. WHEN YOU TALK TO THE PEOPLE WHO WORK UNDER YOUR SUPERVISION, WHAT PERFORMANCE FACTORS DO YOU EMPHASIZE? a. e b. f c g. 158 SURVEY QUESTIONNAIRE ~ PAGE 3 7. oo‘tv \O O-OD‘N ASSUME THAT YOU HAVE THE JOB OF EVALUATING THE PERFORMANCE OF ONE OF YOUR COMPETITORS. WHICH RATIO IN EACH OF THE FOLLOWING PAIRS OF PERFORMANCE MEASURES WOULD BE THE MOST VA LUABLE FOR THIS EVALUATION? . — Realized gross margin Net profits as a percent of sales percentage . __ Net profits per square Net profits per dollar of inventory foot of selling area Sales as a percent of Stock turnover previous year Net profits as a percent Net profits as a percent of invested of sales capital Realized gross margin Stock turnover percentage Net profits per dollar Controllable profits per dollar of inventory of inventory . __ Stock turnover Net profits as a percent of sales Net profits as a percent Net profits as a percent of total of invested capital capital WHAT DO YOU TRY TO ACCOMPLISH WITH THE PRICES THAT YOU PLACE ON MERCHANDISE? HOW DO YOU ARRIVE AT THE PRICES FOR YOUR REGULAR MERCHANDISE? ' HOW DO YOU ARRIVE AT THE PRICES FOR "SALE" MER CHANDISE ? 159 SURVEY QUESTIONNAIRE - PAGE 4 10. DO YOU EXPERIMENT WITH YOUR PRICES TO SEE WHAT EFFECT INCREASES OR DECREASES WILL HAVE ON SALES OR PROFITS? Yes No If so, how is this done? 11. WHEN YOU ARE SETTING PRICES DO YOU CONSIDER WHAT IT COSTS TO BUY, ADVERTISE, SELL, AND DELIVER A PARTICULAR ITEM ? No___ Yes If so, how are these costs determined? 12. 13. 14. 15. DO YOU FEEL THAT THE METHOD OF CALCULATING YOUR SALARY IS BASED ON AN ACCURATE MEASURE OF YOUR WORTH TO THE COMPANY? Yes No WHAT CHANGES WOULD YOU SUGGEST TO IMPROVE THE PRESENT SALARY SYSTEM ? WOULD IT BE POSSIBLE FOR A MERCHANDISING EXECUTIVE IN YOUR COMPANY TO INCREASE HIS OWN SALARY AT THE EXPENSE OF COMPANY PROFITS? Yes Yes No Is this likely to occur? No DO YOU FEEL ANY CHANGES COULD BE MADE IN YOUR COMPANY'S OPERATIONS THAT WOULD INCREASE MER- CHANDISING EFFICIENCY ? No Yes What? a. APPENDIX B EMPIRICAL SURVEY DA TA This appendix presents the data that was gathered during interviews with 111 merchandising executives in 11 department store organizations. The tables summarize the data obtained from each of the survey questions. The tables are presented in the same order as the questions appeared on the questionnaire. TABLE I-Q QUESTION 1, "WHAT WOULD YOU SAY ARE THE MOST IMPORTANT DUTIES AND RESPONSIBILITIES OF YOUR JOB?" Ranking Duties and Responsibilities Nfigfifgnzf 1 Selection of the right merchandise 62 2 Training and Supervision of sub- 53 ordinates '3 To make a profit 27 4 Sales promotion and advertising 25 5 Stock control 24 6 Achieving sales volume 20 7 Selling merchandise to customers 16 8 Sales planning 15 9 Maintaining and developing store 15 image 10 Selection of good help . 15 ll Merchandise diSplay 14 12 Keeping up on fashions and new 13 developments 13 Stock turnover 12 14 Inspiration and stimulation of 11 subordinates 15 Finding out customer wants ll 16 Achieving good markon percentage 10 160 161 Table l-Q Continued *— Number of Ranking Duties and ReSponsibilities Mentions 17 Plan and control investment of 9 company's money, achieve a fair return on the investment 18 Customer service 9 19 Watch competitor's items and prices 9 20 Employee relations 9 21 Keep basics in stock 8 22 Timing of purchases 8 23 Sell sales clerks on items 8 24 Control markdowns 7 25 Coordination of buying and selling 7 26 Keep stocks balanced 6 27 Maintenance of good records 5 28 Presentation of merchandise to 5 customers 29 Maintain good relations with suppliers 5 30 Unit inventory control 5 31 Gross margin percentage 5 32 Expense control 5 33 Work with suppliers to develop Special 4 items 34 Plan balanced lines of merchandise 4 35 Transfer merchandise between stores 4 to increase sales 36 Compare sales results with plans 4 37 Know your merchandise 4 38 Follow up on duties and responsibilities 4 39 Trade up 4 40 Provide fashion leadership 3 41 Scheduling of help 3 42 Assure coverage of sales floor 3 43 Evaluate wholesale markets 3 162 TABLE l-Q Continued Numbe r of Ranking Duties and Responsibilities Mentions 45 Coordinate with receiving and marking 2 rooms 46 Control duplication of items 2 47 Handle complaints 2 48 Give customers value 2 49 Control shrinkage and theft 2 50 Buy merchandise to be sold at a profit 2 51 Know when to st0p reordering l 52 Development of merchandising policy 1 53 ”Not the buying" 1 54 Actually sell merchandise to 1 customers 55 Concentrate on a few resources 1 56 Service the needs of the branches 1 57 Improve on last year's sales 1 58 Buy toachieve a higher ma rkonpercentage l 59 Expand credit usage among customers 1 163 TABLE 2-Q QUESTION 2, "ABOUT HOW MANY HOURS DO YOU PUT IN ON YOUR JOB EACH WEEK?" "HOW IS THIS TIME DIVIDED BETWEEN YOUR DIFFERENT RESPONSIBILITIES ? " w Average Executive Functions Hours Per Week Direct supervision of merchandising 14.9 activities in the stores Office work; writing orders, planning 10.4 and reviewing item performance Buying trips 5.9 Meeting salesmen in own office 5.6 Meeting with subordinates 2.6 Telephone time 2.5 Advertising; planning and 2.2 coordination Meetings with superiors 1.8 Checking inventories and receipts 0.6 Other activities 0.5 Total 48.4 QUESTION 3, 164 TABLE 3—Q "WHEN YOU TALK WITH YOUR BOSS, WHAT THINGS DOES HE REPEATEDLY STRESS AS BEING IMPORTANT TO SUCCESS IN YOUR JOB? " Ranking Control Factors 111/11:13:11.1:f 1 Sales volume 59 2 Stock control 46 3 Promotions 44 4 Markdowns 40 5 Profits 36 6 Markon percentage 35 7 Stock turnover 23 8 Expense control 20 9 Fashion 15 10 Merchandise display 13 ll Gross margin 13 12 Merchandise lines and items ll '13 Sales planning 10 14 Company policies 9 15’ Basic in-stock position 8 16 Personnel problems 7 l7 Merchandising problems 7 18 Keep up with new developments 6 19 Trade up , 6 20 Buy right merchandise 5 21 Watch competitive items and prices 5 22 Train personnel 4 23 Process claims to manufacturers for 4 defective merchandise 24 Cover sales floor 4 25 Stimulate and inspire subordinates 4 26 Shrinkage 4 27 Locate sale merchandise 4 W 165 TABLE 3-Q Continued Number of Ranking Control Factors Mentions 28 Control age of stock 4 29 Maintain and develop store image 3 30 Customer satisfaction 3 31 Unit inventory control 3 32 Give value 3 33 Have broad assortments 3 34 Obtain unit sales reports on items 3 35 Clean out old stock 3 36 Follow up on duties and 3 responsibilities 37 Watch in-bound freight 2 38 Pass on merchandise information to subordinates 39 Deve10p merchandising ideas 2 40 Presentation of the merchandise to the 2 customer .41 Stresses merchandising points 2 42 Coordinate with other departments 2 43 Plan competitive assortments 2 44 Buy low - sell high 2 45 Encourage customer change 2 applications 46 Discuss direction company wants to go 2 47 Timing 2 48 Don't tie yourself to one supplier 2 49 Control investment of company funds 1 50 Be price competitive l 51 Establish customer contact 1 52 Employment issues 1 53 Beat last years sales results 1 54 Get exclusive or confined merchandise 1 55 Hire personnel 1 166 TA BLE 3 -Q Continued W Ranking Control Factors 1111;111:2251: 56 Supervise subordinates 1 57 Get end of season merchandise in 1 early at regular prices 58 Control over stock rooms and l serv1ce areas 59 Trade down 1 60 Show initiative 1 61 Have merchandise to cover ads 1 62 Promote high markon items 1 63 Returns percentage 1 64 Buy wearable fashion 1 167 TABLE 4-Q QUESTION 4, "HAVE PERFORMANCE MEASURES BEEN STRESSED IN THE PAST BY YOUR COMPANY THAT ARE DIF- FERENT FROM THOSE BEING EMPHASIZED TODAY ? " NO 30 YES 81 WHICH? m Rank Number of Position Performance Measures Mentions 1 Higher markonpercentage needed 46 2 Expenses higher as a percentage 34 of sales 3 Trade up to better merchandise 15 4 More emphasis on profit 14 5 More fashion 13 6 More emphasis on stock turnover 9 7 Multiple store operation increases 7 work load 8 More competitive 5 9 Automatic stock control 5 10 Merchandise has changed 5 11 More concern with expense control 4 12 Want a larger segment of market 4 13 More promotions 4 14 More basic merchandise 3 15 More emphasis on store image 2 16 More mechanization 2 17 More variety and assortment 2 l8 Markon percentage is falling 2 19 More emphasis on growth 2 168 TABLE 4-Q Continued w PESiItion Performance Measures 1:213:21:f 20 Take markdowns quickly 2 21 More emphasis on profit in relation 1 to investment 22 More concerned with labor problems 1 23 More emphasis on controlling 1 markdowns 24 Do more wrapping and marking in l the department areas 25 More self service 1 26 More controls 1 27 More personnel emphasis l 28 More basic merchandise 1 29 More excitment 1 30 More flexibility l 31 More emphasis on credit business 1 32 More progressive l 33 Communications problems 1 34 More emphasis on training 1 35 Control markdowns by manufacturer 1 36 Customer contact more important 1 37 More service 1 38 Be in an Open to buy position 1 39 More emphasis on merchandise for 1 youth 40 Get as good a markon percentage as 1 competition will allow 41 Blend fashion and volume items 1 169 TABLE 5-Q QUESTION 5, "WHAT DO YOU FEEL ARE THE THREE OR FOUR MOST IMPORTANT OVERALL OBJECTIVES OF YOUR COMPANY ? " Ranking Stated Company Goals figfiZZSf l Profits 70 2 Sales growth 54 3 Customer service 49 4 Development and maintenance of 32 store image 5 Fashion emphasis 22 6 Community service 14 7 Trade up 10 8 Greater share of market 10 9 Integrity and reliability 9 10 Good value 8 11 Broad lines of merchandise 6 12 Responsibility to employees 5 13 Higher markon percentage 5 14 Right merchandise 4 15 Fewer markdowns 4 l6 Proper stock turnover 4 17 Broad assortments 4 18 New credit accounts 3 l9 Attract and train employees 3 20 Serve a broader segment of the 3 market 21 Serve the middle class market 3 22 Match employees and jobs 2 23 Basic in-stock position 2 24 Perpetuity 2 25 Stock different merchandise 2 170 TAB LE 5-Q ggntingeg Numbe r of Ranking Stated Company Goals Mentions 26 Please stockholders 2 27 Control eXpenses 2 28 Timing 2 29 Be exciting 2 30 Carry name brands 2 31 Return on capital 1 32 Reasonable percentage profit 1 33 Profits in line with industry averages l 34 Long run profit 1 35 Watch shortages l 36 Have fresh stock 1 37 Clean display areas 1 38 Achieve operation plan 1 39 Enthusiasm and leadership 1 40 More continunity between stores in I own company 41 Stay competitive l 42 Have the right merchandise 1 43 Appeal to younger matron l 44 Good diSplay 1 45 Meet changing business conditions 1 Develop new products 1 46 QUESTION 6. 171 TABLE 6—Q "WHEN YOU TALK TO THE PEOPLE WHO WORK UNDER YOUR SUPERVISION, WHAT PERFOR- MANCE FACTORS DO YOU EMPHASIZE? " ____________________________ Ranking Performance Factors Emphasized $13?i::lsof 1 Merchandise information 34 2 Sales volume 18 3 Display 17 4 Courtesy 13 5 Fashion trends 13 6 Customer service 12 7 Customer wants 12 8 In-stock on basics ll 9 Control of stocks 10 10 Promotions and events 9 ll Suggestion selling 8 12 Markon percentage 8 13 Selling techniques 7 14 Increased profits 7 15 Markdowns 7 16 Move out old stock 7 17 Stock turnover 6 l8 Stimulate and excite subordinates 6 19 Quality merchandise 6 20 Customer approach 6 21 New merchandising ideas and 5 developments 22 Merchandise presentation 5 172 TA B LE 6-Q Continued Number of Ranking Performance Factors Emphasized Mentions 23 Train subordinates 5 24 Trade customers up to higher markon 4 merchandise 25 Coordinate colors 4 26 Balanced lines of merchandise 4 27 Get employee's opinions on items 4 28 Achieve plans and programs 4 29 Buy right merchandise for the store 4 30 Personnel relations 3 31 Sell details of garments 3 32 Control expenses 3 33 Cover sales floor 3 34 Handle returns pr0per1y 2 35 The buyer has to be a seller 2 36 Customer satisfaction 2 37 Have 20 percent open to buy position 2 38 Credit business 2 39 Gross margin 2 40 Neatness 2 41 Maintain good relations With suppliers 2 42 Improve on last year's performance 2 43 Sell sales people on items 1 44 Know when to st0p reordering l 45 Inventory control 1 173 TABLE 6-Q Continued f Ranking Performance Factors Emphasized NMumber Of entions 46 Employee supervision l 47 Be alert to market opportunities 1 48 Be early in a season 1 49 Multiple sales 1 50 Trade merchandise up 1 51 Give value 1 52 Be aggressive 1 53 Be flexible I 54 Watch shrinkage l 55 Timing l 56 Sales person's productivity 1 57 Show the better merchandise 1 58 Be price competitive l 59 Obtain greater share of the market 1 60 Achieve desired gross margin percentage 1 61 Sales goals 1 62 Sell advertising space to manufacturers l 63 Show three price lines 1 64 Work with the branches 1 174 TABLE 7-Q QUESTION 7, "ASSUME THAT YOU HAVE THE JOB OF EVALU— ATING THE PERFORMANCE OF ONE OF YOUR COMPETITORS. WHICH RATIO IN EACH OF THE FOLLOWING PAIRS OF PERFORMANCE MEA— SURES WOULD BE THE MOST VALUABLE FOR THIS EVALUATION? " #— M W Number of Pair Paired Merchandising Executives Number Control Factors Preferring Each Factor (111) 1 Realized Gross Margin Percentage 30 Net Profits as a Percent of Sales 75 No Preference 2 No Answer 4 2 Net Profits per Sq. Foot of Selling Area 30 Net Profits per Dollar of Inventory 75 No Preference 2 No Answer 4 3 Sales as a Percent of Previous Year 58 Stock Turnover 47 No Preference 2 No Answer 4 4 Net Profits as a Percent of Sales 71 Net Profits asaPercent ofInvested Capital 35 No Preference - No Answer 5 5 Realized Gross Margin Percentage 71 Stock Turnover 32 No Preference 4 No Answer 4 6 Net Profits per Dollar of Inventory 67 Controllable Profits per Dollar of Inventory 38 No Preference 2 No Answer 4 7 Stock Turnover 20 Net Profits as a Percent of Sales 83 No Preference 4 No Answer 4 8 Net Profits asaPercent of Invested Capital 48 Net Profits asaPercent of Total Capital 33 No Preference 1 No Answer 29 QUESTION 8. 175 TABLE 8-9-Q "WHAT DO YOU TRY TO ACCOMPLISH WITH THE PRICES THAT YOU PLACE ON MERCHANDISE? QUESTION 9. "HOW DO YOU ARRIVE AT THE PRICES FOR YOUR REGULAR MERCHANDISE? Ranking Executive Comments Number Of Mentions 1 Be competitive 63 2 Use higher ma rkon percentages on con- fined, owned. or imported merchandise 55 3 Use a markon percentage that is tradi- tional with the type of merchandise 51 4 Follow the manufacturer's suggested list 45 Try to obtain a planned average markon percentage 25 6 Price the item according to its worth 16 Price according to what the traffic will bear 15 8 If an item doesn't have an average markon percentage or better we do not buy it 14 Follow fair traded prices 12 10 Will use lower markon percentage if there is prospect of high turnover ll 11 Price to points and lines 11 12 Price secondary to fashion 10 13 Follow markup chart 10 14 Lead competitors on price 9 15 Give value 8 16 Variable markon percentages are used 7 l7 Markon percentage is increasing 7 18 Some items carried at low markon and lose money on them 7 19 Consider transportation to arrive at a landed cost 6 20 Bring item in at high markon percentage and if it sells we take an ad and have a good price comparison at a lower price 5 21 Use fair prices 5 176 TABLE 8-9-Q - Continued Number of R k' . an ing Executive Comments Mentions 22 Trade up to a higher priced merchandise 4 23 Since we can't raise prices on competi- tive items, we may ask manufacturer to raise the suggested list to allow more markon. Other firms will follow the manufacturer where they might not fol- low one store in its quest for a higher markon percentage 4 24 Price to sell 3 25 Price to produce a good net profit 3 26 Use a reasonable margin 2 27 Use moderate price lines 2 28 Price to get volume 2 29 Price to income of community 2 30 Have manufacturer redesign to allow better markon percentage 31 Negotiate for better prices 2 32 Do not buy volume items for less than average ma rkon percentage 33 Push high markon merchandise 34 List prices are meaningless 2 35 Buy end-of—season merchandise and bring it in early at regular markon percentage 2 36 Use higher markon percentage on higher priced merchandise 1 37 Selection of merchandise influences markon percentage achieved 1 38 Do not use 98 cent endings; class versus mass appeal 1 39 Use several price lines 1 40 Volume doesn't make up for low markon percentage 1 41 Do not promote low markon merchandise 1 42 Do not sell items below cost, once we own it costs are sunk 177 TABLE 8-9-Q - Continued Numbe r of Ranking Executive Comments Mentions 43 Inflation makes it difficult to maintain price points and manufacturers have to cut quality to do so 1 44 When pricing, who is to say what the value is? ' l 45 We don't know where the top markon percentage is yet 1 46 Balancing markon percentage against volume is too difficult 1 47 The public can and will pay a higher markon percentage 1 48 Buy close outs l QUESTION 9A. TABLE 9A—Q 'SA LE' MERCHANDISE ? " "HOW DO YOU ARRIVE AT THE PRICES FOR Number of Ranking Pricing Policies Mentions 1 Sale merchandise bought cheaper 67 2 Smaller markon percentage used on sale merchandise 57 For clearance use one third off 29 4 For clearance use one half off 19 5 Use regular or higher markon per- centage for sales 16 6 Buy from regular suppliers for sales 8 7 What is needed to sell the item 6 8 First markdown is the cheapest 6 9 Try not to sell below cost 4 10 Follow standard dollar markdowns 2 11 Twenty percent or more off for clearance 2 12 Sell at cost 1 QUESTION 10. 178 TABLE lO-Q "DO YOU EXPERIMENT WITH YOUR PRICES TO SEE WHAT EFFECT INCREASES 0R DECREASES WILL HAVE ON SALES OR PROFITS?" NO 59 YES 39 IF SO, HOW IS THIS DONE? — fi=====f===u==n Ranking Pricing Procedure flgzzgsf 1 If the item is not selling, lower price 32 2 Use higher markon percentage to see what will happen 20 3 Never raise prices 10 4 Moved to even pricing with success 6 5 Lower prices for competitive reasons 2 6 If item is selling well, may move it up 2 7 Raise prices when market prices increase 2 8 Some price points work better than others 2 9 Maintain prices 1 10 Trade up to higher price points 1 11 Try different price lines to see what sells 1 12 Use multiple and irregular prices 1 QUESTION 11, No.15; YES 44 179 TABLE ll-Q "WHEN YOU ARE SETTING PRICES DO YOU CON- SIDER WHAT IT COSTS TO BUY, ADVERTISE, SELL, AND DELIVER A PARTICULAR ITEM?" COSTS DETERMINED? IF SO, HOW ARE THESE Ranking Executive Comments Number Of Mentions l Expenses covered by markon percentages 57 2 Consider inbound transportation costs 17 3 Raise prices to cover Special 5 advertising 4 Cooperative advertising is important 2 5 Trade discount covers these eXpenses 2 6 Where expenses are large, such as 2 appliance delivery, they are considered 7 Expenses are considered on high and 1 low markon items 8 We ask whether the price of the item can 1 carry advertising costs 9 It is hard to load advertising into prices 1 10 Consider eXpenses only in special cases 1 11 We watch selling expenses 1 12 If you use expenses to price you will be 1 out of line competitively QUESTION 12, “DO YOU FEEL THAT THE METHOD OF CALCU- LATING YOUR SALARY IS BASED ON AN ACCURATE MEASURE OF YOUR WORTH TO THE COMPANY ? " YES _fl. No_1_§_ 180 TABLE 13-Q QUESTION 13, "WHAT CHANGES WOULD YOU SUGGEST TO IMPROVE THE PRESENT SYSTEM? " ________ __ ____.T______ . Number of Ranking Suggested Changes Mentions l Feels underpaid 17 2 More information on how bonus is 9 determined They pay only what they can get you for 5 4 Would like percent of the profit in 3 addition to percent of volume 5 System should include qualitative 3 evaluation 6 Tie bonus to increase in sales or profits 2 Base salary should be tied to the cost 1 of living 8 Need base salary since percentages do 1 not cover all the work 9 Base pay not an accurate measure of the 1 work done 10 Bonus plan is accurate 1 ll Present system rewards seniority, may 1 be overpaid 12 More salary less bonus 1 13 Method of determining base salary penalizes best buyers 1 14 Women paid less than men 1 15 With branches net profit system loses 1 accuracy when others control expenses 16 We are charged for inventory controlled 1 by others 17 1 Volume subject to outside influences not 1 under the control of the buyer 18 Should pay bonus for lower markdowns or 1 higher markon percentage 19 Put sales people on commission 1 181 QUESTION 14, "WOULD IT BE POSSIBLE FOR A MERCHANDISING EXECUTIVE IN YOUR COMPANY TO INCREASE HIS OWN SALARY AT THE EXPENSE OF COMPANY PROFITS? " NO 60 YES 27 IS THIS LIKELY TO OCCUR? NO 26 YES_Z_’_ » TABLE 15—Q QUESTION 15. "'DO YOU FEEL ANY CHANGES COULD BE MADE IN YOUR COMPANY'S OPERATIONS THAT WOULD INCREASE MERCHANDISING EFFICIENCY ? " NO 22 YES 86 WHAT? ——T——_—_ Ranking Suggested Changes $133228“ 1 Faster and more detailed merchandising 19 reports - 2 Electronic inventory control 17 3 Make receiving and. marking more 13 efficient 4 Simplify paper work and accounting 10 procedures 5 More help to keep records 8 6 Better warehousing 7 7 More space for merchandise display 6 8 Separation of buying from selling 6 activities 9 More efficient stock control 5 10 Improved advertising 5 11 Improved communications between 5 branches and buyers 12 Department package wrapping 4 13 More automation 4 14 More research 3 182 TABLE 15-0 9010mm Number of k' Ran ing Suggested Changes Mentions 15 More turnover 3 16 Better physical handling of merchandise 3 l7 Fewer bosses 3 18 Better communications between buyers, 3 warehouse and receiving room 19 Get merchandise on floor faster 2 20 Simplified transfer of merchandise 2 between stores 21 Pay sales help higher wages 2 22 Better display and presentation of 2 merchandise 23 More open to buy flexibility 2 24 Simplify purchase form 2 25 Increased stock room Space and help 2 26 Need traffic manager to route inbound l freight 27 Decentralized buying yields higher prices 1 for merchandise 28 Need standardized boxes for merchandise 1 to simplify handling and storage 29 Need standardized manufacturer's l invoices 30 Prefer department rent on a square foot 1 basis rather than on sales 31 Questions value of sales person 1 wrapping 32 More clearly defined buyer 1 responsibilities 33 Buy basic items centrally l t‘ 183 TABLE 15-Q Continued :1 fi Number of Ranking Suggested Changes Mentions 34 Broader lines of merchandise 1 35 More centralization of management 1 36 Divisional merchandising managers 1 may not be needed 37 Better packaging and preticketing 1 38 Classify credit customer and appeal 1 by direct mail 39 Buying group accounting system makes 1 it hard to sell low markon items 40 Growth has brought bureaucracy l and rigidities 41 Improved marking procedures 1 42 More flexibility in moving sales 1 help around store 43 More enthusiastic buyers 1 44 Increased emphasis on fashion image 1 45 Remodel the store 1 46 Improve hours and working conditions 1 for employees 47 Buy fewer foreign goods 1 48 Eliminate overlap between accounting and l merchandising divisions 49 More premarking of merchandise 1 50 Too much control from the t0p l 51 More exchange of merchandising 1 information between stores 52 Simplify sales transaction 1 53 Allocate transport costs on sales 1 rather than on use APPENDIX C COMPUTATION OF CHI SQUARE VALUES Two separate tests of significance were completed using the executives' preferences for control factors recorded in question 7. The first test evaluated the null hypothesis that buyers and mer- chandise managers showed no real preferences between the paired control factors. This would mean that each of the paired perfor- mance measures would have been selected about 50 percent of the time. The chi square test was used to evaluate the differences be- tween the actual and the expected preferences for the control factors (Table l-C) . The second test evaluated the null hypothesis that there were no differences between buyers' and merchandise managers' prefer- ences for the paired control factors. A slightly different form of the chi square analysis was used in this test. The data was tabulated in a 2 by 2 table and analyzed using the following formula: 2 N(ad ~bc)2 (a +b)(c +d)(a +c)(b +d) where the values of a, b, c, d, and N are taken from the following table: Executives' Preference for Control Factors Buyers Mf/Irchandise Total anagers =$ First ControlFactor a b a +b Second Control Factor c d c +d Total a+c b+d a+b+c+d=N 184 185 0000000 0 0H 00o 0H 0.0.0 H0 030.... 000000 H00 0 m0H000ox0 Ho 33300000 00H. 0 00 000 00 0.0.3 «o 0000.» 000000 30 0 m000000x0 ..Ho 33300000 003 00000000. H0 0000.00 000 0330 .00000000 0.0 00.0 00.00 0.0 0.00. 00 08008 038 .\. 0 00 8080 .02 00.0 00.00 0.0 0.00. 00. 000008 08002.0 .0 0 .... 80000 ....z 0 0.0.0 00.00 00.000 0.00 0.00. 00. $00... 00 .0 0 8. 809.0 .02 00.00 00.000 0.00 0.00. 00 08658 V0080 0 0.00 2.0 0000.0 0.00 0.00. 00 38.8.60 380000 200008000 :0 0000.0 0.00 0.00. 00 .00808:: 00 $809.0 $2 0 0.3 00.0. 00.0.00 0.00 0.00. ...0 0.5058 v0080 00.0 00.0.00 0.00 0.00. 00 .0 80008 0080 080000 0 0.0. 00.0 00.000 0.2 0.00. 00 08008 0808.8 00 .0 8080 32 00.0 00.000 0.2 0.00. 00 $000 00 .0 0 00 80000 $2 0. 0.0 00. 00.00 0.0 0.00. 00. 08658 0080 on. mN.NH m.m mSH. om 000..» 0003000 Ho 0\0 0 00 00H0m m 0.00 0.0.0 00.000 0.00 0.00. 00 00852.0 00 $809.0 82 0.0.0 00.000 0.00 0.00. 00 8:... 080.... 00 0008080 002 0 0.: 00.0 00.000 0.00 0.00. 00 0300 0o .0 00 800.00 .02 . 00.0 00.000 0.00 0.00. 00 008000000 20 000080 0 00000H0m 00an 000000 0000000H00nH 000300h H00u0oO £0 H0000 0000 000 .00 9,088.0 000000000082 00000 00.0 mMHOHOHH DOMXM Emma. OH. MHDH<> HM