Musimundo

1. DESCRIBE THE STRATEGIC CONTEXT IN WHICH QUINTANA SHOULD JUDGE MUSIMUNDO’S PERFORMANCE. WHAT ARE THE CHARACTERISTICS OF THE ENVIRONMENT THAT MUSIMUNDO COMPETES IN? WHAT ARE PEGASUS’ STRATEGIC OBJECTIVES FOR MUSIMUNDO? HOW DO THESE FACTORS AFFECT THE BUDGETING PROCESS?

Strategic Context

Quintana wants to strategically reward the managers of the Musimundo stores for meeting their budgetary goals; however, some managers were completely unable to do this and other managers were guaranteed their sales quota.

Quintana can rectify this situation by modifying the Musimundo incentive system. Quintana can use multiple performance measures to reward his managers. These performance measures can be sales based on a flexible budget that looks at historical sales and measures them against current sales. The manager could be rewarded for the percentage of increase.

Quintana can also use a balanced scorecard approach for each store. A store’s success can be based on a number of factors aside from sales. These factors could be customer satisfaction surveys, growth within the store, and management of employees and human resources.

Additionally for the next year, Quintana should implement and/or refine an Activity Based Budgeting system. Quintana can first assign overhead costs to cost pools that represent the largest activities for Musimundo. These costs would be related to the purchase, location, and stocking of Music (Music represented 41% of the Musimundo business in 2004).

After these overhead costs are assigned, the costs can be allocated to the various retail stores based on their consumption of the good (e.g. the number of musical works they stock and sell).

The Musimundo Environment

The Musimundo environment is jaded and disproportionately profitable in various regions of Argentina. As Argentina was exiting its economic crisis, various regions were “catching up” in the realm of consumption; however, other regions were either not “catching up” or lacked the activity to generate the proper sales.

Managers in the more profitable regions were achieving/surpassing their sales goals, while managers in the less active regions were unable to achieve their sales goals. These underperforming managers were penalized by a system that they neither fostered nor developed. In all likelihood, the underperforming managers were disincentivized by unrealistic budgetary goals for their region, needing further assurances from corporate that their vision could be achieved. All retail stores suffered from a lack of product, destroying the potential sales that they could have gained. The stores in less popular/populated regions may have garnered a reputation for being unreliable and continually out of stock.

Pegasus’ Strategic Objectives

The main strategic issue from the Pegasus point of view was how to obtain more capital from the principal investors. The investors were not adverse to this proposition but relied on the various budgets and financials to determine how much and where to place this capital.

Budgeting & The Pegasus Objective

Budgeting affected the Pegasus Objectives because these were the only criteria by which Pegasus could gauge the profitability of the venture. While the budgets were decent, they inadequately compensated for the entire region of Argentina. With an economy that did not have such historical turmoil, this may be less of an issue; however, the country was still getting back on its feet. This is the area where Quintana can be instrumental. By shaping the budgets to more adequately reflect and reward the various regions, Quintana can demonstrate two important results: 1) Sales are increasing on a macro level, and 2) Sales are increasing on a per store basis. This would convince Pegasus that a capital infusion was warranted.

2. THE COMPONENTS OF MUSIMUNDO’S PERFORMANCE INCENTIVE PLAN ARE DESCRIBED IN EXHIBIT 6. USING THIS INFORMAITON, CAN YOU TELL WHAT THINGS MANAGERS ARE ACCOUNTABLE FOR? USING THE DATA IN THE CASE, PLEASE COMPARE THE LIST OF THINGS FOR WHICH THE MANAGER IS ACCOUNTABLE WITH THE LIST OF THINGS HE HAS CONTROL OVER. PLEASE PREPARE SUCH A LIST FOR NALDA (CEO) AND GEJUNDES (BRANCH MANAGER).

Exhibit 6

Bonus % of Salary

1. Achieve 100% of sales target in a given quarter. 10%

2. Achieve 100% of EBITDA budget in a given quarter. 6%

3. Achieve 90 points on monthly customer-service evaluations. 2%

4. Achieve 90 points on the quarterly supervisor visit evaluations. 2%

20%

5. Super Achievement Bonus = 1 months Salary

Quarterly Sales Targets = 100%

Annual Sales Target = 110%

From Exhibit 6, can we tell what things managers are accountable for? No!

• What is the sales target? Is it units or revenue? The store managers have the ability to discount 10% per customer. These discounts could increase unit sales, but lower revenues.

• Is the sales target for total unit sales or is it per unit? Does each unit have a sales target? Sales for CD’s, Videos, Electronics, etc. The manager could have low sales with 2-3 different units and higher sales with other units. Is it cumulative or per unit? If the target is per unit, the managers would want to sale more extended warranties and tickets because there is no target for these items. Sales target per unit would produce incentives to monitor the ongoing sales of each item and make adjustments to slower selling units. Sales targets per unit will help ensure achieving a more exact sales budget across all units.

• Is the EBITDA budget a monetary number is it a percentage of revenues?

• What are the components to the customer-service evaluation? What are the questions on the evaluation? The managers do not know what services to provide in order to receive 90 points. They may provide fast check out services and the customer-service evaluation is based upon product knowledge and availability.

• What are the components to the quarterly supervisor visit evaluations? Is the evaluation based upon employee satisfaction or is it based on cleanliness