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Strategy ch 2 goals values and performance
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Stakeholder approach
Firm is a coalition of interest groups- it seeks 2 balance their different objectives
Shareholder approach
Firm exists to maximize the wealth of its owners (=max present value of profits/life of the firm)
Rationale for assuming profit maximization is primary goal of a firm
1) board of directors legally obliged to pursue share-holder interest.
2) to replace assets firm must earn return on capital > cost of capital
3) Firms that do not maximise stock-market value will be acquired
Accounting profit
1) Normal return to capital, rewards investors 4 use of their capital
2) Economic profit which is the pure surplus available after all inputs have been paid 4
Economic profit
(net profit after tax-cost of capital employed)* WACC
Advantages of Economic profit over Accounting
1) Sets more demanding performance discipline 4 managers
2) improves allocation of capital between different businesses of a firm by taking into a/c the real costs of more capital intensive businesses
Value maximising approach to strategic decision:
Identify alternative courses of action.
Estimate cash flows associated with each action
Estimate cost of capital for each action
Select the course or action which generates highest NPV.
Problems with Value maximising approach to strategic decision:
Estimating cash flows beyond 2-3yrs is difficult
Value of a firm depends on option value as well as DCF value.
Putting performance Analysis into practice->
1) Appraise current & past performance.
Forward looking measures
Backward looking measures
2)Diagnose Source of poor performance- Du Pont formula.
3) How can we set performance objectives?
Balanced scorecard
Paradox of value
Companies that are the most successful in creating long-term s/h vallueare typically those that:
a) have a mission
b) hove strong consistent ethical values
Author
amck
ID
215942
Card Set
Strategy ch 2 goals values and performance
Description
Strategy ch 2 goals values and performance
Updated
2013-04-26T16:40:03Z
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