Strategy ch 2 goals values and performance

  1. Stakeholder approach
    Firm is a coalition of interest groups- it seeks 2 balance their different objectives
  2. Shareholder approach
    Firm exists to maximize the wealth of its owners (=max present value of profits/life of the firm)
  3. 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
  4. 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
  5. Economic profit
    (net profit after tax-cost of capital employed)* WACC
  6. 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
  7. 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.
  8. 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.
  9. 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
  10. 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
Card Set
Strategy ch 2 goals values and performance
Strategy ch 2 goals values and performance