Strategy ch 2 goals values and performance

Firm is a coalition of interest groups- it seeks 2 balance their different objectives

Firm exists to maximize the wealth of its owners (=max present value of profits/life of the 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

• 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

(net profit after tax-cost of capital employed)* WACC

• 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

• 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.

• Estimating cash flows beyond 2-3yrs is difficult
• Value of a firm depends on option value as well as DCF value.

• 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

• 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