ch02 - Goals Values and Performance OUTLINE Strategy as a...

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Goals, Values and Performance Strategy as a quest for value What is profit? The shareholder value approach The shareholder value and strategy formulation Mission and values OUTLINE
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Strategy as a Quest for Profit The stakeholder approach : The firm is a coalition of interest groups —it seeks to balance their different objectives The shareholder approach : The firm exists to maximize the wealth of its owners (= max. present value of profits over the life of the firm) For the purposes of strategy analysis we assume that the primary goal of the firm is profit maximization. Rationale: 1) Boards of directors legally obliged to pursue shareholder interest 2) To replace assets firm must earn return on capital > cost of capital (difficult when competition strong). 1) Firms that do not max. stock-market value will be acquired Hence: Strategy analysis is concerned with identifying and accessing the sources of profit available to the firm
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From Profit Maximization to Value Maximization Profit maximization an ambiguous goal Total profit vs. Rate of profit Over what time period? What measure of profit? Accounting profit versus economic profit (e.g. Economic Value Added: Post-tax operating profit less cost of capital Maximizing the value of the firm: Max. net present value of free cash flows: max. V = Σ t C t (1 + r) t Where: V market value of the firm. C t free cash flow in time t r weighted average cost of capital
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Performance Under Different Profitability Measures COMPANY MARKET CAP. ($BN.) NET INCOME ($BN) RETURN ON SALES (%) RETURN ON EQUITY (%) RETURN ON ASSETS (%) RETURN TO SHARE- HOLDERS (%) Exxon Mobil 372 36.1 19.9 34.9 17.8 11.7 General Electric 363 16.4 10.7 22.2 14.7 (1.5) Microsoft 281 12.3 40.3 30.0 18.8 (0.9) Citigroup 239 24.6 22.0 21.9 1.5 4.6 BP 233 22.3 9.9 27.9 10.7 10.2 Bank of America 212 16.5 27.0 14.1 1.2 2.4 Royal Dutch Shell
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This note was uploaded on 08/18/2011 for the course BADM 449 taught by Professor Fertig during the Spring '11 term at University of Illinois at Urbana–Champaign.

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ch02 - Goals Values and Performance OUTLINE Strategy as a...

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