BADM-449-Class-2 - BADM 449 Business Strategy / Management...

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BADM 449 Business Strategy / Management Policy Class #2
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Purpose of Strategy Any viable business generates: Value Added = Sales revenue – Cost of Material Inputs VA distributed among employees, lenders, shareholders, government, etc. Based on what mechanisms/principles is this distribution done? In other words, what determines who will get how much and why?
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Purpose of Strategy Interestingly, different laws and different countries give different mandates to managers: Continuity of the enterprise (Netherlands) National interest (France) Shareholder AND employee interest (Germany) Shareholder interest (English-speaking countries) We will assume management of the enterprise in the interest of the shareholders . So what do the shareholders want the CEO to do? How easy is it for the shareholders to motivate the CEO to do it?
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Goals, Values, and Performance What might managers do if they are told that they will be evaluated based on short term accounting profits? Maximizing profits entails potential problems: Total profit, profit rate, or some other “returns”? Short, medium, or long-term profits? Accounting, economic, or some other type?
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Goals, Values, and Performance (2) Economic value added is a widely used performance measure. It is the net operating profit after tax less cost of capital, calculated as the total capital employed times weighted average cost of capital: EVA = NOPAT -WACC EVA introduces more discipline in deploying and allocating capital. However… The problem of short, medium, and long run, still not resolved. Why? Need another measure of performance to capture the temporal dimension…
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Goals, Values, and Performance (3) Value of the enterprise, NPV of future free cash flows: C t - free cash flow in year t (net operating profit plus depreciation less taxes less
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This note was uploaded on 04/02/2012 for the course BADM 449 taught by Professor Echambadi during the Fall '10 term at University of Illinois, Urbana Champaign.

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BADM-449-Class-2 - BADM 449 Business Strategy / Management...

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