Lecture

1
Lecture 2Goals, Values and Performance

• Strategy as a quest for profit
• The shareholder value approach
• Mission and values

2
Strategy as a Quest for Profit

• The stakeholder approach The firm as a
  coalition of interest groups pursuit of multiple
  objectives.
• The shareholder approach The firm exists to
  maximize the wealth of its owners.
• Why is profit maximization a reasonable goal?
• (1) Boards of directors legally obliged to
  pursue shareholder
• interests.
• (2) To replace assets, firm must earn return
  on capital gt cost of
• capital (difficult when competition
  intense).
• (3) To survive acquisition, firm must achieve
  stock-market
• value gt break-up value.

3
Disaggregating ROCE Tree
COGS/Sales
Depreciation/Sales
Return on Sales
SGA expense/Sales
ROCE
Fixed Asset Turnover Sales/PPE
Inventory Turnover Sales/Inventories
Sales/Capital Employed
Creditor Turnover Sales/Acct
Turnover of other items of working capital
4
Linking Value Drivers to Performance Targets
Order Size
Customer Mix
Sales Targets
Sales/Account
Customer Churn Rate
Margin
cogs/ sales
Deficit Rates
Cost per Delivery
Development Cost/Sales
Maintenance cost
Shareholder value creation
ROCE
New product development time
Indirect/Direct Labor
Inventory Turnover
Customer Complaints
Economic Profit
Capital Turnover
Downtime
Capacity Utilization
Accounts Payable Time
Cash Turnover
Accounts Receivable Time

CEO
Corporate/Divisional
Functional
Departments Teams
5
Values and Mission

• The role of values
• Place constraints on the means for pursuing
  shareholder value max.
• Increase the effectiveness for building
  competitive advantage
• 1. Reinforce strategic intent
• 2. Build internal consensus and commitment
• The role of mission
• Foundation for strategy
• 1. What the firm seeks to achieve
• 2. What it intends to become