Quản trị kinh doanh - Goals, values and performance

Identify strategy alternatives Estimate cash flows associated with cash strategy Estimate cost of capital for each strategy Select the strategy which generates the highest NPV

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Goals, Values and PerformanceStrategy as a quest for valueWhat is profit?The shareholder value approachThe shareholder value and strategy formulationMission and values OUTLINEStrategy as a Quest for ProfitThe 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.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 > cost of capital (difficult when competition intense). (3) To avoid acquisition, firm must achieve stock-market value > break-up value.What is Profit?Profit maximization an ambiguous goalTotal profit vs. Rate of profitOver what time period? Accounting profit versus Economic profitEconomic Value Added (EVA) as a measure of economic profit:— Post-tax operating profit less cost of capitalFrom profit maximization to value maximization —Net present value of firm = Discounted future profits over the life of the firm Net Inc. ROS ROE EVA Market Return to Value Added Shareholders ($m) (%) (%) ($m) ($m) (%)General Motors 2,956 1.8 19.7 -5,525 -17,943 21.4General Electric 6,573 9.4 22.2 4,370 285,320 45.3Exxon 6,370 6.3 14.6 -2,262 114,774 22.4 Philip Morris 5,450 10.3 39.0 5,180 98,657 64.8IBM 6,328 7.7 32.6 2,541 -5,878 77.5Coca-Cola 3,533 18.8 42.0 2,194 157,356 1.3Wal-Mart 4,430 3.2 21.0 1,159 159,444 107.7 Procter & Gamble 3,780 10.2 12.2 61,661 102,379 15.9 Microsoft 4,490 31.0 27.0 3,776 328,257 37.5Hewlett-Packard 2,945 6.3 17.4 -593 45,464 10.7 How U.S. Companies Perform Under Different Profitability Measures, 1998Value Maximization Maximizing the value of the firm: Max. net present value of free cash flows : max. V = (1 + re)tCtWhere:V market value of the firm. Ct free cash flow in time t re+d weighted average cost of capitaltApplying Shareholder Value Maximization to Strategy ChoiceIdentify strategy alternativesEstimate cash flows associated with cash strategyEstimate cost of capital for each strategySelect the strategy which generates the highest NPVValuing Companies and Business UnitsIf net case flow growing at constant rate (g) V = C1 ( r - g )With varying cash flows which can be forecasted for 4 years: V = C0 + C1 + C2 + C3 + VH (1 + r ) (1 + r )2 (1 + r )3 (1 + r )3 where: VH is the horizon value of the firm after 4 yearsProblems of DCF Approaches to Strategy ApproachNet Present Value of the Firm depends on option values as well as discounted cash flow expectationsEstimating cash flows beyond 2-3 year horizon is hazardous---especially in dynamic marketsHENCE: Some simple guidelines for maximizing the value of the firm—On existing assets-- maximize after-tax rate of returnOn new investment-- seek after-tax rate of return > cost of capitalOPTIONVALUEFinancial optionsReal optionsStock priceExercise priceUncertaintyTime to expiryDividendsRisk-freeInterest rateRisk-freeinterest rateValue lost over duration of optionDuration of optionUncertaintyInvestment costPresent value of returns to theinvestment ======The greater the NPV, thehigher the option valueThe higher the cost, the lower the option valueHigher volatilityincreases option valuesTime = opportunity tolearn about outcomesLoss of cash flow to fully-committed competitorslowers option valueHigher interest rate increases option valueby increasing value of deferring investmentCommentsThe six levers of financial and real optionsROCEReturn onSalesSales/CapitalEmployedCOGS/SalesDepreciation/SalesSGA expense/SalesFixed Asset TurnoverSales/PPEInventory TurnoverSales/InventoriesCreditor TurnoverSales/AcctTurnover of other items of workingcapital Disaggregating Return on Capital EmployedShareholdervalue creationROCEEconomic ProfitMarginCapitalTurnoverSales Targetscogs/salesDevelopmentCost/SalesInventoryTurnoverCapacityUtilizationCashTurnoverOrder SizeCustomer MixSales/AccountCustomer ChurnRate Deficit RatesCost per DeliveryMaintenance costNew productdevelopment timeIndirect/DirectLaborCustomer ComplaintsDowntimeAccounts PayableTimeAccounts Receivable Time CEO Corporate/Divisional Functional Departments & TeamsLinking Value Drivers to Performance TargetsFINANCIALF1 Return on Capital EmployedF2 Cash FlowF3 ProfitabilityF4 Lowest CostF5 Profitable GrowthF6 Manage riskStrategic ObjectivesFinanciallyStrong* ROCE* Cash Flow* Net Margin* Full cost per gallon delivered to customer * Volume growth rate Vs. industry* Risk indexStrategic MeasuresC OU MS ET R- C1 Continually delight the targeted consumerC2 Improve dealer/distributor profitability* Share of segment in key markets* Mystery shopper rating* Dealer/distributor margin on gasoline* Dealer/distributor surveyDelight the ConsumerWin-Win RelationshipI1 Marketing 1. Innovative products and services 2. Dealer/distributor qualityI2 Manufacturing 1. Lower manufacturing costs 2. Improve hardware and performanceI3 Supply, Trading, Logistics 1. Reducing delivered cost 2. Trading organization 3. Inventory managementI4 Improve health, safety, and environmental performance I5 QualityINTERNAL* Non-gasoline revenue and margin per square foot* Dealer/distributor acceptance rate of new programs* Dealer/distributor quality ratings* ROCE on refinery* Total expenses (per gallon) Vs. competition* Profitability index* Yield indexDelivered cost per gallon .Vs. competitors* Trading margin* Inventory level compared to plan & to output rate* Number of incidents* Days away from work* Quality indexL E & A GR RN O I WN TG HL1 Organization InvolvementL2 Core competencies and skillsL3 Access to strategic information* Employee survey* Strategic competing (?) availability* Strategic information availabilitySafe and ReliableCompetitive SupplierGood NeighborOn SpecOn timeMotivated and PreparedBalanced Scorecard for Mobil N. American Marketing & Refining Shareholder ValueMeasures: Market value of the firmMarket value added (MVA)Return to shareholders Intrinsic ValueMeasures: Discounted cash flowsReal option values Financial IndicatorsMeasures: Return on Capital Growth (of revenues & operating profitsEconomic profit (EVA) Value DriversSources: Market share Scale economies Innovation Brands A Comprehensive Value Metrics FrameworkThe Paradox of ValueThe companies that are most successful in creatinglong term shareholder value are typically those that:Have a mission—They give precedence to goals other than profitability and shareholder return;Have strong, consistent, ethical values.Examples: “Visionary” companies studied by Collins & Porras, e.g. Merck, Wal-Mart, Procter & Gamble, Disney, HPBoeing — Boeing’s focus pre-1996: “to build great planes” with weak financial controls — post-1996 focus: creating shareholder value — after 2000, rapid decline in Boeing profitabilityValues and MissionThe role of (ethical) values :Place constraints on the means by which the firm will pursue shareholder value max.Increase the effectiveness with which the firm builds competitive advantage though reinforcing strategic intent and building internal consensus and commitment.The role of mission:Foundation for strategy Statement of what the firm seeks to achieve and what it intends to become.

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