Goals, Value and Performance Chapter 2 Strategy Management Chapter PPT

1. Group Presentation :
 Aditya Jhunjhunwala
 Priyanka Kumari
 Priyanka Roy
 Poulami Ghosh

2. INTRODUCTION AND OBJECTIVES
4 COMPONENTS :
• The firm’s goals and values
• Its resource and capabilities.
• Its structure and management systems.
• Its industry environment.
WE WILLABLE TO KNOW ABOUT :-
• Strategy as a quest for value.
• Putting performance analysis into practice.
• Beyond profit: values and corporate social responsibility.
• Beyond profit: strategy and real options.

3. STRATEGY AS A QUEST FOR VALUE
• THERE IS MORE TO BUSINESS THAN MAKING MONEY.
• BUSINESS ENTERPRISES ARE CREATIVE ORGANIZATIONS WHICH PROVIDE OPPORTUNITY TO
MAKE A DIFFERENCE IN THE WORLD.
• EACH ENTREPRENEUR HAS A UNIQUE A PERSONAL GOAL
- FAMILY CARS FOR MULTITUDE(HENRY FORD)
- BRINGING THE POWER OF PERSONAL COMPUTING(STEVE JOBS)
- REDUCING DEATHS FROM INFECTION AFTER SURGERY(JOHNSON &
JOHNSON)
- REVOLUTIONIZING VACUUM CLEANING(JAMES DYSON)
• ORGANIZATIONAL PURPOSE IS ARTICULATED IN COMPANIES VISION & MISSION STATEMENT.

4. STRATEGY AS A QUEST FOR VALUE
• THE COMMON DENOMINATIONS ARE DESIRE ,NEED AND CREATE VALUE.
• VALUE IS THE MONETARY WORTH OF A PRODUCT OR ASSET. VALUE CAN BE CREATED IN TWO
WAYS- BY PRODUCTION AND BY COMMERCE.
• VALUE ADDED = SALES REVENUE FROM OUTPUT-COST OF MATERIAL INPUTS
= WAGES/ SALARIES + INTEREST + RENT +
ROYALTIES / LICENSE FEES+ TAXES + DIVIDENDS + RETAINED PROFIT

5. The value added created by he firm is distributed among different parties: employees, lenders , landlord ,
government and owners .The firms also create value for their customer.
There is a conflict with the multiple constituencies though interest is referred to as the stakeholder approach to the
firm.
There is an ongoing debate as to whether companies should operate exclusively in the interests of their owners or
should also pursue the goals of multiple stakeholders.
Company have legal and ethical responsibilities to employees, customers, society and the natural environment.
The primary goal of strategy is to maximize the value of the enterprise through seeking to maximize profit over the
long term.
here is three justification in case of money making
1.competition
2. the market for corporate control
3.convergence of stakeholder interests
VALUE FOR WHOM?
SHAREHOLDER VS. STAKEHOLDER

6. WHAT IS PROFIT ?
• Profit is the surplus of revenue over cost available for distribution to the owners of the firm.
• Profit can be in any ways – accounting profit, cash profit or economic profit.
• Profit Maximization as its name signifies refers that the profit of the firm should be increased while Wealth
Maximization, aims at accelerating the worth of the entity.

7. ACCOUNTING PROFIT AND ECONOMIC PROFIT
Explicit cost are a direct payment made to others in the course of running a business, such as wages, rent, and
materials, as opposed to Implicit costs, which are those where no actual payment is made.
For example, an employee could take a vacation and travel. The explicit costs would include travel expenses,
the cost of a hotel room, and costs related to entertainment. The implicit costs relate to the trade-off, namely the
wages that the employee could have earned if the vacation was not taken.
 Economic Profit
Economic profit is equal to total revenues less both implicit and explicit costs. For a firm to stay in business, both
implicit and explicit costs must be covered. If firms are receiving a negative economic profit in a market, they will
leave that market. A normal profit rate exactly covers wage costs and the competitive rate of return on capital
 Accounting Profits
Accounting profits are generally higher than economic profits, as they omit certain costs, such as the value of
owner-provided labour and the firm's equity capital.
When calculating "economic profit", explicit and opportunity costs are taken into account.

8. LINKING PROFIT TO ENTERPRISE VALUE
Profit maximization means maximizing the net present value of the firm.
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash
outflows.
Value of an enterprise (v)is the sum of its free cash flows (c )in each year t,discounted at the enterprise’s cost of
capital (r).
V=∑Ct/(1+re+d)t
Re=cost of equity
Rd =cost of debt
Re+d=weighted average cost of capital
Cost of capital( c) refers to the cost an organization pays to raise funds.
SHARE HOLDER VALUE MAXIMISATION
• Intrinsic values, shareholder value is the NPV of the stream of profits that accrue to owners discounted at the cost
of equity.
• And other in terms of market value ,shareholder value is the current stock market value of the firm’s shares.

9. PUTTING PERFORMANCE ANALYSIS INTO PRACTISE
● For the purposes of strategy formulation, profit maximization is a convenient and reasonable assumption. Once we
look beyond a single period, maximizing profit translates into maximizing enterprise value.
● Discounted cash flow (DCF) valuation of enterprises and strategies encounters two problems. First, it is difficult to
estimate cash flows more than a few years into the future. Second, it does not take account of option value.
ANALYSIS OF PROFIT PERFORAMANCE
• Appraising a firm’s performance.
• Diagnosing the sources of poor performance.
• Selecting strategic on the basis of their profit prospects.
• Setting performance targets.

10. APPRAISING CURRENT AND PAST PERFORMANCE:
• Assess the current situation of the firm.
• Identifying the sources of unsatisfactory performance.
FORWARD –LOOKING PERFORMANCE MEASURES:STOCK MARKET VALUE
• Performance of firm.
• Stream of profit(or cash flows). APPRAISIN
BACKWARD –LOOKING PERFORMANCE MEASURES :ACCOUNTING RATIOS
• Evaluating management effectiveness .
• Accounting measures of performance.

11. PROFITABILITY RATIOS

12. PERFORMANCE DIAGNOSIS
• Profit performance is unsatisfactory.
• Sources of poor performance.
FIGURE:-DISAGGREGATING RETURN ON CAPITAL
EMPLOYED

13. CAN PAST PERFORMANCE GUIDE STRATEGIES FOR
THE FUTURE?
• IF WE FIND THE REASON WHY A COMPANY IS NOT DOING WELL WE HAVE A BASIS OF
CORRECTIVE ACTIONS.
• THE CORRECTIVE MEASURES CAN BE BOTH STRATEGIC AND OPERATIONAL.
• FINANCIAL ANALYSIS OF A COMPANY PERFORMING WELL GIVES IDEA OF THE SOURCES OF
SUPERIOR PERFORMANCE SO THAT STRATEGY CAN PROTECT AND ENHANCE THEIR
DETERMINANTS OF SUCCESS.
• IN THIS DYNAMIC WORLD OF BUSINESS , STRATEGIES HELP THE FIRM TO LOOK FORWARD AND
TO ADAPT TO CHANGES.
• THE CHALLENGING FACTOR IS TO LOOK INTO FUTURE AND IDENTIFY THOSE FACTORS THAT
WOULD THREATEN THE PERFORMANCE OR MAY CREATE NEW OPPORTUNITIES FOR PROFIT SUCH
AS COMPETITION ,TECHNOLOGY ETC.

14. SETTING PERFORMANCE TARGETS : LINKING VALUE
DRIVERS TO PERFORMANCE TARGETS

15. BALANCED SCORECARD
• THE PROBLEM WITH PERFORMANCE MANAGEMENT IS THAT THE PERFORMANCE GOALS ARE
LONG TERM BUT FOR EFFECTIVE CONTROL SYSTEM TARGETS NEED TO BE MONITORED OVER
THE SHORT TERM.
• BALANCED SCORECARD IS AN INTEGRATED SOLUTION FOR BALANCING STRATEGIC AND
OPERATIONAL GOALS AND CASCADING INFORMATION DOWN THE ORGANIZATION.
• IT IS DERIVED FROM 4 QUESTIONS-
- HOW DO WE LOOK TO SHAREHOLDERS?
- HOW DO CUSTOMERS SEE US?
- WHAT MUST WE EXCEL AT?
- CAN WE CONTINUE TO IMPROVE AND CREATE VALUE?

16. SETTING PERFORMANCE TARGETS : BALANCED SCORECARD
FOR A REGIONALAIRLINE

17. • EMPIRICAL RESEARCH SHOWS THAT FIRMS WHICH ARE MOST SUCCESSFUL IN CREATING LONG-
TERM SHAREHOLDER VALUE
o Have a mission – They give precedence to goals other than profitability and shareholder value
o Have strong, consistent, ethical values
• EXAMPLES:
o “Visionary” companies studied by Collins & Porras, e.g. Merck, Wal-Mart, Proctor & Gamble, Disney, HP
o Boeing
Focus pre-1996: “To build great planes”, weak financial controls, yet high profitability
Focus : “Creating shareholder value”. Outcome: loss of market leadership, declining profitability
• LESSON:
o Profit is created not by pursuing profit but by pursuing the factors that create profit.
o The company should not focus only on profit making but should focus on customer retention and customer
values through customer delight, this will indirectly result in profit.
PITFALLS OF PURSUING FINANCIAL TARGETS:
THE PARADOX OF VALUE

18. • Even if we believe that the primary objective of the firm should be long-run profit maximization, no firm
can ignore its relationship with society. For survival and success a firm needs to:
o Maintain its reputation
o Ensure that it has a license to operate
o Be sensitive to its external environment – including its social, political and natural environments
• Michael and Mark Kramer argue that firms should re-conceptualize their businesses towards the creation of
“Shared Value”: “creating economic value in a way which also creates value for society” This requires the
firm to recognize its co-dependence with its natural and social environment.
BEYOND PROFIT:
CORPORATE SOCIAL RESPONSIBILITY

19. GUIDELINE FOR CORPORATE SOCIAL
RESPONSIBILITY
The debate over the social responsibilities of companies has been both contentious and confused. The debate are of
different conception-
the property conception
social entity conception
The sole purpose of business enterprise to make profit fail to recognize that to survive and earn profit an
organization must maintain social legitimacy.
At the other end the argument that the primary responsibility of business enterprise should be the pursuit of social
goals is likely to be similarly dysfunctional.
But there is a middle point where business enterprise are aligned with the requirement of their social and natural
environment but have not lost touch either with their business purpose or with need for functional viability.

20. Despite these arguments, companies are increasingly accepting responsibilities that extend well beyond the
immediate interests of their owners. The case for CSR is based both on ethics and efficacy.
The efficacy argument for CSR also views the firm as embedded within the ecosystem of its social and natural
environments implying congruence between the interests of the firm and those of the supporting ecosystem.
Ethical arguments about management responsibility depend, ultimately, upon what we conceive the firm to be.
There is three reason why CSR might also be in the interest of a company-
Sustainability argument
Reputation argument
License to operate argument
According to porter and kramer there is a intersection between corporate and social interest, which they called
shared value. Creating economic value in a way which also create value for society.
CORPORATE SOCIAL RESPONSIBILITY

21. BEYOND PROFIT: STRATEGY AND REAL OPTION
 The value of the firm is depended on net present value. But it is not the only way.
The simple idea that an option –the choice of whether to do something or not-how we value firms.
The resulting field of real option analysis has emerged as one of the most important development in the financial
theory over the past decades.
•If a investment, once made , are irreversible, flexibility is valuable.
Instead of committing entire project there is virtue in breaking the project into a number of phases.

22. STRATEGY AS OPTION MANAGEMENT
To formulate strategy our primary interest is how can use the principle of option value to create shareholder value.
There is two type of real option:
Growth option
Flexibility option.