2. Chapter 2 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

3. Learning Objectives 1. Describe a company mission and explain its value 2. Explain why the mission statement should include the company’s basic product or service, its primary markets, and its principal technology 3. Explain which goal of a company is most important: survival, profitability, or growth 4. Discuss the importance of company philosophy, public image, and company self-concept to stockholders 5. Give examples of the newest trends in mission statement components: customer emphasis, quality, and company vision 6. Describe the role of a company’s board of directors 7. Explain agency theory and its value 2-3

4. What is a Company Mission? Company Mission: A broadly framed but enduring statement of a firm’s intent. It is the unique purpose that sets a company apart from others of its type and identifies the scope of its operations in product, market, and technology terms. 2-4

5. The Need for an Explicit Mission Why is this firm in business? What are our economic goals? What is our operating philosophy in terms of quality, company image, and self-concept? What are our core competencies and competitive advantages? What customers do and can we serve? How do we view our responsibilities to stockholders, employees, communities, environment, social issues, and competitors? 2-5

6. Formulating a Mission The typical business begins with the beliefs, desires, and aspirations of a single entrepreneur These beliefs are usually the basis for the company’s mission As the business grows or is forced to alter its product, market, or technology, redefining the company mission may be necessary 2-6

7. Ex. 2.2 (adapted) Mission Statement Components 1. Customer-market 2. Product-service 3. Geographic Domain 4. Technology 5. Concern for Survival 6. Philosophy 7. Self-concept 8. Concern for Public Image 2-7

8. Three Essential Components: Basic Product or Service Primary Market Principal Technology If a firm uses a “silver bullet” mission for outsiders to read, it will include these three components. 2-8

9. Primary Company Goals: Survival – A firm that is unable to survive will be incapable of satisfying the aims of any of its stakeholders. Profitability – A firm’s profitability is the mainstay goal of a business. Growth – A firm’s growth is tied inextricably to its survival and profitability. Growth in this sense must be broadly defined. 2-9

10. Company Philosophy Company philosophy is often called company creed. Usually accompanies or appears within the mission statement Reflects the basic beliefs, values, aspirations, and philosophical priorities to which strategic decision makers are committed in managing the company 2-10

11. Public Image Both present and potential customers attribute certain qualities to particular businesses. Firms seldom address the question of their public image in an intermittent fashion. Firms should be concerned with their public image even when there is no public agitation. 2-11

12. Company Self-Concept A major determinant of a firm’s success is the extent to which the firm can relate functionally to its external environment. The ability of firms to survive in a dynamic and highly competitive environment would be severely limited if they did not understand their impact on others or of others on them. Ordinarily, descriptions of the company self- concept per se do not appear in mission statements. 2-12

13. Newest Trends in Mission Components The following are increasingly integral parts in the development of missions: Customers as a priority Quality as a priority Inspirational vision statement 2-13

14. Deming’s 14 Points: 1. Create constancy of purpose. 2. Adopt the new philosophy. 3. Cease dependence on mass inspection to achieve quality. 4. End the practice of awarding business on price tag alone. Instead, minimize total cost, often accomplished by working with a single supplier. 5. Improve constantly the system of production and service. 6. Institute training on the job. 7. Institute leadership. 2-14

15. Deming’s 14 Points (cont’d): 8. Drive out fear. 9. Break down barriers between departments. 10. Eliminate slogans, exhortations, and numerical targets. 11. Eliminate work standards (quotas) and management by objective. 12. Remove barriers that rob workers, engineers, and managers of their right to pride of workmanship. 13. Institute a vigorous program of education and self- improvement. 14. Put everyone in the company to work to accomplish the transformation. 2-15

16. Boards of Directors The board of directors is the group of stockholder representatives and strategic managers responsible for overseeing the creation and accomplishment of the company mission. 2-16

17. Major Board Responsibilities: Establish and update mission Elect top officers & CEO Establish compensation for top officers Determine amount & timing of dividends Set broad company policy Set objectives and authorize managers to implement long-term strategy Mandate company’s legal and ethics compliance 2-17

18. Agency Theory Agency theory is a set of ideas on organizational control based on the belief that the separation of the ownership from management creates the potential for the wishes of owners to be ignored. 2-18

19. Agency Theory The cost of agency problems plus the cost of actions taken to minimize agency problems are collectively termed agency costs. Executives are often free to pursue their own interests because of the disproportionate access they have to company information. This is the moral hazard problem. Adverse selection is an agency problem caused by the limited ability of stockholders to determine the competencies and priorities of executives at hire. 2-19

20. Problems Resulting from Agency Executives pursue growth in company size rather than earnings Executives attempt to diversify their corporate risk Executives avoid healthy risk Managers act to optimize their personal payoffs Executives protect their status 2-20

21. Solutions to Agency Problem  Owners pay executives a premium for their service to increase loyalty  Executives receive back-loaded compensation.  Creating teams of executives across different units of a corporation can help to focus performance measures on organizational rather than personal goals. 2-21

22. Aligning Executive Interests with Owner Interests Stock Option Plans Bonus plans Incentives for Long- Term Performance 2-22