1. Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li1 Lecture #2: Goals, Values and Performance Strategy as a quest for profit The shareholder value approach Mission and values

2. Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li2 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 > cost of capital (difficult when competition intense). (3) To survive acquisition, firm must achieve stock-market value > break-up value.

3. Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li3 Disaggregating ROCE Tree ROCE Return on Sales Sales/Capital Employed COGS/Sales Depreciation/Sales SGA expense/Sales Fixed Asset Turnover Sales/PPE Inventory Turnover Sales/Inventories Creditor Turnover Sales/Acct Turnover of other items of working capital

4. Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li4 Linking Value Drivers to Performance Targets Shareholder value creation Shareholder value creation ROCE Economic Profit Economic Profit Margin Capital Turnover Capital Turnover Sales Targets Sales Targets cogs/ sales cogs/ sales Development Cost/Sales Development Cost/Sales Inventory Turnover Inventory Turnover Capacity Utilization Capacity Utilization Cash Turnover Cash Turnover Order Size Customer Mix Sales/Account Customer Churn Rate Deficit Rates Cost per Delivery Maintenance cost New product development time Indirect/Direct Labor Customer Complaints Downtime Accounts Payable Time Accounts Receivable Time CEO Corporate/Divisional Functional Departments & Teams

5. Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li5 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