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Managing for Shareholder Value and the Role of Strategy

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Managing for Shareholder Value and the Role of Strategy Paul C. Godfrey Marriott School of Management Brigham Young University What is Shareholder Value? – PowerPoint PPT presentation

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Title: Managing for Shareholder Value and the Role of Strategy


1
Managing for Shareholder Value and the Role of
Strategy
  • Paul C. Godfrey
  • Marriott School of Management
  • Brigham Young University

2
What is Shareholder Value?
  • Shareholder value is the share price of the firm
  • The primary responsibility of management
  • Milton Friedman The social responsibility of
    business is to make a profit
  • Profit is primary, but not exclusive
  • Share price allows comparisons between companies
    across industries and sectors
  • Share price is based on the future expected
    returns (dividends and capital appreciation) of
    the firm

3
Valuing Future Earnings
4
Defining Market Capitalization
Market Capitalization The present value of
future earnings discounted for risk
5
Market Cap and Strategy
  • GAP (Competitive Advantage Gap)
  • Advantage over closest rival
  • Creates superior returns

GAP
CAP
  • CAP (Competitive Advantage Period)
  • Barriers to competitor entry, customer exit
  • Sustains superior returns

6
Increasing Shareholder Value
7
What is Strategy?
  • Strategy has to do with choosing among
    alternative paths for translating goals into
    action in ways that create competitive advantage
  • Strategy is long term
  • Strategy is the heart of GAP and CAP
  • Strategy involves attitudes, activities, and
    assets
  • Strategy is a map of where you want to go, what
    you have, and what you need to get there

8
GAP and CAP The Strategy Puzzle
External Fit
Added Value
Scope
Internal Fit
9
External Fit
  • What is the structure of the industry?
  • How is the industry related to the general
    economy? Other industries?
  • What competitive dynamics drive the industry?
  • What strategic positions are available? Which
    are attainable?

10
Added Value
  • How does the business add value to its customers?
  • How does the business add value to society?
  • Does the value added justify the cost of the
    product?
  • What buyer benefits accrue from using the firms
    product or services?

11
What is added value?
Net Buyer Benefit
  • Net buyer benefit is the essence of competitive
    advantage
  • Net buyer benefit acts as a shield against
    competitive erosion
  • Net buyer benefits can be cost or differentiation
    related
  • A great proxy for NBB is the level of price
    discounting needed to move a product

Price
Margin
Total Costs to the firm
12
Scope
  • What businesses is the corporation in?
  • What businesses could the corporation enter?
  • Which new businesses would add value to existing
    customers?
  • Can new products or services give the firm access
    to new customers?

13
Internal Fit
  • How does the firm structure its operations?
  • How is authority spread in the organization?
  • What is the firms culture? What are the shared
    values?
  • What level of alignment exists between the
    internal elements of the firm?

14
Strategic Position
  • How does the firm position itself in the industry
    to maximize its value added return to its
    customers?
  • 09 September07 October
  • Soft Drink Industry, Professional Sports,
    Computer Industry, online auction business

15
Strategic Leverage
  • How can the firm parlay its existing resources in
    to new value-added businesses?
  • 09 October23 October
  • Corporate Strategy

16
Strategic Alignment
  • How should the firm structure its internal
    operations in order to maximize its value added?
  • 28 October18 November
  • Strategy Implementation General Management

17
Conclusion
  • Increasing GAP and CAP depends on
  • The ability of management to understand each
    piece of the strategy puzzle, and
  • The ability of management to successfully deal
    with positioning, scope, and alignment

18
Two views of strategy
  • Strategy is an executive function
  • Top managers control resources and set direction
  • Top management has the perspective and knowledge
    to set strategy
  • Strategy is something lower level employees dont
    need to know
  • Strategy matters at every level of the firm
  • Middle managers, supervisors, and employees all
    influence strategy
  • Lower level employees have deep knowledge of
    customers and markets that is strategically
    important
  • Strategy matters for everyone

19
Why does Strategy matter?
  • Internal
  • Set direction for company
  • Forge alignment
  • External
  • Understand how firm adds value to customers
  • Effectively sell products or services

Finders Partners, Senior Managers
  • Internal
  • Forge alignment for division or work group
  • External
  • Understand how firm adds value to customers
  • Forge alignment with company objectives
  • Sell services and get promoted

20
Managing Me, Inc.
  • The most important firm you will ever direct is
    you
  • Professionally
  • Personally
  • Marriage Family
  • What role will strategy play for you?

21
Strategy and Cash Flows
Locus of Economic Value Locus of Economic Value
Organization Organization
Individual Employee Business Owner Others
Individual Self-Employed Investor Others
Market Market
Creators of Economic Value
Taken from Robert Kiyosaki, The Cash Flow
Quadrant, Warner Books, 1999
22
Which Path Will You Take?
Locus of Economic Value Locus of Economic Value
Organization Organization
Individual Employee Business Owner Others
Individual Self-Employed Investor Others
Market Market
Creators of Economic Value
Taken from Robert Kiyosaki, The Cash Flow
Quadrant, Warner Books, 1999
23
Questions to consider
  • How much of your income will come from each
    quadrant in
  • 5 years?
  • 10 years?
  • 20 years?
  • What strategic position will help you achieve
    your goals?
  • Where will strategic leverage add value?
  • How will you maintain strategic alignment?
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