Business as War

[Ejhfast]

<p>I had an interesting conversation with one of my (undergraduate) classmates the other day. I asked him why he was interested in business as a career (eventual MBA, etc.) and he replied it characterizes the real battlefield of modern times. I assumed that he meant this along the lines of strategy and strategizing, undermining the competition.</p>

<p>And then he elaborates, "a business education can teach one how to destroy rivals using the markets, or lobbying government policy, and that kind of thing." Apparently, this is what he thinks would be a fun and desirable position.</p>

<p>I'd like to see this board's reaction.</p>

[VectorWega]

<p>
[quote]
"a business education can teach one how to destroy rivals using the markets,

[/quote]
</p>

<p>I'm not sure what that means.</p>

<p>
[quote]
or lobbying government policy,

[/quote]
</p>

<p>A business education doesn't really teach one how to do that. An education in public policy would probably be more important.</p>

<p>I do think his underlying motives may bring into question his own integrity. Business is not about destroying competition..it is about growing your own profits. Obviously, some industries are more competitive than others, and sometimes there are heated "battles". However, often times there are not. </p>

<p>For instance, everyone has heard about the Cola Wars between Coke and Pepsi in the 80s. Neither company was actually trying to put the other out of business. If that was their objective, they would have slashed prices. However, in doing so they would have sacrificed their own profits. Instead, they simply created large marketing campaigns which ended up expanding the overall pie and increasing the profitability of both Pepsi and Coke.</p>

<p>I'm not sure I know of many real wars where both sides come out as winners.</p>

[GoGetta09]

<p>I had a professor for a management class a few years ago that was a former drill sergeant in the Army, and he always made comparisons in class between battle tactics and business tactics. Contrary to what many people might think, the similarities are definitely there.</p>

<p>Vector, business is not about growing your profits...business is about maximizing value to the firms shareholders. As such, businesses are always taking the initiative to gain market share when possible. It is in EVERY businesses interest to gain a competitive advantage in the market place in order to advance its market share, now whether it does that through price cutting or by other means the goal remains the same. </p>

<p>
[QUOTE]
For instance, everyone has heard about the Cola Wars between Coke and Pepsi in the 80s. Neither company was actually trying to put the other out of business. If that was their objective, they would have slashed prices.

[/QUOTE]
</p>

<p>Not really, that's more of a marketing subject, but I'll explain it anyway. It is in the best interest of most firms to avoid price wars because if it is prolonged they eventually price themselves out of business and into bankruptcy. If coke had the opportunity to put pepsi out of business you damn well better believe they would do so. </p>

<p>Rarely in business do both competitors come out as winners. When you're dealing with significant competitors, it can definitely get pretty cut throat. For your own sake, it's a good idea not to think that everyone is your friend in the business world, because they can easily turn around and stab you in the back.</p>

[tetrishead]

<p>The people that read Sun Tzu and take it seriously in a business context are psychopaths, and I mean that seriously. They have disassociated from reality.</p>

<p>That's not to say blue chip life is some happy nap time or whatever, but it's not war, and your classmate is an idiot who four years into his career will take some stupid little thing too far and get fired for fear of being unstable. Yes, there have been murders and conspiracies and extortion and big money has influenced our country and plenty of people who are rich and in business are disgusting human beings.</p>

<p>It's still not war, it's never been war, it'll never be war. There is not some gentleman's agreement anymore, but there's still regulation, and there's still bureaucracy. The people who think like your classmate are the people who watch an episode of Damages and think it's real life. You pretty much have to be out for yourself, but the crazy cases people hear about that make them think like this are the 1%.</p>

[VectorWega]

<p>
[quote]
It is in the best interest of most firms to avoid price wars because if it is prolonged they eventually price themselves out of business and into bankruptcy.

[/quote]
</p>

<p>Not true. Could Wal-Mart cut their prices further than they already have? Yes. Could they drive even more competitors out of business? Yes. Why don't they? It has nothing to do with bankruptcy. It has to do with maximizing shareholder value and profits (both of which have been mentioned in this thread).</p>

<p>
[quote]
Rarely in business do both competitors come out as winners.

[/quote]
</p>

<p>It's not that rare. Look around. There are multiple successful companies in many industry and they are often not successful at the expense of their main competition. Often times, they actually share their greatest success at the same time.</p>

<p>
[quote]
If coke had the opportunity to put pepsi out of business you damn well better believe they would do so.

[/quote]
</p>

<p>Not at the expense of shareholder value. That being said, i'm not saying that they wouldn't want to put Pepsi out of business, but there are gigantic costs associated with waging such a "battle". BTW, often times competition forces companies to cut costs, innovate, and stay customer focused. Competition can be a driving force behind a company increasing long-term shareholder value.</p>

[GoGetta09]

<p>
[QUOTE]
Not true. Could Wal-Mart cut their prices further than they already have? Yes. Could they drive even more competitors out of business? Yes. Why don't they? It has nothing to do with bankruptcy. It has to do with maximizing shareholder value and profits (both of which have been mentioned in this thread).

[/QUOTE]
</p>

<p>Name a formidable competitor of walmart and i'll give you a million dollars.</p>

<p>...Judging from the case studies I've done in my classes, in general companies do not like price wars. Company A reduces prices to gain competitive advantage, Company B follows suit, company A reduces prices again, company B follows suit again... so on and so forth. Eventually both firm's price themselves into severe financial distress or bankruptcy. Why? Margins become so minuscule that lack of cash flow and liquidity can threaten the stability of the firm. </p>

<p>
[QUOTE]
It's not that rare. Look around. There are multiple successful companies in many industry and they are often not successful at the expense of their main competition. Often times, they actually share their greatest success at the same time.

[/QUOTE]
</p>

<p>Companies act in the interests of themselves before anything else...I don't think any rational business person would tell you otherwise. If you have an obvious opportunity to gain market share and send your competitors into oblivion you take it. 'nuff said.</p>

<p>
[QUOTE]
Not at the expense of shareholder value. That being said, i'm not saying that they wouldn't want to put Pepsi out of business, but there are gigantic costs associated with waging such a "battle". BTW, often times competition forces companies to cut costs, innovate, and stay customer focused. Competition can be a driving force behind a company increasing long-term shareholder value.

[/QUOTE]
</p>

<p>Exactly, there are costs associated with it...but you are gullible to think that Coke executives sit around all day talking about how happy they are to be friends with Pepsi. In the real world, companies look to capitalize on every advantage they can get their grubby little hands on over their competition. Obviously, they do not do this unless they can do so legally and in a somewhat ethical manner so as to avoid negative publicity/backlash. </p>

<p>Concerning your last few sentences, what's best for the firms customers is not always beneficial to the shareholder...in fact it's usually the opposite. </p>

<p>One other thing you might want to know is that profits and shareholder value do not always go hand in hand. A company may have negative retained earnings (more liabilities than assets), but yet still provide great wealth to shareholders. (Amazon is a great example of this, they operated with negative equity for 8 years but the stock price still soared). The reason being is that although profitability may be non-existent or negative, long term investments usually create a higher present value for future cash flows, thus creating a higher price per share and increasing value for shareholders.</p>

[VectorWega]

<p>
[quote]
Name a formidable competitor of walmart and i'll give you a million dollars.

[/quote]
</p>

<p>Are you saying Wal-Mart doesn't have competition? In Texas, HEB is definitely a formidable competitor.</p>

<p>
[quote]
Margins become so minuscule that lack of cash flow and liquidity can threaten the stability of the firm.

[/quote]
</p>

<p>Yes. Companies act much differently than countries in war don't they?</p>

<p>
[quote]
If you have an obvious opportunity to gain market share and send your competitors into oblivion you take it.

[/quote]
</p>

<p>In your fairy tale world maybe. Companies have opportunities to do this all the time. If you are running an airline I hope you will enjoy the beating you will take going to "war" with a company that you just sent to bankruptcy (by cutting your own margins) and now that company has emerged (via a large govt bailout) much leaner with less debt.</p>

<p>BTW, just because you put your competition out of business does not mean that you will gain any long-term increase in marketshare. Often times, a better run competitor with a better financial position than the last competitor will emerge.</p>

<p>
[quote]
Concerning your last few sentences, what's best for the firms customers is not always beneficial to the shareholder...in fact it's usually the opposite.

[/quote]
</p>

<p>Firms that aren't customer focused often leave themselves open to new competition taking market shares (sometimes huge chunks of market share). See IBM nearly going out of business in the 1980s.</p>

[GoGetta09]

<p>Do you have any grip on reality? </p>

<p>Please let me enlighten you on walmart...</p>

<p>WMT:</a> Competitors for WAL MART STORES - Yahoo! Finance</p>

<p>
[QUOTE]
Yes. Companies act much differently than countries in war don't they?

[/QUOTE]
</p>

<p>You're misunderstanding the context of my point. Many of the same tactics that are used in wars are also used in business. For example, German Blitzkrieg, guerrilla tactics, etc...if you want me to elaborate I can...I was not specifically just focusing on a price cut, that's simply one tactic a company has at its disposal.</p>

<p>I learned this from a guy who was a drill sergeant in the Army, and later became a big wig over at Eastman Kodak's marketing department for over 20 years. At the moment, I'm inclined to accept his credentials and argument over yours, unless you can prove otherwise, because the logic behind it makes perfect sense. </p>

<p>
[QUOTE]
In your fairy tale world maybe. Companies have opportunities to do this all the time. If you are running an airline I hope you will enjoy the beating you will take going to "war" with a company that you just sent to bankruptcy (by cutting your own margins) and now that company has emerged (via a large govt bailout) much leaner with less debt.</p>

<p>

[/QUOTE]
</p>

<p>Companies have opportunities to take out their competitors all the time...? </p>

<p>right...</p>

<p>Concerning your airline argument...companies have not been aggressively going after/buying up their competition simply because they can't afford to do so, but they are always trying to maintain a competitive advantage when possible. Especially now that there is a large amount of market consolidation in cyclical industries going to be taking place (ie M+A's) due to the current impending recession, you're going to notice that many companies will be putting forth their best efforts to destroy/takeover competitors. </p>

<p>I've heard countless names in the news lately trying to take advantage of the cheap prices of companies. Bank of America and Countrywide... Merrill lynch and Wachovia (didnt end up happening, deal fell through after stan o'neal got booted), Microsoft and Yahoo, Sirius and XM, etc, etc... open your eyes. </p>

<p>Secondly, what government bailouts are you referring to? The only one I am recently aware of is Bear Stearns. </p>

<p>
[QUOTE]
BTW, just because you put your competition out of business does not mean that you will gain any long-term increase in marketshare. Often times, a better run competitor with a better financial position than the last competitor will emerge.

[/QUOTE]
</p>

<p>Obviously this is not true 100% of the time, there are exceptions to the rule...but if you don't think there are long term benefits of gaining significant market share from large competitors well... nevermind...feel like I'm talking to a brick wall that doesn't have a damn clue about business 101.</p>

[bluedevilmike]

<p>GG09 is making ridiculous arguments. VW's explanations have been very good, so I'm not quite sure why I'm bothering.</p>

<p>First, some of the same tactics used in war have analogies in business, just as they do in medicine, law, professional sports, politics, etc. This is obvious. It is also a useless thing to say.</p>

<p>Second, obviously companies do not like competition. But they VERY rarely actually act to eliminate their competition, because doing so is extremely costly. Most of the time, both companies can make money and coexist quite peacefully.</p>

<p>This second point is true because (as you do not seem to acknowledge), business is about making money. In virtually every business context in the history of the country, the steps that it would take to eliminate your competition would be so costly that it would not be worthwhile.</p>

<p>This is also true because the government will often step in and interfere. The fact that you've only ever heard of the Bear Stearns "bailout" is absurd and demonstrates that you have not been paying attention. An entire class of bankruptcy filing exists for restructuring purposes. Airlines are bailed out routinely; Amtrak runs on a permanent government subsidy; lawsuits are routinely filed to keep monopolies under control. So you can actually "win" in this attempt and get absolutely demolished. Business in America is not a meritocracy.</p>

<p>The level of rudeness you display in your post is not only obnoxious, it's entirely ungrounded in any grasp of the facts.</p>

[VectorWega]

<p>
[quote]
Concerning your airline argument...companies have not been aggressively going after/buying up their competition simply because they can't afford to do so, but they are always trying to maintain a competitive advantage when possible.

[/quote]
</p>

<p>Why speak to this point if you have no clue about the Airline industry?</p>

<p>
[quote]
Secondly, what government bailouts are you referring to?

[/quote]
</p>

<p>Do you remember 9/11 or was that "before your time" ?</p>

<p>
[quote]
feel like I'm talking to a brick wall that doesn't have a damn clue about business 101.

[/quote]
</p>

<p>Yes, I am clueless. You = college senior. Me = retired before the age of 30. Thanks to my clueless investment choices (blind luck?), I will never have to work another day in my life if I choose not to.</p>

<p>BTW, I'm not dismissing the fact that there are similiarities between war and business. You could say that about any competitive endeavor. However, the threadstarter's classmate appears to be a bit delusional. Employees often move from one competitor in an industry to another and it is not uncommon for direct competitors to work together on things such as govt lobbying efforts. This is clearly not warlike.</p>

[GoGetta09]

<p>
[QUOTE]
GG09 is making ridiculous arguments. VW's explanations have been very good, so I'm not quite sure why I'm bothering.</p>

<p>First, some of the same tactics used in war have analogies in business, just as they do in medicine, law, professional sports, politics, etc. This is obvious. It is also a useless thing to say.</p>

<p>

[/QUOTE]
</p>

<p>I'm not so sure where you disagree with me...I never said business is war...I simply stated that some of the tactics/strategies were similar. I wasn't agreeing with the thread starter, but I wasn't completely disagreeing either. I just offered the opinion that there was some truth to it. </p>

<p>
[QUOTE]
Second, obviously companies do not like competition. But they VERY rarely actually act to eliminate their competition, because doing so is extremely costly. Most of the time, both companies can make money and coexist quite peacefully.

[/QUOTE]
</p>

<p>I do not disagree with this, obviously many companies coexist peacefully but the reason why isn't because they don't want to gain advantage on their competitors. The reason is just as you say...it's not always financially possible or rational to do so. I've already stated this in my previous post.</p>

<p>
[QUOTE]
This second point is true because (as you do not seem to acknowledge), business is about making money. In virtually every business context in the history of the country, the steps that it would take to eliminate your competition would be so costly that it would not be worthwhile.

[/QUOTE]
</p>

<p>Please re-read what i posted here... </p>

<p>
[QUOTE]
Companies act in the interests of themselves before anything else...I don't think any rational business person would tell you otherwise. If you have an obvious opportunity to gain market share and send your competitors into oblivion you take it. 'nuff said.</p>

<p>Exactly, there are costs associated with it...but you are gullible to think that Coke executives sit around all day talking about how happy they are to be friends with Pepsi. In the real world, companies look to capitalize on every advantage they can get their grubby little hands on over their competition. Obviously, they do not do this unless they can do so legally and in a somewhat ethical manner so as to avoid negative publicity/backlash.

[/QUOTE]
</p>

<p>By "obvious opportunity" to gain market share and send your competitors into oblivion...I'm implying that it would not be at a great expense to the operation of your own business...I didn't think I had to explain that, it's a given. If a competitor of yours is weakened for whatever reason and you notice an obvious opportunity to realize a long term gain in market share you take it. </p>

<p>
[QUOTE]
The fact that you've only ever heard of the Bear Stearns "bailout" is absurd and demonstrates that you have not been paying attention. An entire class of bankruptcy filing exists for restructuring purposes. Airlines are bailed out routinely; Amtrak runs on a permanent government subsidy; lawsuits are routinely filed to keep monopolies under control. So you can actually "win" in this attempt and get absolutely demolished. Business in America is not a meritocracy.</p>

<p>The level of rudeness you display in your post is not only obnoxious, it's entirely ungrounded in any grasp of the facts.

[/QUOTE]
</p>

<p>There are only two government bailouts that have taken place that I know of...the first one was the Chrysler bailout in the late 70s, and the more recent one of Bear Stearns is the other. I don't really consider the 9/11 airline bailouts to be as significant because that was an extraordinary circumstance. It was done due to a national catastrophe as opposed to a general down turn in the business. </p>

<p>Secondly, I did not know that airliners were "routinely" bailed out by the federal government. If you can show me some examples I'd definitely like to read about this. </p>

<p>Finally the "rudeness" may have been a bit spiteful, but I wasn't a big fan of being told I live in a fairy tale world.</p>

[GoGetta09]

<p>
[QUOTE]
Why speak to this point if you have no clue about the Airline industry?

[/QUOTE]
</p>

<p>Because it was a generalized statement and you don't have to be an expert on the Airline industry to observe it. </p>

<p>
[QUOTE]

Do you remember 9/11 or was that "before your time" ?

[/QUOTE]
</p>

<p>Refer to my above post.</p>

<p>
[QUOTE]
Yes, I am clueless. You = college senior. Me = retired before the age of 30. Thanks to my clueless investment choices (blind luck?), I will never have to work another day in my life if I choose not to.</p>

<p>BTW, I'm not dismissing the fact that there are similiarities between war and business. You could say that about any competitive endeavor. However, the threadstarter's classmate appears to be a bit delusional. Employees often move from one competitor in an industry to another and it is not uncommon for direct competitors to work together on things such as govt lobbying efforts. This is clearly not warlike.

[/QUOTE]
</p>

<p>So you're a wise investor...that has absolutely nothing to do with running a company. If all successful portfolio managers/stock traders/bond traders/etc were so knowledgeable on how to run a business they would all be CEO's. The skill sets are different and there is absolutely no connection whatsoever.</p>

[GoGetta09]

<p>Oh and one more thing...</p>

<p>
[QUOTE]
You = college senior. Me = retired before the age of 30.

[/QUOTE]
</p>

<p>Professor with 20+ years of experience at Kodak > You</p>

[tetrishead]

<p>
[quote]
If all successful portfolio managers/stock traders/bond traders/etc were so knowledgeable on how to run a business they would all be CEO's

[/quote]

Haha, absolutely not, and if you think people yearn to become CEO's you're disconnected with reality. I, and anyone else with half a brain, would take a senior position at a VC group, hedge or PE fund over being a CEO for any company on this Earth any day of the week.</p>

[VectorWega]

<p>
[quote]
Professor with 20+ years of experience at Kodak > You

[/quote]
</p>

<p>I'm not having a discussion with a professor or a professional. I'm having a message board squabble with an undergrad.</p>

[GoGetta09]

<p>
[QUOTE]
I'm not having a discussion with a professor or a professional. I'm having a message board squabble with an undergrad.

[/QUOTE]
</p>

<p>What does it matter if it is me or my professor talking to you?...the message is the same. </p>

<p>Honestly, what are you trying to prove?</p>

<p>You brag about being this great investor... Prove to me how it specifically enhances your knowledge of running a successful business and maybe I'll give you some credit for it. </p>

<p>I personally know several people who have made millions through forex and penny stock trading...I've learned a lot from them, but neither of them are college graduates and neither of them know the first thing about managing a sound business. I was able to learn the basic concepts of their strategies within a few months...anyone can do it, big deal, you're not impressing me...so get off your high horse. </p>

<p>By the way, nice job of completely avoiding the previous substantive posts I made.</p>

[VectorWega]

<p>
[quote]
What does it matter if it is me or my professor talking to you?...the message is the same.

[/quote]
</p>

<p>You are not the professor. It's quite probable that you are distorting your professor's message.</p>

<p>
[quote]
Prove to me how it specifically enhances your knowledge of running a successful business and maybe I'll give you some credit for it.

[/quote]
</p>

<p>Without going into too much detail, I am very adept at finding market asymmetries and am very willing to take the risks necessary to exploit them.</p>

<p>I have never actively traded stocks/bonds or any other financial securities and would not necessarily be good at that. I am financially competent, but my strength has always been my strategic thinking. Of course, I don't have all the answers, but I think I have enough that I can be considered better than "doesn't have a damn clue about business 101. " I generally find opportunities using a marketing perspective (ie an understanding of the 3Cs: company, customer, competition; and strategically where I can make good investments given my understanding of this information).</p>

<p>
[quote]
By the way, nice job of completely avoiding the previous substantive posts I made.

[/quote]
</p>

<p>Sorry, am a bit busy. Perhaps I will get back to them. Although, some of your previous posts you tried to educate me on things I already understood and arguing other points would have just pushed this further off-topic than it already is.</p>

[tetrishead]

<p>
[quote]
Without going into too much detail, I am very adept at finding market asymmetries and am very willing to take the risks necessary to exploit them.</p>

<p>I have never actively traded stocks/bonds or any other financial securities and would not necessarily be good at that. I am financially competent, but my strength has always been my strategic thinking. Of course, I don't have all the answers, but I think I have enough that I can be considered better than "doesn't have a damn clue about business 101. " I generally find opportunities using a marketing perspective (ie an understanding of the 3Cs: company, customer, competition; and strategically where I can make good investments given my understanding of this information).

[/quote]

Based on this I assume you swing trade, as opposed to actually having statistical models you've put together? Not that it's a bad thing, but since this argument has effectively been completed as far as I'm concerned I'm always interested in learning how other people with some proven track record of success do what they do.</p>

[VectorWega]

<p>Sorry, I need to clarify...my investments are not in the stock market. They are small private equity investments.</p>

<p>As for statistical models...no I certainly do not use them and hope to never do so. Obviously, there is a lot of money to be made with statistical models but I would not enjoy conducting business that way. I have a hard enough time forcing myself to create a financial model.</p>

<p>If I can use a poker analogy....Pro poker player Bill Chen (<a href="http://en.wikipedia.org/wiki/Bill_Chen%5B/url%5D"&gt;http://en.wikipedia.org/wiki/Bill_Chen&lt;/a&gt;) has a PHD in Mathematics and his game is based on that (he has a numerical system he uses to rank cards/hands). By contrast, Sam Farha's (<a href="http://www.samfarha.com/biography.html%5B/url%5D"&gt;http://www.samfarha.com/biography.html&lt;/a&gt;) game is all about understanding his opponents and not allowing his opponents to understand him. While the first player is very structured and the other flies by the seat of his pants, both have been highly effective and neither could play the other's game.</p>

[GoGetta09]

<p>
[QUOTE]
Without going into too much detail, I am very adept at finding market asymmetries and am very willing to take the risks necessary to exploit them.</p>

<p>I have never actively traded stocks/bonds or any other financial securities and would not necessarily be good at that. I am financially competent, but my strength has always been my strategic thinking. Of course, I don't have all the answers, but I think I have enough that I can be considered better than "doesn't have a damn clue about business 101. " I generally find opportunities using a marketing perspective (ie an understanding of the 3Cs: company, customer, competition; and strategically where I can make good investments given my understanding of this information).

[/QUOTE]
</p>

<p>Fair enough, I apologize for losing my cool.</p>

<p>
[QUOTE]
Sorry, I need to clarify...my investments are not in the stock market. They are small private equity investments.

[/QUOTE]
</p>

<p>I think therein lies the fundamental flaw/difference in our opinion. The thinking process of managing a small start-up mom and pop kind of company is much different from a large cap corporation. I think what you say of a firm that is customer/service orientated is true for small business, but I really disagree that it's relevant in corporate America, which is after all what we're discussing here.</p>

<p>Since you do not agree with me or my level of credibility, I went ahead and googled "maximize shareholder wealth"...the first google result is the following powerpoint...I think you might find it interesting since there's a "Dr." in front of the guys name who wrote it.</p>

<p><a href="http://www.business.gsw.edu/busa/faculty/jkooti/Finance/Pres/Chapt1/Intro%20to%20Finance.PPT%5B/url%5D"&gt;http://www.business.gsw.edu/busa/faculty/jkooti/Finance/Pres/Chapt1/Intro%20to%20Finance.PPT&lt;/a&gt;&lt;/p>

<p>Several important points I'm going to copy from the powerpoint: note-This was written by Dr. John Kooti of Georgia Southwestern State University.</p>

<p>1)The Primary responsibility of financial managers is the acquisition of funds (cash) needed by the firm and directing those funds into projects that will maximize the value of the firm to its owners. </p>

<p>2) The Goal of the Firm
The shareholders wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners of the firm.</p>

<p>To maximize shareholders wealth--shareholders wealth is represented by the market price of a firm’s common stock</p>

<p>3) Market value of common stock is affected by:
Size of cash flow per period of time</p>

<p>Time of cash flow</p>

<p>Risk of the benefits expected to be received</p>

<p>4) Alternative Business forms</p>

<p>A sole proprietorship has little conflict, low taxation, but limited financing available, and unlimited liability</p>

<p>The firm may eventually add more partners (Partnership)and start to borrow from banks to fuel its growth.</p>

<p>At some stage the firm may choose to incorporate and go public, I.e. becomes a Corporation</p>

<p>Individuals or firms who buy shares of such a firm become equity participants and may be quite active</p>

<p>At the Corporation stage, new investment and challenges face a firm, financing is abundant, stockholders have limited liability, but accountability is high as well</p>

<p>On or about this stage, the firm is likely to hire finance professionals</p>

<p>5) Financial manager objectives</p>

<p>Maximize shareholder wealth</p>

<p>in an efficient market, maximize stock price</p>

<p>Identify and implement projects that add value to the firm, I.e., contribute more than they cost.</p>

<p>Raise financing by issuing financial instruments that cost less than the financing raised</p>

<p>6) Finance Managers should use the NPV rule
The NPV rule:</p>

<p>first, estimate benefits from undertaking a project by finding the present value of all future cash flows directly attributed to the project</p>

<p>Second, estimate costs of undertaking the project</p>

<p>Third, estimate the NPV of the project </p>

<p>Undertake a project with positive NPV</p>

<p>7)Maximize NPV of the firm</p>

<p>Take up all positive NPV projects</p>

<p>Maximize Market Value Added (MVA) - which is market value of equity less book value of equity = shares outstanding times stock price minus total common equity</p>

<p>*Maximize Economic Value Added (EVA) *</p>

<p>8) Goal of financial management</p>

<p>Is not maximization of EPS
Is not maximization of profits
Is not maximization of Sales</p>

<p>9) Agency Theory
Shareholders are the Principals</p>

<p>Managers are their Agents</p>

<p>An agency conflict arises when the goals of these two parties are not congruent.</p>

<p>An agency conflict is generally costly to the firm, I.e., it results in reduced value of the total firm</p>

<p>There are ways of mitigating this conflict but it cannot totally eliminated or reduced to zero.</p>

<p>*note: (This is precisely why most CEO compensation is realized in the form of stock/options to minimize conflict of interest between management and the shareholders.)</p>