1. Copyright © 2004 South-Western. All rights reserved.20–1 Learning Goals Explain how a firm’s value is determined Summarize the key business decisions and explain how they affect the firm’s value Illustrate how one particular firm (IBM) recently made several key business decisions to increase its value

2. Copyright © 2004 South-Western. All rights reserved.20–2 Valuation of a Business Firm’s value is equal to the present value of its future cash flows –Firm’s value is highly influenced by its expected future earnings –“What will you do for me TOMORROW”??? –Crystal ball: COGS, competition, analysts, mgmt. Projections, past performance, economic indicators, global markets etc….

3. Copyright © 2004 South-Western. All rights reserved.20–3 Management Decisions and Firm Value Strategic planning Organizational structure Production process Motivating employees Managing employees

4. Copyright © 2004 South-Western. All rights reserved.20–4 Marketing Decisions and Firm Value Product strategies Pricing strategies Distribution strategies Promotion strategies

5. Copyright © 2004 South-Western. All rights reserved.20–5 Financing Decisions and Firm Value Debt vs. Equity Investment strategies Global Markets and indicators

6. Copyright © 2004 South-Western. All rights reserved.20–6 Small Business Survey What Are the Major Concerns of Small Businesses?

7. Copyright © 2004 South-Western. All rights reserved.20–7 Relationships Among Business Strategies Organizational structure and production –Structure depends on product mix Pricing and production strategies –Pricing strategy dictates level of production needed, which influences plant site, design, and layout Pricing and distribution strategies –Pricing strategy dictates exclusivity and intensity of distribution

8. Copyright © 2004 South-Western. All rights reserved.20–8 Relationships Among Business Strategies Pricing and promotion strategies –Pricing strategy determines the kinds of promotions that will be effective –Pricing strategy also influences how much money will be allocated to promotions Pricing and financing strategies –Pricing influences production volume and amount of funds required to finance operations Accounting and information systems –Needed to make proper business decisions

9. Copyright © 2004 South-Western. All rights reserved.20–9 Common Sequence of Business Functions Exhibit 20.2

10. Copyright © 2004 South-Western. All rights reserved.20–10 IBM’s Business Strategies Provide shareholder value –42 percent increase in stock price Mission and strategic plan –Lead in the creation, development, and manufacture of most advanced information technologies –Services software and OEM technology will drive growth in revenues and earnings Social responsibilities –Focus on education and the environment

11. Copyright © 2004 South-Western. All rights reserved.20–11 Change in IBM’s Revenue, Expenses, and Earnings Exhibit 20.3 Note: Figures are in millions of dollars.

12. Copyright © 2004 South-Western. All rights reserved.20–12 Change in IBM’s Liquidity and Efficiency Exhibit 20.4 Note: Figures are in millions of dollars.

13. Copyright © 2004 South-Western. All rights reserved.20–13 Conclusions About IBM Comparing 1992 to 2001 results –Revenue higher in 2001 –Operating expenses lower in 2001 –Earnings before interest and taxes higher in 2001 –Liquidity improved in 2001 –Efficiency improved in 2001

14. Copyright © 2004 South-Western. All rights reserved.20–14 Chapter Summary Firm’s value is equal to the present value of its expected future cash flows Management, marketing and finance decisions can enhance a firm’s value IBM increased its value by –Downsizing to reduce cash outflows –Revising product and pricing strategies to increase or maintain cash inflows –Funding new investments to capitalize on new opportunities

15. Copyright © 2004 South-Western. All rights reserved.20–15 Final Exam Exam on Thursday, June 8 th Covers material since last exam Chapters 10, 18 and 20 Same format as the other 2 exams 50 M/C questions: bring pencils and ScanTron

16. Copyright © 2004 South-Western. All rights reserved.20–16 Presentation See template and examples on my site See financial template on my site for a financial example 5 – 10 minutes long All team members must be present to get credit Must have more than 2 presenters but all members do not have to present