Chapter 2
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
Describe a company mission and explain its value
Explain why the mission statement should include the
company’s basic product or service, its primary markets,
and its principal technology
Explain which goal of a company is most important:
survival, profitability, or growth
Discuss the importance of company philosophy, public
image, and company self-concept to stockholders
Give examples of the newest trends in mission statement
components: customer emphasis, quality, and company
vision
Describe the role of a company’s board of directors
Explain agency theory and its value
2-3
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.
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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
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
Ex. 2.2 (adapted)
1.
2.
3.
4.
5.
6.
7.
8.
Mission Statement Components
Customer-market
Product-service
Geographic Domain
Technology
Concern for Survival
Philosophy
Self-concept
Concern for Public Image
2-7
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
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
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
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
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 selfconcept do not appear in mission statements.
2-12
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
Deming’s 14 Points:
1.
2.
3.
4.
5.
6.
7.
Create constancy of purpose.
Adopt the new philosophy.
Cease dependence on mass inspection to achieve
quality.
End the practice of awarding business on price
tag alone. Instead, minimize total cost, often
accomplished by working with a single supplier.
Improve constantly the system of production and
service.
Institute training on the job.
Institute leadership.
2-14
Deming’s 14 Points (cont’d):
8. Drive out fear.
9. Break down barriers between departments.
10. Eliminate slogans, exhortations, and numerical
11.
12.
13.
14.
targets.
Eliminate work standards (quotas) and management
by objective.
Remove barriers that rob workers, engineers, and
managers of their right to pride of workmanship.
Institute a vigorous program of education and selfimprovement.
Put everyone in the company to work to accomplish
the transformation.
2-15
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.
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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
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.
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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.
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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
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
Aligning Executive Interests with Owner Interests
Stock Option Plans
Bonus plans
Incentives for Long-
Term Performance
2-22