synthesis of business functions

Copyright © 2004 South-Western. All rights reserved.

Jeff MaduraIntroduction to Business 3eIntroduction to Business 3e

22Special TopicsSpecial Topics

Synthesis of Business Synthesis of Business Functions Functions

Synthesis of Business Synthesis of Business Functions Functions

Copyright © 2004 South-Western. All rights reserved. 20–2

Learning GoalsLearning 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


Synthesis of Business Synthesis of Business FunctionsFunctions


Valuation of a BusinessValuation of a Business•Firm’s value is equal to the present value of its future cash flows– Cash inflows come from sales– Cash outflows result from payment of

expenses or taxes– Firm’s value is highly influenced by its

expected future earnings


business onlinebusiness online ee -- businessbusiness


Management Decisions and Management Decisions and Firm ValueFirm Value

• Strategic planning– Capitalize on opportunities that increase revenue or

reduce production costs

• Organizational structure– Try to attain low level of operating expenses

• Production process– Plant site location to minimize costs– Design and layout to reduce costs– Quality to improve customer satisfaction and firm’s

reputation– Use technology to improve efficiency


Management Decisions and Management Decisions and Firm ValueFirm Value

• Motivating employees– Increase employee satisfaction– Align compensation with performance– Provide job security– Provide flexible work schedule– Utilize employee involvement programs

• Managing employees– Proper recruiting and screening of new hires– Develop employees’ skills– Establish proper performance evaluation procedures


Marketing Decisions and Firm Marketing Decisions and Firm ValueValue

• Product strategies– Target appropriate market– Differentiate products from competitors

• Pricing strategies– Proper pricing can increase future cash flow

• Distribution strategies– Influence the number of customers reached by firm’s

products

• Promotion strategies– Increase acceptance of products through special

deals, advertising, and publicity


Small Business SurveySmall Business SurveyWhat Are the Major Concerns

of Small Businesses?


Business Decisions and Firm Business Decisions and Firm ValueValue

•Financial management decisions– Financing strategies help firm obtain the

amount and type of financing they desire.

– Proper financing strategies can enable firm to obtain funds at a low cost.

– Firms use investing strategies to allocate funds across business operations.

– The present value of a project’s cash flows must exceed the initial outlay in order for a project to be feasible.

Copyright © 2004 South-Western. All rights reserved. 20–11Exhibit 20.1

Summary of Key Summary of Key Business FunctionsBusiness Functions


Relationships Among Relationships Among Business StrategiesBusiness 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


Relationships Among Relationships Among Business StrategiesBusiness 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


Common Common Sequence of Sequence of

Business FunctionsBusiness Functions

Exhibit 20.2


IBM’s Business StrategiesIBM’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


IBM’s Business StrategiesIBM’s Business Strategies• Assessment of Industry

– Future in information technology services

• Foreign market penetration– $24 billion business with 20% annual growth

• Management strategies– Recent downsizing and reorganizing to focus on e-commerce

(organizational structure)

– Consolidated work done by data centers and reduced office space worldwide (design and layout)

– Use flexible production processes

– Enhanced customer service (TQM)

– Devote substantial resources to training and rewarding employees


IBM’s Business StrategiesIBM’s Business Strategies• Marketing strategies

– Product strategies focus on developing new and revising existing products

– Pricing strategy focuses on reducing prices to increase volume

– Distribution strategy focuses on delivering some products directly to customers

• Finance strategies

– Obtain financing in the countries where they conduct business

• Business investment strategies

– Capital expenditures and stock repurchase


Change in IBM’s Revenue, Change in IBM’s Revenue, Expenses, and EarningsExpenses, and Earnings

Exhibit 20.3Note: Figures are in millions of dollars.


Change in Change in IBM’s IBM’s

Liquidity Liquidity and and

EfficiencyEfficiency

Exhibit 20.4Note: Figures are in millions of dollars.


Conclusions About IBMConclusions 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


Chapter SummaryChapter 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

synthesis of business functions

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