Self‐Study Questions

1. Since long‐run profitability requires that a firm is sensitive to the

interests of its customers, employees, suppliers, and society‐at ‐large,
whether a firm is run in the interests of its shareholders or its
stakeholders makes no real difference. Do you agree? Are there
situations where shareholder and stakeholder interests diverge?

No, I do not agree. The shareholders and the stakeholders have conflicting
interests and neither one can manage on its own as these interests need to be
implemented together so as to be effective. The divergent interests can lead to
conflict during negotiations for mergers and acquisitions as shareholders often
support the move because of the higher dividends they will receive whereas
company stakeholders like employees, suppliers and management may not support
such deals as they can lead to job losses and disruption of supply chains. The
interests of shareholders and stakeholders determine their viewpoints. For
shareholders, the most important job for the company is to increase stock prices,
pay ore dividends, expand into new markets, increase profitability and make the
business attractive to more investment. They want the company to achieve organic
and inorganic growth. To increase their returns on investment. Stakeholders are
more concerned about achieving long-term goals, better working conditions and
improved service delivery. For many employees, job stability, better compensation
and improved welfare packages are more important than higher profit margins.

2. Table 2.1 compares companies according to different profitability

measures.

1. Which two of the six performance measures do you think are the
most useful indicators of how well a company is being managed?

Since the purpose of business is to create value for the customer and then to
extract some of that customer value in the form of profit, I would say that Market
Capitalization and Return to Shareholders are the most useful indicators of a well-
managed company. Market Capitalization is the total dollar value of a company's
outstanding shares. This figure is used to determine a company's size, as opposed
to sales or total asset figures. If the company is providing value to the customer
then it will grow and so will its market capitalization. Return to shareholders is the
percentage of the company’s income that is being returned to the shareholders in
the form of a dividend. This share dividend is the actual profit that the company is
extracting for the customer value. The more successful the company the more
profit is returned to the shareholders of the company.
 2. Is return on sales or return on equity a better basis on which to
compare the performance of the companies listed?

Return on Equity is a better basis of comparison of the performance of the

companies listed. Return on sales is the pre-tax profit as a percentage of sales.
This leaves other debits out of the equation and gives a false sense of return. The
Return on Equity is the net income as a percentage of year-end shareholder’s
equity. This allows the comparison to occur with the real profits of the company.

3. Several companies are highly profitable yet delivered very low

returns to their shareholders during 2017. How is this possible?

It is possible to be highly profitable, yet deliver a negative return to shareholders.

If the company has to re-invest the capital profits back into the company, this can
affect the deliverable total to the shareholders.

3. With regard to Strategy Capsule 2.2, what additional data would you
seek and what additional analysis would you undertake to investigate
further the reasons for UPS's superior profitability to FedEx?
Each generation anticipates that simpler access should a greater amount of what
the world brings to the table. More items and services, more data and thoughts,
more individuals and spots. FedEx made that desire. UPS is the world's biggest
package delivery organization and a worldwide innovator in supply chain services,
offering a broad scope of choices for synchronizing the development of goods,
data and assets. Headquartered in Atlanta, UPS serves in excess of 200 nations and
regions worldwide and works the biggest franchise shipping chain.

4. The CEO of a chain of pizza restaurants wishes to initiate a program

of CSR to be funded by a 5% levy on the company's operating profit.
The board of directors, fearing a negative shareholder reaction, is
opposed to the plan. What arguments might the CEO use to persuade
the board that CSR might be in the interests of shareholders, and what
types of CSR initiatives might the program include to ensure that this
was the case?
Corporate social responsibilities play a crucial role in influencing consumers'
behaviors and attitudes in Organizations in that they have a greater retention of
their customers because of the improved products and services. The good services
increase customer's loyalty who are in most cases the shareholders of the
organization who largely assist in decision making. Customers are further more
likely to refer other customers to the company thus the referred customers come
with confidence in the company. Corporate social responsibilities facilitate
customer and shareholder satisfaction as they are guaranteed the best services or
products.  There are various types of CSR initiatives that may be employed to
ensure that they impact the company positively. They include; Ethical Corporate
Social Responsibility which focuses on ensuring that all the customers and
shareholders are treated equally.

5. Nike, a supplier of sports footwear and apparel, is interested in the

idea that it could increase its stock market value by creating options
for itself. What actions might Nike take that might generate option
value?

For Nike to engender optimum value, should adopt new technologies and come up
with innovations in order to link more with customers by dominating their funds.
Nike can come up with technology that can benefit the entire society by utilizing
recycled raw materials on their goods. Engaging with environmental friendly
products can optimize their value. Also by using renewable forms of energy like
geothermal, wind or solar energy to enhance conservation of the environment.