A strategy is a set of related actions that managers take to increase their company’s performance.
Strategic leadership is about how to most effectively manage a company’s strategy-making process to create competitive advantage. The strategy-making process is the process by which managers select and then implement a set of strategies that aim to achieve a competitive advantage. Strategy formulation is the task of selecting strategies, whereas strategy implementation is the task of putting strategies into action, which includes designing, delivering, and supporting products; improving the efficiency and effectiveness of operations; and designing a company’s organizational structure, control systems, and culture.
Maximizing shareholder value is the ultimate goal of profit-making companies for two reasons. First, shareholders provide a company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services.
Risk capital is capital that cannot be recovered if a company fails and goes bankrupt.
Second, shareholders are the legal owners of a corporation, and their shares represent a claim on the profits generated by a company. Thus, managers have an obligation to invest those profits in ways that maximize shareholder value.
By shareholder value we mean the returns that shareholders earn from purchasing shares in a company. These returns come from two sources: (1) capital appreciation in the value of a company’s shares and (2) dividend payments.
One way of measuring the profitability of a company is by the return that it makes on the capital invested in the enterprise.2 The return on invested capital (ROIC) that a company earns is defined as its net profit over the capital invested in the firm (profit/capital invested). By net profit we mean net income after tax. By capital we mean the sum of money invested in the