4 CHAPTER 1 An Overview of Corporate Finance and the Financial Environment
This chapter should give you an idea of what corporate finance is all about, includ-
ing an overview of the financial markets in which corporations operate. But before
getting into the details of finance, it’s important to look at the big picture. You’re
probably back in school because you want an interesting, challenging, and rewarding
career. To see where finance fits in, let’s start with a five-minute MBA.
The Five-Minute MBA
Okay, we realize you can’t get an MBA in five minutes. But just as an artist quickly
sketches the outline of a picture before filling in the details, we can sketch the key el-
ements of an MBA education. In a nutshell, the objective of an MBA is to provide
managers with the knowledge and skills they need to run successful companies, so we
start our sketch with some common characteristics of successful companies. In partic-
ular, all successful companies are able to accomplish two goals.
- All successful companies identify, create, and deliver products or services that are
highly valued by customers, so highly valued that customers choose to purchase
them from the company rather than from its competitors. This happens only if the
company provides more value than its competitors, either in the form of lower
prices or better products.
- All successful companies sell their products/services at prices that are high enough
to cover costs and to compensate owners and creditors for their exposure to risk. In
other words, it’s not enough just to win market share and to show a profit. The
profit must be high enough to adequately compensate investors.
It’s easy to talk about satisfying customers and investors, but it’s not so easy to ac-
complish these goals. If it were, then all companies would be successful and you
wouldn’t need an MBA! Still, companies such as the ones on Fortune’s Most Admired
list are able to satisfy customers and investors. These companies all share the follow-
ing three key attributes.
The Key Attributes Required for Success
First, successful companies have skilled people at all levels inside the company, includ-
ing (1) leaders who develop and articulate sound strategic visions; (2) managers who
make value-adding decisions, design efficient business processes, and train and moti-
vate work forces; and (3) a capable work force willing to implement the company’s
strategies and tactics.
Second, successful companies have strong relationships with groups that are out-
side the company. For example, successful companies develop win-win relationships
with suppliers, who deliver high-quality materials on time and at a reasonable cost. A
related trend is the rapid growth in relationships with third-party outsourcers, who
provide high-quality services and products at a relatively low cost. This is particularly
true in the areas of information technology and logistics. Successful companies also
develop strong relationships with their customers, leading to repeat sales, higher
profit margins, and lower customer acquisition costs.
Third, successful companies have sufficient capital to execute their plans and sup-
port their operations. For example, most growing companies must purchase land,
buildings, equipment, and materials. To make these purchases, companies can reinvest
a portion of their earnings, but most must also raise additional funds externally, by
some combination of selling stock or borrowing from banks and other creditors.
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2 An Overview of Corporate Finance and the Financial Environment
