Financial Management 300: Intro to Finance

• The lecture introduces Financial Management 300 and BCTA by the University of Johannesburg.
• Lecturers of the course include Thabiso Madiba (C Ring 750), Hiresha Naidoo (C Ring 748), and Chamain Seete (AT, C Ring 753).
• Management should focus on a company’s potential future, not just its current state.
• The beauty of finance lies in its future orientation, holistic overview, and focus on value and growth.

Financial Accounting vs. Management Accounting

• Financial accounting provides information for external users and generates "general purpose" financial statements.
• It reports on past financial events and must adhere to externally imposed standards, emphasizing objective data.
• Management accounting, by contrast, is built to give internal users information and makes “specific purpose" statements & reports.
• Management accounting provides future-focused reports, is not bound by external standards, and uses subjective data.

Decision Making, Planning, and Control Process

• The stages involve identifying objectives, exploring alternative strategies, and selecting appropriate actions.
• Implementation of decisions is followed by comparing actual versus planned outcomes and responding to any differences.
• A key to success involves defining your "why" through purpose, potential, and belief.
• A student-centric learning process involves self-reflection and correction, problem-solving, understanding theory, understanding problems, and problem discovery.

Unit 1 - Strategy: Learning Outcomes

• Understand strategy theory.
• Evaluate an entity's strategy.
• Demonstrate understanding of sustainability's impact on business decisions.
• Strategy is defined as direction and scope that achieves competitive advantage via resource configuration within a changing environment to meet market needs and stakeholder expectations.
• Strategy includes making both short-term and long-term strategic decisions and serves as a managerial roadmap.
• Strategy helps negate/ prepare for things that could go wrong.
• Strategy involves competitive moves and business approaches to attract customers, conduct operations, grow, compete, and improve financial and market performance to meet objectives.
• Financial management decisions should align with a company's strategy.
• The CEO has ultimate responsibility, but senior executives also play influential roles in strategy-execution.
• Companies with diverse operations delegate more strategic functions.
• General Electric (employs over 300,000 people) exemplifies a company delegating by spanning jet engines to TV broadcasting.
• To develop a strategic plan, an organization must consider where they want to go, where are they now, and how to get there.

Strategic Management Process

• The process starts with developing a vision, setting objectives, and crafting a strategy.
• Requires implementing and executing the strategy and monitoring developments, and making adjustments as needed.
• Strategic management encompasses developing a vision, setting objectives, crafting a strategy, implementing the strategy and evaluating performance.

Defining Strategy: Mission, Vision and Objectives

• Strategic management involves asking “Where do we want to go?” (Phases 1 & 2), “Where are we now?” (Phase 3), and “How are we going to get there?” (Phases 4 & 5).
• Vision, mission, and objectives are all interlinked
• Vision, mission, and objectives are interlinked and communicate the entity's strategy to stakeholders.
• Vision portrays the company's future business scope.
• Mission describes the company’s present business and rationale.
• Objectives define the actions required to achieve the vision.
• Setting objectives is about defining the action and it is about converting a mission into something specific to achieve.
• Objectives can be both long-term and short-term with strategy serving as the means to achieve them.

SMART Goals for Setting Objectives

• Specific: Objectives must give a precise attribute of the formulation sought.
• Measurable: Objectives need an Index or measure for determining progress.
• Attainable: Objectives must be realistic.
• Relevant: Objectives should align with the mission statement.
• Time Bound: A time frame must be defined in which the objective must be achieved.
• A "Increase the organisation's profits" smart goal example involves increasing revenue while cutting expenditure by moving to reduce rental costs by 7%.
• Sales increase by signing 5 more potential clients over 3 months.
• Improving customer relationships by networking and referrals.
• Moving to cheaper property will allow the company to give room to the growth of profits.
• Increased profit will be the aim for the end of the coming three months.

Generic Competitive Strategies Overview

• Low-cost provider: Has overall lower costs than rivals, broad spectrum of customers, price-sensitive buyers.
• Broad differentiation: Product/service distinguished from rivals, broad spectrum of customers.
• Focused differentiation: Aims at a narrow buyer segment with customized attributes.
• Focused low-cost: Targets a narrow buyer segment and outperforms rivals with lower costs.
• Best-cost provider: Offers value for money, balances low cost and differentiation.
• Examples of companies exhibiting Competitive Strategies include Capitec, PEP, Nandos, BMW, Safair, Spur, Harley-Davidson and Rolex

Strategic Analysis: SWOT Analysis

• A critical assessment of strengths, weaknesses, opportunities, and threats, in relation to internal and external forces affecting company performance positively or negatively.
• Companies should focus on strategies that leverage strengths, avoid decisions that highlight weaknesses, and defend against threats.
• Strengths are characteristics of a business which give it advantage over its competitors.
• Weaknesses are characteristics of a business which is a disadvantage compared to its competitors
• Elements in a company's external environment that allow it to formulate & implement strategies to increase profitability are considered Opportunities
• Threats are defined as Elements in company's external environment that could endanger the integrity & profitability of the business
• Application is the key - SWOT analysis (laundry list):.
  • Strengths include good reputation, IT capabilities, leadership, financial resources, research and development, valuable assets, scale economies, proprietary know-how, market dominance, distribution networks, advertising, and alliances.
  • Weaknesses: Low reputation, weak brand, old technology, lack of skills, poor morale, poor R&D, lack of patents, limited distribution channels, cash flow problems, narrow product line, CEO dependence, and lack of capital.
  • Opportunities include unfulfilled customer needs, new markets, faster growth, technological innovation, deregulation, removal of international trade barriers, demographic shifts, and economic upswing.
  • Threats consist of substitute products, new market entrants, slower growth, new regulations, increased trade barriers, shifts in consumer tastes, technological advances, demographic changes, and economic downturn.
• SWOT Analysis considerations include:
  • Strengths: Internal/consumer perspective.
  • Weaknesses: Internal/consumer perspective.
  • Opportunities: External perspective.
  • Threats: External perspective.

PESTEL Analysis & Porter’s 5 Forces

• PESTEL helps determine how conditions/developments, external environment may create industry opportunities/threats.
  • Political factors include taxation, employment, company and health & safety laws, environmental and competition regulations, trade restrictions/tariffs, and political instability.
  • Economic factors are economic growth, interest and exchange rates, inflation, and unemployment.
  • Health consciousness, population growth, age distribution, career attitudes, safety emphasis, demographics, and lifestyle changes
  • Technological factors include research and development, automation, technological incentives, and the rate of technological change.
  • Environmental factors consist of weather, climate change, pollution, sustainability, and natural disasters.
  • Legal components are laws, regulations, licenses, permits, and any changes to these.
• Porters 5 Forces is an analytical model for assessing the competition in an industry

Porter's 5 Forces Analysis (Laundry List)

• When evaluating Porter's 5, application (NB!!!) is key
• Threat of New Entrants:
  • High barriers to entry = low threat = high profits
    • Includes cost advantage, scale economies, access to tech, brand loyalty, initial capital, access to raw materials, regulations, customer switching costs, and retaliation from existing industry players.
• Threat of Substitute Products/Services:
  • Depends on Buyers' willingness to substitute, relative price/performance of the substitutes, customers’ loyalty plus cost of switching.
• Bargaining Power of Suppliers: High when:
  • Switching cost is high, there are few suppliers, there is a scarcity/no substitutes, highly differentiated, and suppliers threaten to integrate forward into the industry.
• Bargaining Power of Customers/Buyers: Strong when:
  • There are fewer buyers than suppliers, the switching costs are low, and the buyer can backward integrate.
  • Also includes buyer purchases in bulk volume, buyers source products from other suppliers, most of the seller's products are purchased, and buyers are more informed about the suppliers products.
• Rivalry within the Industry: High when
  • There are many competitors of a similar size, industry growth rate is low, high are exit barriers, low are switching costs, similar products are available, plus products can perish.
• According to Correia, the UN Sustainable Development Goals (SDGs) aim to achieve 17 SDGs by 2030 by setting targets for each goal to monitor and make progress toward the achievement of these goals represents a company's responsibilities to society

Strategic Choice: Stakeholder Analysis

• Stakeholders are defined as people, a group etc, who can affects or can be affected by an organizations’ actions/strategy.
• Stakeholders include Internal employees, management, and owners/founders.
• External stakeholders include communities, government, pressure groups.
• Connected stakeholders are customers, suppliers, trade unions, financiers.
• When determining an entity's strategies and objectives, assess the impact and power of stakeholders to influence said strategies.
• The Stakeholder Matrix of Power of Influence includes a stakeholder, their interests, and their influence
• Stakeholder power is high or low on one axis and the stakeholder level of interest is high or low on the other axis.
  • A: minimal effort (monitor)
  • B: keep informed
  • C: keep satisfied
  • D: manage closed (key players)

Business Model Overview

• Consists of Value Proposition, Customer Segments, Customer Relationships, Channels, Key Activities, Key Resources, Cost Structure, and Revenue Stream

Building Blocks of a Business Model

• Customer segments: Defines the customer segment that the company is targeting, interests or profiles plus segment customers according to gender, age, purchasing patterns, etc.
• Value propositions: Explains why do customers select a product/service over another is the Quality of performance, Custominsation among others.
• Channel: The means by which does a company reach its customers including communicate and distribute its products.
• Customer relationships: Manner in which a company sets up its relationships with the customers and the type of relationship demanded from a company.
  • Examples include individual assistance, general assistance, Automated services, Communities and Co-creating and open source
• Revenue streams: Pricing schemes that a customer segment will demand or appreciate.
  • Includes Transaction, Usage fee, Subscription fee, Renting, Licensing, Brokerage, Advertising etc
• Key resources: What a company owns, or what controls that will enable it to offer a value proposition to its customers and to manufacture products, distribute products and engage effectively with customers.
• Key activities is the actions that a company takes to ensure success.
• Key partnerships - Key a stakeholder, supplier, etc.
• Cost structure contains Fixed vs variable costs and Scale economies
• Examples of questions that can be as part of the building blocks of a business models:
  • Who are out key partners?
  • Which key activities to our value propositions require?
  • What value do we deliver to the customer?
  • For whom are we creating value?
  • How are we integrating them with customer routines?

How to Execute Strategic Implementation

• Strategy implementation comprises the organization's structure, resources, information, decision process, human resources, reward system, leadership approaches, staffing and the evaluation of performance.
  • Evaluation of performance involves reviewing actual experience, changing conditions, new ideas etc.
• Accountants monitor and report progress against performance targets via standard cost variance analysis, budgets and budgetary control, and divisional financial performance measures like ROI, RI, and EVA.
• The entire process of managing strategy is ongoing, and all actions are subject to modification.
• The next lecture will feature a guest lecturer for a practical class, and an objective test will be released on 20 February 2025.