Strategic Financial Management Lectures PDF

ACC08/FMS01 LECTURES Gems  Financial Management Part 1 Strategic Financial Management “How...

ACC08/FMS01 LECTURES Gems  Financial Management Part 1 Strategic Financial Management “However beautiful the Topical Objectives strategy, you should At the end of this section, you are expected to : 1. Distinguish the external and internal environment of the occasionally look at firm; and 2. Discuss the relevance of different financial strategies in case situations. the results. ”. -Sir Winston Churchill (1871- Environment of Firms 1965) Since no firm exists in isolation, if one would like to put itself in a competitive position, all sides should be covered. An environmental appraisal is necessary to choose strategy to be employed. strategy Consists of the competitive Internal Environment moves and business approaches:  to attract and please The internal environment of a business organization is itself-- its customers, resource capabilities, relative cost position, and competitive  compete strength versus other industry competitors. successfully,  grow the business, conduct operations, Analyzing the organization’s strengths, weaknesses, and opportunities, and threats must lead to the answer of two  achieve targeted questions: is the company able to meet its financial objectives and objectives is it able to maintain its competitive position in the industry. Crafting and Executing Strategy by Thompson, Strickland, and Gamble Some indicators used to evaluate whether an organization has the winning advantage: 1. Sales growth 2. Customer acquisition and retention 3. Profit Margin 4. Trends in the firm’s net profits and ROI 5. Overall financial strength and credit rating STRATEGIC FINANCIAL MANAGEMENT24  6. Continuous improvement in its internal performance 7. Trends in the company’s stock price and shareholder value 8. Image and reputation with its customers 9. Rating on factors on which buyers base their brand choice (e.g. Technology, product innovation, customer service, product quality, delivery time, etc.) External Environment The external environment of any business organization consists of its immediate industry environ and the macro-environment. Figure 1. Components of a Company’s Macro-Environment (Reference::Strickland) Stronger when: o Good substitutes are available o Substitutes are attractively priced o Users have low switching costs Stronger when: o High switching costs o Needed inputs are short in supply o Few suppliers o Forward integration W1. Lower prices Stronger when: W2. Different Features o Low Switching costs W3. Better Performance Stronger when: W4. Higher quality o Buyers are large o Entry barriers are low W5. Stronger Brand Image o Large volume o Newcomers can expect W6. Wider selection purchases W7. Bigger dealer network attractive profits o Quantity and quality W8. Low-interest financing o Buyer demand is growing of information W9. Higher levels of advertising W10. Stronger product innovation available to customers W11. Better customer service STRATEGIC FINANCIAL MANAGEMENT25 o Backward integration Industry’s Driving Forces The most common driving forces can be categorized in any of the following: 1. Changes in the long-term industry growth rate 2. Increasing globalization of the industry 3. Growing use of the Internet and emerging new Internet technology applications 4. Changes in who buys the product and how they use it 5. Product innovation 6. Technological change and manufacturing process innovation 7. Marketing innovation 8. Entry or exit of major firms 9. Diffusion of technical know-how across more companies and more countries 10. Changes in cost and efficiency 11. Growing buyer preferences for differentiated products instead of a commodity product or for a 12. more standardized product instead of strongly differentiated products 13. Reductions in uncertainty and business risk 14. Regulatory influences and government policy changes 15. Changing societal concerns, attitudes, and lifestyles Nature of Strategies Generic Competitive Strategies 1. A low-cost provider strategy: striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by under pricing rivals. 2. A broad differentiation strategy: seeking to differentiate the company’s product/service offering from rivals’ in ways that will appeal to a broad spectrum of buyers 3. A best-cost provider strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes 4. A focused or market niche strategy based on lower cost: concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals 5. A focused or market niche strategy based on differentiation: concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals products Collaborative Strategies These strategies are useful during 1. freshly emerging markets, STRATEGIC FINANCIAL MANAGEMENT26  2. rapidly growing markets, 3. mature, slow-growth markets, 4. stagnant or declining markets, 5. turbulent markets 6. fragmented markets comprised of a large number of relatively small sellers. Collaborative Strategies include: 1. Strategic alliances and collaborative Partnerships 2. Mergers and Acquisitions 3. Vertical Integration ( may it be forward or backward) 4. Outsourcing Diversification Diversification is most suited when there are opportunities for expanding into industries: 1. Whose technologies and products complement its present business 2. Which has same resource strengths 3. With closely related businesses opening new venues for reducing costs 4. Where a powerful and well-known brand name can be transferred to the products of other businesses Strategies for Various Markets Markets Available Strategic Options Emerging Industries a. Push to perfect the technology, improve product quality, and develop additional attractive performance features b. Consider merging with or acquiring another firm to gain added expertise and pool resource strengths c. As technological uncertainty clears and a dominant technology emerges, adopt it quickly d. Acquire or form alliances with companies that have related or complementary technological expertise e. Pursue new customer groups, new user applications, and entry into new geographical areas f. Makes it easy and cheap for first-time buyers to try the industry’s first-generation product g. Shift the advertising emphasis from creating product awareness to increasing frequency of use and building brand loyalty. STRATEGIC FINANCIAL MANAGEMENT27  Markets Available Strategic Options h. Use price cuts to attract the next layer of price- sensitive buyers into the market i. Form strategic alliances with key suppliers to gain access to specialized skills, technological capabilities, and critical materials or components Rapidly Growing Markets a. Driving down costs per unit so as to enable price reductions b. Pursuing rapid product innovation c. Gaining access to additional distribution channels and sales outlets. d. Expanding the company’s geographic coverage. e. Expanding the product line to add models/styles Slow Growth, Mature Markets a. Pruning Marginal Products and Models b. Improving on Value Chain Innovation c. Trimming Costs d. Increasing Sales to Present Customers e. Acquiring Rival Firms at Bargain Prices f. Expanding Internationally g. Building New or More Flexible Capabilities Stagnant or Declining Markets a. Pursue a focused strategy aimed at the fastest growing market segments within the industry b. Stress differentiation based on quality improvement and product innovation c. Strive to drive costs down and become the industry’s low-cost provider Turbulent, Fast-Changing Markets a. Invest aggressively in R&D to stay on the leading edge of technological know-how b. Keep the company’s products and services fresh and exciting enough c. Develop quick response capability d. Rely on strategic partnerships with outside suppliers and with companies making tie-in products e. Initiate fresh actions every few months not just when a competitive response is needed Fragmented Industry a. Constructing and operating “formula” facilities b. Becoming a low-cost operator c. Specializing by product type d. Specialization by customer type e. Focusing on a limited geographic area STRATEGIC FINANCIAL MANAGEMENT28  Markets Available Strategic Options Foreign Markets a. Maintain a one-country production base and export goods to foreign markets b. License foreign firms to use the company’s technology or to produce and distribute the company’s products c. Employ a franchising strategy d. Follow a multi-country strategy e. Follow a global strategy f. Use strategic alliances or joint ventures with foreign companies Strategic Position and Action Evaluation (SPACE) Matrix (David, 2012) Sixteen (16) strategies are identified as to its attributes of aggressiveness and competitiveness. References 1 Strategy, Winning in the Marketplace by Thomson, Gamble, and Strickland (latest Ed) 2 Strategic Financial Management by Samuel Weaver STRATEGIC FINANCIAL MANAGEMENT29 STRATEGIC FINANCIAL MANAGEMENT30