Strategic Financial Management PDF

Strategic Financial Management Introduction to Strategic Management Prepared by Manoj Suranga  What is Strategic Management? Strategic Management is the term applied to describe those activities of an organization that enable it to meet the challenges of a constantly changing...

Strategic Financial Management Introduction to Strategic Management Prepared by Manoj Suranga  What is Strategic Management? Strategic Management is the term applied to describe those activities of an organization that enable it to meet the challenges of a constantly changing environment.  Organization Organization is a group of people working together for achieving a common objective.  Organization as an open system Organizations are an open system. They influence and are influenced by the environment in which they operate. Characteristics of open systems: 1. They have subsystems 2. Performances are generated through interrelations between divisions and activities. 3. All systems transform inputs into outputs. 4. Open system have a goal around which it seeks to organize itself. 5. Systems seek a state of dynamic equilibrium 6. Feedback gives information about the state of dynamic equilibrium.  Strategy Strategy can be defined as course of actions carried out to achieve pre-determined objectives. It is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.  The Characteristics of Strategic Decisions 1. Strategy is likely to be concerned with or affect the long term direction of the organization 2. Strategic decisions are likely to be concerned with the scope of an organization’s activities 3. Strategic directions are normally about trying to achieve some advantage for the organization over competition 4. Strategy can be seen as search for strategic fit with the business environment. 5. Strategy can also be seen as creating opportunities by building on or stretching an organization’s resources and competences. 6. The strategy of an organization is affected not only by environmental forces and strategic capability, but also by the values and expectations of those who in and around the organization – stakeholders of the organization.  Components of organizational Strategy 1. Scope (extent of the organization’s present & planned interactions with its environment) 2. Resource deployments (The level and patterns of organization’s past & present resource & skill deployments) 3. Competitive advantages (unique advantages over competitors) 4. Synergy (joint effects)  Advantages of formal strategic planning (a) Formalized strategic planning provides what many would term a logical but certainly a structured means of analysis and thinking about complex issues and problems. (b) It is argued that formal and structured planning systems force managers to take a longer-term view of strategic options and directions than they would otherwise. (c) Formalized and structured planning systems, it is suggested, enable effective control and evaluation. (d) Co-ordination between different functions and managers throughout the organization can be increased with highly formalized and structured planning systems. (e) Related to co-ordination, formalized strategic planning also helps ensure that the required resources to implement strategic plans are understood and made available. (f) Finally, formalized planning systems can sometimes help to motivate individuals towards the achievement of strategic objectives, particularly where they are involved in the planning process and feel, therefore, that they have some degree of ownership of and commitment to the process.  Disadvantages of formal strategic planning (a) Highly formalized strategic planning systems may not always adequately reflect the people and cultural elements of the organization. (b) Individual managers may feel absolved from any strategic planning responsibilities, these being left to the specialist strategic planners. As a result, line managers may not feel they own strategic plans. (c) Highly formalized strategic plans can be restrictive, particularly where the environment is changing rapidly. This may result in lost opportunities and a gradual loss of strategic fit. (d)Highly formalized strategic planning can become very cumbersome and over-detailed, requiring large amounts of analysis and information, often resulting in information overload. (e) Strategic planning can become a substitute for action, i.e. it can become an activity in its own right, divorced from the actual activities and plans of the organization.  Levels of Strategy Corporate Strategy is concerned with the overall purpose and scope of an organization and how value will be added to the different parts (business units) of the organization. Ex: Acquisition & diversification Entering new industries Leaving existing industries  Levels of Strategy Business Strategy This deals with the competitive position of the specific SBUs or divisions with respect to those products or services which should be developed and the markets towards which they should be aimed. A strategic business unit is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU. Decisions taken at this level include deciding between cost leadership, differentiation, and focus.  Levels of Strategy Operational Strategy This third level of strategy is concerned with specific functions within the organization, such as marketing or finance, and the contribution which these make to the other strategic levels. Operational strategies are concerned with how the component parts of an organisation deliver effectively the corporate and business-level strategies in terms of resources, processes and people. The Vocabulary of Strategy The Model of the Elements of Strategic Management  Three elements or processes of the Strategic Management 1. Understanding Strategic Position /Strategic Analysis Strategic analysis is the first step in strategic planning. It consists of the planner assessing the current position/performance of the organization –including its present objectives and strategies and relating this assessment to an analysis of trends and changes in the organization’s environment. A key technique here is SWOT analysis, i.e. the assessment of strengths, weaknesses, opportunities and threats.  Three elements or processes of the Strategic Management 2. Strategic Choice This second step in strategic planning contains three sub- steps. The first of these is the generation of strategic options. For example, the objective of growth can be achieved through acquisition or through internal development. Similarly, a company can compete on the basis of, say, cost leadership, or focus, or differentiation. The second step in strategic choice is to evaluate these options. The third step in strategic choice then is the selection of alternative strategies.  Three elements or processes of the Strategic Management 3. Strategy into Action The third element in the strategic planning process is implementation. Broad strategic choices need to be translated into specific action programs. Resources need to be allocated, responsibilities defined, organizational structures designed and, finally, systems of information and control put in place. It is often at the implementation stage that most of the problems of coordinating and controlling strategic plans are encountered. Rational Approach to Strategic Management  Strategic Management Process Strategic Management Process will have six integrated stages. note Setting Organizational Direction strategic analysis / Environmental Analysis understanding strategic position – Internal Environment – External Environment Strategy Formulation / Generation strategic choice Strategy Evaluation / Selection Strategy Implementation Monitoring & Controlling strategic into action  Strategic Management Process 1. Setting Organizational Direction Strategic planning process starts with deciding the directions which organization wants to focus & basically the direction will be generated by the combination of following four concepts. Organizational Vision Statement Organizational Mission Statement Organizational Goals Organizational Objectives  Strategic Management Process 2. Corporate Analysis/ Environmental Analysis / Situational Analysis It is very important to analyze & understand the organizational environment before taking major decisions. Organizational environment refers to the forces that can make an impact. Forces made up opportunities and threats. Organizations do not exist in isolation. It works with the overall environment. Scholars have divided these environmental factors into two main parts as, Internal Environment External Environnent  Strategic Management Process 3. Strategy Formulation Based on the organizational direction and the environmental factors, organization will develop several possible strategies with the purpose of achieving set pre-determined tasks. These strategies will be generated by top management and sometimes the suggestions of the lower level employees will be considered as well. At a given scenario, organization will initially come out with number of strategies which will lead the organization towards the same direction.  Strategic Management Process 4. Strategy Evaluation Organization may not be able to implement all generated strategies in the previous level due to lack of resources or due to feasibility limitations. Therefore organization must evaluate each & every strategy generated by them in the previous stage for resource availability and feasibility.  Strategic Management Process 5. Strategy Implementation After the evaluation and selection process, organization will implement the best option/ options and will put the plan in to real world practice. Organizational structure, decision making mechanism, and efficiency will be the critical factors behind the success of the implementation.  Strategic Management Process 6. Monitory & Controlling After implementing the strategy, organization must continuously monitor the results in order to make sure that the organization moves in the correct direction. If organization is not moving in the correct direction, it will have to take immediate corrective actions or to change the present strategy.  Different Strategic Patterns 1. Intended Strategies note These are those strategies which are deliberately planned and designed by the corporate planner. They are literally "strategy as design", and are useful in that they provide a structured and systematic way of thinking about strategic issues and decisions. These strategies maybe planned in formal strategic planning workshops and are usually developed by the corporate planning department, sometimes with the help of corporate strategy consultants.  Different Strategic Patterns 2. Realized Strategies These are the actual strategies that an organization follows in practice. These are often different from its intended strategies due to following reasons. internal organizational politics may require that intended strategies be modified planned strategies turn out to be unworkable the environment has changed since the plans were developed intended plans are resisted or even rejected by interested parties affected by the plans  Different Strategic Patterns 3. Emergent Strategies note These are strategies that gradually emerge from the day-to-day decisions and activities of the organization. There is no doubt that the ability to learn is an important and useful skill in the contemporary organization, especially with heightened environmental complexity and the quickening pace of change. Emergent strategies, however, give rise to the danger of uncertainty and strategic drift.  Different Strategic Patterns (may work) 90% ( May not work) 10%  Stakeholders Stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals and on whom, in turn, the organisation depends.  Stakeholder Analysis Stakeholders are the groups or individuals whose interests are directly affected by the activities of a firm or organization. Stakeholders can be divided into two main groups. 1. Internal Stakeholders People who are staying inside of an organization and interest about organizational activities. Ex: Employees, internal shareholders, directors 2. Connected Stakeholders Are stakeholders that are external but deal with the organization on a regular basis. Ex: Government organizations, Media, Community, Potential investors, Competitors, Customers, Suppliers, Banks & Financial institutions Stakeholders bank  Stakeholder Power The degree to which stakeholder needs are considered as part of the objective setting process depends on the level of power they have to impact the organization and its results. The needs of powerful groups will tend to be prioritized. For example large customers have significant power and products, prices, location of production facilities and so on may be impacted by their needs. Small customers have far less power and less consideration will be paid to their individual needs. Stakeholder Mapping (Mendelow’s Matrix) supployers customers  Stakeholder Mapping (Mendelow’s Matrix) Power- The power to influence the organisation, and affect its decision making. Interest – The interest which the stakeholder has in the organisation.  Stakeholder Mapping (Mendelow’s Matrix) Minimal effort – e.g. Temporary employee. Give them basic information to meet their needs, but pay little attention to them in decision making and strategy. Keep informed – e.g. Full time employee. Regularly communicate with them, particularly things they are interested in. This helps retain good relationships and avoids them seeking to increase power (e.g. through staff grouping together in a union).  Stakeholder Mapping (Mendelow’s Matrix) Keep satisfied - e.g. Government. They have high power so to avoid them exercising the power they should be kept satisfied e.g. by paying them on time or meeting whatever needs they have. As they have little interest only information is given to them as is necessary (e.g. profit information to government to help assess tax payable). Key players (Keep Close) – e.g. Major shareholder Regular communication is maintained and their goals and objectives included as part of the strategy setting process and business approach.