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Strategic Financial Management

Strategic Financial Management
Concept
Role
Process
Approach
Role Of BOD
Strategic Intent
Strategic Fit
Strategic Stretch
Global Strategy
Global Strategic Management
Strategic Flexibility
Learning Organisation

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Strategic Financial Management

  1. 1. Strategic Financial Management -Chintan Doshi
  2. 2. Role of Strategy
  3. 3. 1. framework for operational (Planning) 2. Clarity in Direction of activity
  4. 4. 3. Increase Organizational effectiveness
  5. 5. 4. Personal Satisfaction
  6. 6. Strategy Formulation Strategy Implementation Evaluation & Control
  7. 7. STRATEGY FORMULATION 1. Determination of vision, mission & objectives 2. SWOT Analysis 3. Strategic alternatives 4. Evaluation and choice
  8. 8. VISION What a company wants to be in the future
  9. 9. MISSION What a company wants to do now
  10. 10. 2. SWOT ANALYSIS
  11. 11. o Opportunity:- Growing Customers/ Demand Threats:- competition Strengths:- Good customer Base Weakness:- Poor Technology Telecom business
  12. 12. 3. STRATEGIC ALTERNATIVES
  13. 13. 4. EVALUATION AND CHOICE Suitability Feasibility acceptability
  14. 14.  IMPLEMENTATION The process of allocating resources & putting strategies into action.
  15. 15.  EVALUATION AND CONTROL
  16. 16. Approaches to strategy making Prescriptive approach Emergent approach
  17. 17. Prescriptive approach
  18. 18. Merit of prescriptive approach It provides a clear master plan It gives advance indication
  19. 19. Limitations of prescriptive approach Future is uncertain Political and economical change
  20. 20. Emergent approach
  21. 21. Merits of emergent approach Constant monitoring of environment Advantages of experimentation & resultant
  22. 22. Limitations of emergent approach Experimentation process Precious time could be lost
  23. 23. Mintzberg’s proposition Entrepreneurial mode Adaptive mode Planning mode
  24. 24. Role of Board Of Directors
  25. 25. 1.Act As Trustees of Shareholders Work With Faith and Honesty in Protecting Long Term Aim. Like Profit Maximization And Wealth maximization
  26. 26. 2. Determining Fundamental Objectives, Vision And Missions Of Company Works For Overall Development Of Company Works For Long run Visions Of Company Ensures That They Works Or Acts As per Company’s Fundamental Laws And Articles
  27. 27. 3. Approving Financial Matters Approving Budget Pays Dues On Time Distribution Of Corporate Earnings Control Unnecessary Expenditures Annual Report
  28. 28. 4. Checks and Control Check Overall Performance Relevance To Mission Proper Allocation Of Resources Ensure Internal Control
  29. 29. 5. Statutory Functions Directors’ Performs With Certain Legal Matters Fulfill All The Requirements Of Legal Procedures
  30. 30. Top Management  Top level manages determine broad strategic stocks for the organization in general and focus On the big picture.  One of the weaknesses of this type of managerial  organization is that it can polarize power and  Salary as well as create a rigid structure that reduces information flow.  Top level as managers (such as ceos) tend to be big picture strategy thinkers with a substantial amount of experience in the industry and/or function they mange.
  31. 31. Characteristic High lever manages tend to have a substantial amount of experience ideally across a wide variety of functions many high level managers become part of on executive team by mastering their functional disciplines across various roles becoming the chief operations officer. Chief technology officer .
  32. 32. Responsibilities  The primary role of the executive team or the top level managers roles is to look at the or organization as a whole and derive strategic plans company policies substantial financial investments strategic alliances discussions with the board stakeholder managerial tasks are often high risk high return decision making initiatives in nature top level management roles are therefore often high stress and high influence roles within the organization.
  33. 33. Top management is the head of the head of the organisation it consists of the board of directors and its chairman the chief Executive managing director or general manages and the senior Executive (viz deputy general manager)in the operation of the Enterprise top management is the ultimate level of authority Further these top level managers are primarily involved in board Organisation matters such as policy formulation long range Planning goal the top management of organisation strategies in General the top management effectively deals with all elements And focus that after the survival stability and growth of an Organisation.
  34. 34. STRATEGIC INTENT
  35. 35. Vision  Realistic  Attractive  Future
  36. 36. Example  Infosys To be globally respected company that provides best of breed software solution by best in class people.
  37. 37. Developing a vision Conducting vision audit  Targeting the vision  Setting vision context  generating the alternative vision  Choosing the final vision
  38. 38. Mission Difference b/w vision and Mission  vision is forward looking and Mission states what organization is and why it exits. Vision Emphasis on long term concept with very high level of achievement and mission deals with product, services offers, way these are offered.
  39. 39. Example Infosys To achieve our objective in a environment of fairness, honesty and courtesy towards our clients, employee, vendors and society at large.
  40. 40. Goals  Market share and brand equity Productivity Profit picture Human resource development Innovation in product, technology process and procedures  Resource planning
  41. 41. Objective  Profitability – Net profit increase by lower costs and increasing revenue.  Improving brand equity  Optimum utilization of resources  Motivating employee  Improved cash flow for development activities.
  42. 42. STRATEGIC FIT
  43. 43. STRATEGIC FIT Meaning : Strategic fit expresses the degree to which an organization is matching its resources and capabilities with the opportunities such as M&A in the external environment. Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy.
  44. 44. Resources can be classified… Tangible:  Financial (cash, securities)  Physical (location, plant, machinery) Intangible:  Technology (Patents, copyrights)  Human resources  Reputation (brands)  Culture
  45. 45. Achieving Strategic Fit There are mainly three steps in achievement of strategic fit namely…. 1. Understanding the customer and supply chain uncertainty 2. Understanding the supply chain 3. Achieving strategic fit
  46. 46. 1.Understanding customer and supply chain Identify the needs of the customer segment being served Understanding the customer (demand) uncertainty Understanding supply uncertainty
  47. 47. 2. Understanding The Supply Chain Capabilities Supply chain responsiveness Supply chain efficiency
  48. 48. 3.Achieving Strategic Fit Step is ensure that what the supply chain does well is consistent with target customer’s needs For example; 1.Wal-mart 2.Dell
  49. 49. Benefit The benefits of good strategic fit include cost reduction , due to economies of scale , and the transfer of knowledge . Strategic fit can be used actively to evaluate the current strategic situation of a company as well as opportunities such as M&A.
  50. 50. STRATEGIC STRETCH
  51. 51. Strategic Stretch Strategic Intent is seen as going beyond Business as Usual Seen as Core Competency in Practice Apple and Honda's strategic intent was global dominance. Compare with Strategic Fit which doesn't have a long term component. Basically they used their core competences to achieve Strategic Intent. The difference between Intent and Resources is call Strategic Stretch.
  52. 52. Examples: Apple beat Microsoft in mobile apps market Google beat Microsoft is search and categorization of networked information CNN beat CBS is news and current affairs presentation
  53. 53.  Firms first need to understand the competitive environment - e.g. those companies winning and losing market share. The next step is to diagnose the competitive environment. e.g. Its market segments, potential for profitability and growth.  Industrial structure analysis points us to the what of competitiveness. i.e What make the company more profitable. News whats have been exhorted such as Six Sigma, become customer led, compete on time.  Understanding the what of competitiveness is a prerequisite to catching up. Understanding the why is the prerequisite for getting out in front. Who do some companies continually redefine the competitive environment e.g. Apple while others just follow.
  54. 54. Breaking the Managerial Frame Managers require their frame of reference from the culture of the company, business school education, peers, consultants and their own experience. They therefore frame their competitive stratagems from these managerial frames.
  55. 55. From Fit to Stretch The concept of fit or the reparations between the company and its competitive environment. The allocation of resources among competing investment opportunities A long-term perspective towards building a company.
  56. 56. From Allocation to Leverage  Perhaps GM was too strategic. It had the resources to employ new technology but the employees were unable or unwilling to adopt new practices and absorb new technologies.  At one time Canon had 10% of the market share that Xerox had but eventually displaced Xerox.  Upstart CNN became the first place to go for breaking news instead of tuning in to CBS, ABC or NBC. There are two approaches to increasing productivity.  One is by downsizing and maintaining the same output with fewer resources. Or, take the Ikea approach, can do more with the existing resources and stretch the organization.
  57. 57. The Arenas of Resource Leverage  Management can leverage its resources, both financial and non-financial in five basic ways. By  Concentrating them strategically  Accumulating them efficiently  Complementing one resource with another  Conserving them  Recovering them from the market place in the shortest possible time
  58. 58. Concentrating Resources  Leverage requires a strategic focal point which has been called strategic intent.  e.g. Komatsu's encircling of Caterpillar. British Airways and the World's Favourite Airline and Ten Tuner's CNN quest to be the first place people tune in for Breaking News. In all these cases there was a convergence of the company's managerial and financial resources and capabilities.
  59. 59. WHY GLOBAL ? Gain access to a larger market Gain access to low-cost input factors Managing corporate risk Leverage core competencies Develop new competencies  Location economies  Unique locational Advantages
  60. 60. Strategy around the world  Cost reduction Vs Local Responsiveness  Cost reduction: MNCs enter global marketplace with the intention to reduce operation cost. Example: Toyata privs  Local responsiveness: Tailor product and service offerings to fit local consumer preferences and host country requirement. Higher cost: MC Donald’s uses Mutton in INDIA.
  61. 61. Four Global Strategies INTERNATIONA L STRATEGY LOCALIZATIONA L STRATEGY GLOBAL STANDARDIZATI ON TRANSNATIONA L STRATEGY GLOBAL STRATEGY
  62. 62. INTERNATIONAL STRATEGY  Leveraging home-based core competencies  Selling the same products or services in both domestic and foreign markets. Example: selling STARBUCKS Coffee internationally.
  63. 63. LOCALIZATIONAL STRATEGY Also known as PRODUCT DIFFERENTIATION  Maximize local responsiveness via a multi- domestic strategy.  Consumers will perceive them to be domestic companies. Example: Nestle’s customized product offerings in international markets.
  64. 64. GLOBAL STANDARDIZATION Also knows as COST LEADERSHIP  Economies of scale and location economies  pursuing a global division of labour based on best-of-class capabilities reside at the lowest cost Example: Lenovo’s R&D in Beijng,Shanghai and Raleigh, production center in Mexico, India and China.
  65. 65. TRANSNATIONAL STRATEGY  Combination of localization strategy [High Responsiveness] with global standardization strategy [lowest cost] position attainable. Example: German multimedia conglomerate Bertelsmann: Caterpillar’s earth moving equipment.
  66. 66. COCA COLA’S GLOBAL STRATEGY  A Unifying message  Global distribution and business systems  New products and new variaties  Community involvement  Recent initiatives
  67. 67. Global Strategy & Global Strategic Management
  68. 68. Global Strategy What is global strategy? And why it is important?
  69. 69.  ‘Global Strategy’ is a shortened term that covers 3 areas: Global, multinational and international strategies.  Essentially , these 3 areas refer to those strategies designed to enable an organisation to achieve its objective of international expansion.
  70. 70.  In developing global strategy it is useful to disintiguish between 3 forms of international expansion that arise from a company’s resources , capabilities and current international position.  If the company is still mainly focused on its home markets, than its strategies outside its home market can be seen as international.
  71. 71.  For example, a dairy company might sell some of its excess milk and cheese supplies outside its home country. But its main strategic focus is still directed to home country.  In South Korea , international and global soft drinks strategy will involve mixing both the global brands like Coke and Sprite with the local brands like Pocara Sweat.
  72. 72.  However the Apple IPod was essentially following in the same strategy everywhere in the world . In this case, the advertising billboard was in North America but it could have been anywhere.
  73. 73. International Strategy  The organisation objective relate primarily to the home market. However, we have some objectives with regard to overseas activity and therefore need an international strategy.
  74. 74. Multinational Strategy  The organisation is involved in a number of markets beyond its home country, but it need distinctive strategies for each of these markets because customer demand and perhaps competition are different in each country.
  75. 75. Global Strategy  The organisation treats the world as largely one market and one source of supply with little local variation . Importantly , competitive advantage is developed largely on a global basis.
  76. 76. Advantages of Global Strategy 1. Efficiency 2. Life Cycle
  77. 77. 1. Efficiency Leverage economies of scale Buy raw materials in bulk. Can save money in labour , packaging and marketing costs etc.
  78. 78. 2. Life Cycle Introduce products in new markets. Laptop company.
  79. 79. Disadvantages of Global Strategy 1.Macro Economic Risk 2.Operational Risks
  80. 80. 1. Macro Economic Risk All approach does not work in all markets. Some markets have particular tastes or more sensitive to pricing. Popular in one country and not in other.
  81. 81. 2. Operational Risks Includes operational risks. If employment laws or corporation laws change in country where a company manufactures its product. War , strike or natural disasters.
  82. 82. Why is Global Strategy important?  We can say there are 3 answers to this question 1. From a company perspective 2. From a customer perspective 3. From international governmental organizations perspective
  83. 83. 1. From A Company Perspective  Opportunity for New Sales and Profits  Seeking Resources  Seeking Efficiency  Seeking Strategic Asset
  84. 84. 2. From A Customer Perspective  Lead to Lower Prices for Goods and Services  For Example, Nike sources its sports shoes from low labor cost countries like the Philippines and Vietnam.  In addition, some customers like to purchase products and services that have a global image.
  85. 85. 3. From International Governmental Organizations Perspective ( World Bank )  The recent dominant thinking has been to bring down barriers to world trade while giving some degree of protection to some countries and industries.  Thus global strategy is an important aspect of such international negotiations.
  86. 86. Benefits of a Global Strategy 1. Economies of scope 2. Economies of scale 3. Global brand recognition 4. Global customer satisfaction 5. Lowest labor and other input costs 6. Recovery of research and development (R&D) costs and other development costs across the maximum number of countries 7. Emergence of new markets
  87. 87. Costs of a Global Strategy 1. Lack of sensitivity to local demand 2. Transport and logistics costs 3. Economies of scale benefits may be difficult to obtain in practice 4. Communications costs will be higher 5. Management coordination costs 6. Barriers to trade 7. Other costs imposed by national governments to protect their home industries
  88. 88. Sources Of Competitive Advantage From A Global Strategy 1. Efficiency:  Economies of scale from access to more customers and markets.  Exploit another country’s resources – labour, raw material,etc.  Extend the product life cycle – older products can be sold in lesser developed countries.  Operational flexibility – shift production as cost, exchange rates,etc.
  89. 89. Sources Of Competitive Advantage From A Global Strategy 2. Strategy: First mover advantage and only provider of product to the market. Cross subsidization between countries. Transfer price.
  90. 90. Sources Of Competitive Advantage From A Global Strategy 3. Risk:  Diversify macro economics risk. (business cycle not perfectly correlated between countries)  Diversify operational risk. (labour problem, earthquake,war,etc.)
  91. 91. Sources Of Competitive Advantage From A Global Strategy 4. Learning:  Broaden learning opportunities due to diversity of operating environments. 5. Reputation:  Crossover customers between markets – reputation and brand identification.
  92. 92. Nature Of Competitive Advantage In Global Industry 1. Cost Driven: Location of strategic resources. Differences in country cost. Potential for economies of scale. Transportation cost.
  93. 93. Nature Of Competitive Advantage In Global Industry 2. Customer Driven:  Common customer needs favor globalization.  Global customers: global customers often require globally standardized products.  Global channels requires a globally coordinated marketing program.  Transferable marketing: world brands with non- dictionary names may be developed in order to benefit from a single global advertising campaign.
  94. 94. Nature Of Competitive Advantage In Global Industry 3. Competitive Drivers:  Global Competitors: the existence of many global competitors indicated that an industry is ripe for globalization.  Global competitors will have a cost advantage over local competitors.
  95. 95. Nature Of Competitive Advantage In Global Industry 4. Government Drivers: Trade policies Technical Standards Regulations
  96. 96. Difference Between International Strategies Multi-domestic Strategy  Product customized for each market.  Decentralized Control.  Effective when large differences exists between countries. Global Strategy  Product is the same in all countries.  Centralized Control.  Effective when differences between countries are small.
  97. 97. Difference Between International Strategies Multi-domestic Strategy  Advantages:  Product Differentiation  Local responsiveness  Minimized political risk  Minimized exchange rate risk Global Strategy  Advantages:  Cost  Coordinated activities  Faster product development
  98. 98. STRATEGIC FLEXIBILITY
  99. 99. Strategic Flexibility Strategic flexibility is the capability of an organization to respond to major changes that take place in its external environment by committing the resources necessary to respond to those changes. More importantly, the organization should be able to identify change markers so that it can go back to its previous state when the external environmental change is reversed.
  100. 100. Important Market stagnation:- the combination of world recession of UK’s unusually deep and prolonged share of that recession and of a widespread inability to compete effectively in world markets has led to a managerial imperative with the permanent reduction of unit labour costs.
  101. 101. Job loss:- virtually all UK firms have undergone an enforced and dramatic reduction in employment levels, which have often been as expensive in cash terms as they have been painful for employee relation.
  102. 102. uncertainty:- despite treasury optimism about a national growth rate of three per cent, many firms appear privately more cautions about the pace of an upswing and, more importantly are not relying on growth being sustained as a result, such firms are anxious not to over- commit themselves in terms of employment or investment.
  103. 103. Technological change:- The increasing pace, and decreasing cost, of technological change means that the firm (and its employees in particular) needs to be capable of responding quickly to substantial changes in either product lines or production methods (and probably both).
  104. 104. Working time:- As reductions in basic hours have continued ,so employers have increasingly been forced to reconsider the most effective deployment of worked time. This has led to a widespread view among employers that any further reduction of working time can only be sustained through restructuring worked time, often in quite unconventional ways.
  105. 105. LEARNING ORGANISATION
  106. 106. MEANING OF LEARNING ORGANIZATION  Organization that acquire knowledge and innovates fast enough to survive and their in changing environment. learning organization create culture that encourages and supports continues employee ,learning ,critical, thinking and risk taking with new ideas. Allow mistakes and value employee contribution. Lean from experience experiment and disseminate the new know, throughout the organization for incur portion into day to day activities.
  107. 107. CHARACTERISTICS 1. Systems thinking:-  The idea of the learning organization developed from a body of work called systems thinking.  This is a conceptual framework that allows people to study businesses as bounded objects.  Learning organizations use this method of thinking when assessing their company and have information systems that measure the performance of the organization as a whole and of its various components.  Systems thinking states that all the characteristics must be apparent at once in an organization for it to be a learning organization.  If some of these characteristics are missing then the organization will fall short of its goal.  However, O'Keeffe believes that the characteristics of a learning organization are factors that are gradually acquired, rather than developed simultaneously.
  108. 108. 2. Personal mastery:-  The commitment by an individual to the process of learning is known as personal mastery.  There is a competitive advantage for an organization whose workforce can learn more quickly than the workforce of other organizations.  Individual learning is acquired through staff training, development and continuous self improvement; however, learning cannot be forced upon an individual who is not receptive to learning.  Research shows that most learning in the workplace is incidental,  rather than the product of formal training, therefore it is important to develop a culture where personal mastery is practiced in daily life.  A learning organization has been described as the sum of individual learning, but there must be mechanisms for individual learning to be transferred into organizational learning.
  109. 109. 3. Mental models:-  The assumptions held by individuals and organizations are called mental models.  To become a learning organization, these models must be challenged.  Individuals tend to espouse theories,  which are what they actually do. Similarly, which are what they intend to follow, and theories inuse Learning organization tend to have 'memories' which preserve certain behaviours , norms and values.  Increating a learning environment it is important to replace confrontational attitudes with an open culture that promotes inquiry and trust.  To achieve this, the learning organization needs mechanisms for locating and assessing organizational theories of action.  Unwanted values need to be discarded in process called 'unlearning'. Wang and Ahmed refer to this as 'triple loop learning'.
  110. 110. 4. Shared vision:-  The development of a shared vision is important in motivating the staff to learn, as it creates a common identity that provides focus and energy for learning.  The most successful visions build on the individual visions of the employees at all levels of the organization, thus the creation of a shared vision can be hindered by traditional structures where the company vision is imposed from above.  Therefore, learning organizations tend to have flat, decentralized organizational structures.  The shared vision is often to succeed against a competitor; however, Senge states that these are transitory goals and suggests that there should also be longterm goals that are intrinsic within the company.
  111. 111. 5. Team learning:-  The accumulation of individual learning constitutes team learning.  The benefit of team or shared learning is that staff grow more quickly and the problem solving capacity of the organization is improved through better access to knowledge and expertise.  Learning organizations have structures that facilitate team learning with features such as boundary crossing and openness.  Team learning requires individuals to engage in dialogue and discussion; therefore team members must develop open communication, shared meaning, and shared understanding.  Learning organizations typically have excellent knowledge management structures, allowing creation, acquisition, dissemination, and implementation of this knowledge in the organization.
  112. 112. BENEFITS  The main benefits are;  Maintaining levels of innovation and remaining competitive  Being better placed to respond to external pressures  Having the knowledge to better link resources to customer needs  Improving quality of outputs at all levels  Improving corporate image by becoming more people oriented  Increasing the pace of change within the organization
  113. 113. CHALLENGES IN THE TRANSFORMATION TO A LEARRNING ORGANIZATION:-  The book The Dance of Change states there are many reasons why an organization may have trouble in transforming itself into a learning organization.  The first is that an organization does not have enough time.  Employees and management may have other issues that take priority over trying to change the culture of their organization.  The team may not be able to commit the time an institution does not have the appropriate help or training.  For an organization to be able to change, it needs to know the steps necessary to solve the problems it faces.  As a solution, a mentor or coach who is well versed in the learning organization concept may be necessary.
  114. 114.  Also, the change may not be relevant to the organization's needs.  Time should be spent on the actual issues of the organization and its daily issues.  To combat this challenge, a strategy must be built.  The organization should determine what its problems are before entering into the transformation.  Training should remain linked to business results so that it is easier for employees to connect the training with everyday issues.

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