1. 2. Discuss fully the various tools of strategic evaluationNature and purpose of Strategic Evaluation : Strategic evaluation may be defined as the process of determining theeffectiveness of a given strategy in achieving the organizational objectivenessand taking corrective action whenever required. The nature of strategicevaluation is to the effectiveness of the strategy – Strategic evaluation enablesthe management to perform the crucial task of keeping the organization on theright track. In the absence of an evaluation system for strategic choicer,organization the management may not be in a position to know whether or notthe strategy is on the correct track to produce the desired result. The importanceof strategic evaluation lies in its ability to coordinate the tasks of variedfunctions and SBUs effectively. Strategic evaluation helps to keep a check onthe validity of strategic choice. Tools of strategic evaluation competitive cost Dynamics as one of thetools of strategic evaluation, refers to the cost aspects in getting competitiveadvantage for the enterprise, over its competitors. Competitive advantage frequently changes when a segment changeoccurs in the absolute or relative costs of inputs such as labour, raw materials,energy, transportation etc – in essence.
2. Cost Reduction This is one of the main routes increasing the value added in its products /services strategy. The usual methods of cost reduction followed are Designing – in cost reduction come not from activity in the productionplant, but before the product even reaches the factory. By careful designing theproduct, for example, it has a fewer parts or is simpler to manufacture, with lessmember of processes, real reduction in costs may be achieved.Supplier relationship : If a supplier is willing to maintain quality and help reduce costs inmaterials procurement function of the enterprise, the organization gets theadvantage of cost reduction. The BCC Growth share – competitive position – suggests that ananalysis of the market can best be summarized by knowing its growth rate andthat the best indications of a firms strength in a market in its relative marketshore.
3. Features of the above matrixStars : High share SBU, operating in high share market will have a heavy needfor cash to support firm‟s growth. The SBU, (firms) have a high margins andbe generating large amounts of cash. The (firms) SBUs will be both use andproviders of large cash flows. The high market – share shows that the SBUs.have economics of scale and hence are able to generate large amount of cash.They are generally self – supporting with respect to their cash needs.Cash flows : These are firms or SBUs, in a low growth market, but with high market –share. The business is mature, the cash investment needs should be slight andthese businesses should be therefore a source of substantial amounts of cash thatcan be channeled to the other areas. It is therefore likely that they will be ableto generate both cash and profits. Such profits may be transferred to support thestars.Dogs These are the firms or SBUs having low market share and low growthmarket. Their profits are low and hence their products have investments effortsto measure expand market share is very costly. They are often regarded
4. unattractive for long term investment, hence they are recommended forliquidation and disposal.Problem Children This is also called question mark or wild cats. The firms or SBUs, of thisclass have low market share in high growth markets. Problem children areassumed to have heavy cash needs. Although they need found growth theygenerate little cash because they are not very far down the experience curve. Ifa problem child‟s market share cannot be changed it will continue to absorbcash. As its market matures, it will become a cash absorbing do – a cash trapscenario. However, if the market – share can be adequately improved thequestion mark can be converted into a star.The strategic implications The general strategy is that the firms or SBUs must be disciplined tomake sure that cash cow, do infect, generable cash to be used elsewhere. Thecash cows should receive a maintenance investment level, but any tendencyautomatically to reinvest the cash they are generating should be avoided. Starson the other hand should be managed to maintain share; current profitabilityshould be lesser concern.
5. Given that the stars are adequately financed a limited number of the mostpromising question marks are selected for improvement to try to improve theirshare. The other question marks should not receive investment. They should besold, abandoned, or milked for whatever cash they can produce. The dogs usually the most numerous category present a challenge. First adog can sometimes become very profitable, to produce of a „focus‟ segmentstrategy in which business specializes in a small miche when it can dominate. Ineffect, it would then be the star or cash cow of the redefined market. Second,investment can be with held and the business milked or harvested of whatevercash is forth coming until the business dies. Third, the business can be sold, orsimply liquidated. Management should be wary of „turnaround‟ plans for thedogs particularly when there is no fundamental change in the market orenvironment. In essence, the BCC, matrix model is a scheme of reachmanagement. It suggests that over decision need to be made regarding whetheran SBU is to be a cash generator or a cash user. It further suggests that thenumber of SBU selected to be cash user should be limited so that enoughresources will be available to the cash cows and those dogs and problemchildren selected for milking should generate cash and be allowed only theminimal investment. It is also helpful to apply this analysis to competitors as ameans of predictive what they might do, especially if the competitors are knownto be using a portfolio model.
6. 1. Explain strategic formulation of corporate goals and objective, takinginto consideration a leading existing corporate house’s vision and mission CORPORATE GOALS AND OBJECTIVES FORMULATIONSTRATEGY All managers need objectives. A very important consideration in settingobjectives is to convert the organization into integrated networks. The processshould be such that the shared values and identify of the organization isreflected in the process. Objective setting is generally a top-down process. This achieves unityand cohesion throughout the organization. Managers at different levels in theorganizational hierarchy are concerned with different kinds of objectives. Theboard of directors and top managers are involved in determining the vision, themission and the strategic objectives of the firm. They are also involved indeciding upon the specific overall financial objectives in the Key Result Areas. The middle management is involved in setting up objectives for the KeyResult Areas, objectives at the divisional levels, at the departmental andindividual levels. Lower level managers set objectives of units as well as theirsubordinates. Setting objectives converts the strategic vision and mission into targetoutcomes and performance milestones. Objectives represent a managerial
7. commitment to producing specified results in a specified time frame. They spellout how much of what kind of performance by when. They direct attention andenergy to what needs to be accomplished. Corporate goals and objectives include profitability (net profits), growth(increase in total assets, etc.), Utilization of resources (ROE or ROI) and Marketleadership (market share). Objectives are the results or outcomes an organization wants to achieve inpursuing its basic mission. The basic purpose of setting objectives is to convertthe strategic vision and mission into specific performance targets. Objectivesfunction as yardsticks for tracking an organization‟s performance and progress.Objectives should be : Specific Quantifiable Measurable Clear Consistent Reasonable Challenging Contain a deadline for achievement Communicated, throughout the organization.
8. Role of Objectives Objectives play an important role in strategic management. They areessential for strategy formulation and implementation because : They provide legitimacy They state direction They aid in evaluation They create synergy They focus coordination They provide basis for resource allocation They act as benchmarks for monitoring progress They provide motivation.Hierarchy of Objectives In a multi-divisional firm, objectives should be established for the overallcompany as well as for each division. Objectives are generally established at thecorporate, divisional and functional levels, and as such, they form a hierarchy.The zenith of the hierarchy is the mission of the organization. The objectives ateach level contributed to the objectives at the next higher level.Long-range and Short-range Objectives Organizations need to establish both long-range and short-rangeobjectives (Long-range means more than one year, and short-range means one
9. year and less). Short-range objectives spell out the near term results to beachieved. By doing so, they indicate the speed and the level of performanceaimed at each succeeding period. Short-range objectives can be identical tolong-range objectives if an organization is performing at the targeted long-termlevel (for example, 20% growth – rate every year). The most importantsituation where short-range objectives differ from the long-range objectivesoccurs when managers cannot reach the long-range target in just one year, andare trying to elevate organizational performance. Short-range objectives (one-year goals) are the means for achieving long-range objectives. A company thathas an objective of doubling its sales within five years can‟t wait until the thirdor fourth year of its five-year strategic plan. Short – range objectives then serveas stepping-stones or milestones.Multiplicity of Objectives Organizations pursue a number of objectives. At every level in thehierarchy, objectives are likely to be multiple. For example, the marketingdivision may have the objective of sales and distribution of products. Thisobjective can be broken down into a group of objectives for the product,distribution, research and promotion activities. To describe a single, specificgoal of an organization is to say very little about it. It turns out that there areseveral goals involved. This may be due to the fact that the enterprise has tomeet internal as well as external challenges effectively. Moreover, no single
10. objective can pl ace the organization on a path of prosperity and progress in thelong run. However, an organization should not set too many objectives. If it does, itwill lose focus. Too many objectives have a number of problems. For example: (a) They dilute the drive for accomplishment (b) Minor objectives get highlighted to the determent of major objectives There is no agreement to the number of objectives that a manager caneffectively handle. But, if there are so many that none receives adequateattention, the execution of objectives becomes ineffective; there is a need to becautious. It will be wise to identify the relative importance of each objective, incase the list is not manageable.Network of Objectives Objectives form an interlocking network. They are inter-related and inter-dependent. The implementation of one may impact the implementation of theother. If there is no consistency between company objectives, people maypursue goals that may be good for their own function but detrimental to thecompany as a whole. Therefore, objectives should not only “fit” but alsoreinforce each other. As observed by Koontz et.al., “it is bad enough whengoals do not support and interlock with one another. It may be catastrophicwhen they interfere with one another”.
11. Types of Objectives Objectives are needed for each key result area which is important tosuccess. Two types of key result areas are financial performance and strategicperformance. Objectives are also classified into two categories: 1. Financial objectives 2. Strategic objectivesWhich is more important : Financial or Strategic Objectives ? Achieving acceptable financial results is a must. Without adequateprofitability and financial strength, a company‟s pursuit of its strategic vision aswell as its long-term health and ultimate survival is jeopardized. Further, lowearnings and a weak balance sheet may alarm shareholders and creditors, andput the jobs of senior executives at risk. But good financial performance, by itself, is not enough. Of equal orgreater importance is a company‟s strategic performance relating to company‟smarket position and competitiveness. A company‟s financial measures are reallylagging indicators, which reflect a company‟s future financial performance andbusiness prospects. For example, if a company has set aggressive strategicobjectives and is achieving them, such that its competitive strength and marketposition are on the rise, then its future financial performance will be better thanits current financial performance. If a company is losing ground to competitors
12. and its market position is slipping, which reflects weak strategic performance,then its ability to maintain its present profitability is highly suspect. Thusimproved strategic performance fosters better financial performance. That is why a growing number of companies are using the “balancedscorecard” approach for measuring company performance by setting bothfinancial and strategic objectives and tracking their achievement.
13. 1. Show the entrepreneurial growth in India after IndependenceDefinition of an Entrepreneur The word “entrepreneur” is derived from French word “enterprendre”which means “to undertake”. The entrepreneur is often associated with a personwho starts his own, new and small business. The term entrepreneur is defined asone who innovates, raises money, assembles inputs, chooses managers and setsthe organization going with his ability to identify them. The New Encyclopedia Britannica considers an entrepreneur as “anindividual who bears the risk of operating a business in the face of uncertaintyabout the future conditions”. Joseph A. Schumpeter recognized an entrepreneur as a person whointroduces innovative changes. He treated entrepreneur as an integral part ofeconomic growth. The fundamental source of equilibrium was the entrepreneur.
14. Growth and Development of Entrepreneurship in India Entrepreneurship in India is as old as the human civilization itself. Itsevolution could be traced back to as early as Vedic period, when metalhandicrafts existed in the society. The handicrafts entrepreneurship wasobserved among the artisans in the Cities like Banaras, Allahabad, Gaya, Puri,Mirzapur, Bombay and Hyderabad. Indian artisanship was well recognized allover the world but it could not develop properly for reasons like lack ofinitiative from the colonial power structure and infrastructural problems.Entrepreneurial growth and development during the Post Independence After the independence, the Government of India realized the magnitudeof the adverse effects of imbalanced growth of industries. It also recognized thevital role played by the small and medium enterprises in the socio-economicdevelopment. The Government of India devised a scheme for achievingbalanced growth. It introduced the first industrial policy, in 1948 which wasrevised from time to time. Three important measures were taken by theGovernment. 1. To maintain a proper distribution of economic power between private and public sector.
15. 2. To encourage the tempo of industrialization from the existing centres to other cities, towns and villages. 3. To spread the entrepreneurship from a few dominant communities to a large number of industrially potential people of varied social strata. To attain these objectives, the Government accorded emphasis on thedevelopment of small scale industries in cities, small towns and villages. Underthe five year plans, particularly in the Third five year plan, the Governmentstarted providing various incentives and concessions in the form of capital,technical know-how, markets and land to potential entrepreneurs to set upindustries in potential areas to remove the regional imbalances in development.This was the major step taken to initiate interested people of varied social stratato enter into the field of small scale entrepreneurial ventures. Government has established several institutions like Directorate ofIndustries, Financial Corporation, Small-Scale Industries Corporations andSmall Industries Service Institutes to facilitate the new entrepreneurs in settingup their enterprises. This resulted in a rapid growth of small scale units andthere was a tremendous increase in their number from 1,21,619 in the year 1966to 1,90,727 in 1970. During this period some entrepreneurs grew from small to
16. medium-scale and from medium to large-scale manufacturing units. Some ofthe family entrepreneurship units like Tata, Birla, Dalmia, Kirloskar etc. grewbeyond the size and established new frontiers in business.Entrepreneurship Development The Government is attaching much importance for developingprogrammes to stimulate and encourage entrepreneurship development.Entrepreneurship development is a process in which persons are injected withmotivational drives of achievement and insight to tackle uncertain and riskysituation in business undertakings. The process of entrepreneurship development focuses on training,education, reorientation and creation of conducive and healthy environment forthe growth of enterprise. The entrepreneurship development should be viewedin the total perspective and should integrate entrepreneurial training, provisionof incentives, consultancy services, sectoral development and other strategiesof intervention. Several Entrepreneurship Development Institutions were set up by theGovernment both at Central and State level. They are engaged in identification,
17. selection and training of potential entrepreneurship. The programmes arespecially designed to take an integrated approach by providing instruction andcounseling right from identification of the project to the actual operation of theenterprises. Various Entrepreneurship Development Institutions are listedbelow. i. National Small Industries Corporation Ltd (NSIC) ii. Small Industries Development Organisations (SIDO) iii. Small Industries Development Corporation (SIDCO) iv. Small Industries Service Institutes (SISI‟s) v. District Industries Centres (DIC‟s) vi. National Institute of Entrepreneurship and Small Business Development (NIESBUD) vii. National Institute of Small Industries Extension Training (NISIET) viii. Technical Consultancy Organisations (TCO‟s) ix. National Alliance of Young Entrepreneurs (NAYE) x. Centres for Entrepreneurship Development (CED) These institutions provide a wide range of service, support and facilitiesto promote and foster the growth and development of entrepreneurship in India.
18. 1. Calculate any ten accounting ratios for your data1. Liquidity Ratios The liquidity ratios measure the liquidity of the firm and its ability tomeet its maturing short-term obligations. Liquidity is defined as the ability torealize value in money, the most liquid of assets. Liquidity refers to the ability to pay in cash, the obligations that are due.Current Ratio This ratio measures the solvency of the company in the short – term.Current assets are those assets which can be converted into cash within a year.Current liabilities and provisions are those liabilities that are payable within ayear. Current Assets, Loans and Advances ------------------------------------------- Current liabilities and Provisions A current ratio 2:1 indicates a highly solvent position. A current ratio of1.33:1 is considered by banks as the minimum acceptable level for providingworking capital finance.Quick Liquid / Acid Test Ratio Quick ratio is used as a measure of the company‟s ability to meet itscurrent obligations since bank overdraft is secured by the inventories, the othercurrent assets must be sufficient to meet other current liabilities. Current Assets, Loans and Advances - Inventories --------------------------------------------------------------- Current liabilities and Provisions – Bank Overdraft A quick ratio of 1:1 indicates highly solvent position. This ratio serves asa supplement to the current ratio is analyzing liquidity.2. Capital Structure Ratios and Leverage Ratio Leverage or capital structure ratios are those ratios which measures therelative interest of lenders and proprietors in a business organization. These
19. ratios indicate the long-term solvency position of an organization. These ratioshelp the management in the proper administration of the capital.Shareholders Equity Ratio The ratio is calculated as follows : Shareholders Equity -------------------------- Total Assets (tangible) It is assumed that larger the proportion of the shareholders equity, thestronger is the financial position of the firm. This ratio will supplement thedebt-equity ratio. In this ratio, the relationship is established between theshareholders funds and the total assets.Long-term Debt to Shareholders Net Worth Ratio The ratio is calculated as follows : Long – term Debt -------------------------------------- Shareholders Net Worth The ratio compares long-term debt to the net worth of the firm i.e., thecapital and free reserves less intangible assets.Capital Gearing Ratio It is the proportion of fixed interest bearing funds to equity shareholdersfunds. Fixed interest bearing funds ---------------------------------- Equity Shareholder‟s funds The fixed interest bearing funds include debentures, long-term loans andpreference share capital. The equity shareholders funds include equity sharecapital, reserves and surplus.Debt-Equity Ratio
20. Debt-Equity Ratio measures the relative claim of creditor and owners in abusiness organization. Debt Equity ratio can be expressed as follows : Debt ----------- Equity Debt = All external long term liabilities Equity = Share capital and all reserves and provisions. Ideal ratio of the debt-equity ratio is 2:1 i.e., 2 debt for one equity. Anyhigher ratio is considered as a risky position for the firm as more debt isinvolved and a lower ratio indicates a sound financial position.3. Inventory Turnover Ratio Cost of Goods sold Sales ----------------------- or ------------------------- Average Inventory Average Inventory Average Inventory = (Opening Stock + Closing Stock) / 2 The higher the stock turnover rate or the lower, the stock turnover periodthe better, although the ratios will vary between companies. For example, thestock turnover rate in a food retailing company must be higher than the rate in amanufacturing concern. The inventory turnover ratio measures how many times a company‟sinventory has been sold during the year.Inventory Ratio The level of inventory in a company may be assessed by the use of theinventory ratio, which measures how much has been tied up in inventory. Inventory ------------------------ x 100 Current Assets
21. Debtors Turnover Ratio Debtors turnover, which measures whether the amount or resources tiedup in debtors is reasonable and whether the company has been efficient inconverting debtors into cash. The formula is : Credit Sales --------------------- Average Debtors The higher the ratio, the better the position.Debtors Collection Period or Debtors Velocity Ratio Average debtors collection period measures how long it take to collectamounts from Average Debtors ------------------------ x 365 (in days) Credit Sales The actual collection period can be compared with the stated credit termsof the company. If it is longer than those terms, then this indicates inefficiency incollecting debts.Bad Debts to Sales Ratio It measures the proportion of bad debts to sales Bad Debts ------------------------ x 100 Sales Bad debts to sales ratio indicates the efficiency of the credit controlprocedures of the company.Interest Cover The interest coverage ratio shows how many times interest charges arecovered by funds that are available for payment of interest. Interest coverindicates how many times a company can cover its current interest payments out
22. of current profits. It gives an indication of problem in servicing the debt. Aninterest cover of more than 7 times is regarded as safe and more than 3 times isdesirable. An interest cover of 2 times is considered reasonable by financialinstitutions. Profit before Interest, Depreciation and Tax -------------------------------------------------- Interest A very high interest cover ratio indicates that the firm is conservative inusing debt and a very low interest coverage ratio indicates excessive use of debt.Dividend Cover This ratio indicates the number of times the dividends are covered by netprofit. This highlights the amount retained by a company for financing of futureoperations. (a) Equity Dividend Cover Net Profit after Tax – Preference Dividend -------------------------------------------------- Equity Dividend (b) Preference Dividend Cover Net Profit after Tax ------------------------ Preference Dividend4. Debt Service Coverage Ratio (DSCR) Debt Service Coverage Ratio (DSCR) ratio is the key indicator to thelender to assess the extent of ability of the borrower to service the loan in regardto timely payment of interest and payment of loan installment. The ratio iscalculated as follows : Profit after Tax + Depreciation + Interest on Loan ----------------------------------------------------------- Interest on Loan + Loan repayment in a year The greater debt service coverage ratio indicates the better debt servicingcapacity of the organization. A ratio of 2 is considered satisfactory by thefinancial institution. By means of cash flow projection, the borrower shouldwork DSCR for the entire duration of the loan. This will be useful to lender totake correct view of the borrower‟s repayment capacity. This ratio indicateswhether the business is earning sufficient profits to pay not only the interestcharges, but also the installments due of the principal amount.
23. Return on Capital Employed (ROCE) or ROI This ratio is also called Return on Investment (ROI). The strategic aim ofa business enterprise is to earn a return on capital. If in any particular case, thereturn in the long-run in not satisfactory, then the deficiency should be correctedor the activity be abandoned for a more favorable one. The rate of return oninvestment is determined by dividing net profit or income by the capitalemployed or investment made to achieve that profit. ROI consists of two component viz., (a) Profit margin, and (b) Investment Turnover, as shown bellows: Net Profit Net Profit Sales----------------------- x ------------------------ x ---------------------------Capital Employed Capital Employed Capital EmployedAdvantages or uses of ROI Ratio 1. It helps in making comparison of inter-divisional and inter-firm comparison. 2. It helps in measuring the profitability of the firm. 3. It indicates how effectively the operating assets are used in earning return. 4. It can be used as a sensitive gauge of profit making ability of the firm.6. Return on Capital Employed Ratio Return on capital employed is the ratio of adjusted net profit to capitalemployed. It is expressed in percentage. The return on “Capital Employed” maybe based on Gross Capital or Net Capital Employed. Formulation for calculationof return on capital employed is as follows : ProfitReturn on Capital Employed Ratio = ------------------------------------ x 100 Net Capital Employed
24. Net capital employed will be calculated as follows : Net capital employed consists of total assets (i.e. fixed assets, investmentsand current assets) of the business less is current liabilities (i.e., creditors, bankoverdraft etc.) Thus, Net Capital Employed = Fixed Assets + Investments + Current Assets –Current Liabilities. „Thus, Net Capital Employed = Fixed Assets + Investments + WorkingCapital. In other words, we may also express the Net Capital Employed as below :Net Capital Employed = Issued Share Capital + Capital Reserves + Revenue Reserves + Debentures and Long term Loans – Fictitious Assets.Adjusted Net Profit Following adjustments should be made, if necessary, with the figure ofnet profit to arrive at the adjusted net profit for the purpose of computing returnon capital employed. (a) Add any abnormal or non – recurring losses, (b) Add interest on long term liabilities. Moreover, the return on gross capital employed is to be calculated, add interest on short term liabilities also. (c) Add Income – tax paid and provision for income – tax, (d) Deduct additional depreciation based on the replacement cost, (e) Deduct income from investments outside the business, (f) Deduct any abnormal or non-recurring gains.7. Earnings Per Share (EPS) Net Profit after Tax and Preference Dividend EPS = ----------------------------------------------------- No. of Equity SharesBenefits of P/E Ratio 1. This ratio indicates how much an investor is prepared to pay per rupee of earnings.
25. 2. PIE ratio reflects high earnings potential and a low ratio reflects the low earnings potential. 3. PIE ratio reflects the market‟s confidence on company‟s equity. 4. This ratio helps to ascertain the value of equity share. 5. Price – earning approach to share valuation is simple and more popular. 6. This ratio reflects the market‟s assessment of the future earnings potential of the company.8. Dividend Payout Ratio Dividend payout ratio indicates the extent of the net profits distributed tothe shareholders as dividend. A high payout signifies a liberal distributionpolicy and a low payout reflects conservative distribution policy. This ratio iscalculated by dividend per share divided by the earnings per share : Dividend Per Share ----------------------- Earnings Per Share9. Book Value The book value is a reflection of the past earnings and the distributionpolicy of the company. A high book value indicates that a company has hugereserves and is a potential bonus candidate. A low book value signifies a liberaldistribution policy of bonus and dividends, or a poor track record ofprofitability. Book value ratio indicates the net worth per equity share Equity Capital + Reserves – Profit and Loss A/c Debit balance -------------------------------------------------------------------------- Total number of Equity Shares10. Dividend Yield Dividend yield ratio reflects the percentage yield that an investor receiveson this investment at the current market price of the shares. This ratio iscomputed by dividend per share divided by market price multiplied by hundred. Dividend Per Share Dividend Yield = ------------------------ x 100 Market Price