This document provides an overview of strategic financial management. It discusses key objectives of financial management like maximizing shareholder value. It also covers strategy formulation, Porter's five forces model for industry analysis, competitive advantage, and various aspects of strategic financial management like mergers and acquisitions, financial risk management, and linking financial performance to corporate strategy. The document emphasizes analyzing a company's financial structure from the perspectives of investors, competitors, and internal stakeholders to identify opportunities to improve.
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Strategy
• Top Managements Plans to attain
outcomes consistent with the
organization’s missions and goals
• “a pattern in a stream of
decisions”
• Formulation & reformulation is a
continuous process
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Strategy: Its Five “Ps”
• It is a Plan
• It is a Pattern
• It is a Position
• It is a Perspective
• It is a Ploy
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Strategy:Areas of agreement
• Strategy concerns both organizations and
environment
• The substance of strategy is complex
• Affects overall welfare of the organization
• Involves issues of both content and process
• Not purely deliberate
• Exist on different levels
• Involves various thought processes
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New Entrants
• What are the barriers to entry?
– Can it be raised ?
– What is tending to lower the barriers?
• Who are the potential new entrants?
– What are their Characteristics?
• What could be their competitive
strategies?
– How are they likely to reshape the industry?
• When will they enter?
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Suppliers
• Are Suppliers concentrated ?
• How concentrated are the buyers?
• Can suppliers be switched freely?
• How large are their productions?
• How important the product is for the output
quality?
• Percentage cost ?
• What is their bargaining power?
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Buyers
• How fast is demand growing?
• What are the switching costs?
• How price-sensitive the
consumer are?
• What is the customer’s
bargaining power?
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Substitutes
• What are the alternatives?
• What could be their impact?
• How quickly they can penetrate?
• Are there any players in the
industry, who considers substitute
as an opportunity for diversification?
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Industry Competitors
• Who are the major competitors?
• What are their basic characteristics?
• Relative Positions?
• What is the competitive advantage of each of
them?
• How do they compete?
• What form does competition take?
• How is product differentiation achieved?
• How competitive is the industry?
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Porter’s “Structure-conduct-
performance”
• Structure will impact conduct or
competitive behaviour
• Conduct of firms will influence average
performance of firms
• As intensity of forces increases,
environment becomes more hostile &
overall industry profit will decline.
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Competitive Advantage
• The set of capabilities that allows to
consistently outperform their rivals.
• Why CA
– To outperform rivals.
– To consistently deliver high performance.
• It becomes visible when its capabilities
are valuable, rare, lack substitutes and
are difficult to imitate.
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Factors that Build Competitive
Advantage
• Time
• Building on Fast success
• Interconnectedness of
capabilities.
• Investment
• Causal Ambiguity
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Distinction Between Content
and Process
• Strategy – What?
• Process – How?
• What – It is visible to rivals
• How – It is not Visible to
outsiders?
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Value Innovation Strategy
• Creation of a blue ocean and a break from the
competition
• Pursues differentiation and low cost simultaneously
• It is a whole system approach which affects both its
cost structure and its value preposition to buyers
• The whole system of firm’s activities are aligned to
the pursuit of differentiation and low cost
• Thus creates uncontested market space
• Makes competition irrelevant
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Principles of Blue Ocean Strategy
• Formulation principles
– Reconstruct market boundaries
– Focus on the big picture, not the numbers
– Reach beyond existing demand
– Get the strategic sequence right
• Execution principles
– Overcome key organizational hurdles
– Build execution into strategy
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Principles of Blue Ocean Strategy
• Risk Factor each principle attenuates
Search risk
Planning risk
Scale risk
Business model risk
• Risk factor each principle attenuates
Organizational risk
Management risk
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Elements of Financial Policy
• Mix of classes of capital
• Maturity structure of the capital
• Basis of the firm’s coupon and
dividend payments
• Currency
• Exotica
• External control
• Distribution
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Diagnosing FP Opportunities and
Problems
• Were these the right choices?
– Does it create value?
– Does it create competitive advantage?
– Does it sustain the vision?
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Diagnosing FP Opportunities and
Problems
Elements of
Financial
Structure
Current
Structure
Investor
View
Competito
r view
Internal
view
Evaluation
Mix
Maturity
Basis
Currency
Exotica
External
Control
Distribution
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Analysis from Investor’s View
• Investor’s expectations should define
decisions
• Leverage that simultaneously
minimizes the weighted-average cost
of capital and maximizes the share
price and value of the enterprise.
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Think like an Investor
• Cost of debt
• Cost of Equity
• Debt/Equity mix
• P/E ratio
• M/Book ratio
• EBIT multiple
• Bond rating
• Ownership
• Short portion
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From a Competitor’s Perspective
• Standard Practice
• Strategic Position
– Define the universe of competitors
– Financial ratios
– Identify similarities and differences
– Foreign companies data
– Historical Normalization
– Deliberate
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From an Internal Perspective
• Financial Flexibility
– Excess cash + (Debt at minimum rating – Current
Debt outstanding)
• Sustainability
– ROE x (1-DPO)
• De Pont system of ratios
– ROE = P/S x S/A x A/E
• Financial-leverage equation
– ROE = [ROTC + (ROTC – Ka) x (D/E)]
• Feasibility
