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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](https://image.slidesharecdn.com/elementsoffinancialpolicy-210416071551/75/Strategic-Financial-Management-30-2048.jpg)
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Strategic Financial Management
- 1. grk Welcome To a Presentationon Strategic Financial Management GRKMurty
- 2. grk Financial Management: Objectives • Maximizationof shareholder value –Maximization of value added –Maximization of return on investment
- 3. grk Strategy • Top ManagementsPlans to attain outcomes consistent with the organization’s missions and goals • “a pattern in a stream of decisions” • Formulation & reformulation is a continuous process
- 4. grk Strategy: Its Five“Ps” • It is a Plan • It is a Pattern • It is a Position • It is a Perspective • It is a Ploy
- 5. grk Strategy: Advantages & Disadvantages •Sets Direction • Focuses effort • Defines the Organization • Provides Consistency
- 6. grk 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
- 7. grk The Five ForcesModel
- 8. grk New Entrants • Whatare 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?
- 9. grk Suppliers • Are Suppliersconcentrated ? • 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?
- 10. grk Buyers • How fastis demand growing? • What are the switching costs? • How price-sensitive the consumer are? • What is the customer’s bargaining power?
- 11. grk Substitutes • What arethe 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?
- 12. grk Industry Competitors • Whoare 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?
- 13. grk Porter’s “Structure-conduct- performance” • Structurewill 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.
- 14. grk Competitive Advantage • Theset 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.
- 15. grk Factors that BuildCompetitive Advantage • Time • Building on Fast success • Interconnectedness of capabilities. • Investment • Causal Ambiguity
- 16. grk Estimating the Return-Generative Potentialof Organizational Resources
- 17. grk Competitive Advantage: A ConceptualFlow Chart
- 18. grk Distinction Between Content andProcess • Strategy – What? • Process – How? • What – It is visible to rivals • How – It is not Visible to outsiders?
- 19. grk 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
- 20. grk Principles of BlueOcean 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
- 21. grk Principles of BlueOcean Strategy • Risk Factor each principle attenuates Search risk Planning risk Scale risk Business model risk • Risk factor each principle attenuates Organizational risk Management risk
- 22. grk Strategic Financial Management •Mergers and acquisitions – Risky – Valuations – Integration • Financial risk management – Credit risk – Market risk • Interest rate risk • Currency risk • Equity risk – Liquidity risk • Linking financial performance with corporate strategy – EVA – Strategic cost management
- 23. grk Elements of FinancialPolicy • Mix of classes of capital • Maturity structure of the capital • Basis of the firm’s coupon and dividend payments • Currency • Exotica • External control • Distribution
- 24. grk Diagnosing FP Opportunitiesand Problems • Were these the right choices? – Does it create value? – Does it create competitive advantage? – Does it sustain the vision?
- 25. grk Diagnosing FP Opportunitiesand Problems Elements of Financial Structure Current Structure Investor View Competito r view Internal view Evaluation Mix Maturity Basis Currency Exotica External Control Distribution
- 26. grk Analysis from Investor’sView • 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.
- 27. grk Think like anInvestor • Cost of debt • Cost of Equity • Debt/Equity mix • P/E ratio • M/Book ratio • EBIT multiple • Bond rating • Ownership • Short portion
- 28. grk From a Competitor’sPerspective • Standard Practice • Strategic Position – Define the universe of competitors – Financial ratios – Identify similarities and differences – Foreign companies data – Historical Normalization – Deliberate
- 29. grk Important Measures forComparison • Size • ROA • Shareholder Wealth • Predictability • Growth • Financial Flexibility • Others
- 30. grk From an InternalPerspective • 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
- 31. grk What is Best? •Flexibility • Risk • Income • Control • Timing
- 32. grk Developing Financial Strategy Developinga Strategy Investor view Competitor view Internal View Current & Idealized Financial Policies Influences regarding Financial Policy (through FRICT) Identification of Opportunities to improve current Financial Structure