Finance Presentation for Strategic Implementation

1. STRATEGIC IMPLEMENTATION
FINANCE

2. INTRODUCTION

3. Role of Finance in Strategic Planning
Fundamental success of a strategy depends on three
critical factors
 A firm’s alignment with the external environment
 A realistic internal view of its core competencies and
sustainable competitive advantages
 Careful implementation and monitoring

4. Strategic Planning and Decision
Making Process
 Vision Statement
 Mission Statement
 Analysis
 Strategy Formulation and
 Strategy Implementation and Management.

5. The Role of Finance
 Financial
goals and metrics are established
based on benchmarking the “best-in-industry” and
include
 Free cash flow
 Economic Value-Added
 Asset Management
 Financing Decisions and Capital Structure
 Profitability Ratios
 Risk Assessment and Management
 Tax Optimization

6. FINANCE & STRATEGY

7. Aligning Finance with strategy –
Finance functions
 Generating budgets, reports, routine financial status




updates and providing management reports for
decision making
Providing usable building block data to support
analysis
Ensuring cash availability and rationing of capital
Providing analysis of new possibilities
Other activities ( compliance with regulations, audits,
banking function, etc.)

8. Aligning Finance with strategy
 Strategic alignment does not require adding new
functions – it just requires deepening of the traditional
activities
 Finance can make a major contribution to strategic
alignment by promoting and supporting the monitoring
process
 Generating reports transforms to having a good
balanced scorecard with outcome measures and
performance drivers
 Budgets should reflect the costs/benefits and
scheduled timelines of the Action Plans and Other
Key Strategic Initiatives.

9. Aligning Finance with strategy
 Finance function happens in the deep recesses of
the “backroom’’ but it is the oxygen to an
organization’s short and long term health
 In today’s changing world there should be minute
details and projections regarding investments
made, costs incurred, potential cash flows and
profits to implement a strategy to its fullest
potential.
 Hence, Finance as a function is required at every
stage to execute a strategy

10. FINANCE & HR

11. Holistic Approach – The Pivot
Relationship

12. Finance & HR
 Business delivers through people and profits.
 HR decisions affect firm’s profitability.
 CFO - Manage Financial Assets
 CHRO - Manage Human Capital
 Balanced Score Card for better financial
performance

13. Harris Corporation
 Communication and IT based company in Florida.
 Healthcare services – John Hopkin’s Medicine
 On-site medical imaging center
 100 % of the Florida employees (6500 ) and their
dependents use the imaging center.
 90%use the pharmacy and
 75% use the medical center.

14. Finance is from Mars
HR is from Venus

15. FINANCE & OPERATIONS

16. Strategic Decisions
 Product/Service Selection
 Facility Location
 Process/Technology Selection
 Layout Decisions
 Product Design
 Capacity Decisions

17. Operational Decisions
 Scheduling
 Adjustment of Output Rate
 Quality Control
 Inventory Decisions
 Transport Decisions
 Housekeeping

18. FINANCE & SYSTEMS

19. Finance & Systems
 Business Intelligence
 Strategic planning & Budgeting
 Performance measurement metric
 Financial processes
 Systems serve as integration tool between
finance and operations.

20. Finance & Systems
 Technological shifts & choices
 Financial modelling & use of information
technology
 Drastic shift in role of CIO
 Relationship between CIO and CFO

21. FINANCE & MARKETING

22.  Finance leads with the mind.
 Marketing leads with the heart.
 Together finance and marketing are a failed
marriage – do u all agree?

23. What is the reality?
 Finance and marketing dept. together
 Collaborative environment.
 Accurate budget planning.
 Added marketing flexibility.
 Overall stronger organization.
 flexible and successful organization

24. Banking industry
 Marketing concept lately entered
 Advertising and promotional measures.
 Launching new schemes
 Market oriented approach in India.

25. GLIMPSE OF ADVANCED
FINANCE

26. Derivatives
A derivative is an instrument whose value depends
on the values of other more basic underlying
variables
-Forward Contracts
-Future Contracts
-Swaps
- Options

27. Forwards and Futures Contracts
 Contract to buy or sell a certain asset for a certain
price at a certain time in the future.
- Long Position
-Short Position
 The forward price for a contract is the delivery
price that would be applicable to the contract if
were negotiated today

28. FORWARDS
Private contract between 2 parties
Non-standard contract
FUTURES
Exchange traded
Standard contract
Usually 1 specified delivery date
Settled at end of contract
Settled daily
Some credit risk
2.28
Range of delivery dates
Virtually no credit risk

29. Options
 Option give the right to do something but not an
obligation.
 Buyer makes upfront payment to get this right

30. Use of Derivatives
 To hedge risks
 To speculate
 To lock in an arbitrage profit
 Help in risk transfer from those who have it to
those who will take it.

31. “If we don’t hedge jet fuel price risk, we
are speculating. It is our fiduciary duty
to try and hedge this risk.”
Scott Topping,
Director of Corporate Finance for Southwest Airlines

32. FUEL HEDGING IN AIRLINE
INDUSTRY
NEED
 After labour, jet fuel is the second largest
operating expense for airlines.
 High volatility of jet fuel prices.
 Historical daily volatility over a recent 25-day
period for Gulf Coast has averaged 58.7 percent.

33. SOUTHWEST AIRLINES

34. PREDICAMENT
 Air travel commodity business
 Intense airline competition, firm unable to pass along
fuel costs to customers.
 Airlines decided to hedge fuel prices
 Carriers that produced an adequate return, tended to
be those that had good fuel hedge positions in place.

35. STRATEGY
 Southwest Airlines use derivative instruments based
on crude oil, heating oil, or jet fuel to hedge their fuel
cost risk.
 They rely on plain vanilla instruments to hedge their
jet fuel costs, including swaps, futures, call options,
and collars (including zero-cost collars).

36. RESULT
 In 2008, locked in more than 70% of the fuel it
expected to consume that year at about $51 a barrel,
far below average crude price of $126.62 a barrel.
 Other large airlines, meanwhile, have only 20% to
30% of their fuel "hedged" that year at an average
cost of $100 a barrel.
 Fuel costs were up 20% for Southwest in the first
quarter whereas American said its fuel costs were up
nearly 50%, which wiped out profit for the nation's
largest airline.

37. OVERALL IMPACT
 Since then the airline has hedged 70% to 80% of its
anticipated fuel use every year, more than any other
airline. The airline said it saved $727 million in 2008
by locking in lower fuel prices in prior years.
 Southwest only airline to make profits.
 Hedging enables Southwest to drive revenue growth,
protect fuel prices and the rest of the cost structure,
and thus enables it to expand and grow.

38. SOCIETE GENERALE

39. Derivatives- A Weapon of Mass
Destruction??
 Baring’s Bank- a 233 year old investment bank had
huge exposures in the banking sector.
 Collapsed on February 26, 1995 due to Nick Leeson’s
trading activities.
 Reduced the values of the bank from $500 million to
$1.60 million.
 Leeson used the infamous Error account 8888.
 Leeson sold straddles, earned premium by selling over
37,000 straddles over a 14 month period.

40. Derivatives- Handle with Care
 EURO STOXX index is a list of 50 blue-chip companies in the
Euro zone.
A trader at Societe Generale bank (Jerome Kerviel) took
positions on options on STOXX beyond his trading limits.
The trading limits had been breached but was ignored by top
management.
He had taken exposures worth $74 billion to make up for
losses which could not be squared off.
The bank incurred a loss of $7 billion.

41. INTERNATIONAL FINANCE

42. Financial Markets
What is it ?
Why do we need it ?

43. International Finance
“International finance (also referred to as international
monetary economics or international macroeconomics) is
the branch of financial economics broadly concerned with
monetary and macroeconomic interrelations between two
or more countries.” – Wikipedia
Simple Definition: Branch of Finance that deals with
interconnecting the financial markets of the world.
Two Major Domains:
• Global Capital Market
• Foreign Exchange (Forex) Market

44. Global Capital Market
 Rapid growth and



At $190 trillion, it was 4+ times of global GDP
From 2003-06, capital markets increased
by $65 trillion. Global GDP increased by
$12 trillion and Goods and Services
volume increased by a mere $5.4 trillion
Source : US Dept. of Treasury Reports

diversification of investor bases
Increased activity by official
monetary sources
Investors search for higher
yields and greater portfolio
diversification
Liberalization of financial
markets, resulting in expanded
market access to global
financial services
Rapid expansion of savings,
particularly in emerging
markets (esp. the BRIC
countries)

45. Forex Market
What is it ?
Foreign Exchange Market is where foreign currency transactions
are carried out and exchange rates between such currencies are
determined.
What is a Foreign currency Transaction ?
Exchange of two different currencies between two different
parties.

46. Exchange Rate
What is it?
The rate at which two currencies are exchanged
Eg: INR/USD – 61.43
Types:
Direct, Indirect, Cash, Spot & Forward
How is the rate fixed ?
 Purchase Power Parity (PPP)
 Absolute
 Relative
 Interest Rate Parity

47. STRATEGIC PLANNING - HEINZ

48. Key Financial Strategies

49. Maintain strong financials with increasing
operating income

50. Deliver growth in organic sales and
operating free cash flow

51. Generate strong return on invested capital

52. Invest in Heinz’s leading brands and core
categories to drive growth

53. Enhance Total Shareholder Return and EPS

54. Detroit

56. What happened?
 Suburbanization
 Deindustrialization
 Tax
 Downsizing
 Employee Benefits
 Bonus
 Borrowing
 Kilpatrick

57. Strategy - Classification of Activities
Key
Services
Projects
Economic
Activities

58. Strategy - Classification of Income
Funding Mix Matrix
Unrestricted
• Local authority
grant,
Investment
income
• One-off grants
and public
donations
General
Fundraising
Core
Financing
Long-term
Short-term
Project
Funding
Programme
Funding
• Lottery Fund
• Legal Services
Commission
Restricted

59. CONCLUSION

60. Conclusion
 Finance plays an important role in improving the
performance of the various other functions of the firm.
 It helps firm implement and monitor their strategies
 Creating specific, industry-related, and measurable
financial goals
 Strengthening the organization’s capabilities with hard-to-
imitate and non-substitutable competencies.
 It creates sustainable competitive advantages that
maximize a firm’s value, the main objective of all
stakeholders.