Strategic Implementation - Finance


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Finance Presentation for Strategic Implementation

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Strategic Implementation - Finance

  3. 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. 4. Strategic Planning and Decision Making Process  Vision Statement  Mission Statement  Analysis  Strategy Formulation and  Strategy Implementation and Management.
  5. 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
  7. 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. 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. 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. 10. FINANCE & HR
  11. 11. Holistic Approach – The Pivot Relationship
  12. 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. 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. 14. Finance is from Mars HR is from Venus
  16. 16. Strategic Decisions  Product/Service Selection  Facility Location  Process/Technology Selection  Layout Decisions  Product Design  Capacity Decisions
  17. 17. Operational Decisions  Scheduling  Adjustment of Output Rate  Quality Control  Inventory Decisions  Transport Decisions  Housekeeping
  19. 19. Finance & Systems  Business Intelligence  Strategic planning & Budgeting  Performance measurement metric  Financial processes  Systems serve as integration tool between finance and operations.
  20. 20. Finance & Systems  Technological shifts & choices  Financial modelling & use of information technology  Drastic shift in role of CIO  Relationship between CIO and CFO
  22. 22.  Finance leads with the mind.  Marketing leads with the heart.  Together finance and marketing are a failed marriage – do u all agree?
  23. 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. 24. Banking industry  Marketing concept lately entered  Advertising and promotional measures.  Launching new schemes  Market oriented approach in India.
  26. 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. 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. 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. 29. Options  Option give the right to do something but not an obligation.  Buyer makes upfront payment to get this right
  30. 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. 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. 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.
  34. 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. 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. 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. 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.
  39. 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. 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.
  42. 42. Financial Markets What is it ? Why do we need it ?
  43. 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. 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. 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. 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
  48. 48. Key Financial Strategies
  49. 49. Maintain strong financials with increasing operating income
  50. 50. Deliver growth in organic sales and operating free cash flow
  51. 51. Generate strong return on invested capital
  52. 52. Invest in Heinz’s leading brands and core categories to drive growth
  53. 53. Enhance Total Shareholder Return and EPS
  54. 54. Detroit
  55. 55. What happened?  Suburbanization  Deindustrialization  Tax  Downsizing  Employee Benefits  Bonus  Borrowing  Kilpatrick
  56. 56. Strategy - Classification of Activities Key Services Projects Economic Activities
  57. 57. 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
  58. 58. CONCLUSION
  59. 59. 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.