2. Discuss fully the various tools of strategic evaluation

Nature and purpose of Strategic Evaluation :

Strategic evaluation may be defined as the process of determining the

effectiveness of a given strategy in achieving the organizational objectiveness

and taking corrective action whenever required. The nature of strategic

evaluation is to the effectiveness of the strategy – Strategic evaluation enables

the management to perform the crucial task of keeping the organization on the

right track. In the absence of an evaluation system for strategic choicer,

organization the management may not be in a position to know whether or not

the strategy is on the correct track to produce the desired result. The importance

of strategic evaluation lies in its ability to coordinate the tasks of varied

functions and SBUs effectively. Strategic evaluation helps to keep a check on

the validity of strategic choice.

Tools of strategic evaluation competitive cost Dynamics as one of the

tools of strategic evaluation, refers to the cost aspects in getting competitive

advantage for the enterprise, over its competitors.

Competitive advantage frequently changes when a segment change

occurs in the absolute or relative costs of inputs such as labour, raw materials,

energy, transportation etc – in essence.

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 production

plant, but before the product even reaches the factory. By careful designing the

product, for example, it has a fewer parts or is simpler to manufacture, with less

member of processes, real reduction in costs may be achieved.

Supplier relationship :

If a supplier is willing to maintain quality and help reduce costs in

materials procurement function of the enterprise, the organization gets the

advantage of cost reduction.

The BCC Growth share – competitive position – suggests that an

analysis of the market can best be summarized by knowing its growth rate and

that the best indications of a firms strength in a market in its relative market

shore.

Features of the above matrix

Stars :

High share SBU, operating in high share market will have a heavy need

for cash to support firm’s growth. The SBU, (firms) have a high margins and

be generating large amounts of cash. The (firms) SBUs will be both use and

providers 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 and

these businesses should be therefore a source of substantial amounts of cash that

can be channeled to the other areas. It is therefore likely that they will be able

to generate both cash and profits. Such profits may be transferred to support the

stars.

Dogs

These are the firms or SBUs having low market share and low growth

market. Their profits are low and hence their products have investments efforts

to measure expand market share is very costly. They are often regarded

unattractive for long term investment, hence they are recommended for

liquidation and disposal.

Problem Children

This is also called question mark or wild cats. The firms or SBUs, of this

class have low market share in high growth markets. Problem children are

assumed to have heavy cash needs. Although they need found growth they

generate little cash because they are not very far down the experience curve. If

a problem child’s market share cannot be changed it will continue to absorb

cash. As its market matures, it will become a cash absorbing do – a cash trap

scenario. However, if the market – share can be adequately improved the

question mark can be converted into a star.

The strategic implications

The general strategy is that the firms or SBUs must be disciplined to

make sure that cash cow, do infect, generable cash to be used elsewhere. The

cash cows should receive a maintenance investment level, but any tendency

automatically to reinvest the cash they are generating should be avoided. Stars

on the other hand should be managed to maintain share; current profitability

should be lesser concern.

Given that the stars are adequately financed a limited number of the most

promising question marks are selected for improvement to try to improve their

share. The other question marks should not receive investment. They should be

sold, abandoned, or milked for whatever cash they can produce.

The dogs usually the most numerous category present a challenge. First a

dog can sometimes become very profitable, to produce of a ‘focus’ segment

strategy in which business specializes in a small miche when it can dominate. In

effect, 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 whatever

cash is forth coming until the business dies. Third, the business can be sold, or

simply liquidated. Management should be wary of ‘turnaround’ plans for the

dogs particularly when there is no fundamental change in the market or

environment. In essence, the BCC, matrix model is a scheme of reach

management. It suggests that over decision need to be made regarding whether

an SBU is to be a cash generator or a cash user. It further suggests that the

number of SBU selected to be cash user should be limited so that enough

resources will be available to the cash cows and those dogs and problem

children selected for milking should generate cash and be allowed only the

minimal investment. It is also helpful to apply this analysis to competitors as a

means of predictive what they might do, especially if the competitors are known

to be using a portfolio model.

1. Explain strategic formulation of corporate goals and objective, taking

into consideration a leading existing corporate house’s vision and mission

CORPORATE GOALS AND OBJECTIVES FORMULATION

STRATEGY

All managers need objectives. A very important consideration in setting

objectives is to convert the organization into integrated networks. The process

should be such that the shared values and identify of the organization is

reflected in the process.

Objective setting is generally a top-down process. This achieves unity

and cohesion throughout the organization. Managers at different levels in the

organizational hierarchy are concerned with different kinds of objectives. The

board of directors and top managers are involved in determining the vision, the

mission and the strategic objectives of the firm. They are also involved in

deciding upon the specific overall financial objectives in the Key Result Areas.

The middle management is involved in setting up objectives for the Key

Result Areas, objectives at the divisional levels, at the departmental and

individual levels. Lower level managers set objectives of units as well as their

subordinates.

Setting objectives converts the strategic vision and mission into target

outcomes and performance milestones. Objectives represent a managerial

commitment to producing specified results in a specified time frame. They spell

out how much of what kind of performance by when. They direct attention and

energy 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 Market

leadership (market share).

Objectives are the results or outcomes an organization wants to achieve in

pursuing its basic mission. The basic purpose of setting objectives is to convert

the strategic vision and mission into specific performance targets. Objectives

function 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.

Role of Objectives

Objectives play an important role in strategic management. They are

essential 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 overall

company as well as for each division. Objectives are generally established at the

corporate, divisional and functional levels, and as such, they form a hierarchy.

The zenith of the hierarchy is the mission of the organization. The objectives at

each 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-range

objectives (Long-range means more than one year, and short-range means one

year and less). Short-range objectives spell out the near term results to be

achieved. By doing so, they indicate the speed and the level of performance

aimed at each succeeding period. Short-range objectives can be identical to

long-range objectives if an organization is performing at the targeted long-term

level (for example, 20% growth – rate every year). The most important

situation where short-range objectives differ from the long-range objectives

occurs when managers cannot reach the long-range target in just one year, and

are trying to elevate organizational performance. Short-range objectives (one-

year goals) are the means for achieving long-range objectives. A company that

has an objective of doubling its sales within five years can’t wait until the third

or fourth year of its five-year strategic plan. Short – range objectives then serve

as stepping-stones or milestones.

Multiplicity of Objectives

Organizations pursue a number of objectives. At every level in the

hierarchy, objectives are likely to be multiple. For example, the marketing

division may have the objective of sales and distribution of products. This

objective can be broken down into a group of objectives for the product,

distribution, research and promotion activities. To describe a single, specific

goal of an organization is to say very little about it. It turns out that there are

several goals involved. This may be due to the fact that the enterprise has to

meet internal as well as external challenges effectively. Moreover, no single

objective can pl ace the organization on a path of prosperity and progress in the

long run.

However, an organization should not set too many objectives. If it does, it

will 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 can

effectively handle. But, if there are so many that none receives adequate

attention, the execution of objectives becomes ineffective; there is a need to be

cautious. It will be wise to identify the relative importance of each objective, in

case 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 the

other. If there is no consistency between company objectives, people may

pursue goals that may be good for their own function but detrimental to the

company as a whole. Therefore, objectives should not only “fit” but also

reinforce each other. As observed by Koontz et.al., “it is bad enough when

goals do not support and interlock with one another. It may be catastrophic

when they interfere with one another”.

Types of Objectives

Objectives are needed for each key result area which is important to

success. Two types of key result areas are financial performance and strategic

performance. Objectives are also classified into two categories:

1. Financial objectives

2. Strategic objectives

Which is more important : Financial or Strategic Objectives ?

Achieving acceptable financial results is a must. Without adequate

profitability and financial strength, a company’s pursuit of its strategic vision as

well as its long-term health and ultimate survival is jeopardized. Further, low

earnings and a weak balance sheet may alarm shareholders and creditors, and

put the jobs of senior executives at risk.

But good financial performance, by itself, is not enough. Of equal or

greater importance is a company’s strategic performance relating to company’s

market position and competitiveness. A company’s financial measures are really

lagging indicators, which reflect a company’s future financial performance and

business prospects. For example, if a company has set aggressive strategic

objectives and is achieving them, such that its competitive strength and market

position are on the rise, then its future financial performance will be better than

its current financial performance. If a company is losing ground to competitors

and its market position is slipping, which reflects weak strategic performance,

then its ability to maintain its present profitability is highly suspect. Thus

improved strategic performance fosters better financial performance.

That is why a growing number of companies are using the “balanced

scorecard” approach for measuring company performance by setting both

financial and strategic objectives and tracking their achievement.

1. Show the entrepreneurial growth in India after Independence

Definition of an Entrepreneur

The word “entrepreneur” is derived from French word “enterprendre”

which means “to undertake”. The entrepreneur is often associated with a person

who starts his own, new and small business. The term entrepreneur is defined as

one who innovates, raises money, assembles inputs, chooses managers and sets

the organization going with his ability to identify them.

The New Encyclopedia Britannica considers an entrepreneur as “an

individual who bears the risk of operating a business in the face of uncertainty

about the future conditions”.

Joseph A. Schumpeter recognized an entrepreneur as a person who

introduces innovative changes. He treated entrepreneur as an integral part of

economic growth. The fundamental source of equilibrium was the entrepreneur.

Growth and Development of Entrepreneurship in India

Entrepreneurship in India is as old as the human civilization itself. Its

evolution could be traced back to as early as Vedic period, when metal

handicrafts existed in the society. The handicrafts entrepreneurship was

observed among the artisans in the Cities like Banaras, Allahabad, Gaya, Puri,

Mirzapur, Bombay and Hyderabad. Indian artisanship was well recognized all

over the world but it could not develop properly for reasons like lack of

initiative 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 magnitude

of the adverse effects of imbalanced growth of industries. It also recognized the

vital role played by the small and medium enterprises in the socio-economic

development. The Government of India devised a scheme for achieving

balanced growth. It introduced the first industrial policy, in 1948 which was

revised from time to time. Three important measures were taken by the

Government.

1. To maintain a proper distribution of economic power between private and

public sector.

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 the

development of small scale industries in cities, small towns and villages. Under

the five year plans, particularly in the Third five year plan, the Government

started providing various incentives and concessions in the form of capital,

technical know-how, markets and land to potential entrepreneurs to set up

industries in potential areas to remove the regional imbalances in development.

This was the major step taken to initiate interested people of varied social strata

to enter into the field of small scale entrepreneurial ventures.

Government has established several institutions like Directorate of

Industries, Financial Corporation, Small-Scale Industries Corporations and

Small Industries Service Institutes to facilitate the new entrepreneurs in setting

up their enterprises. This resulted in a rapid growth of small scale units and

there was a tremendous increase in their number from 1,21,619 in the year 1966

to 1,90,727 in 1970. During this period some entrepreneurs grew from small to

medium-scale and from medium to large-scale manufacturing units. Some of

the family entrepreneurship units like Tata, Birla, Dalmia, Kirloskar etc. grew

beyond the size and established new frontiers in business.

Entrepreneurship Development

The Government is attaching much importance for developing

programmes to stimulate and encourage entrepreneurship development.

Entrepreneurship development is a process in which persons are injected with

motivational drives of achievement and insight to tackle uncertain and risky

situation in business undertakings.

The process of entrepreneurship development focuses on training,

education, reorientation and creation of conducive and healthy environment for

the growth of enterprise. The entrepreneurship development should be viewed

in the total perspective and should integrate entrepreneurial training, provision

of incentives, consultancy services, sectoral development and other strategies

of intervention.

Several Entrepreneurship Development Institutions were set up by the

Government both at Central and State level. They are engaged in identification,

selection and training of potential entrepreneurship. The programmes are

specially designed to take an integrated approach by providing instruction and

counseling right from identification of the project to the actual operation of the

enterprises. Various Entrepreneurship Development Institutions are listed

below.

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 facilities

to promote and foster the growth and development of entrepreneurship in India.

1. Calculate any ten accounting ratios for your data

1. Liquidity Ratios

The liquidity ratios measure the liquidity of the firm and its ability to meet its maturing short-term obligations. Liquidity is defined as the ability to realize 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 a year.

Current Assets, Loans and Advances

-------------------------------------------

Current liabilities and Provisions

A current ratio 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by banks as the minimum acceptable level for providing working capital finance.

Quick Liquid / Acid Test Ratio

Quick ratio is used as a measure of the company’s ability to meet its current obligations since bank overdraft is secured by the inventories, the other current 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 as a 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 the relative interest of lenders and proprietors in a business organization. These

ratios indicate the long-term solvency position of an organization. These ratios help 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, the stronger is the financial position of the firm. This ratio will supplement the debt-equity ratio. In this ratio, the relationship is established between the shareholders 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., the capital and free reserves less intangible assets.

Capital Gearing Ratio

It is the proportion of fixed interest bearing funds to equity shareholders funds.

Fixed interest bearing funds

----------------------------------

Equity Shareholder’s funds

The fixed interest bearing funds include debentures, long-term loans and preference share capital. The equity shareholders funds include equity share capital, reserves and surplus.

Debt-Equity Ratio

Debt-Equity Ratio measures the relative claim of creditor and owners in a business 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. Any higher ratio is considered as a risky position for the firm as more debt is involved 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 period the better, although the ratios will vary between companies. For example, the stock turnover rate in a food retailing company must be higher than the rate in a manufacturing concern.

The inventory turnover ratio measures how many times a company’s inventory has been sold during the year.

Inventory Ratio

The level of inventory in a company may be assessed by the use of the inventory ratio, which measures how much has been tied up in inventory.

Inventory

------------------------ x 100

Current Assets

Debtors Turnover Ratio

Debtors turnover, which measures whether the amount or resources tied up in debtors is reasonable and whether the company has been efficient in converting 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 collect amounts from

Average Debtors

------------------------ x 365 (in days)

Credit Sales

The actual collection period can be compared with the stated credit terms of the company.

If it is longer than those terms, then this indicates inefficiency in collecting 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 control procedures of the company.

Interest Cover

The interest coverage ratio shows how many times interest charges are covered by funds that are available for payment of interest. Interest cover indicates how many times a company can cover its current interest payments out

of current profits. It gives an indication of problem in servicing the debt. An interest cover of more than 7 times is regarded as safe and more than 3 times is desirable. An interest cover of 2 times is considered reasonable by financial institutions.

Profit before Interest, Depreciation and Tax

--------------------------------------------------

Interest

A very high interest cover ratio indicates that the firm is conservative in using 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 net profit. This highlights the amount retained by a company for financing of future operations.

(a)Equity Dividend CoverNet Profit after Tax – Preference Dividend--------------------------------------------------

Equity Dividend

(b)Preference Dividend CoverNet Profit after Tax ------------------------Preference Dividend

4. Debt Service Coverage Ratio (DSCR)Debt Service Coverage Ratio (DSCR) ratio is the key indicator to the

lender to assess the extent of ability of the borrower to service the loan in regard to timely payment of interest and payment of loan installment. The ratio is calculated 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 servicing capacity of the organization. A ratio of 2 is considered satisfactory by the financial institution. By means of cash flow projection, the borrower should work DSCR for the entire duration of the loan. This will be useful to lender to take correct view of the borrower’s repayment capacity. This ratio indicates whether the business is earning sufficient profits to pay not only the interest charges, but also the installments due of the principal amount.

Return on Capital Employed (ROCE) or ROI

This ratio is also called Return on Investment (ROI). The strategic aim of a business enterprise is to earn a return on capital. If in any particular case, the return in the long-run in not satisfactory, then the deficiency should be corrected or the activity be abandoned for a more favorable one. The rate of return on investment is determined by dividing net profit or income by the capital employed 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 Employed

Advantages 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 capital employed. It is expressed in percentage. The return on “Capital Employed” may be based on Gross Capital or Net Capital Employed. Formulation for calculation of return on capital employed is as follows :

Profit

Return on Capital Employed Ratio = ------------------------------------ x 100

Net Capital Employed

Net capital employed will be calculated as follows :

Net capital employed consists of total assets (i.e. fixed assets, investments and current assets) of the business less is current liabilities (i.e., creditors, bank overdraft etc.) Thus,

Net Capital Employed = Fixed Assets + Investments + Current Assets – Current Liabilities.

‘Thus, Net Capital Employed = Fixed Assets + Investments + Working Capital.

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 of net profit to arrive at the adjusted net profit for the purpose of computing return on 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 Shares

Benefits of P/E Ratio

1. This ratio indicates how much an investor is prepared to pay per rupee of earnings.

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 to the shareholders as dividend. A high payout signifies a liberal distribution policy and a low payout reflects conservative distribution policy. This ratio is calculated by dividend per share divided by the earnings per share :

Dividend Per Share

-----------------------

Earnings Per Share

9. Book Value

The book value is a reflection of the past earnings and the distribution policy of the company. A high book value indicates that a company has huge reserves and is a potential bonus candidate. A low book value signifies a liberal distribution policy of bonus and dividends, or a poor track record of profitability. Book value ratio indicates the net worth per equity share

Equity Capital + Reserves – Profit and Loss A/c Debit balance

--------------------------------------------------------------------------

Total number of Equity Shares

10. Dividend Yield

Dividend yield ratio reflects the percentage yield that an investor receives on this investment at the current market price of the shares. This ratio is computed by dividend per share divided by market price multiplied by hundred.

Dividend Per Share

Dividend Yield = ------------------------ x 100

Market Price