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  • Introduction to Strategic Finance :

    An Overview of Strategic Management

    Hemantha De Silva

    Lecture 01

    Date :05.04.2015

    Strategic Finance

    Strategic Finance is the alignment of resources with the institutions mission and strategic plan

    Strategic Finance

    The strategic Finance Initiative helps : Understand recent and likely future trend lines of revenue and

    expenses

    Improve the clarity and functionality of their strategic plans Align effort , attention , and resources with the initiatives that will

    enhance institutional validity

    Focus on achieving and documenting results over inputs Increase institutional productivity Integrate strategies with financial plans Make specific board and executive level plans for next steps to

    achieve concrete objectives toward grater institutional success.

    Strategic Corporate Finance

    BUSINESS OPPORTUNITY, BUSINESS RISK, CAPITAL STRUCTURE, CORPORATE CAPITAL, CORPORATE FINANCE, CORPORATE FUND, INVESTMENT, INVESTMENT DECISION, INVESTOR, MACROECONOMY, MARKET COMPETITOR, MARKET VALUE, MARKETING PLAN,MICROECONOMY, ORGANIZATION PLAN, ROI, SALES AND MARKETING, STRATEGY PLAN

  • Strategic Corporate Finance

    Strategic Corporate Finance is related to identifying possible strategies and methodologies that can maximize the market value of a particular organization.

    It not only involves allocation of limited among the competing opportunities, but also encompasses monitoring and implementation of chosen strategies for achieving the desired objectives.

    Introduction : Strategic Management

    The Art of BusinessBusiness is more an Art than Science.

    Market competition demonstrate characteristics of

    both art and science. Owing to the vagaries of

    human behavior and other factors which

    contribute to it. We can conclude that the conduct of it is ultimately an art, an activity of human creativity and intuition powered by the human will.

    Entrepreneur

    We call the artist an entrepreneur Crafting Strategy is an exercise in entrepreneurship

    Definition : the art of business requires the intuitive ability to grasp the essence of a unique market situation, the creative ability to devise a practical solution , and the strength of purpose and skill to execute the act

    Strategic Thinking

    Seeking new strategic opportunities

    Collection of hard data Collection of soft data

    Making choices about the future on inadequate information

    Use the analytical modelsTo define opportunities Use of intuition to define the

    opportunities

    Accumulation of factsAnd evaluation of

    probabilitiesAccumulation of

    Uncertainties and ambiguities

    Unique interpretation of the strategic opportunity

    INTUTIVE

    RTIONAL

  • Strategic Management

    Thinking

    Learning Planning

    Doing

    Strategic Management

    Strategic Management

    Strategic management is a complex process, must like putting together a jigsaw puzzle.

    But with - missing pieces , extra / irrelevant pieces and involves many people , the solution is very dynamic

    Continue

    Today the decision making process has increasingly become complex and sophisticated as such there are some organization do well and some fail .

    Today modern business executives are responsible to manage various and multifaceted internal activities of the organization.

    External Environment

    Immediate external forces Suppliers Government Agencies CustomersRemote external environment

    Political, Economic, Social , Technological, legal factors.

  • continue

    The management process have grown sophisticated as a result of increase in size and number of competing firms, accompanied and enhanced intervention of the government and greater involvement in international business

    However each of the external factors needs to be assessed , anticipated, monitored and incorporated in the decision making of the firm

    Long term planning

    The fine blending of external and internal consideration in formulation and implementation of plans with long range planning , new venture management, planning , programming, budgeting, and business policy has been the most significant development in the management process since 1970s . It is Strategic Management process

    Concept of SM

    It consists set of decisions and actions resulting in formulation and implementation of a strategy to achieve the objectives of an organization.

    A set of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives

    Combination of effective strategies

    and excellent execution

    Strategy

    Effective Ineffective

    Excellent

    Execution

    Poor

    Long Term Success

    Success Unlikely

    May be successfulFor a while Failure

  • Nature of Strategy and Strategic Decisions

    Strategy is to be concerned with the long term direction of an organization

    Strategy can be seen as the matching of the resources and activities of an organization to the environment in which it operate.

    The strategic fit is developing strategy by identifying opportunities in the business environment and adapting resources and competences so as to take advantage of these.

    Strategic decisions are normally about trying to achieve some advantage for the organization over competition.

    continue

    Strategic Decisions are likely to be concerned with the scope of an organizations activities.

    The Role of Strategy

    Behind every successful company ,there is a strategy

    Strategy is the direction and scope of an organization over the long term, which achieves advantage for the organization through its configuration of resources within a changing environment and to fulfill stakeholders expectations.

    Strategic Decisions

    There are number of consequences of these characteristics.

    * strategic decisions are complex in nature

    * made in situation of uncertainty

    * have to demand an integrated approach

    * have to manage and perhaps change relationships and networks outside the organization

  • continue

    Strategic decisions will very often involve change in organization which may prove difficult because of the heritage of resources and because of culture.

    Strategic Management and Operational

    Management

    Strategic Management Operational Management

    Ambiguous/ uncertainComplexOrganization wideFundamentalLong term implication

    Routinised

    Operationally specific

    Short term implications

    Five Task of SM

    Developing a Strategic Vision & Mission Setting Objectives Crafting a Strategy Implementing the Strategy Evaluating performance & Initiating Corrective action / adjustments

    Vision & Mission

    Example : Sri Lanka Telecom

    Vision To lead Sri Lanka to become the hub of telecommunications in South Asia

    Mission To anticipate and fulfill the communications requirements of all sectors of the nation ,in service oriented work ethic which will provide total customer satisfaction through the most modern telecommunication facilities.

  • Value of Strategic Vision & Mission

    Crystallizes top managements view of firms long term direction

    Helps managers to avoid visionless or rudderless decision making

    Convey organization purposes Motivating employees to do their very best Helps to keep direction related actions of lower- level

    managers on common path

    Identifying a Company Strategy

    Action to diversifyEntering to new Business

    Patters which Defines strategy

    Action to gain sales & Market share

    Action to strengthen competitive capabilitiesand correct weakness

    Action to respond to changing market

    Manage research and development ,productionMarketing , finance & HR

    Action to enter new Geographic or productMarkets or existing one

    Action to merge or Acquire rival companies

    Effort to pursue new marketOpportunities and define Threats to the company

    Action to form strategic Alliances and partnership

    The relationship between a companys strategy and its business model

    A company business model relates to whether the revenue-cost profit economics of its strategy demonstrate the viability of the business enterprise as a whole.

    How well does the strategy fit the company situation

    Is the strategy helping the company achieve a sustainable competitive advantage.

    Is the strategy resulting in better company performance.

    continue

    A wining strategy must fit the enterprise's external and internal situation, build sustainable competitive advantage , and improve company performance

    Excellence execution of an excellent strategy is the best test of managerial excellence and the most reliable recipe for turning companies into standout performance.

  • continue

    good strategy + good strategy execution = good Management

    Microsoft and Red Hat LinuxTwo contrasting business models

    Business model

    Microsoft business model for making money from its operating system products is based on the following revenue cost- profit economics

    1.employ a cadre of high skilled programmers & keep the

    sources code hidden from users .

    2. sell the resulting operating system and software package to PC makers and to pc users at relatively attractive prices

    3.most of its cost arise on the front end in developing the software and are thus fixed , the variable costs of producing and packing the CDs .

    continue

    4. Provide technical assistance to users free of charge

    Red Hat Linux :

    1. 1. formed its own version of the open source Linux operating system.

    2. Rely on the collaborative efforts of volunteers programmers from all over the world.

    3. Collect and test enhancements and application submitted by the open-source community of Programmers.

    continue

    4. charge a modest fee to those who prefer to subscribe to the upgraded and tested family of read at linux products

    5.releas updated versions of linux every 4-6 months.

    6.make the sources code open and available to users. 7.capiatlise on the specialized expertise required to use

    Linux in multiserver, multiprocessor application by providing fees based training , consulting , support ,engineering and content management services to Red hat Linux. Red hat offers Linux certification training program globally over 60 countries.

  • How well is the companys present strategy working ?

    Components of a single business companys strategy

    R&D Supply Chain operation Marketing HR Finance

    Key Functional Strategies

    BusinessStrategy

    Effort to build Competitive advantage

    Planed, proactive movesTo out compete rivals

    Moves to respond and React to changing

    Environment Scope of geographical coverage

    Collaborativepartnerships

    ResourceStrengths &capabilities

    Porters generic strategies

    Effort to build competitive advantage

    1.Lower cost - cost leadership strategy2. a different or better quality product offering compared

    to rivals - differentiation strategy3. Superior ability to serve a market niche or specific

    group of buyers - Focus strategy

    Exercise 1

    Identify your organization's Business strategies and categories them according to porters generic strategies.

    Analysis

    Identify company Resources strengths and competitiveCapabilities . A skill / expertise , valuable Physical assets ,Human Assets, valuable organization assets( process), intangible assets (brand name), competitive capabilities( innovative capability), low overall cost , technological capabilities.

    A company is better positioned to succeed if it has a competitively valuable complement of resources at its command.

    A competence is a something an organization is god at doing ; it is nearly always the product of learning and experience.

  • Analysis

    Core competence is a competitively important activity that a company performs better than other internal activities. Technological capability to introduce new product range. Know how ,

    Distinctive competence is a competitively valuable activity that a company performs better than its rivals.

    A companys success in the market place becomes more likely when it has appropriate and ample resources with which to compete , and especially when it has strengths and capabilities with competitively advantage potential.

    Company Resource weakness and competitive deficiencies

    a companys resource strengths represent competitive assets; its resources weakness represent competitive liabilities.

    Analysis

    market opportunities Markets opportunities is a big factor in shaping a

    companys strategy.

    a company is well advised to pass on a particular market opportunity unless it has or can acquire the resources to capture it.

    Threats to a company s future profitability

    Often , certain factors in a company external environment pose threats to its profitability competitive well being.

    Analysis

    Three Steps of SWOT Analysis Identify company

    Resources strength& competitive capability

    Identify resources ,weaknesses and

    deficiencies

    Identify marketOpportunities

    Identify the externalThreats to the future

    profitability

    What can be gleaned from theSWOT listings

    Conclusions concerning the companys Overall business situation:

    Action for improving company strategy

  • Company Value Chain

    Supply Chainmgt

    operation distribution Makts servicesProfit margin

    PrimaryActivities

    Product R&D and System Development

    Human Resources Management

    General Administration

    Support Activities

    & cost

    Analysis

    The higher a companys costs are above those of close rivals, the more competitively vulnerable it becomes.

    A companys value chain identifies the primary activities that create customer value and the related support activities.

    Stakeholders objectives

    Employees and Managers :Job security, good conditions, job satisfaction

    Customers : high quality product/service, product or services that meets customer need

    Suppliers: regular orders in return for reliable delivery and good service

    Shareholders : wealth creation , dividend or ROI Financial institution : reliable repayments Society/ community : environment friendliness , charitable work,

    prevent health hazards

    Government : to collect taxes in time

    Analytical tools

    McKinsey- 7-S Model Hard elements : Structure / Strategy / System

    Soft Elements : Shared Value/ Staff/ Style/ Skills

    PESTL : Political , Economical, Social/ Culture , Technological, Legal

    Competitive forces :

    In comSU C

    S

    E

  • SU :SUPPLIERS E : New Entrants S : Substitutes C : Customers In Com : Industry competitors

    Relationships : 1 bargaining power of suppliers 2 Threats of new entrants 3 Bargaining power of customers 4. threats of substitute product / service

    End

    Thanks You