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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
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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
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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
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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.
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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
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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.
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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
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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.
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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.
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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.
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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 .
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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.
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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.
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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.
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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
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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
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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
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Thanks You