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PAFC Lecture IV
Academic year 2012-13 Tri IV
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Deadline for submission
Project report (2 copies)
Thursday, 26th of July 2012, 5 pm
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A Project Report that you might prepare in your corporate life later as a document to
accompany your companys loan application to a bank will cover the following +++
Introduction: details of financial assistance required
Executive Summary/Overview of the entire project
Promoters: Promoters and their background,
professional qualifications, experience, etc. Details of
existing business interests to be given Existing Status of the Unit/company: What is the
existing activity, product line, market
Manpower: About the Directors, Managers,
professional manpower their professional
background and expertise, arrangements for Human
Resource Development, etc.
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Project Report will cover .. contd
Infrastructure facilities: About the Equipment, Plant& Machinery, premises.
Product line proposed, details of demand and supply,
competitors, proposed market share Technical Feasibility
Clientele: break up into domestic and export sales,countries to which exports are planned, present and
prospective clients , market potential, marketingarrangements, plans for marketing, advertising,sales, distribution, etc.
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Include detailed financial analysis
While you will include detailed projections of
P&L statements, balance sheets, cash flow
statements, break even analysis, ratio analysis,
etc. , these aspects need to be suitably
commented upon in the project report
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Include sections on
Environmental issues
Corporate Governance Issues
Social Impact of the project SWOT Analysis
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In real life you might enclose
Market Survey Report
Agreements pertaining to Financial/Technicaltie ups
Financial statements & tax returns ofpromoters relate these to sources of fundsfor the project
Annual reports of associate companies/sister
concerns Besides the above, you would include any
other documents supporting your proposal
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The Report should cover details of COP & MOF
COST OF PROJECT (COP) AND MEANS OF FINANCE (MOF)
PROJECT COST:
PREMISES
OFFICE EQUIPMENT
PLANT & MACHINERY
WORKING CAPITAL MARGIN
MISC FIXED ASSETS
TOTAL COP
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Details of COP and MOFcontd
MEANS OF FINANCING
EQUITY/QUASI EQUITY
- PROMOTERS :
- PUBLIC:
TERM LOAN/DPG FROM BANK
OTHERS :
TOTAL
Also separately indicate requirement of working capital finance. Give working.
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TO INCLUDE BALANCE SHEET PROJECTED FOR SEVERAL YEARS
SOURCES OF FUNDS
EQUITY SHARE CAPITAL
RESERVES & SURPLUS
PROFIT & LOSS
TOTAL SHAREHOLDERS FUNDS
OTHERS (SPECIFY ITEM WISE)
TOTAL
USES OF FUNDS:
GROSS FIXED ASSETS
ADDITIONS
LESS: DEPRECIATION
NET FIXED ASSETS
OTHERS (SPECIFY ITEM WISE)
CASH & BANK BALANCES
NET CURRENT ASSETS
TOTAL
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To make P & L statement for several years
REVENUE:
OPERATIONAL EXPENDITURE (SPECIFY ITEMWISE)
OP. PROFIT
DEPRECIATION
PROFIT
DIVIDEND
TRANSFER TO RESERVES
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The cash flow statements
INFLOW
EQUITY
LOANS
OTHERS (SPECIFY ITEMWISE)
PROFIT
DEPRECIATION
TOTAL INFOW
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The cash flow statements . Contd.
OUTFLOW
FIXED ASSETS (SPECIFY DETAILS)
OTHERS (SPECIFY ITEMWISE)
DIVIDEND
TOTAL OUTFLOW
CASH & BANK BALANCES
OPENING BALANCE
NET INFLOW
CLOSING BALANCE
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Work out the key ratios for the period
DEBT/EQUITY RATIO
OP. PROFIT/INCOME (%)
PAT/INCOME (%)
RETURN ON TOTAL ASSETS (%)
RONW (%)
DIVIDEND PAYOUT RATIO
DEBT SERVICE CONVERAGE RATIO
EPS (RS.)
COMPOUNDED ANNUAL GROWTH RATE (%)
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Include break even calculations GROSS REVENUE
VARIABLE EXPENSES
CONTRIBUTION
FIXED EXPENSES
PAT
BREAK-EVEN POINT
CASH BREAK-EVEN POINT
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A Typical Project Report
A typical report will be running into a
hundred pages plus detailed workings
All figures in the project report as wellas in the annexures need to be
supported by detailed workings given at
the end The report needs to be self contained
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STRATEGY AND CAPITALALLOCATION
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Central concern of Top Management
A central concern of top management at thecorporate head office is to allocate capital across
strategic business units and manage the investment
decision making activity in the entire group
Strategy involves matching a firms strengths and
weaknesses with the opportunities and threats
present in the external environment.
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Formulation of Strategies
Environmental Analysis
CustomersCompetitors
Suppliers
Regulation
Infrastructure
Social/political
environment
Internal Analysis
Technical know-howManufacturing capacity
Marketing and
distribution capability
Logistics
Financial resources
Opportunities and threats
Identify opportunities
Strengths and weaknesses
Determine core capabilities
Find the fit between
core capabilities and
external opportunities
Firms strategies
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Corporate Strategy
Conglomerate DiversificationA Mixed Bag
Positives Negatives
Managerial economies of scale Dissipation of
managerial focus
Higher debt capacity
Unprofitableinvestment.
Lower tax burden
Larger internal capital
Reduces risk exposure
Expands opportunities for growth
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Why Conglomerates Can Sometimes Add Value
in Emerging Markets
Khanna and Palepu believe that while focus makes eminent sense
in the west, conglomerates have certain advantages in emerging
markets which are characterised by institutional weaknesses in
the following areas :
Product markets
Capital markets
Labour markets Regulation
Contract enforcement
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Compulsions for Conglomerate Diversification in India
Restriction in growth in the existing line of business, often arising from
governmental refusal to expansion proposals.
Vulnerability to changes in governmental policies with respect to imports,
duties, pricing, and reservations.
Opening up of newer areas of investments in the wake of liberalisation.
Cyclicality of the main line of business leading to wide fluctuations in
sales and profits from year to year.
Desire to avail of tax incentives mainly in the form of investment
allowance and large initial depreciation write-offs.
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Guidelines for Conglomerate Diversification
1. If you lack financial sinews to sustain the new project during thelearningperiod, avoid grandiose diversification projects.
2. Realistically examine whether you have the critical skills and resourcesto succeed in the new line of business.
3. Ensure that the diversification project has a good fit in terms oftechnology and market with the existing business.
4. Try to be the first or a very early entrant in the field you are diversifyinginto. This will protect you from serious competitive threat in the initialyears.
5. Where possible adopt the following sequence: marketing substantialsub-contractingfull blown manufacturing.
6. Seek partnership of other firms in areas where you are vulnerable orcompetitively weak.
7. If the failure of the new project can threaten the companys existence,float a separate company to handle the new project.
8. Remember that meaningful conglomerate diversification represents thegreatest challenge to corporate vision and leadership.
9. Guard against bandwagon mentality and empire-building tendencies.
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Portfolio Strategy
In a multi-business firm, allocation of resources across
various businesses is a key strategic decision. Portfolioplanning tools have been developed to guide the process
of strategic planning and resource allocation.
One such tool is the BCG matrix
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BCG Matrix
High Low
Low
High
Ma
r
k
e
t
G
r
o
w
t
h
R
a
t
e
StarsQuestion
Marks
Cash
CowsDogs
Market Share
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Pattern of Capital Allocation
Stars Question marks
Cash cows Dogs on divestment
(funds generated) (funds released)
Stars Question marks
Cash cows Dogs
Part A
Part B
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Portfolio Configuration based on Relatedness
Identifying the appropriate configuration of business
portfolio is perhaps the most important task of top
management. It calls for an insightful assessment of the
logic of relatedness among various businesses in the
portfolio. There are different ways of thinking about relatedness:
Business selection: Example GEs choosing industries
where it will be No 1 or No 2
Inter-business linkages: P&G manages to get better
deals from WalMart by negotiating collectively on behalf of
its various standalone businesses
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Business Level Strategies
Among the various models that have been used as
frameworks for developing a business level strategy, thePorters generic model is perhaps the most popular
According to Porter, there are three generic strategies that
can be adopted at the business unit level.
Cost leadershipExample: Dell Computers
DifferentiationExample: Coke
Focus Focus on a narrow line of products or a limited
market segment, where it gains competitive edge throughcost leadershipExample: McDonalds
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Strategy of Cost Leadership:
Dell Computer Corporation
Direct selling
Built-to-order manufacturing Low cost service
Negative working capital
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Network Effect Strategy
Network effect: The value of a product or service increases as more andmore people use it.
Network strategy: Success with the network strategy depends on the
ability of a company to lead the charge and establish a dominant position.
eBay
Microsoft
Since most PCs operated with Windows, most new software was
developed for Windows machines. Because most software was Windows-
based, more people bought PCs equipped with the Windows operating
system. To date no one has broken this virtuous circle.
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