Strategic Financial Management Casebook

Rajesh Kumar

• Éditeur: Academic Press
• Année: 2017
• ISBN:
  9780128093528
• Sujet: Business
• Sous-sujet: Corporate Governance

Strategic Financial Management Casebook strategically uses integrative case studies—cases that do not emphasize specific subjects such as capital budgeting or value based management—to provide a framework for understanding strategic financial management. By featuring holistic presentations, the book puts readers into the shoes of those responsible for the world's largest wealth creators. It covers strategies of growth, mergers and acquisitions, financial performance analysis over the past decade, wealth created in terms of stock returns since its listing in stock market, investment and financial decisions, cost of capital, and corporate valuation.

In addition, the casebook also discusses corporate restructuring activities undertaken by each company. Each chapter follows a template to facilitate learning, and each features an Excel-based case analysis worksheet that includes a complete data set for financial analysis and valuation.

• Introduces a conceptual framework for integrating strategy and finance for value creation
• Emphasizes the roles of corporate governance, corporate social responsibility, and risk management in value creation
• Encourages an analysis of investment, financing, and dividend decisions
• Examines non-financial factors that contribute to value

1

Perspectives on strategic finance

Abstract

Financial resources are the foundation of the strategic plan and financial value is the unifying factor which bonds products, market and operating decisions associated with strategic options. The primary finance function is to identify and plan for the proper mix of financing to support strategic activity and to ensure that funds are employed to achieve expected returns. Finance function is the central fulcrum which holds businesses together, manages its controls and information in a decentralized step up. It can be argued that in the long run, all planning leads to financial planning. Finance is the main link between strategic plans and their implementation. Value drivers should be directly linked to shareholder value creation and measured by both financial and operational key performance indicators (KPIs) which must cover long term growth and operating performance. Stock price maximization is one of the significant factor for value maximization objectives. The concept of measuring and managing shareholder value is of paramount importance on account of the increasing relevance of capital markets and corporate governance. The main value drivers for shareholder wealth creation are intangibles, operating, investment and financial. In R&D organizations, intangible assets are a key driver of innovation and organizational value. The information age has an important role for finance. Restructuring is the corporate management strategy of reorganizing a company for value creation. Mergers and acquisitions (M&A) are a part of corporate restructuring activities. Investment decision is considered as the first among equals. The real options valuation is a dynamic approach to valuation in terms of flexibility and growth opportunities. The investment, financing and dividend decisions are the three main pillars of decision making in corporate finance. Share buyback programs are gaining relevance. An IPO is the first sale of a company’s share to the public and listing of shares on a stock market. Corporate governance refers to both the structure and relationships which determine corporate direction and performance. Corporate social responsibility (CSR) refers to fulfilling the responsibilities or obligations that a company has toward its stakeholders.

Keywords

Strategic finance; value drivers; valuation; risk management; corporate restructuring; mergers and acquisitions; investment; financing decisions; dividends; share buyback; IPO; value at risk; balance scorecard; corporate governance; corporate social responsibility

1.1 Strategic role of finance

Strategy basically refers to how resources are to be deployed through a combination of products, markets and technologies. The basic purpose of the finance function is to ensure the timely acquisition and efficient utilization of funds so that strategic goals are achieved. Financial resources are the foundation of the strategic plan and financial value is the unifying factor which bonds products, market and operating decisions associated with strategic options. The financial aspects have a major role in strategic aspects like the type of assets the firm acquires, the rate at which they are acquired and the ultimate size of the firm. Investment, financing, operating, and dividends decisions are the major strategic financial decisions within a firm. The primary finance function is to identify and plan for the proper mix of financing to support strategic activity and to ensure that funds are employed to achieve expected returns.

The unifying financial goal for any profit seeking enterprise would be the maximization of the net present value of the projected cash flows, discounted at the cost of capital.

In modern world, the finance manager ought to be more skilled in managing people and managing risk rather than in aspects of financial reporting. The role of financial director in an organization is becoming increasingly relevant in the context of uncertainty, flexibility federalism, and downsizing [1]. Financial Director is the one director who would be frequently consulted on every strategic decision a company takes. In the context of the trend to reduce the size of the corporate headquarters, however lean and mean a company is, it must produce consolidated accounts and reports to shareholders and authorities. Hence there is a need for adequate financial staff to handle these tasks even in decentralized organizations. Finance function is the central fulcrum which holds businesses together, manages its controls and information in a decentralized step up. It can be argued that in the long run, all planning leads to financial planning. The role of financial directors has become more challenging and sophisticated while dealing with information systems, treasury management, authorities, shareholders, and investing institutions.

The strategic role of finance can be explained in the context of strategy implementation, strategic change and strategic flexibility. Finance is the main link between strategic plans and their implementation. The deployment of funds in capital expenditure programme is an example of how finance function becomes important in strategy implementation. Companies like ABB allows its finance department to play a proactive role in strategy implementation [1]. Financial management and information systems need to respond to organizational changes. Finance function has to respond fast to opportunities in the context of strategic flexibility. Finance department has to identify the essential information needs to the management. The major key elements of strategic finance function are strategic planning, establishment of the optimum capital structure, managing key financial relationship with outsiders, implementation of the financial policy, operational financial planning which includes capital expenditure programs, cash planning, and balance sheet planning. The other key elements include treasury management, debt structure and risk management. The economic viability measures include performance measures and budgeting systems. The element of quality control involves information systems, standards, and procedures. The finance team consists of Finance Director, the controller, the treasurer, senior departmental managers and, business unit financial managers. The finance director is a member of the top management team who is concerned with the strategic direction of the business. Controller is also a part of the core strategy making group which is involved in the implementation of strategic decisions. Finance functions also contain specialized departments like mergers and acquisition (M&A) team information departments. Finance function provided direct input into Unilever’s long, medium and short term plans as well as their cost reduction programs and innovation projects. Unilever developed a culture in finance of innovative business partnering, continuous improvement and capability development which enabled the finance team to play an active role in delivering Unilever’s growth strategy.

1.2 Managing risk

Investors are assumed to maximize investment return. In quantitative sense risk is the measurement of standard deviation of returns. Statistical techniques are used to manage risk. Historical risk estimates are used along with expected return forecasts to generate asset allocation strategies and portfolios which are optimal with respect to risk and return. Managing risk involves various dimensions of risks like competitive risk, project risk, exchange rate risk, and interest rate risks. International diversification is a technique for managing risk. The concept of global diversification ensured that different types of risk could be diversified improving the risk/return trade off.

1.3 Challenges

Modern businesses in the context of globalization, competition and decreasing margins have to focus on ways to drive business performance. Businesses rely on timely and relevant quantitative data to arrive at strategic decisions. It has become increasingly important to focus on value innovation which advocates on maintaining core business strengths while continuously developing new value additive ideas and strategies. Enhanced understanding of risk factors, updated competitive analysis tools, improved valuation, and projection models are all relevant in modern environment.

Modern financial managers must have understanding of control systems and operational risks. Cash management, capital budgeting, earnings volatility, and forecasting demand are the significant challenges faced by managers. The context of increased contagion in the global financial markets creates challenges of managing interrelated employment, debt reduction, monetary policy, and exchange rate policies when companies plan expansion, treasury hedging and capital management, and acquisition strategies.

1.3.1 Strategic value drivers

Mills [2] identify seven value drivers—sales growth rate, operating profit margin, cash tax rate, fixed capital needs, working capital needs, planning period, and cost of capital. The selection of an appropriate planning period is vital for generating future cash flows based on short term and long term perspective. The estimation of the planning period can be explained in terms of five forces identified by Michael Porter. The planning period needs to be explained in the context of potential entrants, possibility of substitute products, relative power of suppliers and buyers and by the degree of competitive rivalry within the industry in which it exists. For example, in the context of planning period, the company may incorporate the threat of new entrant in the market within a five-year period as the present barriers to entry act as a competitive advantage for the company. Organizations which focus on relative performance creates the most value. The strategic value analysis approach must have a long planning period aimed at creating good sales potential and free cash flow.

Competitive advantage is the result of the core competences nurtured by an organization. It results from the collective learning of the company in terms of diverse production skills, integration of different streams of technology, patterns of communication and managerial rewards. Strategic value creation results from the creation of a strategic architecture. Strategic architecture involves identification and development of technical and production linkages across business units which in turn leads to development of distinct skills and capabilities which cannot be replicated easily by other organizations.

John Kay have identified four aspects of core capabilities—reputation, architecture, innovation, and strategic assets. Reputation facilitates companies to follow price differential strategy whereby they could charge premium price for products or gain larger market share at a competitive price. The unique structure of relational contracts that may exist within or around firms is referred to as architecture. Airline industry develops networks through strategic alliances which in turn provides cost effective ways of providing international services to customers. Marks and Spencer’s strategy of growth is based on the development of its supplier architecture. Innovation is also a major source of competitive advantage. Companies like Apple creates value through successful product innovations. Strategic assets are sources of competitive advantage based on the market position.

Fundamental value is based on the present value of expected free cash flows. Shareholder value is firm value minus the value of outstanding debt. Firm value can be based on book value or market value. Market value is based on the stock market performance of a company. The most widely used practical measure of shareholder value is Total Shareholder Return (TSR) which is based on stock price appreciation plus dividends. Companies create value by means of investing capital at a higher rate of return when compared to its cost of capital. Companies with higher returns and higher growth are valued more highly in the stock market.

Knowledge assets are organizational resources which are integral for company’s value creation. The strategic relevance of knowledge assets has led to the generation of new concepts and models for managing a company’s knowledge assets. Intellectual Capital has emerged as a key concept to evaluate the intangible dimension of an organization. The modern economic world is based on the foundation of new technologies, globalization, and increased relevance of intangible assets. Value creation is often perceived as the future value captured in the form of increased market capitalization. The new global economy has led to the emergence of new business models where companies are combining both old and new economy assets. New processes and tools are required to manage the risks on account of new business models. The greatest challenge a company’s face today is identification of the combination of tangible and intangible assets which create the greatest amount of economic value (EV).

Every asset, financial as well as real has value. The key to fundamental aspect of investing and managing assets lies in understanding of not only what value is, but also the sources of value. A value driver is a performance variable which impacts the results of a business such as production effectiveness or customer satisfaction. The metrics associated with value drivers are called key performance indicators (KPIs). Value drivers should be directly linked to shareholder value creation and measured by both financial and operational KPIs which must cover long term growth and operating performance.

The three commonly cited financial drivers of value creation are sales, costs and investments. Earnings growth, cash flow growth and return on invested capital are specific financial drivers. Profitability, growth, and capital intensity are considered as important drivers of free cash flow and value of a firm. The KPIs also include financial measures such as sales growth and earnings per share (EPS) as well as nonfinancial measures. The nonfinancial performance me...

Table des matières

• Cover image
• Title page
• Table of Contents
• Copyright
• Dedication
• Preface
• Acknowledgment
• 1. Perspectives on strategic finance
• 2. Wealth creation by Coca-Cola—a strategic perspective
• 3. Wealth creation by Johnson & Johnson
• 4. Wealth creation by Microsoft
• 5. Wealth creation by Exxon Mobil
• 6. Wealth creation—A case analysis of Apple
• 7. Wealth creation—analysis of Google
• 8. Wealth analysis of General Electric
• 9. Strategies of wealth creation by Berkshire Hathaway
• 10. Analysis of wealth—Walmart
• 11. Wealth analysis of Facebook
• 12. Wealth analysis of Procter and Gamble
• 13. Wealth analysis of Wells Fargo
• 14. Wealth creation by Amazon
• 15. Wealth analysis of AT&T
• 16. Wealth creation by Boeing
• 17. Analysis of wealth—Time Warner Inc.
• Index