FINANCIAL CONTROLLERSHIP CHAPTER 2 PPT
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This document discusses strategies at the corporate and business unit levels. At the corporate level, strategies determine how the organization will achieve its goals of profitability, shareholder value, risk tolerance, and stakeholder approach. Strategies can be evaluated using industry analysis and the value chain. At the business unit level, strategies are developed based on the unit's mission and competitive advantage within its industry structure. Business units are classified by the BCG matrix to determine the appropriate build, hold, harvest, or divest strategy.
FINANCIAL CONTROLLERSHIP CHAPTER 2 PPT
- 1. Strategies provide the broad context within which one can evaluate the optimality of elements of the management control system. Strategies are plans to achieve organization goals. Therefore, we must first determine some typical goals in organizations. Then we discuss strategies at 2 levels (1) the corporate level (2) business unit level
- 2. (1)Profitability-Is the most important goal. Profitability or Return on Investment is expressed by an equation that is the product of 2 ratios: *profit margin percentage: Revenues-Expenses Revenues *Investment Turnover: Revenues/ Investment Revenues-Expenses Revenues Return on Revenues Investment Investment Example: P10,000-P9,500 P10,000 12.5% Return on P10,000 P 4,000 Investment Investment refers to the shareholders’ investment from proceeds of stocks and retained earnings. One of the management’s responsibilities is to arrive at the right balance between debt and equity. (2)Maximizing Shareholder Value- This concept is that the appropriate goal of a for-profit corporation is to maximize shareholder value. Although the meaning of the term is vague, it probably refers to the market price of the corporation’s stocks. Satisfactory Profit is a better way of stating a corporations’ goal for two reasons. First, maximizing refers to the way of finding the maximum amount that a company can earn. Second, optimizing shareholder value.
- 3. What is the ROI if: Revenue – P18,000 Expense --- P15,000 Investment – P10,000 29.99% or 30%
- 4. (3)Risk- The degree of risk taking varies with the personalities of individual managers. (4)Multiple Stakeholder Approach- organizations participate in 3 markets *Capital Markets- public stockholders are the key constituency *Product Market- the customers form a key constituency *Factor Market- the key constituencies are the company’s employees, suppliers and various communities A strategy describes the general direction in which an organization plans to move to attain its goals. A strategy formulations is a process that a senior executives use to evaluate a company’s strengths and weaknesses and in the light of the opportunities and threats present in the environment and then to decide in strategies that fit the company’s core competencies with environmental opportunities. Strategies can be found at 2 levels (1)Strategies for the whole organization (2)Strategies for the business units within the organization
- 5. What is a business’s most important goal? PROFITABILITY
- 8. This describes the general direction in which an organization plans to move to attain its goals. STRATEGY
- 9. CORPORATE-LEVEL STRATEGY It is about being in the right mix. It is more concerned with where and how to compete in a particular industry. Companies can be classified into one of three categories: (1)Single Industry firms operates in one line of business. (2)Related Diversified firm operated in several industries and the business units that are connected through operating synergies. The operating synergies for this are: the ability to share common resources and ability to share common competencies. The role of the corporate office here is (1) the CEO must make resource allocation decisions across business units and (2) must also identify, nurture, deepen and leverage corporate wide core competencies that benefit the whole corporation and benefit the multiple business. (3)Unrelated Diversified firm operated in business not related to one another. The relation between business is purely financial.
- 10. Under what category do you think these businesses belongs to? And why? AYALA CORPORATION PROCTER & GAMBLE ATENEO UNIVERSITY
- 11. BUSINESS UNIT STRATEGIES Competition between diversified firms does not take place at the corporate level. Rather, a business unit in one firm competes with business unit with other firm. Business unit strategies deals with how to create and maintain competitive advantage in each of the industries in which a company has chosen to participate. The strategy of a business unit depends on two interrelated aspects: (1)Business Unit Mission- what is the overall objectives. In a diversified firm, one of the most important tasks of a CEO is resource deployment, that is, make decisions regarding the use of cash generated from some business units to finance growth in other business units. There are sets of missions from which to choose: Build-This mission implies an objective of increased market share Hold-geared to the protection of the business unit’s market share and competitive position Harvest-has the objective of maximizing short term earnings and cash flow Divest-indicated a decision to withdraw from business either through a process of slow liquidation or outright sale
- 13. BCG singles out market share as the primary strategy variable because of the importance it places on the notion of experience curve. According to BGC, cost per unit decreases predictably with the number of units produced over time. Since the market share leader will have the greatest accumulated production experience, such a firm should have the lowest cost and highest profits in the industry. Although experience curve is a powerful analytical tool, it has limitations: (1)The concept applies to undifferentiated products that where the primary basis of competition is on price. (2)In certain situations improvements in process technology may have a greater impact on the reduction of per-unit cost than cumulative volume per se. (3)An aggressive pursuit of reducing cost via accumulated production of standardized items can lead to loss of flexibility in the market place. (4)Commitment to the experience curve concept can be severe disadvantage if new technologies emerge in the industry. (5) Experience is not the only cost driver. Other drivers that affect the cost behaviour are: scale, scope, technology, and complexity.
- 14. (2) Business Unit Competitive Advantage-Three interrelated questions have to be considered in developing the business unit’s competitive advantage. First, what is the structure of the industry in which the business unit operates? Second, how should the business unit exploit the industry’s structure? Third, what will be the basis of the business unit’s competitive advantage. Michael Porter has described two analytical approaches-industry analysis and value chain analysis-as aids in developing a superior and sustainable competitive advantage. Industry Analysis Research has highlighted the important role industry conditions play in the performance of individual firms. According to porter, the structure of an industry should be analyzed in terms of the collective strength of five forces: 1) The intensity of rivalry among existing competitors. 2) The bargaining power of customers 3) The bargaining power of suppliers 4) The threat from substitutes 5) The threat of new entry
- 15. If all 5 forces mentioned earlier are low? Will profitability of the company increase? YES or NO? Justify.
- 16. Porter claims that the business unit has two generic ways of responding to opportunities in the external environment and developing a sustainable competitive advantage: Low Cost- cost leadership can be achieved thought such approaches as economies of scale in production, experience curve effects, tight cost control and cost minimization. Differentiation- the primary focus of this strategy is to differentiate the product offering of the business unit, creating something that is perceived by customers as being unique. Approaches to product differentiation include brand loyalty, dealer network, product design and product features, and technology.
- 17. Value Chain Analysis The value chain disaggregates the firm into its distinct strategic activities. The value chain is the complete set of activities involved in a product, beginning with the extraction of raw material and ending with post delivery support to customers. Value chain analysis seeks to determine where in the company’s operation from design to distribution—customer value can be enhanced or costs lowered. Portfolio Matrices This typically position business unit on a grid where one axis id “market attractiveness” and the other is axis is “market share”