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FINACE
Reference Document
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Content Page No

1. Introduction to Strategy 2

2. Mission 4

3. Business Valuation 6

4. Five Force Analysis 11

5. Product life cycle 12

6. Competitor analysis 14

7. Value Chain 16

8. Corporate Appraisal (SWOT) 18

9. BCG Matrix 19

10. Branding 22

11. New Product Development 23

12. Perceptual Positioning Map 24

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1. Introduction to strategy

Strategy can be defined in a number of different ways, including: A course of action, including the
specification of resources required, to achieve a specific objective.'

Johnson, Scholes and Whittington (Exploring corporate strategy)

Essentially strategy involves setting the future plans of the organisation, but it requires a comprehensive
understanding of the organisations:

• Resources (such as cash, assets and employees

• Environment (such as markets, political and economic issues, customers and

competitors)

• Stakeholders (anyone with an interest in the business, such as shareholders, staff,

customers, government etc.) and what they expect of the organisation.

This will allow organisations to decide how they are going to achieve a sustainable competitive advantage
in the market(s) they operate within.

Levels of strategy

Strategy can be broken down into three different levels.

Corporate Strategy

Business Strategy

Function Strategy

Corporate or Strategic level

It raises the question of which businesses and markets should we be in?

This may involve consideration of acquisition and diversification and will see an organisation being in
more than one business.
Corporate strategy is concerned with:

• Entering new industries

• Leaving existing industries

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Business or management level (how)

Having selected a market, the organisation must develop a plan to be successful in that market. The aim
is to compete successfully in the individual markets that the company chooses to operate in.

Business strategy is concerned with how to:

• achieve advantage over competitors

• avoid competitive disadvantage

Corporate strategy affects the organisation as a whole while business strategy will focus upon strategic
business units (SBUs). An SBU will be a unit within an organisation for which there is an external market
for products distinct from other units.

Functional or operational level (day to day)

This is concerned with how the component parts of the organisation in terms of resources, people and
processes are pulled together to form a strategic architecture which will effectively deliver the overall
strategic direction.

Operational strategy is concerned with:

• Human resource strategy

• marketing strategy

• information systems and technology strategy

• operations strategy

These could be unique to the SBU and benefit from being individually focussed or the corporate unit may
seek to centralise them and so benefit from synergy.

Remember that all three levels are linked. A corporate or business level strategy is only going to succeed
if it is supported by appropriate operational strategies.

For instance, a hotel chain may have a high-level strategy of 'excellence in customer care', but the
success or failure of this will depend on the staff who clean the rooms and cook the meals, etc.
Therefore, the day to day activities must be focussed on achieving the corporate level strategy.

It is worth mentioning that formulating the strategy is the easy part. Actually implementing it is the
difficult part. Premiership football clubs in the UK will all have strategies in place to win their league.
Only one will actually do so!

Whichever approach is chosen, remember that many different types of organisation will need a strategy.
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2. Mission

The mission therefore is the basic purpose of the organisation and tries to identify the reason it exists.
Ultimately the strategies of the organisation should be designed to support the accomplishment of this
mission.

It is important that the organisation is able to communicate its mission both internally and externally,
which requires the creation of a mission statement.

'The mission says why you do what you do, not the means by which you do it.'

Essentially, the mission statement is a statement in writing that outlines the organisation's mission and
summarises the reasoning and values that underpin its operations.

There is no 'correct' format for the mission statement and it will vary in style and length for each
organisation. However, typically it is a short, punchy (and hopefully memorable) explanation of the
reason the organisation exists.

Mission statements fulfil a number of purposes:

• To communicate to all the stakeholder groups – everyone involved in the organisation will be
made aware of its mission and should therefore know what to expect from the organisation.

• To help develop a desired corporate culture – by communicating core values to key groups, such
as employees.

• To assist in strategic planning – the organisation should ensure that its strategies are consistent
with its overall mission and therefore its corporate values. The mission statement can also be
used as a way of screening out potentially unsuitable strategies.

However, there are a number of criticisms of mission statements, including:

• They may not represent the actual values of the organisation

• They are often vague – mission statements tend to be stated in very general terms, using phrases
that are difficult to measure (such as Coca-Cola's desire to 'refresh the world').

• They are often ignored – mission statements are often seen as a public relations exercise and are
not used by employees or managers when developing strategies.

• They may become quickly outdated – especially in fast-moving industries.

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Vision statements

Vision statements are often confused with mission statements, but the two are subtly different.

While a mission statement defines the present purpose and state of an organisation, the vision
statement identifies the ideal position that the company wants to reach within the medium to long-term.
It is, essentially, the longer-term aspirations of the organisation.

4Vision statements help give a longer-term direction to the organisation's strategies and are designed
to help staff make decisions and behave in a way that helps move the company towards its ideal long-
term position.

Unfortunately, they have many of the same drawbacks as mission statements.

Objectives

A mission is an open-ended statement of the firm's purpose and strategy. Objectives are more specific
and seek to translate the mission into a series of mileposts for the organisation to follow.

To be useful for motivation, evaluation and control purposes, objectives should be SMART:

• Specific – clear statement, easy to understand

• Measurable – to enable control and communication down the organisation

• Attainable – it is pointless setting unachievable objectives

• Relevant – appropriate to the mission and stakeholders

• Timed – have a time period for achievement.

Key issues

In the same way that an organisation's overall strategic plans need to be translated into a hierarchy of
lower level tactical and operational plans, there will be a hierarchy of objectives where the mission
statement is translated into detailed strategic, tactical and operational objectives and targets.
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Typical issues this gives rise to are as follows:

• Objectives drive action, so it is important that goal congruence is achieved and the agreed
objectives do drive the desired strategy.

• It can be difficult (although necessary) to prioritise multiple, often conflicting objectives.

• This is made more complex when some objectives are hard to quantify (e.g. environmental
impact).

• There will be a mixture of financial and non-financial objectives.

• There is always the danger of short-termism.

• Objectives will vary across stakeholder groups and a strategy may satisfy some groups but not
others.

3. Business valuation

The Objective of this analysis is to identify a suitable value for a business entity as a going concern. The
most important factor is to value non-listed organisation since the shares are not traded in a market
perspective. However even in the case of a listed company the share price varies every day indicating an
inconsistent value.

3.1 Techniques of Business valuation

1 Asset based

2 Earnings based

3 Cash flow based (CAPM)

4 Dividend valuations

3.1.1 Asset Based

This is the value of an organisation according to financial interpretation. This is determined based on the
value of real assets. This is expressed based on the equity value attributed through the assets.
The following value can be seen

1 Net asset value

2 Replacement cost

3 Net realisable value

4 Divisional value (Divestment value of assets)

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3.1.1.1 Net Asset Value

This is the value demonstrated in the financial statements. This is the book value of the assets
maintained according to a particular accounting standard.

Fixed Assets 300

CA 89
CL (29)
NCA 60
Total Assets 360

Financed by
Debt 140
Equity
Share Capital ( $ 1 par value) 100
Share Premium 50
General Reserves 60
P/L 10 220
Total Assets 360

3.1.1.2 Replacement cost / value

This is the value of the existing assets in the case of replacement form the market. Therefore, the values
of the assets are identified based on the possible cost that has to be incurred to acquire in the case of
replacement. This just an estimate

3.1.1.3 Net Realizable Value

This is the Value that can be generated by selling the assets in the market. This existing value of an asset
based on potential sales through a market will be considered.

3.1.1.4 Divisional Value

This is the value that can be created by disposing the assets by breaking in to identifiable units. Therefore
the asset will be sold based on different units. This can some times create move value than as a single
unit.

eg:- Airline

In the case of asset based valuation the net asset method is considered.
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3.1.1.5 Advantages of Asset Based Valuation.

1 This provides consistent values

2 This provides values which are competitive due to the standard nature of measurement eg:-
Accounting standards
3 This value demonstrates the actual purchase cost.

4 This value is available based on present and future classification.

5 This is the real value of the assets

3.1.1.6 Limitations of Asset Based valuation

1 This is a value of the past which is not significant in the present. (Historical value)

2 This demonstrates the cost according to books which is not market driven.
3 The value can be distorted through depreciation.

4 The value can be manipulated though creative accounting

3.1.2 Earnings Based

This method of valuing a business is based on the P/E ratio - price Earnings ratio. This identifies the
Share price based on the Maximum potential of the business as a going concern.

3.1.2.1 P/E ratio

This ratio demonstrates the number of times a particular earnings can be repeated based on the
potential of the organisation in the future.

This is a futuristic measure available based on an efficient market

Share price = P/E x EPS

MV = P/E x Earnings (Total)

MV = Shane price x No of shares Issued

This will demonstrate the future potential based on the current level of earnings.
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3.1.2.2 Advantages Earnings based valuation

1 This is directly focussed on earnings.

2 This considers the share price in determining the potential

3 This indicates the potential future value of the business ( maximum)

4 This can be used to compare different investments.

(1) within the same industry - Industry PE, competitor PE, organisations -PE

(2) compare different industries. eg:- Airline , Banking

3.1.2.3 Limitations of Earnings based valuation

1 The volatility of share price creates practical problem to the ratio

2 This assumes the earnings to be similar in the future period which is unrealistic.

3 In the case of a loss making situation this is impossible.

4 The earnings potential can vary over time .eg:- Introduction of the 5th competitor Air Tel India to
Sri Lanka will disturb the existing market leader Dialogue and earnings potential in Sri Lankan
mobile communication.

3.1.3 Cash flow Based Valuation

This method identifies the future potential of the business based on the present value. Therefore the
market value toay. CAPM is commonly used to determine the opportunity cost - Refer capital structure

MV = Net earnings
COC

Sp = EPS or = Div / share

COC(CAPM) COC(CAPM)

If information is available determine the NPV ( Cash flow based valuation)

3.1.3.1 Advantages
1 This demonstrates the real potential of the business based on the future.

2 This identifies cash which is a realistic measurement.

3 This demonstrates the present value based on the opportunity cost.

4 This can be used to compare different business.

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3.1.3.2 Limitations

1 This emphasise on an unrealised value for the company.

2 This is only a fore cast which may / may not be significant.

3 This only identifies the cash flow.

4 This assumes the COC to be constant over a passage of time which is unrealistic

3.1.4 Dividend based valuation

This valuation method is developed based on the nature of the dividend. This considers the dividend
declared as the basis for valuing the organisation. This model assumes that the dividend demonstrates
the trend in the earnings if not a substantial proportion of earnings. This is also interpreted as total
earnings paid as dividends.

Dividend

constant Dividend model constant Dividend growth model(Gordens)

SP = Dividend per share SP = do(1 + g)

COC r -g

This can be used to obtain the total market value.

MV = Total dividend (1+ g) MV= Total earnings ( 1 + g)

r-g r - g

3.1.4.1 Advantages of the model

1 This identifies the real earnings

2 This demonstrates the market expectation of potential growth.

3 This is a practical measure due to the consideration of real dividends.

4 This indicates a consistent value for the business

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3.1.4.2 Limitations of the model

1 This assumes dividend to be constant. however in practice this is variable. ( change)

2 Determining a specific growth rate is not practical

3 This cannot be used if the growth rate is greater or equivalent to the cost of capital.

4 Dividend not necessarily reflect earnings. Therefore this cannot be considered as a uniform
theory.

However to ensure completeness earnings growth model can be used for a comparison.

Sp = EPS(1+g)
r-g

4. Five Force Analysis – M. Porter

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5. Product Life Cycle

for management in

Introduction stage

The product is new to the market at this stage. Key points are:

• It will be purchased by 'innovators'

• High launch and marketing costs are likely

• Production volumes will be low and product cost will be high

• Buyers are unsophisticated

• Competition is little if any.

'Pioneer companies', who are the first to the market with a particular product, are usually forced to sell
the concept. These early promotions will help competitor companies who enter later with 'me too'
versions of the product concept. Early entry is risky as heavy requirement for cash and product idea may
fail BUT early entry allows the prospect of establishing market share and developing first mover
advantage.

Growth stage

During this stage, the market grows rapidly. Key points are:

• Sales for the market as a whole increase

• New competitors, attracted by the prospects, enter to challenge the 'pioneer'

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• New segments may be developed

• Demand becomes more sophisticated

• Competition levels increase.

The market becomes profitable and cash flows increase to recover the initial investment in development
and launch costs.
There are many new consumers with no preference who they buy from.

It will become more difficult in later stages to persuade people to switch from their existing brand. It is
important to build a brand during this stage if possible to ease the traumas at the later stages via
defensive strategy.

Prices often fall due to economies of scale and increasing competitive pressure, and evidence of
differentiation will become apparent, e.g. branding develops.

Maturity stage

During this stage market growth slows or even halts. Key points are:

• Fully sophisticated demand

• High levels of competition

• Price becomes more sensitive

Demand reaches saturation. The only way to increase market share is to gain business from
competitors or from 'late adopters' or 'laggards'

• It would be desirable to have a high market share at this stage or to have successfully developed a
niche

• Large market share changes can be difficult to achieve at this stage and most companies would
concentrate on defensive strategies to protect their current position and compete hard for the
new customers coming into the marketplace

Decline

During this stage, the number of customers falls. Key points are:

• Competition reduces as players leave

• Price falls to attract business as sophisticated customers expect cheap prices

• Slow 'harvesting' must be balanced with straight divestment

• Investment kept to a minimum to take up any market share that may be left by departing
competitors

• There may be profitable niches remaining after industrial death.

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6. Competitor Analysis (competitor intelligence)

This can be defined as a set of activities which examines the comparative position of competing
enterprises within a given strategic sector. It seeks to:

provide an understanding of the company's competitive advantage/disadvantage relative to its

competitor's positions

help generate insights into competitors' strategies - past, present and potential give an informed basis
for developing future strategies to sustain/establish advantages over competitors.

Grant highlights three purposes:

• To forecast competitors' future strategies and decisions

• To predict competitors' likely reactions to a firm's strategic initiatives

• To determine how competitor behaviour can be influenced to make it more favourable for the
organisation.

A framework for competitor analysis

Step 1: Identify competitors

Brand competitors sell similar products to the same customers we serve, e.g. Coke and Pepsi.

• Industry competitors sell similar products but in different segments, e.g. BA and Singapore
Airlines.

• Form competitors sell products that satisfy the same need as ours though technically very
different, e.g. speedboat and sports car.

• Generic competitors compete for the same income, e.g. home improvements and golf clubs.
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Step 2: Analysis of Competition

Step 3: develop competitor response profiles

Laid back: Does not respond. Maintain their own strategy

Selective: Reacts to attack in only selected markets;

Tiger: Always responds aggressively;

Stochastic: No predictable pattern exists. Cannot be identified.

The nature of global competition

Why enter foreign markets?

• Pressure from shareholders to increase their return on capital employed

• Saturated domestic markets making home expansion difficult

• Opportunities as emerging markets arise with increases in economic income and spending
power
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7. Value Chain – M. Porter

Value drivers

Value drivers are activities or features that enhance the perceived value of a product or service by
customers and which therefore create value for the producer. Value drivers can be tangible or intangible.

For example, a high-street electronics retailer could have several value drivers, including:

Knowledgeable, friendly staff

If these value drivers are present, it will attract customers to the retailer's stores and may help it achieve
a competitive advantage over rivals.

Primary activities

These activities are involved in the physical creation of the product, its transfer to the buyer and any
after-sales service. Porter divided them into five categories

1. Inbound logistics are activities concerned with receiving, storing and distributing the inputs to
the product. They include materials handling, stock control and transport.

2. Operations transform these various inputs into the final product – machining, packing,
assembling, and testing and control equipment.

3. Outbound logistics relate to collecting, storing and distributing the product to buyers.

4. Marketing and sales provide the means whereby consumers and customers are made aware of
the product and transfer is facilitated. This would include sales administration, advertising,
selling and so on.

5. Service relates to those activities which enhance or maintain the value of a product such as
installation, repair, training and after-sales service.

This is a means by which the activities within and around the organisation are identified and then related
to the assessment of competitive strength.
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Resources are of no value unless they are deployed into activities that are organised into routines and
systems. These should then ensure that products are produced which are valued by customers and
consumers. Porter argued that an understanding of strategic capability must start with an identification
of the separate value-adding activities.

Support activities

Each of the primary activities are linked to support activities and these can be divided into four areas:

(1) Procurement refers to the processes for acquiring the various resource inputs to the primary
activities – not the resources themselves. As such it occurs throughout the organisation.

(2) Technology development – all value activities have a technological content, even if it is just 'know
how'. IT can affect product design or process and the way that materials and labour are dealt
with.

(3) Human resource management, which involves all areas of the business and is involved in
recruiting, managing, training, developing and rewarding people within the organisation.

(4) Infrastructure refers to the systems of planning, finance, quality control, information
management, etc. All are crucially important to an organisation's performance in primary
activities. It also consists of the structures and routines that sustain the culture of the
organisation.

Generally

The primary and secondary activities are designed to help create the organisation's margin by taking
inputs and using them to produce outputs with greater value.

The value chain can be used to:

• give managers a deeper understanding of precisely what their organisation does

• identify the key processes within the business that add value to the end customer - strategies can
then be created to enhance and protect these, and

• Identify the process that do not add value to the customer. These could then be eliminated saving
the organisation time and money.

The value system

Looks at linking the value chains of suppliers and customers to that of the organisation. Can add value
by:

• Enhancing the supply – e.g. organic food for ready meals

• Controlling of the retail process – e.g. car dealerships

• Linking it all together to give advantage – Porter's diamond

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Resources are of no value unless they are deployed into activities that are organised into routines and
systems. These should then ensure that products are produced which are valued by customers and
consumers. Porter argued that an understanding of strategic capability must start with an identification
of the separate value-adding activities.

Support activities

Each of the primary activities are linked to support activities and these can be divided into four areas:

(1) Procurement refers to the processes for acquiring the various resource inputs to the primary
activities – not the resources themselves. As such it occurs throughout the organisation.

(2) Technology development – all value activities have a technological content, even if it is just 'know
how'. IT can affect product design or process and the way that materials and labour are dealt with.

(3) Human resource management, which involves all areas of the business and is involved in
recruiting, managing, training, developing and rewarding people within the organisation.

(4) Infrastructure refers to the systems of planning, finance, quality control, information
management, etc. All are crucially important to an organisation's performance in primary
activities. It also consists of the structures and routines that sustain the culture of the
organisation.

Generally

The primary and secondary activities are designed to help create the organisation's margin by taking
inputs and using them to produce outputs with greater value.

The value chain can be used to:

• give managers a deeper understanding of precisely what their organisation does

• identify the key processes within the business that add value to the end customer - strategies can
then be created to enhance and protect these, and

• Identify the process that do not add value to the customer. These could then be eliminated saving
the organisation time and money.

The value system

Looks at linking the value chains of suppliers and customers to that of the organisation. Can add value by:

• Enhancing the supply – e.g. organic food for ready meals

• Controlling of the retail process – e.g. car dealerships

• Linking it all together to give advantage – Porter's diamond

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8. Corporate Appraisal - Position Audit (SWOT)

In the information above we have examined the methods that can be used to analyse the current situation
of an organisation – internally, externally and with specific reference to its stakeholders, mission and
objectives.

Internal environmental analysis will look for the Strengths and Weaknesses of the organisation

External environmental analysis will look for the Opportunities and Threats that the organisation needs
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9. BCG Matrix

Developed originally to assist managers in identifying cash flow requirements of different businesses
within the portfolio and to help to decide whether change in the mix of businesses is required. A broad
portfolio indicates that a business has a presence in a wide range of products and market sectors – this
may or may not be a good thing!

Four main steps:

(1) divide the company into SBUs

(2) allocate into the matrix

(3) assess the prospects of each SBU and compare against others in the matrix

(4) develop strategic objectives for each SBU.

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Assessment covers:

Relative market share – the ratio of SBU market share to that of largest rival in the market sector. BCG
suggests that market share gives a company cost advantages from economies of scale and learning
effects. The dividing line is set at 1. A figure of 4 suggests that SBU share is four times greater than the
nearest rival. A figure of 0.1 suggests that the SBU is 10% of the sector leader.

Market growth rate – represents the growth rate of the market sector concerned. High-growth industries
offer a more favourable competitive environment and better long-term prospects than slow-growth
industries. The dividing line is set at 10%.

SBUs are entered onto the matrix as dots with circles around the dots denoting the revenue relative to
total corporate turnover. The bigger the circle, the more significant the unit.

Using the matrix

The model suggests that appropriate strategies would be:

• hold – adopt strategies to keep the product in its current quadrant – i.e. invest heavily in
advertising or promotion for a star product in order to maintain its current high market share.

• build – increase investment in the product in an attempt to boost its market share.

• harvest – reduce investment in the product in order to maximise the net cash return from
the product to the business.

• divest – disposal/closure of the product in order to release any cash currently tied up within it.

Cash cows – hold, build or harvest

• High market share in a low-growth market.

• Usually a cash generator and profitable.

• Often cost leaders as economies of scale usually earned. Likely that at one time the cash cow was
a star and has now been subject to declining growth.

• Low growth implies a lack of opportunity and therefore the capital requirements are low. Fixed
asset investment not required, hence cash surplus.

• Profits from this area can be used to support other products in their development stage.
Therefore, the balanced portfolio needs some of these.

• Defensive strategy often adopted to protect the position. This may involve reinvesting to protect
position via the acquisition of new threshold competencies.
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Stars – hold, divest or build

• High market share in high-growth areas – usually market leader

• Offer attractive long-term prospects – may one day become a cash cow

• absorb large amounts of cash from investment needs as fixed asset investment required to
sustain growth. Cash also required to beat off competitor attack strategies

• New areas and likely to be attacked – advertising required in both defensive and offensive style.

Question marks – build, harvest or divest

• Low market share in high-growth industries

• Opportunity exists in these areas – a dilemma exists between investing further to build market
share, or exit the market due to uncertainty over the success of the product

• may need to invest heavily to secure market share

• Potential to become a star if nurtured

• Investment required – machines and expertise but degree of uncertainty as to exactly what is
needed

• Careful consideration required at corporate level

• Sometimes known as the 'problem children' – they need to be caught early to ensure that they
don't become 'problem adults'

• will usually absorb substantial management time and may not be successfully developed.

Dogs – build, harvest or divest

• Low market share in a low growth market

• To cultivate would require cost and substantial risk

• Often divested – only question is then the speed of the divestment

• could be 'niched' and so turned into a success

• Otherwise little in future prospects

• may require investment just to keep product in portfolio, especially if the company is offering a ‘
one stop shop' or is using the product as a 'loss leader'.

• Note that sometimes dogs cannot be divested – particularly in the public sector where failing
schools for example will need to be reinvested in and possibly restructured but certainly not
divested.
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10. Branding

How to develop a Brand

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11. Process of New Product Development
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12. Perceptual Positioning Map