3.Strategy Formulation

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Business ManagementPrepared by: JamalChapter 2

STRATEGY FORMULATION:

1) PLANNING & CONTROL:

Long term Strategic Planning: The formulation, evaluation andselection of strategies for the purpose of preparing a long term plan ofaction to attain objectivesCharacteristics of Strategic Planning:

a. They are written downb. They are circulated to interested parties in the orgc. They specify the outcomesd. They specify how these are going to be achievede. They trigger the production of operational plans lower down the

hierarchy

Strategic Cash Flow Planninga. It ensures that sufficient funds are available for investment, whichused for best advantage

b. It differs from cash budgeting in the following way:c. The planning horizon is longerd. The uncertainty about future cash inflow and outflow are much

greatere. The business should be able to respond to an unexpected need for

cashf. Planned cash flow must be consistent with its dividend policy and its

financial structure, debt & gearing policies

Strategic Fund ManagementIt involves asset management to make assets available for sale if cashdeficiencies arise.

a. Core assets that are needed to carry out the core activities of thebusiness

b. Assets that could be sold off at fairly short notice eg short termmarketable investments

c. Assets not essential for carrying out core activities and can be soldbut their amount and time scale not known eg long terminvestments

2) FINANCIAL CONTROLSLevel of Controls:

a. Strategic planning and control: process of deciding onobjectives of the org, on changes in these objectives, on theresources used to attain these objectives, and on the policies thatare to govern the acquisition, use and disposition of theseresources.

b. Tactical or Management Control: the process by whichmanagers assure that resources are used effectively & efficiently inthe accomplishment of the org objectives.

c. Operational Control: the process of assuring that specific task arecarried out effectively and efficiently


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3) GROWTH STRATEGIESExpansion: is the growth of existing product and development of existingmarket. It some times referred as market penetrationHorizontal Integration: adding new products to its existing market ornew markets to its existing productVertical Integration: occurs when company becomes either one of thefollowingIts own supplier of raw material or component (backward verticalintegration)Its own distributor or sales agent (forward vertical integration)Purpose of Vertical Integration:

a. To provide a secure supply of raw material with more control overquality, quantity and price

b. To strengthen relationship & contacts of the manufacturer with thefinal consumer of the product

c. To win a share of higher profitDisadvantage of Vertical Integration:

The acquired company loses out on the industry-wide scale economiesthat might arise out of the merger with a similar firm.Higher cost of innovation

Concentric Diversification:It occurs when a company seeks to add new products that havetechnological and marketing synergies with the existing product lineConglomerate diversification:It consist of making entirely different product for new classes of customer.Advantages of Conglomerate diversification:

a. Risk is spread: protection against failure of one or more of the firmsexisting range

b. The firms overall profitability and flexibility might improvec. Management might wish to escape from the present business into

anotherd. Greater business substance or status might mean better access to

capital market

e. The firm can exploit under utilized resources

f. Company can use its goodwill and reputation of one market intoanother market.

Limitation:a. The dilution of share holders earning if diversification into growth

industries with high PE ratio

b. Profitable business will be milked to support ailing onesc. Resource allocation will be political rather than an economic processd. The org might suffer more in recessione. The management of acquiring company might interfere in the

running of the acquisition, to the detriment of its operations

f. It will only successful if it has a high quality of managementg. Failure in one segment will drag down the rest, as it will eat up

resources

Withdrawal:Sometime it is better to cease operations or to pull out of a marketcompletelyReason for withdrawal:


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a. May be it is the business of the company to buy operations,improving their performance and sell them at profit

b. Resource limitations means that less profitable businesses have tobe abandoned

c. Bankruptcyd. The company might change its generic strategy for competitive

advantagee. Decline in purchasing power of the market segment or fall in the

market size

Exit barrier:There are some exit barriers to discourage withdrawal.

a. Economic barrier includes redundancy costsb. Manager might fail to grasp the principles of opportunity costingc. Political barrier include government actiond. Marketing consideration may delay withdrawale. Psychology: Managers hate to admit failure

f. It will be better for entities to be going concerns in order to achievethe best price

Growth by Acquisition:

Companies consider growth through acquisitions might facecorporate indigestion typified by problems of communication,blurring of policy decision and decline in the staff identity withcompany and products

Acquisition provide a means of entering a market, or buildingup a market share, more quickly at lower cost than would beincurred if the company rise to develop its own resources.

Organic Growth:Organic growth requires funding in cash, following factors must be takeninto account:

Organic Growth Growth by Acquisition

The company must make financeavailable, possibly out of retainedearning

The company can use its existingstaff & system to create growthprojects

Overall expansion can be planned

more efficiently eg suitable placefor new factory

Economies of scale can beachieved with more efficient useof central head office functions

No over staffing and no extra dept

Acquisition can be made byshare exchange transaction

They have to acceptacquirees staff & system

They have to take existingsites

In acquisition, they have topurchase the head officefunctions of other companies

Overstaffing and overlappingof different department

4) PRICING DECISIONS:Pricing decision can be categorized as:

i. Short term pricing: discounting to augment demand. Pricedepends upon the elasticity of demand


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ii. Competitive Bidding: for a specific price. Preparation ofcost data for submitting a bid to a potential customer in the hope ofsecuring his order

iii. Strategic Pricing: adjusting prices in line with falling costsdue to learning effects

5) REGULATORY FRAMEWORK OF ACCOUNTING :

Factors which effects financial reporting / accounting are:i. National/ local legislationii. Accounting concepts and individual judgmentiii. Accounting Standardsiv. Other international influencesv. Generally accepted accounting principle GAAPvi. True or fair view

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3.Strategy Formulation