Strategy & Capital Allocation 4

7/30/2019 Strategy & Capital Allocation 4

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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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Strategy & Capital Allocation 4

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