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Chapter 4 Linking corporate and financial strategies

Corporate Financial Strategy 4th edition Dr Ruth Bender. Chapter 4 Linking corporate and financial strategies. Linking corporate and financial strategies: contents. Learning objectives Business risks reflect the volatility of results Elements of business risk Porter’s five forces

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Chapter 4 Linking corporate and financial strategies

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  1. Corporate Financial Strategy4th edition Dr Ruth Bender Chapter 4Linking corporate and financial strategies

  2. Linking corporate and financial strategies: contents • Learning objectives • Business risks reflect the volatility of results • Elements of business risk • Porter’s five forces • Environmental analysis – PESTLE • Resource-based theory • Developing strategies to enhance shareholder value • Decisions in financial strategy • Risk from different perspectives • Balancing business and financial risk • Balancing business and financial risk in private companies • Pecking order

  3. Learning objectives • Distinguish business risk and financial risk, and explain why there should be an inverse relationship between them. • Explain the different elements of financial strategy. • Assess how risky a particular business is, with a view to understanding how it should be financed. • Understand the seven drivers of value, and how they can be related to business strategy in order to increase value. • Discuss how the elements of financial strategy might apply differently to public and privately owned companies.

  4. Business risk reflects the variability of results Price Volume Sales – Costs = Profits Products Markets Fixed Variable Committed

  5. Elements of business risk Demand volatility Input cost volatility Growth drivers Selling price volatility Expense volatility Industry analysis Working capital needs Currency exposures Corporate governance

  6. Porter’s five forces New entrants Customers Rivalry Suppliers Substitutes Porter, M. (2004). Competitive Strategy, The Free Press

  7. Environmental analysis – PESTLE Political Economic Social Technological Legal Environmental

  8. Resource-based theory V aluable R are I mperfectly imitable N on-substitutable

  9. Developing strategies to enhance shareholder value Market views of the company Management ability Corporate governance External forces SHAREHOLDER VALUE VALUEDRIVERS STRATEGY Resources KPIs Targets

  10. Decisions in financial strategy How large should the asset base be? How much of the finance should be debt? How much should be paid in dividends? Should we issue new shares?

  11. Risk from different perspectives

  12. Balancing business risk and financial risk High   Business risk   Low High Low Financial risk

  13. Balancing business risk and financial risk in private companies High   Business risk  ? Low High Low Financial risk

  14. Pecking order 1. Internal resources 2. Borrow 3. Issue equity

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