Business Management Prepared by: Jamal Chapter 2

STRATEGY FORMULATION:
1) PLANNING & CONTROL: Long term Strategic Planning: The formulation, evaluation and selection of strategies for the purpose of preparing a long term plan of action to attain objectives Characteristics of Strategic Planning: a. They are written down b. They are circulated to interested parties in the org c. They specify the outcomes d. They specify how these are going to be achieved e. They trigger the production of operational plans lower down the hierarchy Strategic Cash Flow Planning a. It ensures that sufficient funds are available for investment, which used for best advantage b. It differs from cash budgeting in the following way: c. The planning horizon is longer d. The uncertainty about future cash inflow and outflow are much greater e. The business should be able to respond to an unexpected need for cash f. Planned cash flow must be consistent with its dividend policy and its financial structure, debt & gearing policies Strategic Fund Management It involves asset management to make assets available for sale if cash deficiencies arise. a. Core assets that are needed to carry out the core activities of the business b. Assets that could be sold off at fairly short notice eg short term marketable investments c. Assets not essential for carrying out core activities and can be sold but their amount and time scale not known eg long term investments 2) FINANCIAL CONTROLS Level of Controls: a. Strategic planning and control: process of deciding on objectives of the org, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources. b. Tactical or Management Control: the process by which managers assure that resources are used effectively & efficiently in the accomplishment of the org objectives. c. Operational Control: the process of assuring that specific task are carried out effectively and efficiently

Business Management Prepared by: Jamal Chapter 2

3)

GROWTH STRATEGIES Expansion: is the growth of existing product and development of existing market. It some times referred as market penetration Horizontal Integration: adding new products to its existing market or new markets to its existing product Vertical Integration: occurs when company becomes either one of the following Its own supplier of raw material or component (backward vertical integration) 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 over quality, quantity and price b. To strengthen relationship & contacts of the manufacturer with the final consumer of the product c. To win a share of higher profit Disadvantage of Vertical Integration: The acquired company loses out on the industry-wide scale economies that 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 have technological and marketing synergies with the existing product line Conglomerate 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 firms existing range b. The firms overall profitability and flexibility might improve c. Management might wish to escape from the present business into another d. 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 into another 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 ones c. Resource allocation will be political rather than an economic process d. The org might suffer more in recession e. 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 management g. 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 market completely Reason for withdrawal:

Business Management Prepared by: Jamal Chapter 2

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 to be abandoned c. Bankruptcy d. The company might change its generic strategy for competitive advantage e. 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 costs b. Manager might fail to grasp the principles of opportunity costing c. Political barrier include government action d. Marketing consideration may delay withdrawal e. Psychology: Managers hate to admit failure f. It will be better for entities to be going concerns in order to achieve the best price Growth by Acquisition: Companies consider growth through acquisitions might face corporate indigestion typified by problems of communication, blurring of policy decision and decline in the staff identity with company and products Acquisition provide a means of entering a market, or building up a market share, more quickly at lower cost than would be incurred if the company rise to develop its own resources. Organic Growth: Organic growth requires funding in cash, following factors must be taken into account: Organic Growth Growth by Acquisition The company must make finance Acquisition can be made by available, possibly out of retained share exchange transaction earning They have to accept The company can use its existing acquirees staff & system staff & system to create growth They have to take existing projects sites Overall expansion can be planned In acquisition, they have to more efficiently eg suitable place purchase the head office for new factory functions of other companies Economies of scale can be Overstaffing and overlapping achieved with more efficient use of different department of central head office functions No over staffing and no extra dept

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PRICING DECISIONS: Pricing decision can be categorized as: i. Short term pricing: discounting to augment demand. Price depends upon the elasticity of demand

Business Management Prepared by: Jamal Chapter 2

ii. iii. 5)

Competitive Bidding: for a specific price. Preparation of cost data for submitting a bid to a potential customer in the hope of securing his order Strategic Pricing: adjusting prices in line with falling costs due to learning effects

REGULATORY FRAMEWORK OF ACCOUNTING : Factors which effects financial reporting / accounting are: i. National/ local legislation ii. Accounting concepts and individual judgment iii. Accounting Standards iv. Other international influences v. Generally accepted accounting principle GAAP vi. True or fair view