MAC2602-Exam Pack.

MAC2602-Exam Pack. Principles Of Strategy, Risk & Financial Management Techniques. Strategy and strategic planning Topic 1 : Development of the organisation’s strategy Study Unit 1 : Defining concepts – mission,core values,vision,strategy and strategic objectives  Mission - core purpose Effective mission statement :  Inspire change ,but does not change  Long-term in nature  Easy to understand and easy to communicate  Core values - principles that guide the organisation  Vision - defines direction for the future  Strategy – choosing long-term strategies to achieve purpose set out in mission statement Three generally accepted competitive strategies :  Cost leadership strategy  Pricing strategy :  Price skimming  Selective pricing  Market pricing  Predatory (penetration) pricing  Differentiation Elements of strategy :  Choice of activities which provide a competitive advantage  Trade-offs made to choose specific actions  Activities chosen must fit one another  Major structural changes can change strategies,however cannot be constantly reinvented  Formulation should display a broad conceptual knowledge of the operating environment of the organisation  Core values are taken into account  Strategic objectives – measures to progress and targets to achieve in a specific time frame Characteristics :  Precise formulation of goals to be achieved  Contains a measure of progress  Contains a target to be achieved  Contains a time frame for target to be achieved SMART criteria :  Specific  Measurable  Attainable  Relevant  Time-bound Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Study Unit 2 : Key stakeholders : roles,conflict and influences  Stakeholders – those persons and organisations that are affected by the organisation's activities and who have an interest in the strategy of the organisation.  Classification of stakeholders :  Primary Stakeholders (have a contractual relationship)  Internal Stakeholders o Managers o Employees  Connected Stakeholders o Shareholders/owners o Banks and lenders o Suppliers o Customers  Secondary Stakeholders (do not have a contractual relationship)  External Stakeholders o Government o Local authorities o Professional bodies o Pressure groups o Community at large  Possible conflicts between the expectations of the different types of stakeholders - shareholders/owners expect a specific return on their investment whilst employees expect security of their jobs and job satisfaction.  Influence of different stakeholders on development of organisation strategy :  Dependency  Degrees of power  Level of interest Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Study Unit 3 : Factors that influence the development of an organisation’s strategy  Influence of Factors in the external environment :  Political (including legal) environment  Economic environment  Social environment (sustainability and ethics)  Technological environment  Competitive Environment (operating) :  Customer position Purpose of a competitor analysis : o Study the market,trends and patterns o Predict and forecast an organisation’s demand and supply o Formulate a strategy o Increase the market share o Develop a strategy for organisation growth o Plan for diversification and expansion o Study forthcoming trends in the industry  Customer base  Suppliers  Creditors  Labour market  Influence of factors in the internal environment :  Corporate culture (shared beliefs,values and symbols)  Organisation leadership (executives and managers)  Human resource policies (formal decisions)  Industrial relations (Labour relations)  Controls at organisation level (such as code of conduct) Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Study Unit 4 : Strategic planning processes and approaches  Strategic planning - defines the organisation’s strategy,and makes decisions on allocation of resources (capital and people) to follow this strategy.  Goals and outcomes of strategic planning :  Goal congruency  Goal hierarchy  Goal sequencing  Typical three-step approach to strategic planning :  Step 1 - Situation (SEE) – determine and evaluate the current situation  Step 2 - Target (THINK) – define goals  Step 3 - Proposal/Path (DRAW) – map a plan to achieve the goals  Strategic planning process includes :  Strategic objectives must be set  Resources to be used stipulated  Policies that govern acquisition and use of resources must be decided  Analytical Models used for strategic planning :  SWOT Analysis  Porter’s Five Forces Model  SWOT analysis :  Internal factors : (page 31) o Strengths o Weaknesses  External factors : (page 32) o Opportunities o Threats  Benefits from using SWOT analysis for strategic planning are :  Identification of core competencies  Correcting internal weaknesses  Protecting against external threats  Monitoring of their overall external environment  The SWOT analysis approach to strategic planning : 1. Situational analysis 2. Strategy formulation 3. Strategy achievement programmes (implementation) 4. Strategy evaluation  Porter's Five Forces Model :  Risk of entry by potential competitors (threat of new entrants)  Barriers to entry (Table 4.3)  Factors determining the strength of rivalry (Table 4.4)  Barriers to exit (Table 4.5)  Bargaining power of buyers  Bargaining power of suppliers  Threat of substitute products or services  Rivalry among existing competitors Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Part 2 : Introduction to financial management,financing and the cost of capital Topic 2 : Introduction to financial management Study Unit 5 : The overall objectives of businesses  Short-term profit maximisation for owners - maximisation of profit to the exclusion of everything else :  Profitability - annual return or compensation earned on an investment  Drawbacks because short-term profit measures :  Ignore risk  Do not distinguish between profit and cash flow generated  Are an annual measure instead of a measure of financial returns across a number of years  Do not reflect strategic behaviour employed  Encourage short-term returns at the expense of the development of the business in the long-term  Long-term owner/investor value maximisation - interest in capital growth of investment rather than achieving maximum accounting profit in one financial year :  Process of creating long-term owner/investor value :  Step 1 - Set strategic objectives to recognise importance of maximising longterm value  Step 2 - Establish appropriate means of measuring capital returns  Step 3 - Manage the business in such a way to maximize long-term value  Step 4 - Measure the returns over a period of time to see if long-term value maximisation objectives have been achieved  Sustainable long-term wealth creation (owners/investors and other stakeholders) :  Sustainability for humans  Sustainability for businesses  Corporate governance and sustainability :  Corporate governance - is a set of processes,customs,policies,laws and institutions affecting the way a business is managed.  Selected developments in sustainability and corporate governance : (page 53)  Report of the World Commission on Environment and Development (1987)  Global Reporting Initiative presented Sustainable Reporting Guidelines (2002)  King Report on Corporate Governance for South Africa (2002) (King II)  The Code of Governance Principles for South Africa 2009 (King III)  Globalisation and shareholder activism :  Globalisation - leads to greater competition for services and products and as well as for money that potential shareholders are planning to invest.  Other financial (profit-based) and non-financial (value-based) performance measures :  Value-based management - is used to overcome shortcomings of profit-based measures  Balanced scorecard reports performance measures across four dimensions :  Financial  Customer  Internal business processes  Learning and growth Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Study Unit 6 : An overview of financial management functions  The development of the financial manager’s traditional role :  Traditional Financial Management - control of money and money-related operations within the business  Traditional role of the financial manager with regard to investment and financing decisions :  Financial manager : o Investigates financing opportunities and makes financing decisions : ► Capital markets : - Equity - Debt ▼ Money markets o Investigates investment opportunities and makes investment decisions : ► Operating assets : - Current - Non-current ▼ Financial assets  An overview of the functions of financial management :  Financial management (Objective : maximising long-term sustainable wealth) :  Financing decisions (Objective : Obtaining funds with the minimum effective cost) : o Forms of equity finance : - Topic 4,Study unit 11 o Forms of loan finance/debt : - Topic 4,Study unit 11 o Techniques : - Effective cost of finance (Topic 5,Study unit 13) - Time value of money (Topic 3,Study unit 8 & 9)  Investment decisions (Objective : investing in sustainable projects with maximum long-term returns) : o Investment opportunities : - Capital assets (Topic 8,Study unit 19) - Replacement of assets (Topic 8,Study unit 20 & 21) o Techniques : - Time value money (Topic 3,Study unit 8 & 9) - Capital budgeting (Topic 8,Study unit 20 & 21) Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Study Unit 7 : Legal forms and structures of businesses  Sole proprietorship - formed by single individual who is the owner of that organisation.It is unincorporated  Least regulated and easiest type of business to start  Profit of the business is regarded as that of the owner  A sole proprietor as a business form has unlimited liability  Organisation ceases to exist when owner dies  Individuals usually have limited funds available  Selling the business might be difficult if there is no willing buyer  Partnership - formed between two and twenty individuals or organisations.It is unincorporated  Partnership agreement can be formed by oral or written agreement,will set out how partners will divide the profits and losses  Formation is easy and inexpensive  Profit-share taxed in the hands of the partner  Unlimited liability  Legal form same as sole proprietorship  New partnership must be formed each time someone exists or joins  Funds limited to combined funds of partners  Partnership can combine resources of all the individual partners  Close Corporation - exists separate from it's owners.Maximum of 10 natural persons  No new CC's can be formed  Less expensive to form than a company  Limited liability as like a company  Concept of continuation like a company  Investment known as member's interest/contributions  Owners are often the managers  Taxed the same way as companies  Limited liability unless it is fraudulent or reckless  Company - legal organization distinct from its owners  Non-profit companies :  Objective to further some ‘public benefit’ or relating to one or more cultural or social activities,or communal or group activities  Incorporated by three or more persons  No income or assets transferred to its directors ,members,etc.However,they will be paid a reasonable remuneration for the services they performed  Profit companies : Subdivided into five types :  Private company (Pty) Ltd  Public company (Ltd)  State-owned company (SOC)  External company (foreign companies,outside the Republic of South Africa)  Personal liability company (Inc)  Registration of a company must be made at the Companies and Intellectual Property Commission (CIPC) A company is incorporated by lodging the following main forms : Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace  Notice of Incorporation  Memorandum of Incorporation (MOI) o Flexible document that can deal with matters not addressed in the Companies Act o Sets out rights,duties and responsibilities of shareholders,directors and others within and in relation to a company  Characteristics of private and public companies : Private company :  Fewer disclosure and transparency  Prohibited from offering its shares to the public  May have more than 50 shareholders  Expressed as ‘(Pty) Ltd’  Comprise of at least one director Public company :  Offer shares to the public  Expressed as ‘Ltd’  Comprise of at least three directors  Organisational Structure : ( Page 69)  Entrepreneurial Structure  Functional Structure  Holding organisation Structures  Divisionalised Structure  Life-cycle of the organisation :  Birth :  Just started with no formal structure  Owner makes all the decisions,not much delegation of authority  Youth :  Trying to grow in this stage  Formal structure is designed,limited delegation of authority takes place  Midlife :  Highest level of success has been reached  More complex and formal structure  Maturity :  Focus of improvement of efficiency and profitability  Becomes less innovative  Existing products become outdated,leads to decrease in sales and profitability  Slowly coming to an end,can be countered by introducing changes to renew  The relationship between shareholders and management (agency theory) Summary of relationships between parties in a company :  Ownership in company through shares held in company by shareholders ▼  Shareholders elect a board of directors ▼  Board of directors selects and appoints managers Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace  Agency Theory - conflict between self-interest of the managers and their task to maximise long-term wealth of shareholders.Shareholders try to curb this by offering performance bonuses.  Change in ownership  Take-Over - transfer of control of a company from one group of shareholders to another group of shareholders. Downloaded by: Zureida12 | Distribution of this document is illegal S - The study-notes marketplace Topic 3 : Time value of money Study Unit 8 : Time value of money concepts and mathematical formulae  Cash flows – any receipt or payment of money.Includes capital and interest Various types of cash flows :  Single cash flows  Annuities o Ordinary annuity o Perpetuity o Annuity due  Unequal cash flows  Simple Interest - interest calculated on the principal only for the entire term S = P(1 + i × n)  Compound Interest - adding that interest to the principal for investment in the following period S = P (1 + i)n  Future value – the amount an investment will be worth at a future date if invested at a particular simple or compound interest rate  Future value (single payment - 1 period) : FV = PV(1 + i)  Future value (single payment - multiple periods) : FV = PV(1 + i)n  Future value (ordinary annuity) :  Future value (annuity due/annuity in advance) :  Present value - current value of future cash flows  Present value (single payment) : PV = [