Corporate Governance

Lecture 13
Financial Planning &International Organizations
 The Financial Planning
• Financial planning is the process of evaluating the impact of alternative
investing and financing decisions of the firm.
• Every financial plan has three components:
• A model
• Inputs
• Outputs
 The Financial Planning
• The model is a set of mathematical relationships between the inputs and the
outputs.
• Inputs to the model may include:
• Projected sales
• Collections
• Costs
• Interest rates
• Exchange rates
 The Financial Planning
• The outputs of the financial plan are:
• Pro forma financial statements
• A set of budgets
• Pro forma financial statements are projected financial statements.
• A budget is a detailed schedule of a financial activity:
• Sales budget
• Advertising budget
• Cash budget (A cash budget is an estimation of the cash inflows and
outflows for a business over a specific period of time, and this budget is
used to assess whether the entity has sufficient cash to operate.)
 The Financial Planning
• The planning horizon is the length of time that the
financial plan projects into the future.
• Short-term financial plans
• Usually have a planning horizon of one year or less.
• Are detailed and very specific.
• Long-term financial plans
• Usually have a five- or ten-year planning horizon.
• Tend to be less detailed.
Components of the Financial Plan
• Clearly stated strategic, operating and financial objectives.
• Assumptions on which the plan is based.
• Description of underlying strategies.
• Contingency plans for emergencies.
• Budgets, classified by
• time period
• Division/Types (Master Budget. A master budget is an aggregate of a company's
individual budgets designed to present a complete picture of its financial activity
and health: types: a) Operating Budget, b) Cash Flow Budget, c) Financial Budget
and d) Static Budget (A static budget is a type of budget that incorporates
anticipated values about inputs and outputs that are conceived before the period
in question begins. When compared to the actual results that are received after
the fact, the numbers from static budgets are often quite different from the actual
results.)
 Components of the Financial Plan
• The financing program, classified by
• time period
• source of funds
• types of funds
• A set of period-by-period pro forma financial statements for the entire planning
horizon.
 Planning Cycles
• A planning cycle specifies how frequently plans are reviewed and updated.
• The planning horizon is also renewed with each update.
• Short-term plans are updated more frequently than long-term plans.
 Bottom-Up and Top-Down Planning
• A bottom up planning process starts at the production level and proceeds
upwards through the corporate hierarchy.
• A top-down planning process starts with top management making strategic
decisions.
• These decisions are then implemented by managers further down the corporate
hierarchy.
 Phases of the Financial Planning Process

• Formulating the plan

• Implementing the plan
• Evaluating performance
 Benefits of Financial Planning
• Standardizing assumptions
• Future orientation
• Objectivity
• Employee development
• Lender requirements
• Better performance evaluation
• Preparing for contingencies
 Types of International Organizations
1. Multinational Corporation
2. Multidomestic Corporation
3. Global Company
4. Transactional or borderless company
 Multinational Corporation
A multinational corporation (MNC)is any type of international company that
maintains operations in multiple countries.
 Multidomestic Corporation
A multidomestic corporation, which decentralizes management and other decisions to the
local country. This type of globalization reflects the polycentric attitude. A multidomestic
corporation doesn’t attempt to replicate its domestic successes by managing foreign operations
from its home country. Instead, local employees typically are hired to manage the business and
marketing strategies are tailored to that country’s unique characteristics. For example,
Switzerland-based Nestlé is a multidomestic corporation. With operations in almost every
country on the globe, its managers match the company’s products to its consumers.
In parts of Europe, Nestlé sells products that are not available in the United States or Latin
America. Another example is Frito-Lay, a division of PepsiCo, which markets a Dorito chip in
the British market that differs in both taste and texture from the U.S. and Canadian version.
 Global Company
A global company, which centralizes its management and other decisions in the home
country. This approach to globalization reflects the ethnocentric attitude (expressing
the belief that one's own ethnic group or one's own culture is superior to other ethnic
groups or cultures, and that one's cultural standards can be applied in a universal
manner).
Global companies treat the world market as an integrated whole and focus on the need
for global efficiency and cost savings. Although these companies may have
considerable global holdings, management decisions with company-wide implications
are made from headquarters in the home country. Some examples of global companies
include Sony, Deutsche Bank AG, Starwood Hotels, and Merrill Lynch.
 Transactional or borderless company
A transnational, or borderless, organization and reflects a geocentric attitude.
For example, IBM dropped its organizational structure based on country and
reorganized into industry groups. Ford Motor Company is pursuing what it
calls the One Ford concept as it integrates its operations around the world.
Another company, Thomson SA, which is legally based in France, has eight
major locations around the globe. The CEO said, “We don’t want people to
think we’re based anyplace.” Managers choose this approach to increase
efficiency and effectiveness in a competitive global marketplace.
 How Organizations go International?
There are different approaches for organizations to be International:
1. Global Sourcing
2. Exporting/Importing
3. Licensing/Franchising
4. Strategic Alliance
5. Mergers & Acquisitions
 Global Sourcing
Global sourcing (also called global outsourcing), which is purchasing materials
or labor from around the world wherever it is cheapest. The goal: take
advantage of lower costs in order to be more competitive.
For instance, Massachusetts General Hospital uses radiologists in India to
interpret CT scans. Although global sourcing may be the first step to going
international for many companies, they often continue to use this approach
because of the competitive advantages it offers. Each successive stage of going
international beyond global sourcing, however, requires more investment and
thus entails more risk for the organization.
 Exporting and Importing
Exporting the organization’s products to other countries—that is, making
products domestically and selling them abroad. In addition, an organization
might do importing, which involves acquiring products made abroad and
selling them domestically. Both usually entail minimal investment and risk,
which is why many small businesses often use these approaches to doing
business globally.
 Licensing or Franchising
Managers also might use licensing or franchising, which are similar approaches
involving one organization giving another organization the right to use its
brand name, technology, or product specifications in return for a lump sum
payment or a fee usually based on sales.
The only difference is that licensing is primarily used by manufacturing
organizations that make or sell another company’s products and franchising is
primarily used by service organizations that want to use another company’s
name and operating methods.
 Strategic alliance

When an organization has been doing business internationally for a while and has gained
experience in international markets, managers may decide to make more of a direct foreign
investment. One way to increase investment is through a strategic alliance, which is a
partnership between an organization and a foreign company partner or partners in which both
share resources and knowledge in developing new products or building production facilities.
For example, Honda Motor and General Electric teamed up to produce a new jet engine. A
specific type of strategic alliance in which the partners form a separate, independent
organization for some business purpose is called a joint venture.
For example, Hewlett-Packard has had numerous joint ventures with various suppliers around
the globe to develop different components for its computer equipment. These partnerships
provide a relatively easy way for companies to compete globally.
 Merger & Acquisition
A ‘Merger’ happens when two firms, often about the same size, agree to
operate and go forward as a single company, are said to merge together.
When one company takes over another and clearly establishes itself as the new
owner of the company, the purchase is called an Acquisition.
 Types of Mergers
• Horizontal merger - Two companies that are in direct competition and share the
same product lines and markets
• Vertical merger - A customer and company or a supplier and company
• Market-extension merger - Two companies that sell the same products in
different markets
• Product-extension merger - Two companies selling different but related products
in the same market
• Conglomeration - Two companies that have no common business areas
 Types of Acquisitions

• Horizontal acquisitions: Companies that operate a horizontal-acquisition

strategy take over or merge with companies in a similar market sector and at
the same stage of production. The aim is to acquire additional products or
services to offer their customers, or to increase market share by acquiring
competitors
• Vertical acquisitions: An acquisition where one company buys another
company in the same industry, but at a different stage of the production
cycle. A vertical acquisition can reduce the costs of the two companies by
eliminating redundant processes. It also reduces reliance of one company on
another. For example, an upstream oil company can merge with a
downstream oil company to streamline operations.