Amity Business School

Amity Business School

MBA Class of 2010, Semester IV
Strategic Financial Management

Prof Akhil Swami/Anuj Srivastava

1
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SFM---CALSS 1 AND 2

Role of finance and strategy in management process

1.Strategy, Management process.

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•
Strategic management allows an organization to be more proactive
than reactive in shaping its own future; it allows an organization
to initiate and influence activities and thus to exert control over its
own destiny. Small business owners, chief executive officers,
presidents and managers of many for-profit and non-profit
organizations have recognized and realized the benefits of strategic
management.
Historically, the principle benefit of strategic management has been
to help organizations formulate better strategies through the use of
the more systematic, logical and rational approach to strategic
choice.
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• Which stage does your company

belong?
• There are three stages of a turnaround
strategy:
• I – Pre-turnaround
• II – Period of Crisis
• III – Period of Recovery
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Future is uncertain so challanging

• Nobody can really guarantee the future,
but in this era of Strategic Management,
those firms, even in bad times will be able
to survive, who will size up the chances,
calculate the risk involved, estimate
own ability to deal with them,
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Scenario analysis
• choose that alternative plan which will be
according to the anticipated future and
finance, marketing, HRM and Production
all will have to work in the same way and
position as per the scenario anticipated.
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MNC decision making

• MNC ‘S evaluate a FDI, they compile a
list of prospective investments, next
objective is to select a combination of
Projects that maximize the
shareholders wealth. They face
problems which are not faced by local
companies.
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• 1. Difference between project and parent co,

cash flow.
• 2. Foreign Tax Regulation.
• 3. ex –Appropriation.
• 4. Blocked Funds.
• 5. Exchange rate changes and Inflation.
• 6. Project specific training.
• 7. Difference between the basic business risk of
Foreign and domestic projects.
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Tough discretion/decision required

• Managers need to understand the options
available. ------expanding or contracting a
project, abandoning the project, employing
new techniques, entering new line of
business, involvement of project managers
in determining the financial policy,
combining with the norms of lending and
credit.
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Strategy droop
• Strategy Droop---
• The organization as a whole may have taken
too many projects simultaneously. Top
management knows that there is going to be
strategic slippage or strategic droop.
• They start too many projects at a time, in the
hope that this will compensate for
disappointing results. This cultivates in
harmful interpersonal rivalry, excess
competition for recourses, bad politics and
sometimes the resulted are inferior to what
otherwise could have been achieved if lesser
number of projects were started.
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Hubrious hypothesis
• Gap Analysis thus is a useful tool to avoid
strategic droop. Gap analysis has to be backed
up with strategic plan. CRAP analysis----creating
anticipation plans.
• Hubrious Hypothesis------
• When the Manager pushes a project too hard,
because of his misplaced conviction, that he
can make no wrong. Does not listen to
correct advice and ultimately the project
suffer?
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Role of Finance and strategy in

Management process
• Management Process----Planning, Organizing, staffing,
leading and controlling.
• Role of Finance in strategic Management--------Role of
Finance in strategic Management--------
• Investment Principle----The firm is expected to invest in
only those assets where they are expected to get greater
returns than minimum expected return or Hurdle Rate.
Riskier projects have to have higher returns.
• Financing Principle----Mixture of Debt and Equity on the
basis of type of industry/ Product /future trends, so as to
minimize the hurdle rate.
• Dividend Principle-----If the firm cannot find investment
opportunities that can earn higher return than Hurdle rate,
money is refunded to investors as Dividend.
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•
Strategic management allows and organization to be more
proactive than reactive in shaping its own future; it allows an
organization to initiate and influence activities and thus to exert
control over its own destiny. Small business owners, chief executive
officers, presidents and managers of many for-profit and non-profit
organizations have recognized and realized the benefits of strategic
management.
Historically, the principle benefit of strategic management has
been to help organizations formulate better strategies through
the use of the more systematic, logical and rational approach
to strategic choice.
 Amity Business School

Benefits of SFM
• Financial Benefits:
1.Improvement in sales.
2.Improvement in profitability.
3.Improvement in productivity.

Non-Financial Benefits:
1.Improved understanding of competitors strategies.
2.Enhanced awareness of threats.
3.Reduced resistance to change.
4.Enhanced problem-prevention capabilities.
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Some important terms

• Balloon payment mortgages----Mortgages that
requires payments for a three to five year
period , at the end of the period , full payment of
the principal is required.
• Bullet Loan.-----loan structured so that interest
payments and the loan principal are to be paid
off in one lump sum at a specified future date,
• Chattel mortgage bond—which is secured by
personal property.
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• Contagion effect----Adverse effects of a

single firm that becomes contagious
throughout the industry.
• Dirty float----System whereby exchange
rates are market determined without
boundaries. But subject to government
intervention.
• Indenture----legal documents specifying
the rights and obligations of both the
issuing firm and the bond holders.
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• Noise trading----Theory used to explain

that stock prices may deviate from their
fundamental values as a result of the
buy and sell positions of uninformed
investors(noise traders).A market
correction may not eliminate the
discrepancy because of the uncertainty
surrounding the stock’s fundamental
value.