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Lez. 29/09/2021 strategy WHAT IS A COMPANY? It is a voluntary association where two or more persons come together to carry on activities for a common business goal. It is a commercial organization that operates on a for-profit basis and participates in selling goods or services to customers. A company is an entity that has a separate legal existence from its owners. The owners of the company are known as members or shareholders. Its legal status given a company the same rights as a natural person which means that a company can incur debt, sue and be sued. A company is a form of business organization, that could even be:
- Partnership
- Association
- Joint-stock company
- Foundation
- An organized group of persons (incorporated or not) Company objectives:
- Maximisation of sales revenue
- Maximisation of profit
- Maximisation of investments (return on capital employed)
- Survive over time
- Long-term stability
- Growth
- Satisfying people
- Enhancement/maximisation of the wealth of the business The input-output model Resources : primary → equity, labour; other → technical & industrial properties, commercial properties
How do companies work?
- Management activities
- Run the business
- Organization activities
- Organize the business
- Accounting activities
- Record the business Activities - Management
- Strategic management : the set of managerial decisions and actions that determines the long-run performance of corporation; it includes environmental analysis (internal and external), strategy formulation , strategy implementation , evaluation and control
- Operative management : the set of managerial decisions and actions that determines the performance of a daily activity and short-term performance; it includes purchasing, operations and sales Activities – Organization How relevant are the people? Happy employees mean happy clients. How relevant is “organizing organizations”? Company organization follows company values: innovation, integrity, excellence, talent, entrepreneurship, stewardship. Organizing involves creating a structure of relationship among people working for the desired results”. Organizing means:
- Determining, grouping and structuring the activities
- Creating rules for effective performance at work
- Allocation necessary authority and responsibility
- Determining detailed procedures and systems regarding coordination, communication motivation Culture : development, improvement and refinement of the originality, individuality, identity, and personality of a given people. Activities – Accounting
- Accounting is a service activity which “provides quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making resolved choice among alternative courses of action”.
- Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof”.
- Accounting is the process of identifying, measuring and communicating information to permit informed judgments and decisions by users of the information”. Accounting is an organized way of measuring and summarizing the information - mainly quantitative and financial in nature - related to the activities of business. The users of accounting information rely on accounting information to make decisions. Internal users : owners, managers, officers, internal auditors, sales staff, budget officers External users : lenders, potential shareholders, governments, labor unions, external auditors, customers A public company is a company listed on the financial market. They are obliged to disclose a huge amount of information. Investors base investment decisions and estimate the value of stock using accounting information. Recent accounting scandals has shaken the confidence of investors in financial markets.
Management is not governance! Governance is about setting a rule under which the management activities can be run. Corporate governance is the institutional framework that regulates the division and exercise of power in the corporation. Corporate governance was defined as ‘the system by which companies are directed and controlled’. The phrase corporate governance came into prominent use in the 1980s, and is often used narrowly to refer to the mechanisms and rules that govern relationships among direct corporate participants in publicly-traded firms, especially shareholders, directors, managers, and sometimes employees. Corporate governance is something different from the daily operational management activities enacted by a company’s executives. It is a system of direction and control that dictates how a board of directors governs and oversees a company. In most corporations, the owners (shareholders) do not manage the company’s operations. Corporate governance is needed to ensure that the managers are committed to return some of the firm’s profits to investors, invest properly the firm’s capital into effective projects. Separation of Ownership & Managerial Control Modern public corporation form leads to efficient specialization of tasks
- Risk bearing by shareholders
- Strategy development and decision-making by managers In small corporations, the owners typically manage the firm but it is not necessary that owners run the company or are even involved in the day-to-day operations of the company. Separation of ownership and management in corporate governance involves placing the management of the firm under the responsibility of professionals who are not its owners. Owners of a company may include shareholders, directors, government entities, other corporations and the initial founders. Advantages :
- The owners of a company may not have all of the necessary skills and experience needed for certain managerial roles. Creating a management team separate from the ownership enables the company to be run by professionals with diverse skills such as in marketing, corporate financing and public relations.
- Performance appraisals are an essential part of good corporate governance, as they enable managers to evaluate the company and to point out areas of improvement. It can be complex to evaluate performance where there is a lack of separation of ownership and management.
- Separate managers and owners in a firm ensure that a system of checks and balances is in place. Managers act as a buffer between the company and stakeholders such that they can alleviate negative impacts of stakeholder activities and avoid hitches in public relations.
The board of directors A company's board of directors is the primary body influencing corporate governance. A board of directors is a panel of people who are elected to represent shareholders. Every public company is legally required to install a board of directors; non-profit organizations and many private companies – while not required to – also name a board of directors. The directors are responsible for setting the company’s strategic aims, providing the leadership to put these into effect, supervising the management of the business and reporting to shareholders on their stewardship. Functions :
- Represent shareholders, create shareholder value and align the interests of management with those of shareholders while protecting the interests of other stakeholders (customers, creditors, suppliers)
- Define company’s mission, goals, approve strategic plans and decisions to achieve these goals
- Appoint senior executives to manage the company in accordance with strategies, plans, policies, and procedures
- Oversee the company’s performance by setting objectives, establishing short term and long-term strategies to achieve these objectives, and assessing the performance of senior executives in fulfilling their responsibilities without micromanaging
- Approve major business transactions and corporate plans, decisions, and actions
- Develop and approve executive compensation, pension, post-retirement benefits plan, and other long-term benefits, including stock ownership and stock options
- Review financial reports and provide counsel to the company’s senior executives, especially the CEO, on material strategic decisions and risk management
- Ensure the company’s compliance with applicable laws, rules, and regulations
- Approve the company’s major operating, investing, and financial activities
- Set the tone at the top by promoting legal and ethical conduct throughout the company
- Evaluate the performance of the board, its committees (audit, compensation, and nominating), and the members of each committee
- Approve dividends, financing, capital changes, and other extraordinary corporate matters
- Oversee the sustainability of the company in creating long-term shareholder value and protecting interests of other stakeholders Most effective boards get their work done through committees that report to the full board. Setting up a small group of directors chosen for their relevant expertise has proven to be an effective way to examine complex issues. CG relationship with stakeholders: are stakeholders all the same? The ‘shareholder primacy’ view (1980s: US and other English-speaking countries) has focused on the set of governance problems that arise in publicly traded corporations in which equity shares are held and traded by numerous individuals who have little or no management connection to the firm. In Europe and Asia (as well as in the US in the middle of the twentieth century), corporations are more likely to be viewed as institutions with a quasi-public character and role. The goal of corporate governance is more likely to be seen as a balancing of interests among all of the corporate stakeholders (so-called ‘stakeholder’ view of the firm). Shareholder model versus the stakeholder model:
- Shareholder model - the purpose of the corporation is to promote shareholder value
- Stakeholder model - the purpose of the corporation is to serve a wider range of interests
Lez. 05/ The Income Statement Also known as the profit and loss statement, it reports on activities occurred during the financial period considered, it lists sales (revenues), gains, costs and losses over a period of time and it reports expenses incurred in order to earn that income (application of the matching principle). Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants (IASB Framework). It includes revenues and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to sales, fees, royalties, etc. Gains represent other items that meet the definition of income but are not related to the ordinary activities of an organization. Inventory represents the amount of the costs of products awaiting to be sold on the market. The inventory of a product includes the cost of its raw materials, work-in-process, and finished goods that means all costs necessary to acquire the inputs and transform them into products ready for sale. Expenses are the costs incurred to generate revenues, they are related to the ordinary activity of a company or to its financial activities (cost of raw materials, personnel, distribution, services, administrative expenses) Losses are items that generate a decrease in the economic benefit of an entity but are not related to the ordinary activities. Losses can result from: sale of an asset for less than its carrying amount, the write-down of assets, or a loss from lawsuits. The income statement could have one of these 2 structures:
Operating income = Gross margin - Operating expenses Gross margin = revenues - costs of the product This is an example of an income statement as it appears in the annual report: •Vertical structure •Intermediate margins •Split between operating and non-operating activities To understand if the profit value is good, we have to divide the profit with the revenue value. When looking at the income statement it is important to analyse not only the net profit, but also the intermediate margins realized in the different kinds of activities run by the firm EBIT Indicator of a company's operating profitability, calculated as revenues minus operating expenses, excluding tax and interest. (Even called "operating earnings", "operating profit" and "operating income”)
- Profit before tax and extraordinary items = this measure combines all of the company's profits before tax, including operating and non-operating activities except extraordinary items and taxes
- Profit before tax : profitability measure that doesn’t include corporate income tax. This measure deducts all expenses from revenue, but it leaves out the payment of tax. (Even called "earnings before tax”)
THE BALANCE SHEET
The balance sheet is a financial ‘snapshot’ at one point in time (usually on the last day of the firm’s fiscal year). It is an ‘inventory’ of what the firm owns (assets) and how those assets are financed (liabilities and owners’ equity)
- Left-hand side lists assets
- Right-hand side lists liabilities and owners’ equity Assets : the company’s economic resources (money, goods and properties, credits). Liabilities : obligations to third parties arising from past events (bank loans, debt to suppliers) Shareholders’ equity : overall amount of shareholders’ investments into the firm. It is what the firm owes to its owners A balance sheet reports on investing and financing activities. It lists amounts for assets, liabilities, and equity at a point in time. Although throughout the fiscal year the numerous operations vary the property of the firm, the equation is always respected. The relationship is reflected in the Balance Sheet equation :
It provides information on the financial health of an organization. It is helpful in determining the organization's liquidity risk, financial risk, credit risk and business risk. When combined with other financial statements of the organization and the financial statements of its competitors, it may help point out strengths and weaknesses of the organization. The balance sheet analysis allows the reader to evaluate investing and financing activities of the firm in terms of:
- Evaluation of the assets’ composition to assess the risks the firm bears
- Evaluation of the financial sources section (liabilities shareholders’ equity) to understand the financial risks the firm bears (in term of weight of liabilities compared to shareholders equity)
- Comparison between the nature of investments and financial resources In the final balance sheet left-side and right-side items are positioned according to two different logics:
- Assets: are listed to the liquidity logic, from the most liquid (cash) to the less one (fixed assets)
- Liabilities: are positioned according to the temporal term of the obligations, from the short term to the long term
We only pay cash, immediately, because Ikea is a B2C company (due to this Ikea has few receivables). Ikea inventories are thousands of flat packages. There is an increase in total assets due to the increase of fixed assets. current assets 50,012 – current liabilities 11,084 → current assets are enough to cover debts. fixed assets 25,355 – non-current liabilities 4,032 – equity → the majority of the liabilities are current and has few long-term liabilities. Equity has increased by 2014 and Ikea is not dependent from other organizations. Equity is a bigger part of the section, that means 70%. It is a very good data; the company is very autonomous. Comparing this situation with 2005, assets increased, equity increased, and long-term liabilities decreased. Lez. 12/ FINANCIAL RATIOS
- Static key performance indicators
- Mathematical comparisons of financial statements items or categories
- Don’t take into consideration the size of a company or the industry so they can also be used to compare different companies in different industries
- To judge whether a ratio is good or bad it is necessary to compare it with something else, such as the company’s own ratios over time to ascertain trends and other comparable companies or industry averages These insights allow investors, lenders and other decision-makers to make informed and rational economic decisions regarding the firm There are 4 main groups of financial indicators
LIQUIDIY RATIOS
Current ratio measures the number of euros of current assets for each euro of current liabilities. It helps estimate the short-term debt-paying ability of the company. The quick ratio gives a more prudent indication of the firm’s ability to meets short financial obligations out of current assets. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. SOLVENCY RATIOS : measure the ability of the firm to attract financial contributors and then meet long-term debts. Debt ratio (D) is a stock ratio indicating the proportion of total (net) assets financed by debt at a particular point in time (the balance sheet date) Equity ratio or “ leverage ratio ” is a stock ratio indicating the portion of a company’s assets contributed by owners at a particular point in time (the balance sheet date). It measures how many euros of total assets are supported by each euro of Shareholders Equity.
- ROS is not bad
- ROA is not so good (the company didn’t generate yet operative income?
- ROE is not bad. *overheads: fix costs GROWTH RATIOS: measure the ability of the firm to grow over time (6 months, 1 year, 3 years, 5 years, 10 years). They are measured assessing the growth rate of a specific item over time, like: revenues growth rate, EEBIT growth rate and shareholders’ equity growth rate. Growth rate income = current income – last income / current income x 100% Example 2016 revenues = 100,000€ 2015 revenues = 91,000€ Growth rate = (100,000€ - 91,000€)/91,000€ = 9.9% Financial ratios are good key performance indicators for measuring:
- The ability of the firm to meet its short-term obligations
- The ability of the firm to generate future revenues and meet long-term obligations
- The ability of the firm to provide financial rewards sufficient to attract and retain financing Financial ratios are static in nature, they can’t say anything about future performance of the company Lez. 19/ WHAT IS STRATEGY? Example Madonna has sold more than 300 million records worldwide and is recognized as the world’s top-selling female recording artist of all time by the Guinness World Records. According to the Recording Industry Association of America (RIAA), she is the best-selling female rock artist of the 20th century and the second top-selling female artist in the
United States, behind Barbra Streisand, with 64 million certified albums. Forbes magazine estimated her annual earnings as $58 million in 2010, $110 million in 2009, $40 million in 2008, and $72 million in 2007. Why has Madonna been so successful in the world of entertainment? Personality, controversial elements and topics (religion, lgbt sex) Is she exceptionally talented? She makes a lot of choreography, her voice is not memorable or talented, she is not particularly talented in dancing Does Madonna have a strategy? If so, what are the main elements of that strategy? What has Madonna done to achieve and sustain success? She is a great manager; she has managed her success. She has the capability to change overtime according how the society was going to change. She has been always able to foresee really in advanced external new trends and to choose the right one. She was always in line with the trends and with the mass market. She is a trend sector.
- Her goal commitment (ambition) and sustained level of effort
- Her brilliance in identifying and exploiting alliance partners
- Her continual renewal and reinvention
- Sex: common to all the phases Effective implementation of a strategy: simple, consistent, long-term goals, profound understanding of the competitive environment, objective appraisal of resources. Strategy is a plan, a method or series of actions designed to achieve a specific goal or effect. Strategy is the pattern of objectives, purposes, or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be. The essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match. Tactic is useful in specific conditions, while strategy is effective in the long run, is a set of choices which are permanent, it shapes the business and allows the company to achieve the goals in the long run. Strategic management evolution
Stakeholder power/interest grid and managerial responses The basic framework: strategy as a link between the firm and its environment Lez. 20/ Industry analysis The business environment of the firm consists of the external influences that affect its decisions and performance How can managers monitor the vast array of possible influences?
- MACRO environment = PEST model (political, economic, social and technological)
- MICRO environment = 5 FORCES model Any industry can be described by considering five players that generate five forces: buyers, suppliers, substitutes, potential entrants. Structural determinants of the competitive forces
- When concentration is high, rivalry is low; when concentration is low rivalry is high
- When diversity is high, rivalry is low; when diversity is low, rivalry is high.
- The higher exit barriers, the lower is rivalry
- When the bargaining power is low, players can make rules and the profitability goes up; switching costs
- When buyers are informed, they made better decisions. Industry analysis can be used to:
- Explain differences in profitability between industries and changes in the profitability of a given industry over time
- Assist managers in positioning the firm advantageously
- Predict possible changes in competition and profitability in the near future
- Identify opportunities for changing industry structures and alleviating competitive pressures. The challenges of applying the five forces framework: •Dealing with missing factors •Choosing the appropriate level of analysis •Dealing with uncertainty and rapid structural change Defining the industry
- Industries versus markets
- Substitutability on the supply side versus substitutability on the demand side
- Boundaries are seldom clear-out
- In practice the way boundaries are drawn depends on the purpose and context of the analysis There is a missing factor, which is a sixth element. It is related to complementary product (butter and jam for example). Our business could be related to some other. The suppliers of complements create value for the industry and can exercise bargaining power. The difficulty in drawing industry boundaries and the need to define industries more
