Corporate Financial Strategy
4th edition
Dr Ruth Bender
Chapter 4
Linking corporate and financial
strategies
Corporate Financial Strategy
Linking corporate and financial strategies: contents
 Learning objectives
 Business risks reflect the volatility of results
 Elements of business risk
 Porter’s five forces
 Environmental analysis – PESTLE
 Resource-based theory
 Developing strategies to enhance shareholder value
 Decisions in financial strategy
 Risk from different perspectives
 Balancing business and financial risk
 Balancing business and financial risk in private companies
 Pecking order
Corporate Financial Strategy
2
Learning objectives
1. Distinguish business risk and financial risk, and explain why there
should be an inverse relationship between them.
2. Explain the different elements of financial strategy.
3. Assess how risky a particular business is, with a view to
understanding how it should be financed.
4. Understand the seven drivers of value, and how they can be related to
business strategy in order to increase value.
5. Discuss how the elements of financial strategy might apply differently
to public and privately owned companies.
Corporate Financial Strategy
3
Business risk reflects the variability of results
Price
Volume
Sales – Costs = Profits
Products
Markets
Fixed
Variable
Committed
Corporate Financial Strategy
4
Elements of business risk
Demand volatility
Input cost volatility
Growth drivers
Selling price volatility
Expense volatility
Industry analysis
Currency exposures
Corporate
governance
Working capital
needs
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Porter’s five forces
New
entrants
Suppliers
Rivalry
Substitutes
Corporate Financial Strategy
Porter, M. (2004). Competitive Strategy,
6
Customers
Environmental analysis – PESTLE
Political
Economic
Social
Technological
Legal
Environmental
Corporate Financial Strategy
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Resource-based theory
aluable
are
mperfectly imitable
on-substitutable
Corporate Financial Strategy
8
Developing strategies to enhance shareholder value
External
forces
STRATEGY
Management
ability
Corporate
governance
SHAREHOLDER
VALUE
Resources
KPIs
Targets
Corporate Financial Strategy
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Market views
of the
company
VALUE DRIVERS
Decisions in financial strategy
How large
should the
asset base
be?
Corporate Financial Strategy
How much
of the
finance
should be
debt?
How much
should be
paid in
dividends?
10
Should we
issue new
shares?
Risk from different perspectives
Debt
Features for Issuer
(the Company)
Features for Investor
Corporate Financial Strategy
Equity
Interest must be paid
Can choose whether to pay
Repayments must be made dividends
Lender might have the right No repayment obligation
to repossess assets
A high-risk instrument
A low-risk instrument
Interest is contractual
Repayment is contractual
The lender might obtain
security
Dividends are at the
discretion of the company
No requirement to repay
capital
A low-risk instrument
A high-risk instrument
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Balancing business risk and financial risk
High




Business
risk
Low
Low
Corporate Financial Strategy
Financial risk
12
High
Balancing business risk and financial risk in private companies
High


?

Business
risk
Low
Low
Corporate Financial Strategy
Financial risk
13
High
Pecking order
Corporate Financial Strategy
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