BUSINESS PLAN VS STRATEGIC PLAN
The Business Plan is a document made by a team of entrepreneurs to launch a new venture
and find start-up liquidity. It is composed using the direct approach which is a planning
method that focuses on the analysis and definition of assumptions used to obtain forecast
data.
The direct approach is a complex process because it considers all variables that are
necessary to quantify certain information. Given the fact that it is very time and cost
consuming it should apply only to some relevant key value drivers.
It makes detailed assumptions about the main financial items, so with the direct approach we
need to describe everything in detail.
The strategy is to get a detailed description of the marketing plan and operational plan.
It begins with the executive summary that includes a presentation of the business, the
products and services, an industry analysis and trends, the competition, the business’
strategic position, a summary of income and assets and a summary of how proceeds will be
used and from where funds are borrowed.
Business plan establishes a Business model for a startup company designing the first
milestones. The business plan method is made up by different steps:
1. analysis of the market, the industry and available resources
2. detailed description of the marketing plan and operational plan
3. detailed assumptions about main financial items
4. financial data forecasting
The Strategic Plan is a document used by larger and already existing companies that
focuses on the strategic intentions and actions that the company will put in action during the
planning period. It is designed and delivered by existing companies with the ultimate goal of
creating a FINANCIAL CONSENSUS among stockholders and creditors.
It is composed using the indirect approach because a lot of detailed financial information is
already existing.
Strategic plan establishes an overall plan for the business.
The indirect approach for the Strategic Plan is made up by different steps:
1. analysis of the historical data
2. assumptions on critical issues and need for change
3. financial data forecasting
4. action plan in order to justify how and why are setting new assumptions and new
forecasting factors
It makes assumptions about critical issues and need for change also determining quantity
changes on historical data.
This method simplifies decisions, considering that some historical data do not change in the
forecast and others change only due to inflation.
It begins with the executive summary which focuses on the strategic project proposed, the
main implementation actions and a summary of the main financial data expected.
Both Business Plan and Strategic Plan should report the vision and mission of the company.
BEP
The BEP, break-even point is the point at which total revenue is equal to total costs. It
corresponds to the level of production at which the company would make zero profit and
zero loss. It can be expressed both in terms of volume and turnover.
It is usually calculated on a time horizon that is longer than a single year.
The analysis of the BEP is a useful process in order to understand what is the amount of
products sold and the level of revenues that we need to obtain before the company begins to
make profits. It shows the volume and sales required to balance total costs. The BEP is the
point at which the operating profit is equal to zero. The analysis responds to the question: ”at
which level of sales does the company begin to make profits?”
BEP = fixed costs/contribution margin
VISION = expressed with a long term statement concerning the desired future state of the
company.
It is not enough to determine the vision, we need also to determine goals. The vision is more
externally and market oriented
MISSION = detailed statement that is internally focused, it assesses how the company will
achieve the vision
The mission is a shorter statement that explains in detail something concerning the vision.
It is more internally oriented than the vision.
STRATEGY = expresses how vision and mission will be achieved in practice
The strategy represents the strategic approach used by the company to the selected market.
It represents the business basic direction for the future.
Strategy means finding a way in order to be different from others (not the best one but
different).
The strategy hypotheses casual interconnections between goals and resources.
GOALS = key areas in which the company expects strategic results. Goals are not
measurable but contain factors that can be measured as objectives. They cover a long term
period such as 10 years. They directly relate to the mission
Goals must be coherent with the mission, vision, KSF, SEP. They have a broader scope in
comparison with objectives.
OBJECTIVES = statements of measurable results that provide the basis for operational
planning and budgeting. They cover a short term period such as 1 year. They indirectly
relate to the mission
They are narrow in scope (in comparison to goals). We use objectives in order to measure
goals.
KEY SUCCESS FACTORS = factors that will allow a company to defeat competitors
Keywords that highlight what is necessary for the company to operate effectively at various
stages of the business model
KEY PERFORMANCE INDICATORS = measures of success of a company generally
expressed in units different from money. We use them in order to demonstrate how the new
strategy will improve the business.
Indicators used to measure the success factors, the value drivers and the risks.
The operational KPIs allow the company to monitor the positive development of the KVDs.
Good KPIs provide an objective way to determine whether the strategy is working, they help
to motivate employees, they help in evaluating the company’s performance at various levels,
they help in developing a common language and they help managers to allocate resources.
The identification of the KPIs make it possible to translate in operating terms the strategic
aims in the strategic plan.
KEY VALUE DRIVERS = measures that drive the value generation boosting revenues or
reducing costs.
Key performance indicators that affect financials. They are unique attributes of a company’s
business model that create and sustain its value.
They synthesize the casual connections between strategy and performance by reflecting the
operational levers that are expected to drive profitability and growth.
FINANCIALS = classical financial ratios like EBITDA, EBIT, ROS, ROI
ENTERPRISE RISK MANAGEMENT = process that a company’s board of directors
management and other personnel applies in a strategy setting and it permits to reassure
stakeholders about the company’s ability to prevent and handle risk.
It is the process of identifying the events that may affect the entity and to manage risks. It
has to provide reassurance regarding the achievement of the company’s goals. The
purposes of the risk management are:
1. understand the underlying risks and manage them
2. individuate the areas that are more at risk
3. be ready in order to manage risks and threats
BUSINESS MODEL CANVAS
A business model is the rationale of how an organization creates, delivers and captures
value.
It is the set of organizational and strategic solutions through which the company acquires a
competitive advantage.
We can use a specific template in order to design a new business model or in order to
describe the existing one → the business model canvas
To sketch out the business model 9 building blocks are necessary:
1. customer segment
2. value proposition
3. distribution channels
4. customer relationship
Customer segment, value proposition, distribution channels, customer relationship are more
externally oriented, they focus on the creation of value
5. revenue streams
6. key resources
7. key activities
8. partner network
9. cost structure
The last five building blocks are more internally oriented, they look for efficiency
The CUSTOMER SEGMENT defines the different groups of people or organizations an
enterprise aims to reach and serve.
Customer groups represent different segments if:
- they have different needs, and for this reason they justify different offers
- they can be reached through different distribution channels
- they have different profitabilities
- they have different willingness to pay
- they require different types of relationships
There are different types of customer segments:
mass market → no distinction between different customer segments
niche market → tailored products for specific requirements of customers
segmented → distinction between segments with slightly different needs
diversified → serving unrelated customer segments with very different needs
multi-sided platforms → serving interdependent customer segments
The VALUE PROPOSITION describes the bundle of products and services that create value
for a specific customer segment.
It creates value through a distinct mix of elements.
Values may be quantitative or qualitative: newness, performance, customization, design,
price, brand/status, accessibility, convenience
The DISTRIBUTION CHANNELS describes how the company communicates with and
reaches its customer segments
Distribution channels are customers’ touchpoints.
Channels have 5 distinct phases:
a. awareness → they raise customer awareness about the product and service of the
company
b. evaluation → they help customers evaluating the product and service of the company
c. purchase → they permit customer to purchase products and services
d. delivery → they deliver the value proposition to customers
e. after sales → they provide post-purchase support
Distribution channels can be owned by the company itself or owned by partners
The CUSTOMER RELATIONSHIP describes the types of relationships a company
establishes with specific customer segments
There are several categories:
personal assistance → based on human interactions
dedicated personal assistance
self-service → no direct relationship with customers
automated service → it is a mix of more sophisticated form of customer self-service
with automated processes
communities
co-creation
The REVENUE STREAMS represent the cash a company generates from each customer
segment
There are two different types of revenue streams:
a. revenues coming from one-time customer payment
b. revenues coming from ongoing payments
There are many ways to generate revenue streams:
- asset sale = selling ownership rights
- usage fee = from the use of a particular service
- subscription fees = selling continuous access to a service
- lending / renting / leasing = temporarily granting someone the right to use an asset in
return for a fee
- licensing = giving permission to use protected intellectual property in exchange for a
fee
- brokerage fees
- advertising = from fees for advertising
Pricing mechanisms:
I.
fixed menu pricing → predefined prices are based on static variables
II.
dynamic pricing → prices change based on market conditions
The KEY RESOURCES describe the most important assets required to make a business
model work
They are physical, intellectual, human and financial.
The KEY ACTIVITIES describe the most important things a company must do to make its
business model work
The can be categorized as; production, problem solving and platform / network
The KEY PARTNERSHIPS describe the network of suppliers and partners that make the
business model work.
There are 3 motivations to create partnerships:
→ optimization and economies of scale
→ reduction of risk and uncertainty
→ acquisition of particular resources and activities
The COST STRUCTURE describes all costs incurred to operate a business model
Costs should be minimized in every business model
There are 2 classes of business model cost structures:
1. cost driven = minimizing costs whenever is possible
2. value driven = focus on value creation
Cost structures can have some characteristics: fixed costs, variable costs, economies of
scale and economies of scope.
OPERATIONAL PLANNING = process of implementing strategic plans and objectives to
reach specific goals.
The operational plan describes what each party does. It describes the structure that is
required to obtain the value proposition
We have 2 goals:
- effectiveness = accomplish specific tasks or reaching a goal → external goal
- efficiency = obtaining the highest possible return with the minimum use of resources
→ internal goal. It is the analysis of cost incidence on sales
Porter’s analysis is a useful tool that identifies a set of interrelated generic activities common
to a wide range of firms.
PORTER VALUE CHAIN:
This value chain distinguish two different kind of activities: primary activities and support
activities
primary activities → represent some minimum activities that have to be completed in order
to run the business. For each of them it is important to identify related costs and potential
competitive advantages.
The goal is to create value that exceeds the cost of providing the product or service, thus
generate a profit margin
A company can decide to make this activities internally (make) or to proceed with
outsourcing (buy) → make or buy decision
- inbound logistics =activities that are responsible for receiving, warehousing and
inventory control of input materials
- operations = all the value-creating activities that transform inputs into the final
product
- outbound logistics = warehousing and fulfillment → all the activities required by a
company to get the finished products to customers
- marketing & sales = all activities related to convincing customers to buy a company’s
products, like channel selection, advertising and pricing
- service = all the activities that maintain and enhance the product’s value, they include
customer support and repair service
A company needs to manage these activities in an efficient and profitable way.
support activities → activities that add some complexity in the value proposition and permit
to increase sales and make the company grow.
Support activities are the activities that enable a company to make the difference, to
distinguish its products from those of competitors
- procurement = activities related to the function of purchasing raw materials and other
inputs
- technology development = includes R&D, process automation and other technology
development
- human resource management = consists of recruiting, development and
compensation of employees
- firm infrastructure = finance, legal and quality management
A company needs to put the two types of activities together in order to define the path of the
business
Once activities have been defined a company has to list resources needed, some resources
might be used by only one activity others are shared between more so it is necessary to
allocate costs to every single activity.
Overhead costs are not allocated because they are below the operating costs, they are
financial costs (interests and taxes).
The EARNING POWER can be defined as the product of two factors:
the company’s ability to generate income on the amount of revenue it receives = net
profit margin
the company’s ability to maximize sales revenue from proper asset employment =
total asset turnover
Earning power = Net profit margin * total asset turnover
BORSA ITALIANA GUIDE
Borsa Italiana says that the Strategic plan is prepared to talk with different networks.
It is the document that illustrates the management’s aim relating to the company’s strategies,
the action which will be carried out for the achievement of the strategic aims, the evolution of
the KVDs and the expected results.
The drawing up of the strategic plan contributes to:
● improve the quality of management’s strategic aims
● direct the implementation of actions
● improve the corporate performances
The action plan in the strategic plan is an instrument that guides the main operating choices.
It is the document in which are illustrated:
the presentation of the effective competitive strategies operative at corporate and
SBU level
the management’s strategic aims
the actions carried out to reach strategic objectives
the evolution of the key value drivers
the expected results
We focus on 2 things:
- developing an investment case
- management roadshow → when we ask for new financial sources we do not think
only about one potential investment or one business angel, but we refer to different
categories of investors that could provide different kinds of resources.
The preparation of the strategic plan for listed companies is an occasion to compare and
evaluate their planning process.
The QMAT, quotation management admission test, covers everything that concerns the
business model adopted by a company, the significant stakeholders and the sector it
belongs to.
It is useful for all the financial communications requested for the IPO.
The strategic plan has to be good in order to convince people, for this reason we need some
minimum requirements:
financial sustainability → it must be considered in relation to the quality and quantity of the
sources of funding which the management intends to use in order to deal with the
requirements linked to the achievement of the strategy. Get control over the net financial
position (NFP)
The sources of funding must be aligned with the borrowing capacity of the company and the
risk profile of the company.
consistency → between the level of investment and expected results.
There must not be incongruities between goals, actions, available resources and results
reliability → appropriate and verifiable assumptions. A sensitivity analysis must be
conducted when variability and risk arise.
The content of the Strategic plan must emerge as realistic in terms of:
1. the performance and the market share
2. the market trends
3. the behavior of competitors
4. the structure and the distribution channels
5. the legislative, social and environmental context
COMPONENTS OF THE STRATEGIC PLAN
1. Strategy pursued → description of:
operative strategic layout
performance realized
need for strategic renewal
It identifies the positioning developed as a result of past choices and actions
2. Strategic aim = what the company would like to do. It identifies the plan via which the
company intends to create value for the shareholders
At SBU level the strategic aim must define:
- the positioning of the company within the overall value chain of the sector
concerned
- the configuration of the business model
- the targets of current and potential customers and the products’ portfolio
- the price strategy for the main products
- the current and prospective geographic areas within which to operate and the
distribution channels to use to reach customers
3. Action plan = what the company would like to do in practice → actions that reduce
the gap between the strategy pursued and the strategic aims.
- economic and financial impact and timetable
- investments to be made
- organizational impact of the individual action in terms of business model
- intervention on products portfolio
- actions which change the customer target
It has to provide the strategic aims with practicability and credibility
4. Assumptions = how to justify everything. The formulation of the assumptions
represent one of the most important stages of the entire process.
The drawing up of the assumptions depends on the business model of the company
and the economic model adopted
All strategic plans are evaluated on the basis of the assumptions and the financial
prospects associated with the strategic choices
5. Forecast financial data that have to be consistent with the strategic aims and the
action plan. They refer to the SBUs, distribution channels, geographic areas,
customer type and products or services
When the strategy and the action plan are defined, we are able to translate them into
numbers.
The goal is to define the value of the business and how the company is able to generate
value.
Business angels before giving money to a company they want to proceed with DUE
DILIGENCE. The check on the strategic plan should start off from the analysis of the
requisites that it has to satisfy.
They check on financial sustainability, consistency and reliability.
Financial sustainability = verify that the financial dynamics support the achievement of the
strategic objectives anticipated by the plan
Consistency between strategic aims and precise organizational actions
Reliability analyzed with respect to a series of dimensions pertaining to the competitive
context, historical results, the visibility and the sensitivity analysis.
One of the phases of the due diligence process is the analysis of organizational
sustainability.
It will be useful to look at:
I.
consistency between strategic aims and organizational actions
II.
realizable/feasible nature of the action plan
III.
estimate of the cash flow linked to the organizational investments
COMPETITIVE ADVANTAGE happens when a company is able to offer customers better
products and services at the same cost or in line with those of the competition at a lower
price.
It derives from the way in which within its business model the processes combine and
integrate.
If the existing advantage cannot be canceled within a short period of time, then it can be
defined as sustainable.
EXECUTIVE SUMMARY is extremely important, because sometimes people read only it and
not the entire document.
In this chapter the strategic project should be presented briefly, together with the guidelines
of the action plan and the main results expected.
Its purpose is to provide an overview of the content of the plan which will be detailed in
subsequent points.
What’s the effect of the VAT in the forecast?
VAT is not a cost and it is not a revenue, it has just a financial effect, not affecting the income
statement.
THe VAT calculation affects the Cash flow statement and the amount of bank overdrafts.
VAT in real life is something that we have to pay to our suppliers (so in real life we should
consider: purchases + VAT)
VAT is a general tax assumption on consumption.
The end consumer pays the overall VAT bill upon his purchase of goods or service
proportionally to the price he pays and depending on the fix VAT rate.
VAT of the period = VAT on sales - VAT on purchase
VAT on purchase > VAT on sales → the company matures a credit toward the tax office
Why is EBITDA the starting point?
EBITDA is the profit before interest, taxation, depreciation and amortization and it is the first
point of the cash flow statement because it can be considered as an operating cash flow if
we are assuming that we have collected everything from customers and paid everything to
suppliers.
If we have collected everything, net sales is an inflow of cash.
It could be like an operating cash flow, we assume that we have collected everything.
If we have paid everything it is an outflow of cash.
But we have some accounts receivables, inventories, because we can see them from the
balance sheet. (In the hypothesis of having collected everything, having paid everything and
having no changes in inventory, EBITDA is the operating cash flow.)
What is the free cash flow of a business and how is it calculated?
The free cash flow is the sum of cash from operating activities and cash from investing
activities.
It is the cash flow available to manage relationship with debtholders (repayment of financial
debt, pay interests) and relations with shareholders (distribute dividends)
It has to consider the cash flow from operations but even the cash flow from investing
activity, because we have to tell that it is the cash generated by the core business of the firm
and if we want to run the business even in the future we have to create a basis for the future,
so we have to invest in operating assets (machinery, patents → we will use them in the
operating activities).
Part of the cash flow is positive and it is used to support the ordinary investment of the
business.
It is the cash flow generated by the core business activities minus the amount of cash to run
the future business. It is the cash available for financing activities.
Contribution margin is the amount of profit that will be made by a company on each unit
that is sold above and beyond the break even quantity.
It is the difference between unitary revenue and unitary cost.
FIXED COSTS = costs that tend to not change according to production’s volume (payroll,
rent, R&D)
They are strictly related to production capacity
They are represented as a “step function”
VARIABLE COSTS = all costs that vary, we assume in a linear way, according to
production’s volume. Economies of scale and the learning process contribute to decrease
costs.
Their function is often a nonlinear one.
Define operating expenditure (OPEX)
Operating expenditure means costs concerning the core business.
Operating expenses are the costs that a company incurs for running its day-to-day
operations. OPEX are ongoing and repetitive costs.
Operating costs that are capitalized are called capital expenditure (CAPEX). It considers the
money an organization or corporate entity spends to buy, maintain, or improve its fixed
assets.
Do you think that in the post-money situation the financial statement will change
considering the operating activities?
NO, it will change just for items concerning financial activities.
The equity injection will have the effect of modifying some items of financial statements:
-
in the income statement: interests, taxation and net income
In the income statement: the ST debt with the bank decreases and in this way also
the interest decreases, if the interest changes also the level of taxation changes and
if the taxation changes also the net profit changes
-
in the balance sheet: share capital and reserves, net income, debt for taxation and
bank overdrafts
In the balance sheet: reserves and share capital change, net income changes, debt
for taxation changes and also the level of bank overdrafts changes
It does NOT change the core business activities.
By introducing the new injection of money, the financial need will be 0 even in the future.
It has a positive effect, because short term debt decreases over time.
What is the difference between the pre-money and the post-money situation?
The pre-money valuation refers to the value of a company not including external funding
from the business angel.
The post-money valuation includes outside financing or the latest capital injection.
The post-money value of the business is the pre-money value plus the new equity injection.
There is the injection of money from the business angel and thanks to the new injection of
money some items will change, not concerning the operating activities (= core business
activities).
The equity injection will have the effect of modifying some items of financial statements:
- in the income statement: interests, taxation and net income
- in the balance sheet some items: share capital and reserves, net income, debt for
taxation, bank overdrafts.
By introducing the new equity injection, the financial need will be 0 even in the future.
In post-money situation, financial need is covered through negative bank account which is as
maximum equal to 10%-20% of sales in the previous year
A company should choose between different kinds of debt considering its goal.
Debt could be:
- term loans = fixed sum of money repaid over a defined period of time usually secured
by the borrower’s collateral.
- line of credit = ST debt with bank = fluctuating debt balance. It is an arrangement
between the bank and a customer that establishes the maximum loan amount that
the customer can borrow, usually its between 10%-20% of total sales of the previous
year
- other types of debt = bond, convertible bond
BUSINESS ANGELS are serial entrepreneurs with a lot of cash, high net wealth individual or
associations of medium public and private investors.
They bring many benefits: equity injection, strong business knowledge, support designing
the business plan, network of consultant and access to first clients
VENTURE CAPITAL = specialized financial companies for start-up technologies that
demand a high share of the equity and a few board members.
It forces company’s growth.
The Venture capital’s 4 rules are:
1. at least one star
2. maximize the exit
3. reinforce business building
4. excellent screening process
When an investor analyzes a business he looks at the market opportunity then there is the
value proposition, the management team, because people make the difference and the
financial results
Monthly cash flow shows on a monthly basis how much cash is available in bank accounts.
It analyzes all items considering all the assumptions, answering the question in which month
there will be the monetary inflow or outflow.
The sum of monthly data at the end must be equal to the total annual amount.
It is important because the annual cash flow statement may hide some information if we
have a negative pick that is reached on a month before december and then re-absorbed by
positive cash flo from operation.
Business Valuation is the process of determining the economic value of a business or
company. It depends on the quality of forecasts and it has to justify numbers.
Company’s valuation will allow to define the fair value of the company and define ownership
percentages
We have two goals:
1. define the value we would like to use to deal with the business angel (the fair value of
the company)
2. define the percentage of ownership that we will give
It depends on the quality of forecasts and it has to justify numbers.
There are several methods
Company’s valuation is obtained through:
- the DCF method (Discounted Cash Flow), according to this method the value of the
firm is estimated as the present value of the future cash flows available to
shareholders and lenders.
It considers the ability of the company to generate cash from the future core business
activities
- average income
It considers the future income of the company. Income is good only if it is translated
into cash generated
- multiples
It uses marketing information about companies that have similar characteristics
The average results obtained through calculations are called pre-money valuation.
Post-money enterprise value = discounted pre-money enterprise value + Business
angel’s investment
Discounted pre-money enterprise value = pre-money enterprise value * (1- discount rate)
TERMINAL VALUE = value of the business beyond the forecasted period when future cash
flows can be estimated. It is necessary to discount it to know its value at present time.
CLIENTS VS CUSTOMERS
The client is a particular kind of customer and it should be served in a particular way.ùA
company sells them personalized products, customized service and special discounts.
The relationship with a client has a LT orientation.
Clients focus on margin and professional expertise represents the key.
They have a highly individualized attention
Customers are just those who buy, any user. A customer is a person who simply buy the
product. They are the end user of a product and might not have been the actual customer
who purchased the product.
The relationship with a customer has a ST orientation.
Customers focus on volume. The professional expertise is not as critical as for clients
Thay pay more attention to routine.
CONSUMERS = are the end users and might not have been the actual customer who
purchase the product
PRICING is the hardest decision an entrepreneur is called to take.
The chosen price is supposed to be:
→ interesting for customers
→ challenging and coherent with the price of competitors.
In order to define the price it is necessary to consider the 3 clear milestones methodology:
- customers analysis in order to define the maximum price.
In order to analyze the customers, an entrepreneur can apply 3 different methods:
buy response = through a survey the company tries to understand how much
customers would buy at different prices
joint analysis = an entrepreneur tries to understand the effect that both price
and products’ features have on customers
economic value for the customer = the entrepreneur tries to compare the new
product with an old or a competitors’ one.
- the costs/company analysis in order to define the minimum price that can be charged
In order to analyze the cost there are 3 methods:
full cost
direct cost = from the accounting system it allows to directly allocate costs to each
productive line
break even cost = cost that permits to cover fixed costs and variable costs. it is the
cost with which a company can achieve an operating profit equal to 0.
- the competitors analysis in order to position the business.
An entrepreneur has to consider the cost structure of the market (monopoly,
undifferentiated oligopoly, differentiated oligopoly, pure competition or monopolistic
competition).
In order to define the price an entrepreneur has to consider:
> the willingness to pay so the maximum amount that a consumer accepts to pay
> the VAT, valued added tax
> the average unitary revenue, which is lower than the price.
The price is strictly related to 2 external key elements and an internal one:
→ perceived benefits, concerning the willingness to pay
→ perceived sacrifice, meaning that a consumer decides to buy a company’s product and
refuses to by that of another one
→ company’s cost structure which is the difference between unitary cost and marginality of
the business
If the price is too high the company will not be able to sell its products
If the price is too low customer may think that there could be something bad with the product
and this could cause some issues about quality and could lead to troubles in defining prices
in the long term.
When a company defines the price it has to consider both the customers’ point of view
(market analysis) and the company’s point of view (internal analysis)
Pricing is a complex process that needs a lot of information about: targets, positioning
strategy, competitors, potential competitors, technical products’ advantages, customer
behavior, legal constraints and cost structure.
Prices need to deliver: margins and profits, ROI, production levels, market share, increasing
sales at start-up time, the expected perceived quality.
The price does not remain the same over time, it can change according to the increase
reputation of the brand or thanks to the introduction of new technologies.
The chosen strategy influences pricing.
Skimming price is a pricing strategy in which a firm charges a high initial price and then
gradually lowers it to attract more price-sensitive customers.
The focus with this pricing strategy is to increase the profitability of the company changing
the price in the right way.
In order to apply this specific pricing strategy a company needs to analyze the market which
has to be characterized by specific conditions:
- an inelastic demand, meaning that even if the company charges a higher price,
customers will continue buying its products
- the products should have a short life cycle
- the company is self-funding from profits
- possibility to test and segment the demand
The penetration price is a pricing strategy in which a firm charges a low price in the attempt
to push volumes and gain a large market share. With this pricing strategy a company applies
high discounts at the beginning.
This strategy is usually used by start-up companies.
The focus is not on profitability, but it is on increasing volume.
In order to apply this pricing strategy the market has to be characterized by some conditions:
- elastic demand, meaning that if the company lowers the price, customers will buy
more
- presence of economies of scale
- presence of strong competitors
- possibility to widen the market
COMPANY'S VALUE → the strategic planner’s ultimate goal is to translate the strategy into
value for the markets.
There are different kinds of value
The MARKET VALUE is the value coming from a transaction. If a company is listed it is the
price of the shares. If the company is not listed, then he market value is defined through a
transaction with a contract.
It concerns volatility, it depends on the market and on the expectations of the market
The BOOK VALUE is the value written in the balance sheet, it is an accounting value
obtained using accounting rules.
It increases year by year thanks to the profit generated by the company, because profits
increase equity.
The ECONOMIC VALUE is the worth of the company determined by the market preferences.
It is useful to define forecasts and how the new strategy will create new value.
It is destined to increase due to the positive effect of the new strategy.
It is the result of the estimation useful to define the potential value of a business,
The WINDING-UP VALUE, also called liquidation value, is the value in case of liquidation of
the business. It could be higher than the book value, when the liquidator tries to sell the
assets in the net operating capital by splitting the whole company and does his best to sell
these elements and to obtain the best he can.
The difference between liquidation value and book value is due to the hidden reserves
The difference between the economic value and the liquidation value is due to future
planned profits
The difference between the economic value and the market value is the market euphoria.
Sometimes the market value can be lower than the economic value because the price of
shares does not reflect the estimated economic value. In this case managers, given the fact
that they run the day by day of the business, take the opportunity to invest in the business as
shareholders exploiting information asymmetry. This action is called management buyout
(MBO).
If the market value is lower than the liquidity value, then the company s splitted and different
assets are sold at a lower price.
If the MV < WV it means that the company is really in trouble and they are forced to sell at a
lower price
If the market value is lower than the book value this could be due to 3 different scenarios:
1. the stock is undervalued
2. the company’s assets may be overvalued. The market does not recognize the value
of some assets
3. the return on invested capital is poor, meaning there are too many assets and a low
performance (ROA)
BALANCED SCORECARD focuses on the value intangibles created thanks to the action
plan. It communicates the multiple, linked objectives that the company must achieve to
compete based on its intangible capabilities.
It translates mission and strategy into goals and measures along 4 perspectives: financial,
customer, internal business processes, learning and growth.
It is a bottom-up approach explaining why the company is able to follow the path. It needs to
be coherent with vision and mission.
It is necessary to identify the processes in which the firm must excel in implementing its
strategy.
On the right there are the key initiatives that the company has to do in order to put into
practice the strategy and achieve results.
INCOME STATEMENT concerns one year, the year after comes back completely blank
BALANCE SHEET reports all resources that will become cash in the future and others that
will be costs
STATEMENT OF CASH FLOWS shows how the company’s working capital flows into and
out of the business during the year.
It includes:
Cash flows from operating activities > difference between all the cash received by the
business and all the cash paid out by the business in conducting its day by day
operations
receipts > all cash received from sales, changes in account receivable and
changes in inventory
payments > all payments made by the company to all accounts (suppliers,
employees, rent, utilities)
Cash flow from investing activities > acquisition or sale of plant assets
Cash flow from financing activities > proceeds from issuance or sale of stock, bonds.
FREE CASH FLOW = the sum of cash operating activities and cash from investing activities
The primary objective of preparing financial plans is to estimate the future financing
requirements in advance of when the financing will be needed.
Most firms engage in 3 types of planning:
a. strategic planning → defines in very general terms how the firm plans to make money
in the future. It has to present investment and also the result of the new strategy. It
serves as a guide for all other plans
b. long term financial planning → considers a period of 3 to 5 years and incorporates
estimates of the firm’s income statement and balance sheets for each year of the
planning horizon
step 1: construct a sales forecast
step 2: prepare pro-forma financial statements (percentage on sales method)
step 3: estimate firm's financial need
c. short term financial planning → considers a period of one year or less and is a very
detailed description of the firm’s anticipated cash flows.
It is typically presented in the form of a cash budget that contains details concerning
the firm’s cash receipts and disbursements.
Cash budget is a useful tool for predicting the amount and timing of the firm’s future
financing requirements
Steps in financial forecasting:
1. construct a sales forecast > based on past trend in sales, influence of any anticipated
event that might affect the trend
2. prepare pro-forma financial statements > use the percent of sales method that
expresses future expenses assets and liabilities as a percentage of sales
3. estimate the firm’s financing needs > indirectly, mixed, directly method.
DIRECT AND INDIRECT METHOD FOR THE CASH FLOW STATEMENT
INDIRECT METHOD means starting from the existing numbers, applying general
assumptions and formulas to find results.
It is easier to prepare compared to the direct one.
It explains the net cash flow that is provided by operating activities, beginning with the
amount of profit and loss for the year and adding or deducting revenue and expense items
that do not affect cash.
DIRECT METHOD is encouraged by the international financing reporting standard (IFRS) as
it provides detailed information about major classes of gross cash receipts and gross cash
payments.
It lists 3 types of expense: start-up, fixed and variable.
It breaks down the changes in bank account month by month
The difference between the two methods is in the calculation of the cash flow from operating
activities.
ABC: ACTIVITY BASED COSTING is the process of allocating costs to different activities.
Once we have defined the activities, we have to list all the resources that we need and also
the amount.
Some resources are used only by one activity, while others are used by more activities and
in this case we need to share costs.
From this analysis we can understand which activities need the main part of the investment.
Some costs are direct → they go directly in the list of costs of a SBU
Some costs are indirect → they are in common between two or more SBUs.
JUDGEMENTAL MODELS are qualitative estimates based on experts’ opinion. They can be:
- survey of sales forces
- surveys of customers
- historical analogy
- market research = surveys, tests and observations
- delphi method = use of a panel of experts to obtain consensus of opinion
SOURCES OF SPONTANEOUS FINANCING = part of financial need can be covered by
something that is happening inside the company, through the EBITDA.
It means that profit generated by the core business helps the company to finance itself
So accounts payables and accrued expenses are typically the only liabilities that vary
directly with sales and they are referred to as sources of spontaneous financing
SOURCES OF DISCRETIONARY FINANCING
Raising financing with notes payable, LT debt and common stock requires managerial
discretion and hence these sources of financing are called discretionary sources of
financing.
Profit is different from profitability.
Profit: it is the absolute number that is earned on an investment
Profitability: it is the return on our investment (ROE, ROA, ROI)
Sensitivity analysis is a technique that helps you evaluate how different factors affect the
outcome of your strategic plan. It can help you identify the key drivers of your performance,
the risks and opportunities of different scenarios, and the trade-offs and priorities of your
decisions