Corporate Financial Strategy
4th edition
Dr Ruth Bender
Chapter 5
Financial strategies over the life cycle
Corporate Financial Strategy
Financial strategies over the life cycle: contents
 Learning objectives
 Life cycle model
 Shake-out period
 Portfolio matrix incorporating product life cycle [with names]
 Portfolio matrix incorporating product life cycle [with pictures]
 Unknowns decrease over the life cycle
 Net cash flows at different stages of development
 Modified Ansoff matrix
 Financial strategy changes over the life cycle
 Cost of capital in a divisional structure
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Learning objectives
1. Understand what financial strategy is, and how it can add value.
2. Explain why shareholder value is created by investments with a
positive net present value.
3. Appreciate how the relationship between perceived risk and required
return governs companies and investors.
4. Differentiate the different models of measuring shareholder value.
5. Explain why share price is not necessarily a good proxy for company
value.
6. Outline how agency theory is relevant to corporate finance.
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Life cycle model
Launch
Maturity
Growth
Decline
£
Sales
0
Time
Profits
Cash flows
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Shake-out period
Anticipated sales forecast used to justify
capacity increases
Sales /
capacity
Overcapacity position
Actual sales level
Historical
fast growth
in sales
Time
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Portfolio matrix incorporating product life cycle
High
Star
?
Rate of
market
growth
Cash
cow
Dog
Low/negative
High
Low
Relative market share
Based on Boston Consulting Group
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Portfolio matrix incorporating product life cycle
High
Rate of
market
growth

Low/negative
High
Low
Relative market share
Based on Boston Consulting Group
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Unknowns decrease over the life cycle







LAUNCH
Product risk
Market
acceptance
Market share
Size of market at
maturity
Length of maturity
period
Maintenance of
market share
Rate of eventual
decline
Corporate Financial Strategy
GROWTH
MATURITY
 Market share
 Size of market at
maturity
 Length of maturity
period
 Maintenance of
market share
 Rate of eventual
decline
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 Length of maturity
period
 Maintenance of
market share
 Rate of eventual
decline
DECLINE
 Rate of eventual
decline
Net cash flows at different stages of development
GROWTH
LAUNCH
Cash inflow
Sales
High
Cash outflow
Marketing, fixed assets,
Working capital, etc. High
Cash inflow
Sales
Low
Cash outflow
R&D, launch Marketing,
fixed assets, etc.
High
Net cash flow
?
Net cash flow
Negative
Cash flow starts negative,
becoming neutral or positive
MATURE
DECLINE
Cash inflow
Sales
Cash outflow
Ongoing cost base
Cash inflow
Sales
Cash outflow
Maintenance
Net cash flow
High
Low
Positive
Net cash flow
Low
Low
Negative
Cash flow starts positive,
becoming neutral
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Modified Ansoff matrix
Products
Existing
Existing
Core
business
growth
strategy
Related
New
Customerled growth
strategy
Markets
Related
Productled growth
strategy
Diversification
strategy
New
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Financial strategy changes over the life cycle
Corporate Financial Strategy
GROWTH
LAUNCH
Business risk high
Financial risk low
Funding equity (float)
Dividend payout nominal
Growth high
P/E high
Eps low
Share price growing & volatile
Business risk very high
Financial risk very low
Funding equity (venture capital)
Dividend payout nil
Growth very high
P/E very high
Eps nominal
Share price growing &
highly volatile
MATURITY
DECLINE
Business risk medium
Financial risk medium
Funding debt
Dividend payout high
Growth medium / low
P/E medium
Eps high
Share price stable with
limited volatility
Business risk low
Financial risk high
Funding debt
Dividend payout total
Growth negative
P/E low
Eps declining
Share price declining & volatile
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Cost of capital in a divisional structure
This extract from the financial
report of Henkel shows that
divisions with different risk
profiles are given different
WACCs
Source: Henkel 2012 financial statements,
page 54
www.henkel.com
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