Chapter 5 Financial strategies over the life cycle
Description: Chapter 5 Financial strategies over the life cycle Corporate Financial Strategy 4th edition Dr Ruth Bender Financial strategies over the life cycle: contents Learning objectives Life cycle model Shake-out period Portfolio matrix
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slide1. Chapter 5 Financial strategies over the life cycle Corporate Financial Strategy 4th edition
Dr Ruth Bender<br>
slide2. 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 2<br>
slide3. Learning objectives Understand what financial strategy is, and how it can add value.
Explain why shareholder value is created by investments with a positive net present value.
Appreciate how the relationship between perceived risk and required return governs companies and investors.
Differentiate the different models of measuring shareholder value.
Explain why share price is not necessarily a good proxy for company value.
Outline how agency theory is relevant to corporate finance. 3<br>
slide4. Life cycle model 4<br>
slide5. Shake-out period 5 Time Historical fast growth in sales Sales / capacity Anticipated sales forecast used to justify capacity increases Overcapacity position Actual sales level<br>
slide6. Portfolio matrix incorporating product life cycle 6 Relative market share High Low Low/negative High Funding Star Dog Cash cow ? Rate of market growth Based on Boston Consulting Group<br>
slide7. Portfolio matrix incorporating product life cycle 7 Relative market share High Low Low/negative High Funding Rate of market growth Based on Boston Consulting Group ï‚«<br>
slide8. Unknowns decrease over the life cycle 8 LAUNCH
Product risk
Market acceptance
Market share
Size of market at maturity
Length of maturity period
Maintenance of market share
Rate of eventual decline GROWTH
Market share
Size of market at maturity
Length of maturity period
Maintenance of market share
Rate of eventual decline MATURITY
Length of maturity period
Maintenance of market share
Rate of eventual decline DECLINE
Rate of eventual decline<br>
slide9. Net cash flows at different stages of development 9 GROWTH
Cash inflow
Sales High
Cash outflow
Marketing, fixed assets,
Working capital, etc. High
Net cash flow ?
Cash flow starts negative, becoming neutral or positive LAUNCH
Cash inflow
Sales Low
Cash outflow
R&D, launch Marketing,
fixed assets, etc. High
Net cash flow Negative MATURE
Cash inflow
Sales High
Cash outflow
Ongoing cost base Low
Net cash flow Positive DECLINE
Cash inflow
Sales Low
Cash outflow
Maintenance Low
Net cash flow Negative
Cash flow starts positive, becoming neutral<br>
slide10. Modified Ansoff matrix 10 Products Existing New New Existing Markets Related Related Core business growth strategy Customer-led growth strategy Product-led growth strategy Diversification strategy<br>
slide11. Financial strategy changes over the life cycle 11<br>
slide12. Cost of capital in a divisional structure 12 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<br>
Dr Ruth Bender<br>
slide2. 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 2<br>
slide3. Learning objectives Understand what financial strategy is, and how it can add value.
Explain why shareholder value is created by investments with a positive net present value.
Appreciate how the relationship between perceived risk and required return governs companies and investors.
Differentiate the different models of measuring shareholder value.
Explain why share price is not necessarily a good proxy for company value.
Outline how agency theory is relevant to corporate finance. 3<br>
slide4. Life cycle model 4<br>
slide5. Shake-out period 5 Time Historical fast growth in sales Sales / capacity Anticipated sales forecast used to justify capacity increases Overcapacity position Actual sales level<br>
slide6. Portfolio matrix incorporating product life cycle 6 Relative market share High Low Low/negative High Funding Star Dog Cash cow ? Rate of market growth Based on Boston Consulting Group<br>
slide7. Portfolio matrix incorporating product life cycle 7 Relative market share High Low Low/negative High Funding Rate of market growth Based on Boston Consulting Group ï‚«<br>
slide8. Unknowns decrease over the life cycle 8 LAUNCH
Product risk
Market acceptance
Market share
Size of market at maturity
Length of maturity period
Maintenance of market share
Rate of eventual decline GROWTH
Market share
Size of market at maturity
Length of maturity period
Maintenance of market share
Rate of eventual decline MATURITY
Length of maturity period
Maintenance of market share
Rate of eventual decline DECLINE
Rate of eventual decline<br>
slide9. Net cash flows at different stages of development 9 GROWTH
Cash inflow
Sales High
Cash outflow
Marketing, fixed assets,
Working capital, etc. High
Net cash flow ?
Cash flow starts negative, becoming neutral or positive LAUNCH
Cash inflow
Sales Low
Cash outflow
R&D, launch Marketing,
fixed assets, etc. High
Net cash flow Negative MATURE
Cash inflow
Sales High
Cash outflow
Ongoing cost base Low
Net cash flow Positive DECLINE
Cash inflow
Sales Low
Cash outflow
Maintenance Low
Net cash flow Negative
Cash flow starts positive, becoming neutral<br>
slide10. Modified Ansoff matrix 10 Products Existing New New Existing Markets Related Related Core business growth strategy Customer-led growth strategy Product-led growth strategy Diversification strategy<br>
slide11. Financial strategy changes over the life cycle 11<br>
slide12. Cost of capital in a divisional structure 12 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<br>