Strategic Financial Management - Case Study Example

Strategic financial management – The News Corporation Introduction In order to measure the performance of firms within the international market, it is necessary to refer primarily to their operational strategies and their strategic plans in general. In this way, the targets of the firms in the long term can be identified offering the appropriate basis for the evaluation of the firms’ strategic options regarding their various activities. Towards this direction, Neely (2002, 295) noticed that ‘the key benefit in the process of deciding what to measure appears to lie in the fact that the process forces management teams to be explicit about their priorities’. On the other hand, Robertson et al. (1995, 547) who stated that ‘because private sector organizations are driven primarily by market or consumer preferences, organizational effectiveness is more readily measured in terms of efficiency and profitability’. In practice, the performance of firms is measured using the appropriate tools of strategic and financial analysis which are presented below. In this paper, the firm under examination is News Corporation, one of most powerful firms within the media industry worldwide. In accordance with the corporate website ‘News Corporation is a diversified entertainment company with operations in eight industry segments: filmed entertainment; television; cable network programming; direct broadcast satellite television; magazines and inserts; newspapers; book publishing; and other’ [1]. The performance of the firm is measured using the appropriate tools of strategic analysis like the Porter’s model of five forces, the SWOT analysis, the PESTEL analysis. On the other hand, the financial efficiency of the firm is measured through the estimation/ calculation of a series of ratios based on the financial data published by the firm for the last 2 years. Appropriate assumptions are then made regarding the expected performance of the firm in the future. 2. Financial analysis The firm’s financial analysis is made through the calculation of a series of ratios that have been divided into three main categories in accordance with their relation with the firm’s operational activities. The ratios related with the firm’s performance are included in the Appendix section while the results are going to be analyzed and explained in current section. It should be noticed that currently the firm is continuously developed reaching the $30 billion as total revenues for 2007 (see the corporate website, [1]). The most significant results from the calculation of the firm’s ratios for the years 2004 and 2005 are the following ones: the firm’s working capital was increased reaching the 1.924 in 2005 while in 2004 it was 1.558. This means that the firm’s ability to distribute the roles and the responsibilities among its employees has been improved. The above assumption is also supported by the fact that the firm’s return on capital employed has been improved. In fact, the firm has improved its policies related with the utilization of its capital and its resources and in this way its performance has been improved. In fact, in 2005 the return on capital employed was 8.496% while in 2004 it was 7.37% (a significant increase). On the other hand, it is proved that the firm has appropriately used its financial reserves through a series of profitable investments. In this context, it is noticed that in 2004 the return on investment is 0.131 while in 2005 it is slightly decreased reaching the 0.121. At a next level, with a reference to the firm’s price/ earnings ratio (22.81 for 2005) we could notice that the firm has managed to keep the value of its assets through a series of appropriate investments that led afterwards to the increase of the firm’s profits (as it is proved in the firm’s financial statements until today), see [2]) The performance of the firm through the years can be proved using the figures related with the working capital ratio as calculated for the years 2000 up to 2007. In accordance with the relevant results (see Appendix section) the use of the firm’s resources has been improved the last years – in fact a continuous improvement of the relevant activity can be observed with a working capital ratio of 2.122 in 2007 while in 2000 the same ratio was 1.457 (a significant increase). The development of the firm’s working capital ratio is represented in the Appendix section (see Graph 2). On the other hand, the return on capital employed (see also Graph 3, Appendix) of the firm presents as significant variation. In 2007 ROCE was estimated to approximately 6.2% however in previous years the relevant figure was higher (in 2002 the firm’s ROCE reached the 19.2% while in 2005 the relevant ratio was approximately 8.496%). The above figures prove that the firm has a significant presence in its market however still its stability is not absolutely secured. The performance of the firm’s investment choices could be evaluated using the ratios related with the return on investment (ROI). It seems that the firm has managed to retain the performance of its investments at a stable level the last four years (0.131 in 2004 up to 0.10 in 2007) while in the past the specific sector of corporate activity could not be characterized as totally positive (in 2001 ROI was just 0.015). As for the firm’s profitability, it seems that it reached its highest level in 2002 (with a net profit margin ratio of 79.3%). However, in the last 4 years the relevant ratio remains at specific levels (11.9% in 2007 from 8.91% in 2005). The firm should proceed to the appropriate investment decisions taking into account the risks related with the possible turbulences in the local (Chinese) economy. 3. Marketing Analysis One of the most significant priorities when promoting specific services or products to the customers is the design of an appropriate marketing strategy. The marketing strategy followed by a firm is usually differentiated in accordance with the characteristics of the market involved, the needs of the customers and the firm’s targets especially in the long term. A series of indicative marketing strategies has been proposed by Cravens (1989, 18): ‘market domination strategy could be used by a firm that tries to achieve or hold the dominant competitive position in an industry: a market development strategy seeks to expand market boundaries to generate enhanced performance: a market selectivity strategy is defined as trying to dominate one or a few market segments in heterogeneous markets; finally, a firm may employ a differential advantage strategy where it seeks to develop and exploit a competitive advantage in a homogeneous market’. However, the marketing strategies presented above are – as already explained - just indicative. In fact, firms can formulate their own marketing strategy in accordance with the strategic options available and the customer’s preferences within a specific market. However, the relevant decision is taken by marketers – who can be the firm’s employees or independent consultants. Towards this direction, it is stated by Aufreiter et al. (2000, 53) that ‘when traditional marketers think of organization, they mean structure: distinct product, channel, and customer groups focusing on specific functional tasks, such as brand management, customer segment management, and market research while functional managers play the pivotal roles in these functionally focused groups, which are responsible for generating ideas and taking them to market’. In the case of News Corporation, the observation of the firm’s marketing strategies can lead to the following assumptions: the firm has used the appropriate strategies in order to approach customers around the world emphasizing on the improvement of techniques used in marketing policies and increasing the funding available for marketing initiatives. These efforts resulted to the increase of the firm’s profitability the last years. 4. HRM analysis The reference to the firm’s HR strategies is considered as necessary in order to evaluate its performance in the long term. In this context, it is noticed by Schuler et al. (1998, p.159) that the firms’ strategic plans should be based on a series of criteria, especially the following ones: ‘a) the business structure, b) the legislative and employment relationship context, c) the patterns of HRM competence and decision-making and d) the national culture’. On the other hand, it is noticed by Harris et al. (2004, 156) that ‘the particular set of HR practices that an organization adopts must fit with other organizational factors in order for it to be effective’. However, the firms’ managers can choose among several strategies when having to decide on the HR policies that will be applied in the long term. Towards this direction, it has been found by Kesler et al. (1997, 30) that HR strategies applied by firms could be divided into the following three categories: ‘a. aligning organization, b. developing capabilities, c. managing performance’ (Kesler et al., 1997, 30). From a similar point of view, it is suggested by Lajara et al. (2002, 34) that the strategies applied by firms that operate within the international market should focus on the following issues/ areas: ‘1) leadership and employee motivation and 2) HR practices (recruitment and selection, training performance appraisal and compensation management)’ (Lajara et al., 2002, 34-36). All the above issues should be taken into consideration by the managers of News Corporation when having to decide on the HR policies applied throughout the particular organization. 5. Operations analysis In order to evaluate accurately the firm’s performance it is necessary to refer to its operational strategies across all its particular departments. In this context, it has been noticed by Rand (1999, 97) that ‘businesses fail because management does not have effective control of the business as management is too far removed from revenue-producing processes’. Moreover, it is made clear that in order to measure the firm’s performance a series of organizational activities should be examined, especially the following ones: ‘inputs (materials, energy, information, management, technology, facilities and labor), transformation (or conversion process) and disposition (marketing and sales)’ (Gomez et al., 2002, Ch. 15). The analysis of the particular firm’s operations could be divided into particular categories in accordance with the organizational activities. More specifically, the following parts of the firm’s operational framework should be analytically examined: a) management, b) suppliers, c) technology, d) development of services and e) workplace conditions (firm’s offices, access to facilities and support, communication and so on). 6. SWOT analysis a. Strengths The main strength of News Corporation is considered to be its position within the market. More specifically, because of its position, the firm has a significant advantage over its competitors. The firm’s position which is decided on its performance can help the firm to further improve their profitability through the identification of the appropriate strategic opportunities as the firm’s leader admits. b. Weaknesses News Corporation does not seem to have particular weaknesses. However, in 2001 and 2002 the profitability of the firm was reduced (see also case study, pg. 758). This means that the firm is affected by the turbulences occurred in the international market (the events of September the 11th seems that had their influence on the firm’s performance as in all firm’s operating within the international market). In other words, the company is not yet developed at a level that it can ensure its profitability in the long term. c. Opportunities News Corporation operates in the media industry. The particular industry currently faces a significant growth around the world. In fact, media industry could be characterized as one of the most profitable ones if compared with other industrial sectors. For this reason, News Corporation should try to expand its activities around the world by promoting its strengths and its advantages towards its rivals within the same industry. d. Threats As already stated above, the firm had significant losses in the years 2001 and 2002. The above finding can lead to the assumption that the firm is threatened by the turbulences of the international market while it seems that the mechanisms that could protect the firm by the unexpected changes in the market have not been developed yet. 7. PESTEL analysis Political The firm does not have a main place of activities. In fact, it can be considered as operating simultaneously around the world. For this reason, the possible negative political events occurring within a country are not expected of having a significant influence on the firm’s operational activities globally. Just a temporary influence would be expected and at a local level. Economical In the context, already developed above it should be noticed that the company operates in a market in which competition is extremely strong and every firm that is interested to survey has to proceed to appropriate strategic cooperation. However, the financial power of the firm is significant and therefore no particular consequences are expected to be observed in this firm if taking into account the global financial crisis. Social The development of business activities worldwide has led to the independence of the firm from specific social and cultural traditions. However, within each particular region the firm’s representatives support the development of local traditions and culture at the level that no negative effect on the firm’s performance is caused. Technical The firm is highly depended on the technology. For this reason, it could be noticed that possibly changes in this area should be tracked by the firm trying to innovate its products in all its departments avoiding the failures of the ‘last minute’. Environmental The development of an appropriate environmental strategy is among the necessities for the increase of firm’s profitability in the long term. More specifically, the last years the close monitoring of the environment related with specific corporate activities (location of firm’s branch) is considered to be of significant importance for any firm worldwide. However, in order for this plan to be effective, it is necessary to proceed primarily to a thorough assessment of the physical environment and the firm’s establishments around the world. Legal Legal issues that could possibly appear in the specific industrial sector should be resolved using the appropriate managerial technique. In any case, the particular firm is not considering having any differentiation from existing legal framework accepting totally its content. 8. Porter’s Five Forces One of the most significant models for the evaluation of the competitive position of a firm within the modern market is the Porter’s five forces. If this model (as presented in Appendix section) is used in the case of News Corporation, the following assumptions would be made: a) the firm is already a strong competitor in the market and it should not afraid of the potential of appearance of substitute products. On the other hand, the power of customers to intervene in corporate activities should be considered as limited. However, the competition of the market is extremely strong. For this reason, the frequent review of the corporate plan applied in the particular case, is necessary. Regarding the above, it should be also mentioned that there are not much chances for new entrants in the specific industrial sector in which the competition is extremely strong and it is very difficult for new firms to survive in this sector especially in the long term. As explained above, the relationship between the firm and its suppliers is appropriately developed and for this reason it could not be expected that the suppliers of the firm would press the latter to proceed to specific changes on their existing relationship. 9. Critical success factors for success in the industry News Corporation operates in the media industry. In order to succeed in the particular industrial sector the firm should develop the following advantages towards its competitors: a) more active presence in the market (increase of the funds available for marketing), b) participation in social events and environment – related activities, c) development of the HR strategies applied and improvement of the firm’s remuneration towards its employees and d) review of the firm’s strategic visions and plans as of their feasibility and applicability in current market conditions. 10. Strategic position of the organization 10a. Potential Future Strategies - selection In accordance with the above, the following strategies would be available to the firm in the long term: a) further expansion of corporate activities around the world, b) advanced features of technology would promote the level of work and the profitability of the firm. A relevant assessment of this issue would be of particular importance for the evaluation of the problem. Other strategies could be possibly implemented in accordance with the firm’s needs and the market’s competition. 10b. Detailed Recommended Strategy and Risk Assessment   In order to identify the most appropriate business strategy for News Corporation we should primarily review carefully all issues related with corporate activity, referring with details to all the issues/ sectors the realization of which is delayed. In this context, it is supported by Parnell (2003, 16) that ‘in many respects, the evidence for the existence of a strategy can permeate an organization; its customers appreciate knowing what a company is attempting to accomplish and prospective investors tend to hesitate when they do not have a clear grasp of the firms position and future priorities’. In other words, even if no differentiation from existing strategy will take place, the firm needs to apply specific measures in order to ensure that existed plans of action are applied throughout the corporate activities. References Aufreiter, N., Lawyer, T., Lun, C. (2000). A New Way to Market. The McKinsey Quarterly, 53-58 Cravens D. W., Hills, G. E., LaForge, R., Lunsford, D. (1989). Toward a Theory of Marketing Strategy for New Ventures: Some Preliminary Propositions. In Proceedings of the Winter Educators Conference. Chicago: American Marketing Association Gomez-Mejia, L., Balkin, D. (2002). Management, 1e. The McGraw-Hill Companies Harris, H., Sparrow, P. (2004) Globalizing Human Resource Management. New York: Routledge Kesler, G.C., Law, J.A. (1997). Implementing Major Change in the HR Organization: The Lessons of Five Companies. Human Resource Planning, 20(4):26-37 Lajara, B.M., Lillo, F.G., Sempere, V.S. (2002) ‘The role of human resource management in the cooperative strategy process’, Human Resource Planning, 25(2): 34-46 Neely, A. (2002). Business Performance Measurement: Theory and Practice. Cambridge University Press. Cambridge, England Porter, M. (1998) On Competition. Harvard Business School Press Rand, T. (1999). Why Businesses Fail: an Organizational Perspective. Emergence, 1(4): 97 Robertson, P. J., Seneviratne, S. J. (1995). Outcomes of Planned Organizational Change in the Public Sector: A Meta-Analytic Comparison to the Private Sector. Public Administration Review, 55(6): 547-558 Schuller, R., Rogovsky, N. (1998). Understanding compensation practices across firms: the impact of national culture’, Journal of International Business Studies, 29(1): 159-172 http://www.newscorp.com/investor/index.html [1] http://www.newscorp.com/investor/annual_reports.html [2] Appendix Figure 1 – Porter - Five Forces (source: Porter, 1998, 22) RATIOS 1. CURRENT RATIO (or Working Capital ratio) Formula: Current Assets / Current Liabilities a. Year 2000: 13127/ 9008 = 1.457 b. Year 2001: 16173/ 9776 = 1.654 c. Year 2002: 14647/ 11005 = 1.330 d. Year 2003: 14861/ 9303 = 1.597 e. Year 2004: 10,999/7,058 = 1.558 f. Year 2005: 12,799/6,649 = 1.924 g. Year 2006: 13123/ 6373 = 2.059 h. Year 2007: 15906/ 7494 = 2.122 2. RETURN ON CAPITAL EMPLOYED (ROCE) Formula: (Net Profit before tax / (Total assets - Current liabilities)) x 100 a. Year 2000: (2737/ (65585-9008)) x 100 = (2737/56577) x 100 = 4.8% b. Year 2001: (746/ 84961-9776)) x 100 = (746/75185) x 100 = 0.9 % c. Year 2002: (11962/ (71441- 11005)) x 100 = (11962/ 60436) x 100 = 19.7% d. Year 2003: (1808/ (67747 – 9303)) x 100 = (1808/ 58444) x 100 = 3% e. Year 2004: (2,755/ (48,343 – 10,999)) x 100 = (2,755/37,344) x 100 = 7.37 % f. Year 2005: 3,561/ (54,692 – 12,779)) x 100 = (3,561/ 41913) x 100 = 8.496 % g. Year 2006: (2812/ (56649 – 6373)) x 100 = (2812/ 50276) x 100 = 5.5% h. Year 2007: (3426/ (62343 – 7494)) x 100 = (3426/ 54849) x 100 = 6.2% 3. RETURN ON INVESTMENT Formula: net profits before tax / shareholders equity a. a. Year 2000= 2737/ 32660 = 0.08 b. Year 2001: = (746)/ 47595 = 0.015 c. Year 2002: = (11962)/ 39468 = 0.30 d. Year 2003: = 1808/ 38721 = 0.046 e. Year 2004: 2,755/ 20,875 = 0.131 f. Year 2005: 3,561/ 29,377 = 0.121 g. Year 2006: = 2812/ 29874 = 0.09 h. Year 2007: = 3426/ 32922 = 0.10 4. NET PROFIT MARGIN Formula: (Net profit / Turnover) x 100 a. Year 2000: 2,737/22443 x 100 = 12.1% b. Year 2001: 746/13699 x 100 = 5.4% c. Year 2002: 11962/ 15070 x 100 = 79.3% d. Year 2003: 1808/ 17380 x 100 = 10.4% e. Year 2004: 1533/ 20802 x 100 = 7.36% f. Year 2005: 2128/ 23859 x 100 = 8.91% g. Year 2006: 2812/ 25327 x 100 = 11.1% h. Year 2007: 3426/ 28655 x 100 = 11.9% Performance of the firm through the years – graphs Graph 1 – News Corporation, performance of the firm for the years 2000 to 2007 in accordance with the data published in corporate financial statements Graph 2 – News Corporation, working capital ratio of the firm for the years 2000 to 2007 Graph 3 – News Corporation – ROCE for the years 2000 to 2007 Read More