Explanation of the Development of Strategies - Case Study Example

Part 1 (Explanation of the Development of Strategies) The success of the company in establishing its name, in gaining its reputations, and in building solid foundations in the industry where it belongs revolve around different but equally important factors. Factors such as corporate planning, marketing and sales strategies, advertising campaigns, operations and productions, and financial health of the company contribute in determining the growth rate of the company as well as its growth potentials. Because a company’s growth is typically attributed to the financial performance of the company, particularly on how much profit it makes in a specific period, assigning the best qualified person to handle the financial decisions and manage financial issues in the company is a must. This has been proven in the Marketplace simulation where each financial decision made affects and is affected by decisions made by the other key people in the project. Most importantly, there is no way to determine which decisions are the right decisions because of the volume of information that must be considered and the amount of time spend in deliberating the whole financial condition is considerably less. My task was to handle the financial decision for Spam Computers as the company’s Vice President for Finance. I am working with four other key people on the project that would intensify the market presence of the company’s PC Division by introducing new product lines that would establish strongly in the market, capture a large market share, and become profitable. As a VP for Finance, my main role is to create and propose strategic financial decisions in order to keep the project within the established objective and at the same time make sure that the project is profitable given the decisions. The decisions I propose are expected to affect major, if not all aspects of the business which is why it is necessary that I have an open mind, sharp decision-making skills, have the ability to foresee the economic and financial trends of the project, and veer the project away from unwanted financial losses. However, handling large projects such as this one entails a lot of unpredictable factors and unforeseeable issues. The market demand and behavior changes almost everytime, the team’s decisions are influenced by a number of factors that are hard to control and equally difficult to predict, and the individuals within the organization are experiencing high learning curves that the whole process appears daunting. In other words, managing the company’s finance and predicting the possible financial outcomes in the quarters that would follow is usually difficult. As a result, the final financial strategy developed in the last quarter drifted considerably from initial strategy drafted in first quarter. Below are some of the analysis and explanation of what motivated me to choose certain financial strategies for the organization, their outcomes, and the summary of the things I learned from the decisions I have made. I have also included the outline of what I learned and a discussion on how and which quarter I have learned them in the simulation. Initial Strategies The initial strategies (which mean the strategies involved in the first four weeks since the project was initiated) can be divided into three major stages – (a) funding, (b) establishing a method of allocating funds, and (c) devising financial strategies for the next four quarters. The discussions of the decisions made in this stage will be compared to the final outcome of the simulation to assess the extent of modification done on the initial financial decisions. (a) Funding Naturally, the first major financial concern for the project is capital expenditure. Capital expenditure is a plan for cash of a project that is expected to produce cash inflow in the long run (NetMBA, 2007). The major financial concerns for the first quarter were (a) whether to purchase the external market research that would aid in the decision process of other aspects of the business such as marketing, sales, and advertising aspects and (b) what options for capital is readily available. My initial reaction after reading the scenario is to totally alienate the project (and the team) from the mother company (or headquarter) and work out the funding needed on our own. Detailed below are the best estimates I made for the funding needs as well as the worse predictions I made for the financial decisions for the whole project. Best Estimates Probably the only good estimate I have made during the funding phase of the first four weeks is the prediction I made that the quarterly funds needed would have a ceiling of $1 million in order to establish the project and mobilize it to some degree. What prompted me to think of the $1 million ceiling budget for mobilization is the fact that the project will rely heavily on market research and advertising campaigns relating to the results of the market research. As what Mburu & Moborosi (2003) pointed out, how much a firm spends for advertising depends on its resources and its objectives more than what the other firms in the company are doing. Having this in mind made me focus on the more important part of the first quarter which is the establishment of the method of allocating funds for each segment in the market. Worst Estimates The worst estimate I think I had made during the funding phase is narrowing my options for the sources of funds. I have clearly implied that I would have the project opt for debt financing to finance its operations without taking into consideration that there is still the Corporate Headquarters that can handle the financial needs of the project. While there is no harm done to the virtual Corporate Headquarters, the oversight indicates that I have the tendency to miss vital information that would aid in the decision making process. Such slights should not be made in real world because doing so would not give me the best options there is and would not allow me to hand the best decisions to the group. The result of the worst estimate I made is that the whole prediction the funding issues for quarter 1 can be debunked and it would not affect fund-related decisions on the quarters that followed. (b) Methods of Funds Allocation Funds allocation is an integral part of the whole financial decision-making process because expenses have started in quarter 2. Knowing how to allocate funds is important for the project to be able to stay liquid for the rest of the expenses detailed during the planning stage as well as for the allocations of contingencies. Determining how liquid the project is requires a lot of insight to the operations aspect of the project and to the financial insights. My strategy for funds allocation for all the activities of the group that requires money is quite straightforward. I have employed percentages to determine how much of the fund goes to which activities. So I thought of giving advertisement and R&D equal percentages (35%) and leave the rest for sales and promotions. It was clear in Q2 that there has to be available funds for the research and development of the product and the following quarters will need the funds in order to implement their strategies and in order to implement the modifications of their original strategies whenever necessary. Drafting fund allocation schemes is never easy particularly since the company have no historical records of the financial transactions and disbursements for projects of similar degree of complication. This means that every planning strategy we have to come up with has to be made using estimates and approximates and there are no guarantees that what I was thinking would conform to the results of Q2 or extend its usefulness for Q3 until Q4. Because of the lack of substantial data for analysis and reference, the budgeting and allocation of funds I devised were not able to take into account other aspects of the project like administrative costs, salaries and wages, and building and construction. As a result, most of the informed guesses I did fail to hit the target financial objectives or did not help at all. (c) Devising Financial Strategies The financial issues associated in the first four quarters of the simulation can be summarized into two major categories – funding and allocation. I have had devised a financial strategy related to funding which focused on debt financing. Although the funds were taken from the money support from the Corporate Headquarters of Spam Computers, I have treated it as a debt because the project will need to be profitable in order to meet the required return of investment. Devising financial strategies for PC Department is not easy for the same reasons that allocating funds and budgets for the various aspects of the business. There are not enough data for analysis and references for financial strategies which are very important for the current undertaking of the team. According to Finley (1984, cited from Von Auken & Tolman, 1995), it is typical for start up projects pursuing new technologies that is yet to be out in the market to have fewer sources of funds, high cost of capital, and increase transaction cost by virtue of its new environment. These factors limit the financial strategies employed for the simulation. This is because decision making relies on huge amount of available data in order to draw conclusive inferences and patterns for trends, making understanding of the financial position of the organization easier. Apparently, the whole simulation relies on good team work and coordination of efforts between each members of the team in order to devise and come up with a flexible yet straight-to-the-point financial analysis. Modification to Initial Strategies The lack of available data and the number of issues associated with the other aspects of the business put a lot of pressure to the initial financial strategies that were conceived so that it would conform to the current and future financial needs of the project. For example, the available data for the pilot run of the products in the market (in Q3) showed promising signs for success but actual sales figures changed significantly when the products were officially released in the market in Q4. There have been a lot of modifications in the strategies as well starting when the products were in the market and competing with other brands. Among the various financial modifications that were implemented in the whole simulation were the following: Control Fixed and Variable Costs The initial assumption on Q4 is that the financial strategy should focus on the marketing and advertising campaigns in order to increase the volume of units sold and thus gain a positive cash flow. From Q3 to Q5, the business has gotten negative cash inflow because the sales volume is still insufficient to cover the fixed and variable costs of operations. Seeing this happen, I was considering suggesting to the team that we should lower the variable and fixed costs. Careful deliberation on these matters showed that the team could not lower its variable and fixed expenses because it will just get in the way with other processes. For one thing, the team needs to replace and modify the products that were released in the market because they no longer sell. It means that we have to implement the research and development which cost us another $2.6 million. This is a very big leap of faith for us because our expenses is still going up while the financial support from the Corporate Headquarter is going to be the last and yet the products released in the market is not yet making profits. On top of that, the team has to reserve $2 million for contingencies in case something would happen in the future. So the pressure to be profitable is closing in on financial decisions that are to be made. After careful deliberation, we decided to push through with the product and market researches and spend more on advertising to capture a larger market and to clearly define the market segments we wanted to capture. Total expenses incurred for local and regional advertisement was up by 1000% from $96,000 in 4 to more than $1 million in Q5. Sales and marketing efforts were also deliberately increased to meet the desired market awareness of the brand. The expenses incurred in this quarter were so large that Q5 has the lowest operating profit at -$800,000 since the products were introduced in the market. While the overall financial performance of the PC Division team is going significantly low, there had been many positive results from Q5’s financial strategies. Revenue reached almost $4 million which indicates that the overall strategy of the team is working. It is easy to identify that the increase in the budget for advertising has influenced the revenue-generating activity of the team and thus a pattern was identified. We argued that if the team is to increase its revenues and recover from the major losses it gained in the past five quarters, it has to focus its efforts in financing the advertising and marketing activities of the group. In addition to that, a pattern is also established in the expenses allocated for market research. Direct comparison of the sales volume of Q3 and Q4 indicates that the team’s financial performance is somehow correlated to the use of market research and so it has been decided that funds will also be allocated for market researches. By the end of Q8 and with an increasing expense on advertising and on market research, the team was able to recover all its losses and manage to earn more than $200, 000 in cumulative profits. Focus on Marketing and Advertising efforts. By the end of Q3, the financial decisions began to play active roles compared to its contribution in the team’s decision in the previous couple of quarters. Cash inflow has been noted in Q3 where the product was introduced in the market. The initial strategy, given the result, is to give production more funds to create larger volumes of the products in preparation for Q4. Because of the warm reception of the market on the pilot release, the marketing and advertising efforts were not yet intensified because these areas are of no major concern as far as the team’s performance is taken into consideration. Apparently, the results in Q4 suggests that we should have had intensified our marketing and advertising campaigns by giving these areas substantial budgets to work with. Marketing and Advertising is important because they are the tools of the business that reach out to the consciousness of the market and entice them to buy the product being offered. Getting a large market share and earning a positive market perception relies heavily on how the products are positioned and how they are advertised to the market which also means there are expenses that are to be incurred during the process. Low advertising budgets typically means that prime spots are not saturated with the product and there are fewer people who get to see the products advertised. In other words, low budget on advertising does not coincide with the objective of the team which is to increase market perception. So the team focused its financial resources in increasing the presence of the brand in the market in order to capture the desired market segment. It took a lot of time wasted before the trend was recognized and as a result, the team’s financial performance by the end of the simulation could not be considered superior against its competitors as it landed on the third and fourth places in the market competition. I took this oversight as a personal fault. I should have noted this earlier but I was too occupied looking at the previous faults I have made in the previous decisions that I never realized the trend, or even suggest strong connection. As a VP for finance, I should have had the insight to allocate most of the budget in the activity where the team will get the most profits and so I can say that it was an honest mistake not to focus the effort on marketing and advertising efforts. Nonetheless, I have learned how important it is to focus most of the energy on the income generating activities without losing sight of the support-type activities. Expectations for the Year 3 Spam Computers was able to establish itself in the market of its choice in the span of two years. Even though the profitability of the company is far from impressive compared to some of its competitors, there are many avenues for growth waiting for the company. Given the trend in the volume of sales and the amount spent for advertising campaigns and the positive trend it has established for the last three or four quarters, Spam Computers will see profitability. This is because any shifts in the market trend can be anticipated by the market research which in turn affects the marketing and advertising strategies. That is to say that spam computers will not be spending money on bad investments with no solid promise of profitability, and it would not because the team is already given a forewarning via the market researches. From the strategies worked out by the team, it is easy to identify that the team wants slow but steady growth in sales and profitability. The market it aimed to capture is composed of the workhorse and the travelers whose computing needs are high and at the same time are sensitive to the prices they can afford. Building a strong reputation in these segments is difficult because of their inherent characteristics but as the financial figures in the last quarter shows, there is a wide avenue for growth for Spam Computers. Part 2 (Learning Large organizations use and integrate various functions in their system as the required process gets more complicated than they already were. As the organization increase in size, capability, goals and objectives, and scope of operation, it needs all the information it can have, whether internal information or external information, to guide it and give the decision-makers of the organization better grounds with which they base their decisions. However, the information coming from various departments, different levels, and from several areas with which the organization operate are often lost in the process or not utilized to their full extent simply because organizations have no way of knowing which information are vital and which information would bring greater benefits for the organization as a whole. As a result, the attempt to make strategic plans and decisions crumble. Because of the growing complexities associated with business management, information management becomes vital. An organization that utilizes all the information pertaining to its business processes is more likely to succeed than organizations that miss seemingly irrelevant information (NetMBA, 2007). This is the very reason why companies nowadays are employing an information management system in their processes to ensure that all the information pertaining to the business – HR records, financial transactions, receipts and invoices of purchase, project development plans, etc – are being stored and are continually analyzed for future utility. This is also the main reason why decision making is very difficult for me to do as a VP for Finance in the first two quarters of the business operation. Most common use of the information sifted through the information system is to make decisions that would invariably increase profitability, lower expenses, maneuver course of actions, project performances based on historical data, and determine which management concepts will be the most appropriate to tackle the pressing issues of the organization. I have learned that the massive change in the business process nowadays prompts the organization to shift focus and align themselves to the demands of the business process (Scharp & Kenmore, 2005). However, the changes affect not only organizations but individuals as well – particularly the accountants. Cost accountants whose main function is to define the organization’s budgets and actual costs of operations are becoming more like business process analysts. As what have been said in the article, much of the business scenario has changed. Fifty or so years ago, businesses focus on the people it employ in the organization and accounting is almost often associated with the expenses that are incurred in keeping the people in the organization functional and giving value to the organization’s investment. However, today’s business processes changed drastically into a more flexible, fast-paced, and hard to define situations which need to be constantly updated in order for business organizations to survive and flourish. In response to this, management accounting evolved as well to include the failures of the original roles of cost accountants in the new job functions. As an VP for Finance, I realized how my role as a finance person is influenced by other disciplines. I have realized that working with a team of experts requires me to know bits and pieces of what these experts know in order for me to give my honest opinions on the matter being discussed. The bottom line is cost accountants are no longer confined to their ledgers and financial figures but are also being drawn to more challenging roles in strategic financial planning. I realized that the main functions of cost accountants evolved to include decision making based on the processes that are taking place in the business organization. Cost accountants sees much of the internal process of the business that it becomes easy for them to identify which processes need focus and which needs more aid financially and otherwise. Because cost accountants are more aware of the processes occurring in the business, they have more insights regarding the operational aspects of the organization. Their main function as cost accountants which is to define the budgets involved in certain operations evolved into defining operations that could yield the best results for the business organization, thus they become business process analysts. Cost accountants are the most suitable people for business process analysis because they are the ones that are mostly aware of the financial aspects of the organizations and business processes jobs require that people working on it have the financial knowledge in leading the business process to success, particularly in cutting costs and defining new approaches in cutting costs.   Conclusion As a part of the management team that is tasked to create opportunities and keep these opportunities open for all times, I have realized that the financial aspect of the business is no easy feat considering that businesses are measured by how it performs financially. I have learned from experience that strategic financial management involves a lot of data analysis and identification of financial trends from the historical performances of the business in order to create the most appropriate and most fitting financial decision for the company, in accordance to Godet’s arguments (2001). Without these data and information, creating failure-proof strategic plans, regardless of how close they are to the reality of the situation is almost always impossible (Godet, 2001). I have learned that data and figures needed for financial analysis and for strategic financial planning do not necessarily mean data and figures from accounting transactions alone but also from all the information being utilized by the project. I have realized this in the simulation where keeping myself to the available data for accounting and finance keeps me from what really is happening in the project. That is to say that in order to keep track of the financial performance of the company, I also need to know what happens in other aspects of the business in order for me to make informed decisions. This verifies the importance of data and information discussed above and how cost accountants could not isolate themselves from the rest of the world in these modern times. 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