Strategy, a wordthat has originated from military, refers to a course of action designed toachieve a specific objective. According to military usage, it is not the mannerin which a battle is fought. The strategy is whether the battle should befought at all or not and the terms and conditions on which the battle should befought. The term strategy has been associated with the business world since1950s and presently, more than the military, business managers use the term. Business strategy means the direction and scope of an organization over thelong-term to meet market needs.
Financial strategy is the aspect of strategy that falls within the scope of financial management . It includes business decisions made on investment, financing and dividends.
Strategic financial management is the identification of the possible strategies capable of maximizing an organization's market value and the allocation of scarce capital resources among competing opportunities. It also involves the implementation and monitoring of the chosen strategy so as to achieve stated objectives.
Strategy depends on objectives. The main strategic objectiveof a profit making organization is to maximize the wealth of the owners. Thismeans achieving the maximum profit possible. An organization has various stakeholders including share holders, fund lenders, employees, customers, suppliers,government. In achieving the maximum profit possible, the organization has tobalance the needs of these stake holders. The health of the organization also dependson a proper balance being achieved between long term and short term opportunities.Short term opportunities should not damage the long term viability. When anorganization successfully balances all these factors, the result will be theachievement of the principal strategic financial management objective ofmaximizing shareholder value.
Nestlé, the world's leading Nutrition, Health andWellness company has published 10 Corporate Business Principles. Nestlé wasfounded in 1866 by Henri Nestlé in Switzerland, where their headquartersare still located today. They employ around 280,000 people and have factoriesor operations in almost every country in the world.
Nestlé’s Board has stated, in their corporate web site “The Nestlé Corporate Business Principlesare at the basis of our company’s culture, which has developed over the span of140 years. Since Henri Nestlé first developed his successful infant cereal “Farine Lactée”, we have builtour business on the fundamental principle that to have long-term success forour shareholders, we not only have to comply with all applicable legalrequirements and ensure that all our activities are sustainable, butadditionally we have to create significant value for society. At Nestlé we callthis Creating Shared Value.”
Nestlé says that theyare committed to the following Business Principles in all countries taking intoconsideration local legislation, cultural and religious practices.
1. Nutrition, Healthand Wellness
Nestlé’saim is to enhance the quality of their consumers’ lives by offering tastier andhealthier food and beverage choices and thereby encouraging a healthy lifestyle
2. Quality assurance and product safety
Nestlé name should symbolize a promise to the consumer that theproduct they buy is safe and of high standard.
3. Consumercommunication
Nestléis committed to responsible, reliable consumer communication which empowers consumersto exercise their right to informed choice and promotes healthier diets.
4. Human rights in our business activities
Nestlé supports the guidingprinciples on human rights and labour and they aim to provide an example ofgood human rights and labour practices throughout the business activities.
5. Leadership and personal responsibility
Nestlé recognizesthat their success is based on their people and they agree to treat each otherwith respect and dignity and expect everyone to promote a sense of personal responsibility.Theyrecruit competent and motivated people and provide equal opportunities fortheir development and advancement, protect their privacy and do not tolerateany form of harassment or discrimination.
6. Safety and health at work
Nestlé believesthat they are committed to preventingaccidents, injuries and illness related to work, and to protect employees,contractors and others involved along the value chain.
7. Supplier and customer relations
Nestlé expects theirsuppliers, agents, subcontractors and their employees to demonstrate honesty, integrityand fairness and in the same way, the companyis committed to their own customers.
8. Agriculture and rural development
Nestlé contributesto improvements in agricultural production, the social and economic status offarmers, rural communities and in production systems to make them moreenvironmentally sustainable.
9. Environmental sustainability
Nestlé continues to committhemselves to environmentally sustainable business practices and strive to use natural resources efficiently,favour the use of sustainably managed renewable resources, and target zerowaste.
10. Water
Nestlé believes thatthey are committed to the sustainable use of water and continuous improvementin water management.
(source:www.nestle.com/Common/NestleDocuments/Documents/Library/Documents/Corporate_Governance/Corporate-Business-Principles-EN.pdf)
Theobjectives of an organization are identified separately as Financial objectives and Non-financialObjectives.
Financial Objectives
The main strategicobjective for a profit making organization is to optimize the wealth of theshare holders or owners and this is called maximizing shareholder wealth. Theshareholder wealth is measured by the return that shareholders receive fromtheir investment which is partly represented by the dividend received each yearand partly by the capital gain from the increase in value ofshares over the period.
The various stakeholders may have different interests in the activities of an organization.
- Shareholders – maximizing wealth from theirinvestments
- Fund lenders – receipt of interest and capitalrepayments by the due date
- Suppliers – receipt of payments in full by thedue date
- Customers – continuous trading relationship
- Employees – maximizing rewards paid to them in salariesand benefits and also continuity of employment
- Government – maintaining the level of employmentand broad objectives of sustained economic growth
Business managers facewith such a large range of stakeholders and are unlikely to find their positionto simultaneously maximize the wealth of their shareholders and keep all otherstakeholders satisfied. Therefore, inpractical terms, the main strategic objective may be interpreted as achievingthe maximum profit possible consistent with balancing the needs of othervarious stakeholders in the organization.
Many business managersaccept the fact that cash flow is the main business criterion to judge anorganization’s performance. Cash is a fact whereas profit can be manipulated byaccounting policies. Profitable organizations have gone out of business becauseof lack of funds. Therefore the shareholder wealth is always based on the present value of future cash flows.
An organization may havesubsidiary financial objectives such as:
- Increasing earnings per share by a particularpercentage
- Maintain a particular gearing or borrowing level
- Increasing operating cash flows by a certainpercentage
- Increasing dividends by a certain percentage
- Maintain a certain level of profit retentioncompared to annual dividend
Non-financial Objectives
A profit making organization may have various important non-financialobjectives. These non-financial objectives may limit the achievement offinancial objectives of the organization.
- Customer satisfaction
- Increasing market share
- Welfare of employees
- Welfare of management
- Relationship with suppliers
- Responsibilities to society
- Growth of sales
- Diversification
- Leaders in technology development
The organization should meet defined delivery standards, product quality,reliability, after service levels, and affordable price levels in order toachieve the objectives of customer satisfaction and increased market share. Theobjective of welfare of employees covers issues such as the level of wages andsalaries, working conditions, training and development and pensions. In orderto maintain better relations with suppliers the organization should manageissues relating to timing of payments and other terms of trade. Responsibilityto society is called corporate social responsibility which includes compliancewith relevant laws and regulations or minimizing externalities such aspollution.
The pursuit of these factors as objectives is detrimental to shareholdersas the funds devoted to achieving customer satisfaction, employee welfare etc. couldbe utilized elsewhere. They will incur costs and reduce profits and shareholderswill always be conscious of this trade off. If shareholders think that they are losing as a result,investors will sell their shares and the market value of the organization willfall. But it is reasonably possible for the aggregate benefits to exceed thecosts, so that profits rise over the longer term.
