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Course Facilitator:

Prof. Radhakrishna


Module 1:Planning Analysis &
Overview
Content of Module 1
Phases of capital budgeting Levels of
decision making objective.
Resource Allocation Framework: Key criteria for
allocation of resource elementary investment
strategies portfolio planning tools strategic
position and action evaluation aspects relating
to conglomerate diversification interface
between strategic planning and capital budgeting.
Capital Expenditure
It is also referred to as a capital
investment or capital project or just
project is that it typically involves a
current outlay (or current and future
outlays) of funds in the expectation
of stream of benefits extending far
into the future.
Capital Budgeting
Capital budgeting decision may be
defined as Firms decisions to invest its
current funds most efficiently in long
term activities in anticipation of an
expected flow of future benefits over a
series of year. The firms capital
budgeting decisions will include addition,
disposition, modification and
replacement of fixed assets.
Capital Investments: Importance
Long Term Commitment of Funds
Irreversibility
Substantial Outlays
Long Term Effect on Effect on
Profitability
Capital Investments: Difficulties
Measurement Problems
Uncertainty
Temporal Spread
Types of capital Investments
(1) Types Of Assets
a) Physical Assets
b) Monetary Assets
c) Intangible Assets
(2) Types of Decisions
a) Strategic investments
b) Tactical Investments
(3) Planning and control
a) Mandatory Investments
b) Replacement Investments
c) Expansion Investments
d) Diversification Investments
e) R&D Investments
f) Miscellaneous Investments
Phases of Capital Budgeting
Phase 1): Planning
Phase 2): Analysis
Phase 3): Selection
Phase 4): Financing
Phase 5): Implementation
Phase 6): Review
Levels of Decision Making
Gordon, Miller and Mintzberg defined 3 levels of
decision making:
Operating Decisions
Administrative Decisions
Strategic Decisions
Levels of Decision Making
Questions? Operational
Decisions
Administrative
Decisions
Strategic
Decisions
Where is the
decision taken
Lower Level
Management
Middle Level
Management

Top Level
Management

How Structured is
the Decision
Routine and
Structured
Semi-
Structured
Unstructured
What is the level of
resource
commitment
Minor
resource
Moderate
resource
Major resource
What is the time
horizon
Short term Medium term Long term
Type of CB Decision
Made
Minor Office
Equipment
Balancing
Equipment
Diversification
Project
Objectives of Capital Budgeting
To ensure the selection of the possible profitable
capital projects.
To ensure the effective control of capital
expenditure in order to achieve by forecasting the
long-term financial requirements.
To make estimation of capital expenditure during
the budget period and to see that the benefits and
costs may be measured in terms of cash flow.
To facilitate co-ordination of inter-departmental
project funds among the competing capital projects.
To ensure maximization of profit by allocating the
available investible.
Feasibility Study
Facets of Project Analysis or
Feasibility Study
Market Analysis
Technical Analysis
Financial Analysis
Economic Analysis
Ecological Analysis

Facets of Project Analysis- Market
Analysis
Market analysis is concerned primarily with two questions:
What would be the aggregate demand of the proposed
product / service in future?
What would be the market share of the project under
appraisal?
To answer the above questions, the market analyst requires a
wide variety of information & appropriate forecasting
methods. The kinds of information required are:
Consumption trends in the past & the present consumption
level
Past & Present supply position
Production possibilities & Constraints
Imports & Exports
Structure of competition
Cost Structure
Elasticity of Demand
Consumer behavior, intentions, motivations, attitudes,
preferences & requirements
Distribution channels & marketing policies in use
Administrative, technical, & legal constraints

Facets of Project Analysis- Technical Analysis
Technical analysis seeks to determine whether the
prerequisites for the successful commissioning of the
project have been considered and reasonably good
choices have been made with respect to location, size,
process, etc.
The important questions raised in technical analysis are:
Whether the preliminary tests and studies have been done
or provided for?
Whether the availability of raw materials, power, and other
inputs has been established?
Whether the selected scale of operation is optional?
Whether the production process chosen is suitable?
Whether the equipment and machines chosen are
appropriate?
Whether the auxiliary equipments and supplementary
engineering works have been provided for?
Whether provision has been made for the site, building,
and plant is sound?

Facets of Project Analysis- Financial Analysis
Financial analysis seeks to ascertain whether the
proposed project will be financially viable in the
sense of being able to meet the burden of servicing
debt and whether the proposed project will satisfy
the return expectations of those who provide the
capital. The aspects which have to be looked into
while conducting financial appraisal are:
Investment outlay & cost of project
Means of financing
Cost of capital
Projected profitability
Break-even point
Cash flows of the project
Investment worthwhileness judged in terms of various
criteria of merit
Projected financial position
Level of risk

Facets of Project Analysis- Economic
Analysis
Economic analysis also referred to as social cost benefit
analysis, is concerned with judging a project from the
larger social point of view. In such an evaluation the focus is
on the social costs and benefits of a project which may
often be different from its monetary costs and benefits. The
questions sought to be answered in social cost benefits.
The questions sought to be answered in social cost benefit
analysis are:
What are the direct economic benefits & costs of the project
measured in terms of shadow (efficiency) prices and not in
terms of market prices?
What would be the impact of the project on the distribution
of income in the society?
What would be the impact of the project on the level of
savings & investment in the society?
What would be the contribution of the project towards the
fulfillment of certain merit wants like self-sufficient,
employment and social order?

Facets of Project Analysis-
Ecological Analysis
Ecological analysis should be done particularly for
major projects which have significant ecological
implications like power plants and irrigation,
schemes, and environmental polluting industries
(like bulk drugs, chemicals, and leather processing).
The key questions raised in ecological analysis are:

What is the likely damaged caused by the project to
the environment?

What is the cost of restoration measures required to
ensure that the damage to the environment is
contained within acceptable limits?

Strategy
The word strategy has entered in the field of
management from the military services where it
refers to apply the forces against an enemy to win
a war. Originally, the word strategy ha s been
derived from Greek, strategos which means
generalship. The word as used for the first time
in around 400 BC. The word strategy means the
art of the general to fight in war.
The dictionary meaning of strategy is the art of
so moving or disposing the instrument of warfare
as to impose upon enemy, the place time and
conditions for fighting by one self.

Concept of Strategy
According to Alfred D. Chandler, strategy is the
determination of the basic long-term goals
and objectives of an enterprise and the
adoption of the courses of action and the
allocation of resources necessary for carrying
out these goals.
Strategy involves matching a firms strengths and
Weaknesses-its distinctive competencies-with the
opportunities and threats present in the external
environment (Kenneth R Andrews)
Environmental Analysis
Customers, Competitors,
Suppliers, Regulation,
Infrastructure,
Social/Political
Environment

Internal Analysis
Technical know-how,
Manufacturing Capacity,
Marketing and
Distribution Capability,
Logistics, Financial
Resources
Opportunities and
Threats (Identify
Opportunities)
Strengths and
Weaknesses (Determine
Core Capabilities)
Find the fit between
core capabilities and
external opportunities
Firm's Strategies
Chart: Formulation of Strategies
Concept of Strategy
Concept of Strategy
Strategic Planning also considers the following:
The Cross Sectional Relationship: The
complementarities and synergies between the
existing assets and growth opportunities.
The time series relationships: The relationship
between current growth opportunities and future
growth opportunities.
The risk profile of the firm: The impact of new
investments on the overall riskiness of the firm.
Grand Strategy
Grand
Strateg
y
Growth
Concentration Diversification
Vertical
Integration
Stability Contraction
Divestiture Liquidation
Growth Strategy-Concentration
A concentrated growth strategy involves
focusing on increasing market share in
existing markets.
This strategy is also sometimes called a
concentration or market dominance strategy. In a
stable environment where demand is growing,
concentrated growth is a low risk strategy.
Concentration may involve increasing the rate of
use of a product by current customers; attracting
competitor's customers; and/or attracting non-
users/ new customers.
Eg: Microsoft in Computer software and related
products, Asian Paints in paints.etc.

Growth Strategy- Vertical Integration
Vertical integration is a strategy used by a company to
gain control over its suppliers or distributors in order to
increase the firms power in the marketplace, reduce
transaction costs and secure supplies or distribution
channels
Vertical integration may be of two typesbackward and
forward.
(i) Backward Integration: It involves moving toward the
input of the present product. It is aimed at moving lower on
the production process so that the firm is able to supply its
own raw materials or basic components.
Eg: Reliance Industries Ltd. Has been able to grow largely
through backward integration. It started business with
textiles and went for backward integration to produce PFY
and PSF critical raw materials for textiles, PTA and MEG
raw materials for PFY and PSF, propylene raw materials
for PTA and MEG, and finally naphtha for producing
propylene.
Growth Strategy- Vertical Integration
(ii) Forward Integration: It means the firm
entering into the business of distributing or selling
its present products. It refers to moving upwards
in the production/distribution process towards the
ultimate consumer.
The firm sets up its own retail outlets for the sale
of its own products.
For example, many companies like Bata, DCM,
Bombay Dyeing, Raymonds and Reliance have
set up their own retail outlets to sell their fabrics.
Growth Strategy-Diversification
Beyond a certain point, it is no longer possible for
a firm to expand in the basic product market. So
the firm seeks increased sales by developing new
products for new markets. This strategy towards
growth is called diversification.
The diversification does not simply involve adding
variety in a product but adding entirely different
types of products. Products added may be
complementary.
Diversification- A) Concentric
When a firm diversifies into some business which
is related with its present business in terms of
marketing, technology, or both, it is called
concentric diversification.
For example, Mother dairy has added 'curd and
Lassi to its range of milk products.
Diversification- B) Conglomerate
When a firm diversifies into business which is not
related to its existing business both in terms of
marketing and technology it is called
conglomerate diversification. Several Indian
companies have adopted this strategy. Reliance,
Sahara, DCM, Essar group, ITC, Godrej are
examples of conglomerate diversification.
Stability Strategy
Stability strategy implies continuing the current
activities of the firm without any significant
change in direction. If the environment is unstable
and the firm is doing well, then it may believe that
it is better to make no changes.
A firm is said to be following a stability strategy if
it is satisfied with the same consumer groups and
maintaining the same market share, satisfied with
incremental improvements of functional
performance and the management does not want
to take any risks that might be associated with
expansion or growth.
Contraction Strategy
Contraction is opposite of growth. It may be effected
through divestiture or liquidation.
Divestiture involves sale of a business unit or plant of
one firm to another.
Eg: When Coromandal Fertilizers Ltd. Sold it cement
division to India cements Ltd.
In law, liquidation is the process by which a company
(or part of a company) is brought to an end, and the
assets and property of the company redistributed.
Liquidation is also sometimes referred to as winding-
up or dissolution, although dissolution technically
refers to the last stage of liquidation
Aspects Relating to Conglomerate
Diversification
Conglomerate diversification occurs when a
company stretches out its business into an area
which is dissimilar to its core business.
This often occurs due to a merger or buyout of
another company, or it can occur if the company
simply wants to develop different products that
aren't related to the ones they already produce.
History of conglomerate
In 1960s, conglomerates were popular as the very concept
of a corporate structure was the symbol of the power. This
allowed these conglomerates to buy other businesses at
leveraged rates. In that time, the only method to measure
the real value of a company was its return on investment
(ROI).
Due to this, if the target company had the profits for a
period larger than its interest paid on the loans, it was
considered to grow.
Due to their impact, conglomerate also had an improved
aptitude in borrowing than a smaller firm in money market
and capital market. This allowed the conglomerates to
raise their stock value for many years as these were
considered the giants in the business.
Many investors considered it secure to invest in these
corporate structures. Since the stock permitted them to
raise money, these conglomerates could take out loans
and buy more companies.
Conglomerate Diversification- Advantages & Disadvantages
Advantages
Risk spreading : entering new
products into new markets
offers protection against failure
of current products and markets.
High profit opportunities :Ability
to move into high growth
profitable industries especially
important if current industry is in
decline.
Escape : from the present
business if competition is too
hot.
Better access to capital
markets.


Disadvantages
Management costs increases
due to size of the group
Conglomerates have to face
many accounting-related
problems, for example,
consolidation and group
disclosures, etc.
Taxation of group structure
reduces the taxation benefits
Failure in one business will drag
down the rest.
Lack of management
experience
Focus is lost, and it is difficult to
manage unrelated and well-
diversified business effectively
Due to multinational business,
conglomerates often contact
cultural difference due to which
values are destroyed





Investing in non-core businesses: Has diversification worked
for India Inc?

ITC
Cigarettes to hotels
conglomerate, ITC, is
one of those rare
examples where the
company has
successfully diversified
much beyond its core
business. The company,
which started as a
tobacco products
manufacturer, eventually
expanded to hotels,
paper and packaging,
with agri-business and
foods being added
recently.

Unitech
Delhi-based Unitech
made a foray into the
malls and
entertainment
business about a
decade ago, chalking
out Rs 1,500 crore to
set up amusement
parks and
entertainment centres.
Then, in 2007, buoyed
by a strong cash flow,
it expanded into
telecom. This would
add value to the group,
the company claimed,
while real estate
remained its mainstay.

Videocon Industries
This 'Indian multinational'
started out primarily as a
consumer durables
manufacturer, but its
ambitions have today led it
into a wide-ranging set of
businesses, which include oil
exploration,
telecommunications, financial
services, direct-to-home,
apart from its staple
consumer durables division.
Of these businesses, the oil
& gas foray has proved quite
successful for Videocon, and
is likely to become a money-
spinner in the coming years.
The company owns a stake
in oil fields in Brazil,
Indonesia and Mozambique
UB Holdings

Much of liquor baron Vijay
Mallya's current problems
have manifested from his
overzealous diversification
drive, which has affected
even his core businesses.
Along with United Spirits
and United Breweries, the
group had in place a solid
foundation with strong,
stable cash flows and
growing profitability.
However, the ambitious
Mallya wanted to take the
firm on another trajectory,
and hence the expansion
in fertilisers, aviation,
engineering and real
estate.

Portfolio Planning Tools
In a multi-business firm, allocation of resources
across various business is key strategic decision.
Portfolio Planning Tools have been developed to
guide the process of strategic planning and
resource allocation. Three such tools are the
BCG matrix, The general Electrics Stoplight
matrix and the McKinsey matrix
BCG Matrix
The Boston Consulting Group (BCG) matrix helps
companies evaluate each of its strategic business units
based on two factors: (1) the SBUs market growth rate
(i.e., how fast the unit is growing compared to the industry
in which it competes) and (2) the SBUs relative market
share (i.e., how the units share of the market compares to
the market share of its competitors).
Because the BCG matrix assumes that profitability and
market share are highly related, it is a useful approach for
making business and investment decisions.
Stars : Everyone wants to be a star. A star is a product
with high growth and a high market share. To maintain
the growth of their star products, a company may have to
invest money to improve them and how they are
distributed as well as promote them. The iPod, when it was
first released, was an example of a star product.
Cash Cows: A cash cow is a product with low growth
and a high market share. Cash cows have a large share
of a shrinking market. Although they generate a lot of cash,
they do not have a long-term future. For example, DVD
players are a cash cow for Sony. Eventually, DVDs are
likely to be replaced by digital downloads, just like MP3s
replaced CDs.

Questions Marks or Problem Children: Question
or problem arises when a product has a low share
of a high-growth market. Managers classify these
products as question marks or problem children. They
must decide whether to invest in them and hope they
become stars or gradually eliminate or sell them. For
example, as the price of gasoline soared in 2008,
many consumers purchased motorcycles and
mopeds, which get better gas mileage.
Dogs: In business, it is not good to be considered a
dog. A dog is a product with low growth and low
market share. Dogs do not make much money and
do not have a promising future. Companies often get
rid of dogs. However, some companies are hesitant to
classify any of their products as dogs. As a result,
they keep producing products and services they
shouldnt or invest in dogs in hopes theyll succeed.


General Electrics Stoplight
Matrix
The General Electric Company is highly admired
for the sophistication, maturity and quality of its
planning system .It uses a 3x3 matrix called
General Electrics Stoplight Matrix to guide the
allocation of resources. The matrix calls for
evaluating the businesses of a firm in terms of
two key issues:
Business Strength: How strong is the firm vis-a
vis its competitors?
Industry attractiveness: What is the attractiveness
or potential of the industry?
General Electrics Stoplight
Matrix
Invest Invest Hold
Invest Hold Divest
Hold Divest Divest
Stron
g
Averag
e
Weak
M
e
di
u
m
L
o
w

In
d
u
st
ry
A
tt
r
a
ct
iv
e
n
e
s
s
Business Strength
H
i
g
h
General Electrics Stoplight
Matrix
Business which are favorably placed justify
substantial commitment of funds.
Business which are unfavorably placed call for
divestment.
Businesses which are placed in between qualify
for modest investment.
McKinsey Matrix
The McKinsey matrix has 2 dimensions viz.,
competitive position and industry
attractiveness. The criteria or factors used for
judging competitive position and industry
attractiveness along with suggested weights for
them are:

Industry Attractiveness
Criteria Weight
Industry Size 0.10
Industry Growth 0.30
Industry
Profitability
0.20
Capital intensity 0.05
Technological
stability
0.10
Competitive
intensity
0.20
Cyclicality 0.05
Competitive Position
Criteria Weight
Market Share 0.15
Technological knowhow 0.25
Product Quality 0.15
After-sales service 0.20
Price Competitiveness 0.05
Low operating costs 0.10
Productivity 0.10
McKinsey Matrix
Winners
Winners
Winners
Average
Business
Profit
Producers
Question
Mark
Losers
Losers
Losers
Competitive Position
Industry
Attractiveness
Low
Medium
High
Good Medium Poor
Once an SBU is assessed on the dimensions of competitive position and
industry attractiveness it is placed in one of the nine cells given in the 3x3
matrix.
Note:
Winners- Larger commitment
of resources
Losers- Disinvestments
Question Mark or Average
Business or Profit
Producers-Moderate
commitment of resources

Business Level Strategies
Senior executives and managers involved in the
development and implementation of business-
level strategies are tasked with identifying the
core competencies within the various functional
departments of the company and combining them
in a way that provides the company with the best
opportunity for achieving and sustaining a
competitive advantage in its chosen environment.
Objective: The overall goal of business-level
strategy is to protect the companys position in its
current domain and, if possible, enlarge the
domain in which the company can operate with a
competitive advantage.

Steps for Creation of the
Business-Level Strategy
Companies can create a core competency at the
functional level either by reducing the costs of
performing the value-creation activities that occur
within the function (low cost advantage) or
performing the value-creation activities that occur
within the function to differentiate its products
from those offered by competitors in a way that
customers perceive as having value
(differentiation advantage).
Step 1): Selecting the domain(s) in which the
company will be competing for scarce resources (e.g.,
capital, personnel, technology, inputs and customers)
.
Step 2): Positioning the company in each chosen
domain so that its function-based core competencies
are most effectively leveraged to establish a
competitive advantage.

Porters Generic Business Level
Strategy
Business level strategies are popularly known as
generic or competitive strategies.
Michael Porter classified these strategies into
overall cost leadership, differentiation and
focus. The first two strategies are broader in
concept as their competitive scope is wide
enough whereas the third strategy i.e. the focus
strategy has a narrower competitive scope.
Porters Generic Business Level
Strategy
Cost Leadership Business
Strategy
When the competitive advantage of a firm lies in
a lower cost of products than the competitors
product then it is called as cost leadership.
This strategy gives importance on cost control
and cost reduction technique. This strategy is
used to gain market share.
Eg:-Dell Computers in computers, Hero Motors in
motorcycles, etc.

Cost Leadership Business Strategy-
Conditions
Cost Leadership Business
Strategy

Strategy of Cost Leadership:
Dell Computer Corporation

Direct selling
Built-to-order manufacturing
Low cost service
Negative working capital

Differentiation Business Strategy
When the competitive advantage of a firm lies in
special features incorporated into the product,
when specific products are demanded by the
customers who are willing to pay for those,
when customers need the special system of
distribution then the strategy adopted is the
differentiation business strategy.
Differentiation can be achieved by keeping cost
down and this savings can be reinvested in
specific product features.
Eg:-Rolex in Wrist Watches, Raymond in Textiles,
Intel in microchips, etc.
Differentiation Business Strategy-
Conditions
Differentiation is possible in terms of:
(a) product design,
(b) quality of product,
(c) technology,
(d) distribution system,
(e) customer service etc.
Focus Business Strategy
Focus business strategies essentially rely on either cost
leadership or differentiation but cater to a narrow
segment of the total market. In terms of the market,
therefore, focus strategies are function strategies.
Under this strategy the firm enjoys advantage than the
firms that do not offer product on segmented basis.
(i) Cost Focus: Firm concentrates on a narrow line of
products or limited market segment. Within this domain, it
achieves cost leadership through sustained efforts. Eg:
McDonalds pursues a strategy of cost focus by offering
limited menus to achieve economies of scale.
(ii) Differentiation Focus: Involves concentrating on a
limited market segment wherein the firm can offer a
differentiated product based on its innovative capabilities.
Eg: Porsche specialises in sports car, a market segment in
which it competes with the likes of GM and Nissan.

Condition under which focus
strategies are used
i) There are specialized requirement for using the
products or services that the common customers
cannot be expected to fulfill.
ii) The market is big enough to be profitable for
the focused firm.
iii) There is a promising potential for growth in the
market segment.
Strategic Planning and Capital Budgeting
Environmental
Assessment
Managerial
Vision, Values
and Attitudes
Corporate
Appraisal
Strategic Plan
Capital
Budgeting
Product Strategy,
Market Strategy,
Production Strategy,
and so on
Strategic Planning & Capital
Budgeting
Strategic
Planning:
refers to the
formulation of a
unified,
comprehensive and
integrated plan to
get the strategic
advantages by
challenging the
environment
Strategic Position and Action
Evaluation (SPACE)
The Strategic Position and Action Evaluation (SPACE)
Matrix is one of the strategic management tool for
analyzing the company and its environment to
formulating the strategies.
It is four-quadrant structure which specify whether
aggressive, defensive, competitive or
conservative strategies are most suitable for a given
organization, company or business.
The SPACE Matrix axis signify the 2 external
proportions which are industry strength (IS) and
environmental stability (ES) and two internal
dimensions of a competitive company which are
competitive advantage (CA) and financial strength
(FS).
Strategic Position and Action
Evaluation (SPACE)
Strategic Position and Action
Evaluation (SPACE)
Strategic Position and Action
Evaluation (SPACE)
Steps to Developing a SPACE Matrix
1. Select a set of variables to define FS, CA, ES,
& IS
2. Assign a numerical value:
i. From +1 to +6 to each FS & IS dimension
ii. From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS, CA,
ES, & IS
4. Plot the average score on the appropriate axis
5. Add the two scores on the x-axis and plot the
point. Add the two scores on the y-axis and plot
the point. Plot the intersection of the new xy
point
6. Draw a directional vector from the origin
through the new intersection point.



SPACE Matrix
FS
+6
+1
+5
+4
+3
+2
-6
-5
-4
-3
-2
-1
-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive
SPACE