BUSINESS STRATEGY AND VALUATION
Business strategy is the key to modern day valuation. Financial analysts now more than ever rely on the analysis and understanding of corporate strategy for carrying out business valuation that is hinged on fundamental analysis. Strategy is the term used to explain the totality of plans and actions put in place to ensure that a company’s objectives are met with reasonable satisfaction.
USES OF BUSINESS STRATEGY
Business strategy can be used by both internal management team and external valuation professionals of business concern. Management team rely on her business strategy to achieve competitive edge over other competitors. The plans of a company are evaluated (some people see it as investment appraisal) in the light of obstacles and other challenges that surround the activities of a company.
Probing questions are asked in an attempt to verify the validity of plans and actions upon which a company’s tactics is built. Some of the questions are:
Can our advantages be easily copied by competitors? One of the difficult questions that managers of a firm can ask in order to test the validity and durability of their strategy revolves around the duplicability of her actions, activities, tactics and procedures. If a company’s ways of achieving set objectives and goals are not unique to her, it then means that such ways of doing business cannot be called a strategy. For a strategy to make any economic sense, it must be near impossible for competitors to replicate or copy it.
Are there legislations in place or potential legislation to hinder us? For strategies to have economic value, it must be free from all forms of contravention to existing laws and flexible enough to adjust to new laws. So, managers need to seriously evaluate the legal implications of all the components of her strategies before committing them to longer term plans.
How do the public perceive us? Part of the process of testing a company’s strategy is to conduct a form of public opinion survey so as to have an insight into what the general public think about our company. The benefit of doing this is that the chances of making costly mistakes will be reduced. Strategy that gets the nod from the public is a sign pointing at the soundness of the planned tactics.
Can we sustain our momentum? There is no point starting a programme if you do not have the will power to continue living up to expectation. A company will quickly lose all her customers if she cannot keep up the quality customer service that it spends a lot to build. Think carefully before you launch a new tactics. The customers might well be happy with you if they hadn’t tested the excellent service.
Do we have the right workforce to execute our plans? Strategy as sound as it may be will be reduced to nothing if a company does not have the right mix of manpower to execute the plans. Knowing where a company’s workforce lies is a good planning tool to planning.
The above five questions are just some of the forensic questions that helps us find out inherent and potential weakness in our business model so as to take corrective action. The list of possible questions that can be asked are endless, let your imagination be the driving force.
From the perspective of the external valuers, useful insight can be obtained by carrying out a reverse engineering on the strategy of a company. Since financial analysts and investors operate from the outside, they often make use of lenses. One of such lenses is the financial statement. The external analysts in addition to using accounting information ask the following questions:
What industry is the company operating in? Finding out what industry a company is operating in helps determine the suitability of the kind of strategy that is being implemented. What works well in the pharmaceutical industry may not work in food processing industry for instance. This is why it is very important for an analyst to have an understanding of an industry before attempting to value a business in the same.
What is the knowledge capital of the company? Business evaluators from the outside need to ask questions about the quality of the management team of a company of choice. Common sense draws our attention whenever things are not adding up. A team that comprises of managers that have failed in their entire past attempt to implement a strategy successfully cannot be trusted to execute a similar or better strategy. This does not undermine the fact that people change, but great caution need to be exercised.
How innovative is the company? Trends in the sector that a company operate in raced an important question of whether a company can meet up with the technological wave of the nature of the business. Technology Company for instance needs to have a good record of responding to changes in technological development.
It is obvious from the above discussions that analysis of business strategy is the key to understanding the prospects of a business and making progress in our effort to attach monetary value to the future payoffs that we expect from a company- valuation.