Appendices 1. Definitions
In this appendix, definitions will be given of the concepts that are used in the thesis, whether in the analytical model or the remainder of this thesis.
Analyses: This word refers to all activities that measure the attractiveness of a market. These activities can be split into two groups: collecting data and interpreting data.
Alternative analyses: All analyses that are currently not made by Boom.
Business plan: A detailed plan, with the time frame of one year, which presents the operational targets and is partly the result of strategic and financial analyses.
Changing the business model: Either changing the way in which the wholesale (or retail) business is conducted, or adding retail business to a market in which wholesale business is already established (or vice versa). This objective of this change is to accelerate growth in a profitable way.
Decision-making methodology: The rationale behind the choice of analyses which will be performed as well as the order in which these analyses will be performed in the decision-making process, given a certain goal.
Existing less-developed southern and eastern European (ELDSEE-) market:
A southern or eastern European market in which Boom merchandise is available for sale, and that offer perceived potential.
Financial analyses1: Quantitative analyses, in part based on output from strategic analyses, in order to assess the attractiveness of a market from a financial perspective.
Financial value management: The theory that assumes that rational people strive to enhance their financial wealth and require a premium for running financial risk.
Foreign direct investment 2: The acquisition by residents of a country of real assets abroad. This may be done by sending money abroad to be spent on acquiring land, constructing buildings, mines, or machinery, or buying existing foreign businesses.
1 "financial control": “The actions of the management of an organization taken to ensure that the costs incurred and revenue generated are at acceptable levels. Financial control is assisted by the provision of financial information to management by the accountant and by the use of such techniques as budgetary control and standard costing, which highlight and analyse any variances.” /A Dictionary of Finance and Banking. Oxford University Press, 1997.
Oxford Reference Online. Oxford University Press.
2 "Foreign direct investment": “Inward foreign direct investment similarly is acquisition by non- residents of real assets within a country. Once a country has real assets abroad, if these make profits which are ploughed back into expanding enterprises, this should ideally be shown in the balance of payments as receipts on current account balanced by an outflow on capital account. In fact balance-of-payments accounts often show only net remittances of profits as a current account item, ignoring profits earned abroad and ploughed back in both current and capital accounts.” A Dictionary of Economics. John Black. Oxford University
Future analyses: The alternative analyses, which are included in the checklist. The selection of alternative analyses is based on addressing issues.
Investment in new or ELDSEE- market: All capital expenditure in new or ELDSEE- markets consisting of investments associated with establishing a sales office as well as capital expenditure required for opening a (retail) store such as key money, real estate, rebuilding, Boom hardware, computers, architect fees.
Market: The market for merchandise of the Boom brand.
Market level: The level of detail on which a market is looked at. A country might form a market but a market can also be looked at on a city level for example.
Boom: Boom Europe International (unless stated otherwise), part of Boom Europe
Holding. Boom and Boom will be used interchangeably.
Boom’s analyses: All analyses that Boom performed in the past or performs at present.
Boom Assumptions: The assumptions that Boom makes when performing analyses.
Boom’s target group: A group of potential customers of the same age that is targeted by a Boom product division. In order to determine if a person is a potential customer, his purchasing power might be considered.
New markets: A southern or eastern European market in which Boom merchandise is not for sale yet.
Strategic analyses: Analyses that assess the attractiveness of a market, given the strategic intention of Boom, by considering the market characteristics (measured by economic and demographic variables for example) and the competitors in a market.
As a result, a suitable way of exploiting the perceived potential can be suggested.
Strategic plan: A strategic plan is a high level plan, with the time frame of a couple of years, which represents a strategic intention and is partly the result of strategic analyses. This strategic plan states the main actions that will be undertaken within a couple of years.
Systematic analyses: A set of analyses that includes all relevant analyses that can be made in order to make a balanced and reliable decision.
Target market: The market of which the attractiveness is analysed.
2. Relevant literature per author
In this part of the appendices, literature on several aspects of this thesis is shown in order to provide the reader with some background information.
Schlosser, M. (2002:279-280):
Although financial analyses are useful tools, they cannot be used solely when investments in new markets are assessed. A commitment to a new market is the result of strategic choices and is therefore a general management issue. Such a commitment to a new market (or markets) could result in a change in the power structure of a company. This depends on the level of the commitment measurable by the size of the investment. Often, the decision to make a commitment, by entering a new market, is the result of a complex decision-making process instead of a clear-cut decision made by a specific person on a specified time. As a result different outcomes will be generated when making calculations at different times. At the end of the decision-making process, the involved risk of the investment project will become clearer.
In the incremental approach, the cash flows as a result of an investment can be discounted at a relevant discount rate. In practice, this is more difficult than it seems since only those cash flows that are created by the investment decision have to be taken into account. Therefore the following aspects should be taken into account:
• The nature of the costs; costs could be the result of an allocation process.
• The impact on the existing business portfolio on the company; entering new markets creates options to change the organisation of a company and should therefore be taken into account
• The impact on the company’s future strategic opportunities; if entering the new market will create new options for further development of a company and therefore this added value should be recognised
The time frame of impact of an investment in a new market should also be considered, although theoretically the entire expected life should be taken into account.
Ven, A.D.M. van de (1996:233-258)
Van der Ven took a financial perspective when he described the process prior to making an investment in a new market. Although Van der Ven focused on producing internationally, some of his publication is applicable to Boom even though the considered investment decisions at Boom do not concern investments in production capacity.
Before an investment in a new market is made, a preparatory study will take place.
Van de Ven (1996:234) distinguishes between an orientation study and a feasibility study; together they make up the preparatory study. In the former a rough selection between investment opportunities is made by exploring the different investment opportunities and the needs of the company. A visit to the country in which the investment will be made is part of this study. During the feasibility study, many criteria related to, among others, commercial, financial and economic issues are formulated. Several alternative investment proposals will be made, analysed and commented upon in order to arrive at a sound recommendation concerning the investment.
In order to enhance the probability of choosing the right investment proposal, Van der Ven identifies four relevant aspects of this preparatory study. The study should be strategically orientated and it should be selective, it should clarify the size of the project and moreover, a diverse project team should be set up to conduct the study.
First of all, an investment decision is highly related to strategy, especially when a substantial amount of capital is employed over a long period of time. Boom is able to customise the size of the investment in order to reflect the risk that it is willing to take.
It can adjust the size of its investment by making a choice between different business models when entering a new market. Therefore, although entering a particular new market could very much be a strategic issue, it does not necessarily mean that the related investment will have a long-term impact on the Boom business.
Van der Ven further notes that the investment decision should take the changing environment into account and that critical environmental factors should be studied thoroughly in the preparatory study.
Secondly, the selective nature of the preparatory study has to be apparent in the orientation study (the rough selection) and the feasibility study during which few alternatives can be examined in detail. Possibly there are some variants to these alternatives that should be studied as well.
The clarification of the size of the project enables for a reliable prediction of the size of the investment to be made. For example, the amount of stores that will be opened with the initial investment has to be known in advance. This aspect is less relevant for Boom since it specifies its investment to a detailed level. Concerning the last aspect of the preparatory study van der Ven recommends to set up a diverse project team that contains people with different areas of knowledge in order to judge the feasibility of the project.
Van der Ven describes several steps in the feasibility study. The first step consists of designing the study. The standardisation of this first step is the subject of this research. Some of the elements of this design are market research and project strategy, marketing concept, inputs, location and environment and technology. The last element in the study design is a planned financial analysis. Van der Ven links the study design of the feasibility study with the value chain of Porter, which describes the main activities of a company. Those activities, the primary and secondary activities, are reflected in the feasibility study. In the end, the financial analysis explores the expected margin. Every step of the study, related to one of the primary or secondary activities, should generate a form in order to able to estimate the total costs.
The market research should provide the management with a clear view on the relation between the market and the project. Besides, the strategic opportunities and constraints of the investment project will be identified. The analysis will focus on the target market, the potential needs of the customers in several segments and markets, distribution channels, competitors, social economic environment and future developments. The resulting opportunities and risks serve as input for the project strategy and marketing concept.
The project strategy refers to the activities and the means that are required to achieve the project objectives. Van der Ven states that the overall goal of the project is to strengthen the company’s position either direct or indirect. Examples of the overall goals are financial aspects, the company’s market portfolio or profit opportunities. The project strategy is divided into the geographic scope, market share
and the relation between the product and market. Geographic scope states the potential consuming market for the product. A choice has to be made between combinations of segments and markets. The desired market share depends on the strategy of the company; in case of Boom this is a two percent market share.
Ansoff identifies four different relations between products and markets. Boom uses
“old” products to enter a new market. Ansoff calls this a market development strategy.
The marketing concept differs from the project strategy since it only deals with approach of the chosen market instead of defining the direction of the project. The marketing concept determines:
1. The target group for a product 2. Marketing objectives
3. Marketing strategy 4. Marketing mix
5. How to measure market performance
The planning of the investment project should be planned and budgeted accordingly.
This is possible through a Gantt chart (Ven, 1996:250).
The financial analysis should not be at the end of the feasibility study; in the preparatory study alternatives have been selected based on financial analyses.
Some of these alternatives will be analysed in detail, out of which the best will be chosen. The feasibility of the project is measurable by expected return on equity, the net revenue available to all stockholders. Other parties such as the provider of debt will be interested in the interest. Others financial analyses are total investment cost, economic life and pay back time. Sensitivity analyses might be necessary since the role of the sensitivity to the input will be very important. The method of financing will also be looked at in this last step of the feasibility study.
The calculation of the net returns takes place during all steps of the feasibility study.
The consolidation of this information is done in the last phase to arrive at the net return figure. The total investment is built up of the investments in fixed assets and working capital. The investment in tangible assets does not only include investments in buildings and machinery but also in preparatory activities such as conducting the preparatory study. The return on equity should be measured against the target that has been set, possibly derived from other investment projects. The ROE is higher if the debt equity ratio of the firm is higher due to the effect of levering the firm. This effect possibly distorts the profitability of the investment and therefore other financial analyses should be applied as well. The estimation of future performance relies on historic data and expectations. The role of uncertainty has to be looked at; this is done through sensitivity analyses.
Ward, K. (1992: 11-23)
Financial management strategy can also be described as financial reporting for strategic management or even more specific strategic management accounting in relationship to business strategy. Strategic management is usually perceived to contain the elements planning, implementation and control of business strategy.
Strategic management does include external factors in contrast with traditional financial administration systems. Business strategy is a combination of “where are we now?” and “where do we want to go?” Therefore both the internal as well as the external environment of the business have to be taken into account in order to judge its applicability. Strategic management involves implementing a chosen strategy as
well. Due to a dynamic and ever changing environment, plans that are part of this strategy might have to change (Ward, 1992:13).
Management accounting might provide a contribution to the financial aspect of the strategic analysis, planning and control.
The financial function in a company usually consists of:
¾ The financial administration, which records financial transactions and reports on the financial results of this transactions
¾ Financial management or business financing, which deals with sufficient financial resources to keep the business running
¾ Management accounting, which provides input for financial decision-making processes of managers
Strategic planning involves developing action plans that are needed to realise the
business objectives.
Management accounting is important with respect to strategic planning since many objectives are stated in numbers. The MA system will monitor the results of the strategic plan in order to compare these with the
forecasts and also to provide management with input for their decision-making process. Usually only one financial control tool is used, ROI generally, disregarding the level of business development or strategic intent.
Ward, K. and T. Grundy (1996)
Strategic Management Accounting (SMA) links financial data to its competitive context, in contrast with traditional management accounting that provides managers with information on internal (financial) performance (Ward, 1996: 324). Thus, SMA measures both financial as well as strategic performance. SMA could assist management in:
• Identifying and value competitive advantages (by performing cost/benefit analyses)
• Explore cost base compared to competitors
• “ Evaluate the relative financial attractiveness of different kinds of customers, or distribution channels”
• Analyses key variances
SMA helps to address the question on which business a company should be in, instead of describing the business a company is currently in.
Strategic Value Management (SVM) focuses on elements that add value to a company: investment decisions and acquisitions, cost programmes, programmes for change and for adding value. BP implemented SVM and as a result started to make (economic) analyses of cash flows for investment appraisal and strategic business plans. SVM is seen as an opportunity to improve decision-making based on discounted cash flows since it deals with uncertainty, intangibles and interdependencies, especially before a detailed measurement of value. Furthermore, Strategic Cost Management manages costs by looking at both financial as well as competitive advantage. This prevents cost reductions from harming the business strategy.
3. FMO datasheet
FMO internal document: Country risk of Turkish market
4. Corruption Index
www. transparency.org, 2003 figures
