Registration Number : FIN-20-03-022

Student Name : Wickramarachchi Appuhamilage Hasith Kanishka

Wickramarachchi

Module Title : Strategic Business Analysis and Investment

Decision

Study Centre : Cambridge College of Business and Management Sri Lanka

By submitting this assignment, I confirm that I understand and abide by the Cambridge
College’s plagiarism and collusion regulation

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To : Board of Directors

From : Management Accountant

Subject : Strategic Business Analysis and Investment Evaluation

Date : 25th of April 2020

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Table of Contents

1.0 Task 01 – Strategic Business Analysis ................................................................................ 4

1.1 Introduction to the Selected Company – Nestle Sri-Lanka .............................................. 4
1.2 Strategic Business Analysis to Determine Strategic Position .......................................... 4
1.2.1 External Business Analysis through PESTEL Analysis ........................................... 4
1.2.2 Internal analysis-Porter’s Value Chain Model and Competence Model .................. 6
1.2.3 Cultural Analysis-Cultural web Mc Kinsey 7S ........................................................ 7
1.2.4 Stakeholder analysis-Mendlow’s Matrix .................................................................. 7
1.2.5 Strategic Position-SWOT Analysis........................................................................... 8
1.3 Key Strategic Issues and Recommendations .................................................................... 9
1.4 Relationship between Strategic Planning Process and Capital Expenditure Planning..... 9
2.0 Task 02 – Investment Decision ............................................................................................ 9
2.1 Suitability ............................................................................................................................ 10
2.2 Feasibility ............................................................................................................................ 10
2.2.1 Projected Cash Inflows and Outflows .......................................................................... 11
2.2.2 Investment Appraisal Techniques ................................................................................ 12
2.3 Acceptability ....................................................................................................................... 16
References ..................................................................................................................................... 16

Table of Figures
Figure 1-Power Interest Grid of Stakeholders ................................................................................ 8

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1.0 Task 01 – Strategic Business Analysis

Strategic business analysis refers to the analysis of strategic performance and strategic
performance of business organizations to assist in the strategic decisions to achieve the strategic
objectives in an efficient and effective manner. For the sustainability and survival in the
competitive world, analyzing business strategic position and performance is an essential element
so that the organizations can manage and mitigate risks which can cause adverse impacts on the
organization performance (Grant, 2008).

1.1 Introduction to the Selected Company – Nestle Sri-Lanka

Nestle was initiated in Switzerland as a company which engages in providing food, beverage,
nutrition and wellness products to its customers. The history of the company runs back to the
year 1867 where the business was initiated with a condensed milk factory to produce nutritious
products to its customers. With a history of 114 years by 2020, in Sri-Lanka, different types of
brands has been established in the hearts of the Sri-Lankan customers by providing products for
their daily essential needs. The work with the slogan, “Good Food, Good Life” ensuring the
quality of the products they provide to its customers (Nestle, 2020). A number of world
recognized brands operates in Sri-Lanka to provide the international experiences of taste,
wellness and nutrition to the Sri-Lankan customers.

1.2 Strategic Business Analysis to Determine Strategic Position

In order to determine strategic position of the company, there are various tools and techniques
available to conduct the strategic business analysis. These techniques and tools analyze on the
business internal and external environment, organizational culture, stakeholders and the strategic
position itself (Gurkov & Settles, 2011).

1.2.1 External Business Analysis through PESTEL Analysis

The external business environment consist of two parts as micro and macro business
environment traditionally. According to the modern day analysis, the external environment is
mainly to be considered as the macro business environment factors. These environment factors
can be analyzed by using the PESTEL analysis technique.

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Political Factors
Nestle Sri-Lanka has to have a keen attention on the political environment of Sri-Lanka since the
economy depends upon the political decisions and changes to a greater extent. All the trade and
tariff policies depends upon government decisions. Therefore, the strategic business decisions
should be entrusted based on the nature of political conditions in Sri-Lanka.
Economic Factors
The economic growth rate of Sri-lanka, per capital income, consumers’ propensity to consumer,
the percentage between consumer expenditure and savings, interest rates, inflation rate and the
foreign exchange rates are the most important economic factors that need to be considered by
Nestle in order to improve the efficiencies of the business processes.
Social and Cultural Factors
The living patterns, the culture and other consumer behavioral patterns determine the food
consumption patterns of the Sri-Lankan market. Nestle is a company which provides products
mainly to fulfill the food needs of the customers. Therefore, the food, beverages and other
products need to be implemented in a manner which suits the Sri-Lankan food patterns.
Technological Factors
Nestle uses technological advancements and technological changes to advance the performance
of the business segments, introduce innovative products, research and development activities,
introduce digital, manage costs and etc. Nestle Sri-Lanka gets the support from its parent
company to utilize the advanced technology in its business processes to ensure the achievement
of one of their main strategic objective by 18.5% by the end of 2020(Nestle,
Aboutus/strategy:Nestle Lanka PLC, 2020).

Ecological Factors
As a multi-national company, Nestle should ensure that the company is eco-friendly and does not
harm the environment by any of the activities conducted by them. The research and development
activities were conducted recently to save energy and to use renewable energy source which
would indirectly contribute in protecting the environment of Sri-Lanka.
Legal factors
The fact that Nestle been a multi-National company does not mean that it is free from all the
rules and regulations prevailing in the country. From the business registration, all the laws and
regulations especially the trade laws need to be followed by the company. The rules and
regulations with regard to importation, trading of food products, employment management
should be followed strictly.

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 1.2.2 Internal analysis-Porter’s Value Chain Model and Competence Model

The micro environment under the external environment in the traditional analysis is considered
as the internal environment in the modern day analysis. The internal analysis of a business
organization can be conducted using the Porter’s Value Chain Model and the Competence Model
Porter’s Value Chain Model
Porter’s value chain analysis consist of primary and support activities which helps in the
management of internal business activities. The primary activities include inbound logistics,
operations, outbound logistics, marketing and sales(Hitt, Ireland, & Hoskisson, 2009). All these
four activities have their own comprehensive processes at Nestle since it is a multi-national
company. The support activities such as firm infrastructure, procurement, human resource
management and technological advancements supports the primary activities of Nestle at a
massive manner.
Porter’s Competence Model
Porter’s competence model involves in analyzing five forces which affect the competence of an
organization(Kak, 2004). When it comes to Nestle, it can be analyzed as follows.
1. Rivalry among competing firms-The competition among the existing firms in the food
and beverage industry arise mainly from Uniliver. Uniliver is also a multi-national
company which have a high threat on Nestlé’s operations. There is a severe competition
in the market to become the market leader.
2. Bargaining power of customers-Customers has a high bargaining power since there are
ample of product suppliers in the food and beverage industry. Therefore strategies need to
be conducted to retain the existing customers and attract potential and new customers.
3. Bargaining power of suppliers-The bargaining power of suppliers is not very high. The
supplier supply raw-materials as well as immediate products. Nestle is a platform for the
suppliers to market or make available the products in the market.
4. Availability of substitutes-There are a number of substitutes for the food and beverage
products in the market and they are sometimes uncountable. Therefore, the threat is high.
5. Threat of new entrants-There is a threat for new entrants, since Sri-lanka is a favorable
market for investment opportunities. But the food and beverage industry is dominated by
the current key players and it will take a long time for the new entrants to get establish in
the market.

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 1.2.3 Cultural Analysis-Cultural web Mc Kinsey 7S

Culture frames the organizational behavior to achieve organizational objectives in a stable

manner. Mc Kinsey’s 7S Model(Katz, 2001) can be used to analyze the cultural situation of
Nestle.

Element Explanation
Strategy Business strategies frames the organizational
culture. The strategies undertaken by Nestle
in accordance with their global and local trade
policies frames the organization culture.
Structure Organization structure is the backbone of any
organization. It develops the culture within
itself according to the hierarchal built up
within the organization.
Style The style that organization follows is an
essential part in dealing with the future
cultural changes to the organization.
Staff People or employees place a major role in
framing organization culture since the cultural
factors are basically put into action by the
employees of the organization.
Skills Skills are essential to act according to the
cultural patterns of the organization and avoid
cultural dilemmas.
Systems Systems form an integral part of the
organization culture since systems improve
the coordination between cultural factors.
Shared Values Values that are shared combines all the other
factors of the cultural web of an organization.

1.2.4 Stakeholder analysis-Mendlow’s Matrix

Stakeholders are the groups which have the ability to influence the business activities and who
are influenced by the business activities. There are different kinds of stakeholder groups such as
shareholders, owners, directors, managers, employees, customers, suppliers, trade unions,
government and etc. The impact that the stakeholders can make can be described through the

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Mendelow’s power Interest grid(Makadok & Walker, 2000). As per the analysis, the
stakeholders of Nestle PLC can be depicted as follows.

Figure 1-Power Interest Grid of Stakeholders

Source-Author

1.2.5 Strategic Position-SWOT Analysis

The strengths and weaknesses as well as opportunities and threats of a company, determines the
strategic position of it. That is, the analysis determines the strengths and opportunities to
overcome the weaknesses and threats in the market such that the sustainability of the company
can be maintained(Mooney, 2007). Accordingly the SWOT analysis of Nestlé PLC is as follows.

Strengths Weaknesses
• A cluster of internationally recognized • Massive costs on advertising which is
brands irrecoverable
• Powerful brand equity • Massive costs on research and
• Strong brand image development costs on unsuccessful
• Efficient distribution channels researches
• Effective communication channels • Non adaptation of brands to the Sri-
• Diversified product portfolio under Lankan market
each sub brand
Opportunities Threats
• Growth in Sri-Lankan consumer base • Consumers been aware on health
• Change in food patterns and lifestyles protection
• Reduction in consumers’ disposable
income

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 1.3 Key Strategic Issues and Recommendations

The key strategic issues found when analyzing the strategic position of Nestle PLC is as follows.

• The company invests more on research and development activities, with the intension of
providing innovative products. But they lack of the knowledge n consumer market and
the products are been imported from the parent company where the alterations are done to
package of the products only. Therefore heave investment on R & D is not necessary.
• Further, they have a strategy to reduce or control costs since the profitability of the
business is reducing. In order to increase the profitability, the strategies to increase
revenue also should be implemented while controlling costs.
• More attention should be given on relaunching the products in the Sri-Lankan market.

1.4 Relationship between Strategic Planning Process and Capital Expenditure

Planning

The strategic planning process evaluates the strategic position of the company and recommends
the measures that need to be taken in order to improve the performance or to achieve the overall
strategic objectives of the company(Thompson, Peteraf, Gamble, & Strickland, 2012). The
recommendations might involve in incurring capital expenditure since the strategies relaunched
to achieve strategic objectives would require capital expenditure to generate revenue for the
company.

2.0 Task 02 – Investment Decision

The investment decisions are important for the strategic business growth of an organization.
Many organizations proceed with the investment opportunities on the evaluation of them which
would contribute the organization a positive return to achieve the strategic
objectives(Daubechies & Loris, 2009). Investment decisions should be based upon the fact that
they support in the achievement of overall vision of the company. Investment decisions should
be taken by evaluating various aspects depending upon the suitability, feasibility and
acceptability factors.

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2.1 Suitability

As per the current strategies of Nestle Sri-Lanka, is to embrace digital platforms to ensure that
the marketing activities are conducted in an efficient and realistic platforms. Through this
initiation, 10% of the customer base is personalized and as per the organizational concern, with
the high competition available in the market, 10% personalization should at least increase to 50%
by the end of year 2023. Due to this activity it is expected to improve the organizational sales by
20% at the end of 2023. So in order to improve the customer personalization process through
digital platform, the company should investment in a special ERP system to improve the sales
revenue as expected.
The strategy is very much suitable and the investment decision based upon the strategy is highly
compatible with the current trends in the corporate world. We are in a globalized era where the
connectivity with the business stakeholders should be able to be done in seconds with the threats
arising in the external environment. For example, the recent pandemic outbreak, Covid -19 has
been an economic threat to the world where the people are lacking of their own basic human
needs. If the business organizations have a database or track of the customers, their income
levels and the consumption patterns, the food and beverages which are essentials can be
delivered to their door steps without any hesitation with the help of technology. So the decision
taken to personalize customers to improve revenue by investing on an ERP system is a suitable
decision for the present as well as future sustainability of the business organizations.

2.2 Feasibility

When making an investment decision, the feasibility of the investment decision should be
evaluated to take the decision to accept or reject the investment opportunity available. When it
comes to the assessment of feasibility, financial values should be evaluated based on costs and
returns to evaluate the financial requirements and returns because, whatever the decision made,
there should be adequate finance to fund them and adequate return to fund the
expenditure(Chandra & Shadel, 2007).
As per the decision taken to invest in an ERP system to personize customer base up to a
percentage of fifty, the following cash inflows and outflows can be generated.

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2.2.1 Projected Cash Inflows and Outflows

As per the financial statement figures available at Nestle PLC, the approximate values of cash
inflows and outflows are given in the following table. Based on the figures of 2019, the projected
financial analysis for the four-year period (2020-2023) is given below.

2019 2020 2021 2022 2023

Turnover
36,000,000.00 41,400,000.00 47,610,000.00 54,751,500.00 62,964,225.00
Cost of Sales
23,000,000.00 23,460,000.00 23,929,200.00 24,407,784.00 24,895,939.68
Gross Profit
13,000,000.00 17,940,000.00 23,680,800.00 30,343,716.00 38,068,285.32
Expenses
8,350,000.00 8,600,500.00 8,858,515.00 9,124,270.45 9,397,998.56
Operating
Profit 4,650,000.00 9,339,500.00 14,822,285.00 21,219,445.55 28,670,286.76
Interest
300,000.00 303,000.00 306,030.00 309,090.00 312,181.00
Profit before
tax 4,350,000.00 9,036,500.00 14,516,255.00 20,910,355.55 28,358,105.76
Taxation
(14%) 609,000.00 1,265,110.00 2,032,275.70 2,927,449.78 3,970,134.81
Income after
Tax 3,741,000.00 7,771,390.00 12,483,979.30 17,982,905.77 24,387,970.95

As per the strategic objective of improving customer personalization base by 50% such that to
improve sales revenue by 60% by the year 2023 is a massive target since by the year 2019, there
is a decline in sales revenue by 2.6% when compared to 2018. Therefore, the company expects to
make the investment on purchasing a developed ERP system for the purpose by investing LKR
10,000,000. Due to this fact, the expected projected cash inflows and outflows are predicted
based on the following assumptions.

• Sales revenue to be increased by 15% annually.

• Cost of sales are to be increased by 2% annually and the expenses to be increased by 3%
annually.
• Interest cost to be increased by 1% and the corporate tax rate of 14% remains constant.
• No noncash flow items are included in the above schedule.
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By considering above details net cash flow for the project for each year are as per follows

Y0 Y1 Y2 Y3 Y4

Investment (10,000,000.00)
Turnover
5,400,000.00 6,210,000.00 7,141,500.00 8,212,725.00
Cost of Sales
460,000.00 469,200.00 478,584.00 488,155.68
Gross Profit
4,940,000.00 5,740,800.00 6,662,916.00 7,724,569.00
Expenses
250,500.00 258,015.00 265,755.00 273,729.00
Operating
Profit 4,689,500.00 5,482,785.00 6,397,161.00 7,450,840.00
Interest
3,000.00 3,030.00 3,060.00 3,091.00
Profit before
tax 4,686,500.00 5,479,755.00 6,394,100.00 7,447,749.00
Taxation
(14%) 656,110.00 767,165.70 895,174.14 1,042,684.14
Income after
Tax 4,030,390.00 4,712,589.30 5,498,926.86 6,405,064.14

2.2.2 Investment Appraisal Techniques

Pay Back Period

Cumulative Cash
Year Initial Investment Net Cash Inflows Flows
0 -10,000,000 - (10,000,000.00)
1 4,030,390.00 (5,969,610.00)
2 4,712,589.30 (1,257,020.70)
3 5,498,926.86 4,241,906.16
4 6,405,064.14 10,646,970.00

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The Payback period is 2 years and 3 month for the investment. Since the initial investment is
recovered by the predicted net cash flows, it is recommended to proceed with the investment on
the ERP system.

Advantages and Disadvantages of Payback Period Method

Payback period method is very easy to calculate and the decision can be taken within a short
time period. But the payback period method does not take into consideration the time value of
money and the cash flows after the payback period.

Discounted Pay Back Period

Discounting Discounted Cash Cumulative

Year Cash Flows Factor Flow Discounted CF
0 (10,000,000.00) 1 (10,000,000.00) (10,000,000.00)
1 4,030,390.00 0.909 3,663,624.51 (6,336,375.49)
2 4,712,589.30 0.826 3,892,598.76 (2,443,776.73)
3 5,498,926.86 0.751 4,129,694.07 1,685,917.34
4 6,405,064.14 0.683 4,374,658.81 6,060,576.15

The discounted payback period is 2 years and 7 months and it is recommended to accept the
project since the initial investment is covered during the project period.

Advantages and Disadvantages of Discounted Payback Period Method

Discounted Payback period method is very easy to calculate and the decision can be taken within
a short time period. And the time value of money is taken into consideration. But the cash flows
after the payback period are ignored.

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Net Present Value

Year Cash Flows Discounting Factor Discounted Cash Flow

0 (10,000,000.00) 1 (10,000,000.00)
1 4,030,390.00 0.909 3,663,624.51
2 4,712,589.30 0.826 3,892,598.76
3 5,498,926.86 0.751 4,129,694.07
4 6,405,064.14 0.683 4,374,658.81
NPV 6,060,576.15

The investment has a positive NPV of LKR 6,060,576.15. Therefore, it is advisable to accept the
project since the investment generates a positive NPV.
Advantages and Disadvantages of NPV Method

NPV method considers the time value of money during the project period and it considers both
the cash inflows and outflows during the project period. NPV is one of the best technique used to
determine the financial feasibility of a capital expenditure project. Since the figures and rates are
on approximate basis, the figures or the results are not 100% accurate.

Internal Rate of Return

IRR = Ra + NPVx (Rb - Ra)

NPVx - NPVr

Ra = Lower discount rate

Rb = Higher discount rate

NPVx = NPV at the lower rate

NPVr = NPV at higher rate

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Cash Flow discounted at 10%

Discounting Discounted Cash

Year Cash Flows
Factor Flow
0 (10,000,000.00) 1 (10,000,000.00)
1 4,030,390.00 0.909 3,663,624.51
2 4,712,589.30 0.826 3,892,598.76
3 5,498,926.86 0.751 4,129,694.07
4 6,405,064.14 0.683 4,374,658.81
NPV 6,060,576.15

Cash Flow discounted at 35%

Discounting Discounted Cash

Year Cash Flows
Factor Flow
0 (10,000,000.00) 1 (10,000,000.00)
1 4,030,390.00 0.7407 2,985,309.87
2 4,712,589.30 0.5486 2,585,326.49
3 5,498,926.86 0.4064 2,234,763.88
4 6,405,064.14 0.3010 1,927,924.31
NPV (266,675.45)

IRR = Ra + NPVx (Rb - Ra)

NPVx - NPVr

= 0.1 + 6,060,576.15 (0.35-0.10)

6,060,576.15 - (-266,675.45)

= 34%

IRR is more than the discount rate; hence the project could be accepted.
Advantages and Disadvantages of IRR

IRR provides a margin where it ensures the project’s safety of generating a positive NPV until a
certain percentage. The businesses can be alert on evaluating whether the cost of capital reach
the IRR rate or not. Qualitative characteristics such as virus pandemics and natural disasters are
not taken into consideration.

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2.3 Acceptability

Based on the suitability analysis and the financial feasibility analysis, due to the current
requirement of the company and to meet up the global competition, it is advisable to accept the
project since the financial feasibility study generates a positive impact on the investment of ERP
system.

References

Chandra, S., & Shadel, W. (2007). Crossing disciplinary boundaries: Applying financial
portfolio theory to model the organization of the self-concept. . J. Res. Personal., 41(2),
346-373.
Daubechies, D., & Loris, G. (2009). BrodieSparse and stable Markowitz portfolios. Proc. Natl.
Acad. Sci.,, 106.
Grant, R. M. (2008). Contemporary strategy analysis.
Gurkov, I., & Settles, A. (2011). Managing organizational stretch to overcome the uncertainty of
the Great Recession of 2008. International Journal of Organizational Analysis, 19(4),
317-330.
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2009). Strategic management: Competitiveness
and globalization, concepts and cases.
Kak, A. (2004). Strategic management, core competence and flexibility: Learning issues for
select pharmaceutical organizations. Global Journal of Flexible Systems Management,,
5(4), 1-15.
Katz, M. (2001). Planning ahead for manufacturing facility changes: A case study in outsourcing
Pharmaceutical Technology. 160-164.
Makadok, R., & Walker, G. (2000). Research notes and communications: Identifying a
distinctive competence: Forecasting ability in the money fund industry. Strategic
Management Journal, 21(8), 853-864.
Mooney, A. (2007). Core competence, distinctive competence, and competitive advantage: What
is the difference? Journal of Education for Business, 83(2), 110-115.
Nestle. (2020, 04 22). About Us:Nestle Lanka PLC. Retrieved from Nestle Lanka PLC website:
https://www.nestle.lk/aboutus/history

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Nestle. (2020, 04 22). Aboutus/strategy:Nestle Lanka PLC. Retrieved from Nestle Lanka PLC
Website: https://www.nestle.lk/aboutus/strategy
Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland, A. J. (2012). Crafting and
executing strategy: The quest for competitive advantage.

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