Strategic Planning: How Companies Navigate Uncertainty in Business - Essay Sample

Introduction

The business environment today has become bewildered and fast-changing. The management has adopted formal systems for strategic planning as the crucial tools to evaluate and cope with the uncertainty in business. At the same time, the corporate board members seem to show their increased interest to equip companies with adequate strategies to test against actual results to improve the outcomes. Despite the differences in the strategic planning process adopted by the companies, the ultimate culmination is the projection of financial statements. This allows the board and top managers to consider ways to approve strategic plans to facilitate the increase in the shareholder value. The attractiveness of the projected strategic corporate term is, therefore, defined by the performance of the projected earnings per share. The current paper evaluates strategies that are used to increase stock prices and shareholder value in Toyota Motors Company.

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Strategies to Enhance Shareholders' Value in Toyota Motor Corporation

Toyota Motor is one of the largest companies that involve in public trading as a manufacturer and distributor of motor vehicles and parts. It is segmented into automotive operations and financial services. Toyota Motor, over the years, has been able to enhance its outcome in terms of profitability profit, which has increased the price value for shareholders. The company has been engaged in corporate strategic planning to ensure that the objectivity to create value for shareholders is achieved. Shareholder value defines the financial worth that the business owners receive for the shares they have in the company (Furrer, Pandian, & Thomas, 2007). Creating an increased shareholder value entails the company earning a higher return on invested capital compared to the weighted average cost of capital. Thus, the company needs to perform better than it is expected if the increase in shareholder value is to be realized.

The focus of Toyota Motor is to enhance shareholder value through strategic decision making. Some of the strategies that have been adopted by the organization include capital expenditures where plans have been put in place to ensure corporate resources are allocated to the most profitable and productive use. More strategies include mergers/acquisitions, stock buybacks, dividend increases, reduction of debt, expansion into a new geographic area, and introduction of new projects (Furrer, Pandian, & Thomas, 2007). The adoption of these strategies by Toyota ensures that they provide satisfactory growth for the company to allow the increment of its share market value, which then leads to the improvement in the value of the shareholders.

Capital expenditures have effects on enhancing the value of the shareholders' shares in the company. The cash flow for capital expenditures defines the funds that the company uses for acquisition or upgrading of the physical assents that involve equipment, industrial building, and property. The impact that capital expenditures have on the valuation of shareholders' share depends on the category of spending by the company (Rappaport, 2009). A company will enhance its value of the shareholders' share by spending less cost on the maintenance of production and profitability. Use of lower costs towards maintenance allows the company to increase the expenditures for productivity and revenue increase. Any annual CAPEX is reported as the expenditures on the income statement and calculated as a percentage of the annual revenue that reduces the profit, which then lowers the value of the company's shareholders (Furrer, Pandian, & Thomas, 2007). For the case of Toyota Motors, the company has been working to reduce the capital expenditures to enhance the value of the shares of the shareholders. For instance, in its twelve months of 2019, the company's capital expenditure was $3,702 million that was a reduction from the previous year.

Many companies, including Toyota Motors, have involved in mergers and acquisitions as an increasing trend to enhance the value of the shareholders. The benefitting shareholders in mergers and acquisitions belong to target and acquiring companies. There have many discussions about the effects of mergers and acquisitions on the involving companies. The significant number of accounting studies shows that mergers and acquisitions result in improved profitability and the performance of the company (Rappaport, 2009). They can increase the share prices and stock returns that abnormally occur for the target firms. However, for bidder firms, the stock returns lower though the value for their shareholders improves in the long-run future. For instance, in 2019, Toyota entered a merger with Suzuki Motor Corporation based on a capital alliance to establish and promote a partnership over the long-term. The alliance allowed the two companies to acquire the shares of each other. On the part of Toyota, Suzuki was to purchase the shares at 48 billion Japanese Yen. The ultimate impact on Toyota was the increase in the share price and the value of the shareholders. The sale of shares to Suzuki increased the revenue of the company that has been able to enhance the value of shares owned by shareholders.

Lately, companies have been increasing their stock buybacks. Stock buybacks allow the company to return some of the value to its shareholders. From the financial statements, over the past three years, Toyota Motor Corporation has offered the shareholders stock buybacks. The highest average share buyback ratio of the company over the past three years was 3.60, while the lowest was 3.40. This means that the company has prioritized the improvement of the value of the shareholders. Toyota seems determined to continue spending over $2.5 billion to buy back the shares. In its buyback plan, it has announced a $3.5 billion to buy shares from shareholders to enhance their value. According to its budget, Toyota intends to buy over 30 million shares to boost its value. Increasing of the dividends for the shareholders adds value to shares of the investors. Toyota Motor Company has enhanced the value for its shareholders by increasing its dividend to about $2.06 in 2019. The company also saw the dividend payout ratio raised to 34.25 percent.

The reduction of debt is an excellent sign for the company that looks forward to enhancing the shareholder value. The company is demonstrating about having its act together to generate enough cash flow without depending on others for expansion. The reduction of debts means that the interest expenses will lower (Rappaport, 2009). For Toyota Motor Corporation, its long-term debt rating was cut by Standard and Poor's after there was weak profitability following the lowering of the credit rating of Japan. As a result, the company was able to earn a stable debt outlook which has the impact of enhancing the profitability of the company that will lead to an increased value of the shareholders. The expansion into a new geographic area has the impact of increasing the profit level of the business in future to ensure that the company has enough to facilitate the payment of dividends to the shareholders (Furrer, Pandian, & Thomas, 2007). Toyota has been able to expand its presence in various geographic areas where it has several other facilities around the world in Russia, Japan, China, Malaysia, Australia, the United States, and Indonesia. In all these geographical regions, the company has been able to make net revenue in Yen millions. As Toyota increases its geographical availability, the company has enhanced its revenue to add more to the value of the shareholders on the shares they have with the company. Besides, the introduction of new products is a strategy that a company will adopt to improve the revenue collection that in turn enhances the value of the shares that the owners have invested with the company. For Toyota, the company's new products include the production of vehicles that use electric technology such as hybrid electric vehicles. The company has emerged to be the leading seller of hybrid electric vehicles that use the technology such as hybrid synergy drive (Rappaport, 2009). Others include the plug-in hybrid electric vehicles that started in 2007 and have already been tried. The introduction of new products put the company in a competitive position to enhance the profit it makes.

Recommendations

From the analysis of the financial statements of Toyota Motor Corporation, its ratio, and the strategies, the company can obtain its optimal performance if it employees the outlined strategies (Furrer, Pandian, & Thomas, 2007). However, the use of these strategies to achieve excellent performance varies, considering that they have various weaknesses and strengths. Toyota has been spending an increased amount in the maintenance process that has led to high costs that lower the profitability of the company hence reducing the value of shareholders (Rappaport, 2009). Based on this situation, the recommended strategies would be capital expenditure or CAPEX since it allows the earning capacity of the business to increase and facilitate the company to compete in the market. When considering the balance sheet for Toyota, the company has indeed been making efforts to lower the cost of expenditure to enhance the value of the shareholders. For example, Toyota will enhance its revenue if the capital expenditure lowers to a cost of less than $2 million in a year, and this should continue to lower with the subsequent expenditures.

Mergers and acquisitions have proved to work for Toyota over the years. Toyota has been able to enter an agreement with companies such as Suzuki and other technology companies to improve its production service. By recommending that Toyota agrees to merge with others or acquire some, the company may be able to realize higher profits in the future, considering that the strategy will enhance the market share of the company. As the market share increases, indeed, the value of the shareholders will also enhance following the increased revenue (Arzac, 2006). Mergers and acquisition strategy has the advantage that it allows the company to generate cost efficiency by implementing the economies of scale. The company will also gain in terms of tax and enhance its revenue through market share. When Toyota Motor adopts mergers and acquisitions, it will increase its value generation, which in turn enhances the shareholder value. For example, the merger of Toyota and Suzuki saw the company pump at least $ 4 billion, so the sale of shares to Suzuki. This was an excellent way of enhancing shareholder value.

The third recommendation from the financial analysis of Toyota is the stock buyback strategy. Though Toyota already buys shares from its shareholders, it is in the best interest of the shareholders that the company intensifies these efforts to ensure that investors can dispose of shares that they do not need. Similarly, when the company buys stock from the shareholders, it will have more shares to take care of the dividends, and other needs of the shareholders hence increased shareholder value. The buying back of outstanding shares from shareholders has the advantage of reducing the cost of capital, consolidate the ownership of the company, and free up profits so that they can go into paying executive bonuses. The buyback for stock ensures that the cost of equity financing is reduced as the company may not need a lot of equity financing but continue to do well financially.

Current WACC and Capital Structure of Toyota Motor Corporation

The capital structure depicts the ability of Toyota to finance the operation and growth through the utilization of different funds sources, which...