Strategic Financial Management (SFM) SFM is “the assessment of Strategic Options, Choices and Business performance by both strategic and financial analysis”. SFM examines how a united view of strategic and financial issues can become a practical reality. This is achieved by looking at• the links between corporate strategy and SFM• managing for value-enabling financial management to play a positive and proactive role in strategic management.• the process of value management - These include strategic management accounting and strategic and financial planning.• key applications including strategic investment decisions, acquisitions, strategic cost management, and value business change.• implementing SFM.
STRATEGY:Simplicity: Simplicity resides in their being a relatively a few number of competitive fundamentals which are limited up to deliver VALUE.EX: Brand Differentiation. Service Excellence. First mover advantage.Thinking: Strategy is also about thinking – Strategic Thinking? Where are we? Where do we want to reach?Results – Focus: Strategies do not necessarily have very easily quantified value these strategies ultimately have only if and when are cashed in for real money.
Action: Strategy must also therefore be about action. Because managers are not held accountable for both the Strategic and Financial performance of business they can continue to misjudge the future and get away with it.Timing: Strategy very much requires close attention to the timing, specifically external events of other competitive conditions. Time-window of a strategy can have a profound impact on its ‘Financial value’ (IBM).Energizing: Strategy is essentially an energizing force provides fresh vigor and sense of purpose into managers otherwise buffeted by operational turbulence.Goal Driven: Strategy mean clear linkages with specific operational and financial goals. This means not just setting directions but also establishing controls.
Future: Strategy is about your future. By integrating strategy more closely with finance, we are able to show strategy is relevant because the question is now always asked “What is the value (financial) of the strategy?” Key links between corporate strategy and financial analysis: Strategic Analysis. Strategic Choice. Strategic Implementation. Strategic Value and Learning.Strategic Analysis: In strategic analysis we analyze our current strategic capability, the expectations of stakeholders and culture.
Strategic Analysis and Financial Analysis Strategic Analysis Financial AnalysisMission • Is it stretching but • Does this mission guide (or achievable? misguide) strategy • And is it the essence of development? what we are about? • Does it distract or even destroy Share holder value?Objectives • What are our strategic • Are these consistent with goals? Financial realities? Present and future?Strategies • How do we achieve our • What is the value of these goals – with competitive strategies? advantage?Actions • Do these support our • What is the value of the Strategies? sets of strategies decisions • Are these sufficient? (‘Strategic project set”)?Control • What strategic milestones • What financial returns do we need to pass and (profit and cash) do we when? expect?
Examining Strategic Options Strategic Choice Financial Behavioral Evaluation InfluencesSuitability • What are the • What are the Do we really want competitive benefits/costs of to work this hard? benefits (now and exploiting it? How do we future)? • What will it cost to reinforce • What entry develop and protect commitment to make barriers and this position? it happen? switching costs can be created and how can our lead be maintained?Acceptability Is this acceptable Is the level of What are to all returns consistent stakeholders’ stakeholders? with risk? agendas and how can we steer these?Feasibility Is there a market Is there opportunity Do we really opportunity and within our financial believe it is have We the Constraints? possible? capability?
Strategy Implementation Strategic Analysis Financial Behavioral Analysis IssuesOrganizational What organizational What value is Will a particularStructure and structures will meet added, diluted or structure add valueDesign the competitive destroyed by a given our culture? challenge? specific organizational structure?Resource What businesses What is the likely What will preventAllocation and should we invest impact of resource us from re-Control more in or less in and decisions on allocating what competitive financial resources to where performance do we performance? it needs to go? expect?Managing What key changes What is the What behavioursChange are needed to targeted value of would either support the strategy organizational enhance or erode and how should change the value of these be managed? programmes (and organizational their costs)? change?
Financial impact of transformational changeImplementation and value in a multinational computer company Transformational change may seem an abstract notion, but when we examine specific transformational change programmes these do have some very specific financial benefits which can be quantified.Transformational change Key financial benefits Products simplification. Reduced products costs. Business process re-engineering. Reduced processes costs. Acquisitions and alliances. More revenues, margins and Organizational flexibility. future opportunities. Accelerates product launches-Continuous Improvement more revenues-and reduces costs. Quality management. Key financial benefits Avoids loss of customers and lost revenues- and reduced costs Out-sourcing non-core activities. Improves margins and reduces costs of Management skills. distraction.Team building. Costly management errors are avoided; New opportunities created and harvested. Costs of undue political activity avoided.
Strategy, Value and Learning Strategic learning occurs when managers reflect on their strategic and financial recipes which consciously of unconsciously – drive the decision making process. This may result in insights including: Our views on ‘what business we are in’ or ‘should be in’ need to change. Whether we can make sufficient financial returns out of certain kinds of business. We need to review our profit and cash generation expectations, or our investment priorities. due to adverse shift in competitive environment we must realize that we need to undertake major restructuring and reductions in our cost base and to remain competitive and profitable.
Contrasting strategic and financial analysis:Strategic Analysis… Financial Analysis…Captures a wide range of variables Focuses on a narrower range of– both external and internal. variables – primarily internal.Evaluates tangible and less tangible Is primarily concerned with tangibleareas of value. areas of value.Involves mainly qualitative Involves more quantitativemeasures. measures.Has longer-term horizons. Has a bias towards shorter-term (with some exceptions)Is about creative thinking. Is more about the control process.Deals with broader uncertainties. Employs techniques for measuring specific risks.