Strategy and finance are sometimes thought of as competing functions. The CFO wants to get involved in the strategy. The Head of Strategy wants to have a strong influence on the capital allocations, acquisitions and financial targets that turn a strategy written on paper into action.
The reason why the functions compete is that the two disciplines are deeply entwined. Senior managers and executives need to have not just an understanding of Strategy and an understanding of Finance – but an understanding of Strategy-and-Finance. Both disciplines are critical skills for rising line managers and functional leaders who want to have influence at the senior levels of their organisations.
Here are three ways in which strategy and finance need to be used as an integrated discipline:
Financial analysis is an invaluable tool for diagnosing the strategic situation.
Imagine that it was 2012, you were the Chief Strategy Officer newly arrived at HP and wanted to do a strategic diagnosis of the PC industry. You could and should do a lot of strategic analysis of market attractiveness and competitive advantage. But you should also run some numbers. You might start by analysing sales and revenue – which show rising sales (HP is the world number one in PC sales) but flat and narrow margins.
That might lead to a review of industry sales (which show a rise in units sales) and revenues – which indicate a decline in revenue per PC sold – common across all manufacturers. Probing further, you find that the average profit per PC across all manufacturers is in decline and HP are actually doing better than most. The standout performer is Apple. Broadening the analysis, the same is true across most consumer electronics. Margins are very thin and even the volume player doesn’t earn high returns. Unless they can find ways of developing integrated software and hardware bundles life can be tough. A strategic analysis illustrated with numbers will be so much more convincing…
Financial analysis can help prioritise key strategic issues.
At the end of a strategy diagnostic there are often several issues. For example, for HP, should it focus on developing its software? Can more benefits be gained from focusing more ruthlessly on scale benefits? Is being part of a large, complex organisation stopping the PC business from following the highly aggressive strategies required to develop a sustainable position?
Answering all the issues is impractical – so a first step is to focus on the most important issue. By doing some financial ‘What if’ modelling it is possible to see what the impact might be of different strategies. For example, by looking at shared purchases across HP one might find that the opportunity for further purchasing economies is limited, but the benefits of the PC business getting margins equal to Dell – a company focused more clearly on the PC – would be significant. Gradually the argument can be built that the biggest issue facing HP is whether to split out the PC business, to allow it focus all out on winning as a PC manufacturer, rather than fitting into the complex HP organisational environment.
Financial analysis can help identify and refine the best option.
Now the two options – spin out the PC business and don’t spin it out - can be evaluated in more detail. The strategic analysis can be used to suggest areas where the spun out business might benefit and where it would be hurt. The financial analysis can roughly quantify the effects – focusing attention where the numbers look big. Scenarios can be tested – such as whether the printer business should go with the PC business or not. Another issue that the financials could explore was the potential for the spun of business to be sold to another competitor.
In the end, HP decided to split the company – spinning out the PC and Printer businesses. Although they accounted for about 50% of the revenue and profits, they faced very different strategic challenges to its faster-growing corporate hardware and services operations. The stock price responded favourably to the news – another financial statistic that strategists should be interested in – but that is another story.
Ashridge runs programmes in strategy and finance, which can be taken as combined packages to help equip executives with the skills they need to progress their careers