There appears to be no doubt among analysts that we live in a volatile, uncertain, complex, and ambiguous (VUCA) world. [1] Constant disruptions pose unique challenges for even the most ambitious organizations when it comes to defining and executing a clear winning strategy. But who should be involved in the strategy development process?
Just a few years ago, experts were still advocating for the importance of deeply involving CFOs in the strategy development process. [2] Based on recent research, however, there is now broad agreement that strategy and finance roles within any company are intricately intertwined and inseparable. According to a Harvard Business Review Analytic Services survey, 83% of respondents believe that “having a finance department that does not contribute to business strategy is a business risk.” [3]
This belief is not merely theoretical; it is also put into practice. In fact, the same survey reported that three-quarters (76%) of respondents affirmed that their finance departments played a pivotal role in supporting their organization’s business goals.
Leveraging the significant advancements in automation and digitalization, it is now feasible to depart from the traditional image of finance departments chasing receipts and performing routine accounting tasks. Instead, it is possible to envision expert finance teams with the capacity to focus on the kind of strategic thinking that can truly contribute to their company’s success. [4]
The core essence of strategy is to formulate a set of coordinated, sustainable, and creative actions focusing on one or more strategic priorities that aim at generating value and, ultimately, fulfill an organization’s vision. [5] Finance plays a pivotal role in establishing performance standards and, through its investment and resource allocation choices, facilitates the realization of the overarching long-term strategy. [6] Let’s review some of the key ways finance contributes to business strategy. [7]
An organization’s strategic plan encompasses its mission, vision, and objectives. However, this plan risks remaining wishful thinking without the financial means to execute it. Therefore, finance plays a pivotal role in ensuring that the organization possesses a shared understanding of both the available and required resources to support its strategic priorities.
It is essential to effectively allocate resources to prioritize initiatives aligned with the organization’s strategy. Sound and well-informed financial decisions, including budgeting, investment, and cost management, can significantly bolster a company’s long-term growth.
Key performance indicators (KPIs), including metrics like revenue growth, profitability, and return on invested capital, serve as tools for evaluating progress toward each business goal and reporting it to the rest of the organization in a timely manner. This financial performance feedback loop enables the organization to adjust and fine-tune its strategy in response to financial outcomes, thereby ensuring it remains on the path to success.
In a VUCA environment, the ability to identify, measure, and manage risks can be the decisive factor that determines success or failure. While in defining a strategic plan an organization may have identified potential risks and opportunities in the market, the finance function plays a crucial role in assessing the financial impact of these risks. Through an examination of the financial implications of different strategic alternatives, companies can make well-informed choices aimed at mitigating risks and capitalizing on opportunities.
Determining an organization’s optimal capital structure and financing options is crucially linked to the strategic direction of the company. Strategic decisions, such as entering new markets, launching new products, or expanding operations, require funding. The way a company finances its strategic initiatives can significantly impact its ability to execute its plans and achieve its long-term objectives.
Ensuring the long-term sustainability of a business requires effective strategic and financial alignment. Short-term financial gains must be weighed against the long-term strategic objectives of the company. This requires a balancing exercise between immediate financial performance expectations and investments in the future.
It is essential to effectively allocate resources to prioritize initiatives aligned with the organization’s strategy. Sound and well-informed financial decisions, including budgeting, investment, and cost management, can significantly bolster a company’s long-term growth.
In conclusion, the synergy between strategy and finance is essential to secure a company’s long-term success and sustainability. The Strategy in Action (SiA) program and platform have been designed to integrate both elements at every stage of the strategy formulation process. This approach enables companies to define their goals seamlessly, discuss progress, identify challenges, and seize opportunities in real-time, all while ensuring alignment towards shared success.
[1] Angus Fletcher, Thomas L. Gaines, and Brittany Loney, “How to Be a Better Leader Amid Volatility, Uncertainty, Complexity, and Ambiguity,” Harvard Business Review, September 28, 2023, https://hbr.org/2023/09/how-to-be-a-better-leader-amid-volatility-uncertainty-complexity-and-ambiguity, accessed October 2023.
[2] Ankur Agrawal, Emma Gibbs, and Jean-Hugues Monier, “Who’s Better at Strategy: CFOs or CSOs,” Harvard Business Review, January 11, 2016, https://hbr.org/2016/01/whos-better-at-strategy-cfos-or-csos, accessed October 2023.
[3] “Building a Finance Function That Drives Business Strategy and Growth,” Harvard Business Review Analytic Services, September 13, 2022, https://hbr.org/sponsored/2022/09/building-a-finance-function-that-drives-business-strategy-and-growth, accessed October 2023.
[4] Ibid. and “Connecting Business Finance with Corporate Strategy,” Deloitte, February 2023, https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/consultancy/deloitte-uk-connecting-business-finance-corporate-strategy.pdf, accessed October 2023.
[5] Davide Sola and Jérôme Couturier, How to Think Strategically: Your Roadmap to Innovation and Results (Harlow, United Kingdom: Pearson Education Limited, 2014).
[6] Connecting Business Finance with Corporate Strategy,” Deloitte.
[7] Connecting Business Finance with Corporate Strategy,” Deloitte; “The Role of Finance in Business Strategy,” EDHEC, February 25, 2022, https://online.edhec.edu/en/blog/the-role-of-finance-in-business-strategy/; “Strategic Financial Management,” CFI, https://corporatefinanceinstitute.com/resources/management/strategic-financial-management; Pedro M. Kono and Barry Barnes, “The Role of Finance in the Strategic-Planning and Decision-Making Process,” Graziadio Business Review 2010, Volume 13, Issue 1, https://gbr.pepperdine.edu/2010/08/the-role-of-finance-in-the-strategic-planning-and-decision-making-process/, accessed October 2023.
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