The strategy-finance nexus: Long advocated, still work in progress, and perpetually valuable
Markus Mäkelä
MIT’s Stewart Myers once proposed that strategizing needs finance theory and should learn to apply it right, as the ability to value strategies is clearly central to management. That was quite some time ago – this year marked half a century from his comment¹. Likewise, financial roles often crucially need strategic understanding. In fact, top consulting firms have for decades advocated for a more strategic role for corporate CFOs, as a sort of linchpin between financial management and strategy creation. To invoke a similar metaphor for the CEO, he or she and the board should be capstones, enlisting both sides’ strength to keep the other side strong.
Accordingly, strategy studies have long been proposed as partial contents for finance experts’ education, be it for our abilities to merge expertise from key functions for corporate work, understand development plans to value them as an equity analyst, or for positioning one’s own firm wisely in the competition for clients and capital. Despite some recurring commentary to the contrary, firms’ markets for clients and for private capital are nowhere near as efficient as to render strategy obsolete². Strategy is, after all, the toolkit for locating subaverage competition (or above-average growth) in the market and for competently pursuing what profit opportunities result.
So, the nexus of strategy and finance is an important one; Myers’ argument is strong and has staying power. The intersection of these two expertise areas enables finance professionals and the firms they serve to more deeply understand, pinpoint, and appraise value in the key way – intrinsically. For those who manage business, it is the key part of knowing how to plan and manage business. Or, more correctly, it could be and should be it.
Consider the examples of three ways to improve a client-service business via artificial intelligence: using AI solutions for knowing a firm’s clients noticeably better (CRM systems supported by machine learning), cutting marketing costs via automated production of texts, graphics, and videos (generative AI) and reducing compliance risks via malpractice identification (automated flagging).
Each of these growing business practices can amount to more than just operational effectiveness with some fancy buttresses. They can be strategic, too. That is, your firm may be able to develop competitive advantages from them, and, if strategically skillful, may be able to sustain that for years, growing margins and market share³.
After a firm has identified a set of strategically sound and synergetic projects, however, the key to such success is to prioritize wisely. As in the example cases above, that calls for professional capital budgeting and the strategic insight for estimating the inputted numbers. Appropriately, prioritization is standard dogma for modern business digitization. Commensurate use of the tools that enable effectively prioritizing such projects – valuation methods – are not. They come from the finance profession. And they remain in the tech project management toolboxes of the most skillful competitors only.
Strategy is often subeffective without finance (having mostly just the “inside view,” in the late Daniel Kahneman’s terms); finance, on the other hand, can’t attach its estimates to truly intrinsic business value without knowing where it arises from –competitive advantage, the goal of strategy.
As already implied, many of the markets that a company participates in, be it for clients, recruits, or some forms of capital, are far from efficient, as things stand. Befitting that, business practice has mostly been unable to connect strategic and financial expertise so as to truly show up in valuations.
That leaves quite a lot of room for business development for skilled competitors.
Also, by that, I welcome you to read my “FTS” column on the recent and forthcoming developments of how finance, IT, and strategy converge in today’s business. Bring them together. Generate the relevant capabilities. Create value.
Markus Mäkelä is the President of AFA, of the freshman class of 1998, and now your FTS columnist.
1 Stewart C. Myers, Finance theory and financial strategy, Interfaces, Jan-Feb 1974
2 Some well-established strategy experts bring up today’s “hypercompetitive” business environment to argue that as some advantages are now quickly imitated, strategy has less of use. While true, the statement leaves ample room for value creation via purposely building sticky competitive advantages for growing free cash flows (as many can intuit). That is, there is much reason for firms to continue to have strategy. There are too many firms otherwise, for a chance outcome, that keep beating the market for several years in a row. Put differently, the number of such attainable years is often large enough to well justify having strategy. AI won’t immediately change the situation–and once it will, it is not even clear that it will lessen the role of strategy. The modern need to accommodate agile redefinitions of strategy is a partly different question.
3 That ability may be further amplified by the local nature of some retail-finance customer relations