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Strategy Defined: What is meant by the term strategy in the context of the finance function? A strategy could mean any of the following:

- Employing best practices in business processes

- Seeking out and employing innovative technologies

- Developing new paradigms for analyzing or managing data

- Achieving economies of scale in the data flow dynamic

- Seeking out and employing the best minds in the business

Although many executives/business owners may employ any one or combination of these as their finance strategy, the term itself has a broader application. Strategy in this context involves the choices and perspectives that best suit the circumstances or tasks at hand. Determining an appropriate strategy means understanding the desired end result, then aligning all core competencies (unique strengths of the business itself) and tools to achieve this end as quickly and effectively as possible. Success in employing a strategy lies in the effectiveness of trade-offs or decisions to mix certain core competencies to achieve certain benefits. Strategizing has no absolutes. Because the finance area typically has limited resources at its disposal, a commitment must be made to developing only specific, relevant aspects of the finance function. Having a strategy in which a company wishes to create a worldclass finance function is not practical. Employing parameters is as much a part of strategizing as being forward looking. Being world class at closing the books or budgeting and forecasting are concrete and practical objective statements for strategies. Because developing a sound strategy for the finance function will take time, the small and emerging business owner will be best served by staying focused on critical aspects of the finance area in the short term rather than being all things to all people as it relates to the numbers—the ultimate long-term objective.

Why Does Having a Strategy Count?

Maximizing shareholder wealth or the wealth of business owners is the purpose of the organization. This being the prime objective of the enterprise, the small and emerging business owner is obligated to make sound decisions that move the organization forward. Positioning the management team in a way that they can handle challenges optimally is the best way to achieve forward momentum. Putting this objective in the context of the finance function means anticipating informational needs, laying the groundwork of infrastructure, and conceptualizing the adequate soft components (analysis paradigms, policies, and models). Setting the stage for such initiatives and tasks means dealing with mid- to long-term time horizons. Balancing these goals with the short-term needs of a small and emerging business is a challenge—hence, the need to strategize.

Business does not stop even though the owner is devoting time to planning for the future. Knowing this, small and emerging business owners must focus on the areas of the finance function that count most. They may struggle with relinquishing the focus on current operations to pursue long-term strategy development. The following questions must be asked to better grasp the need for finance strategy development and balance short-term needs with long-term goals:

- Who are the key stakeholders in the business? Stakeholders are those who have an interest in the success or failure of the business. Major stakeholders, in most cases, are shareholders (absentee owners in the case of publicly traded companies) or debt holders (bankers). Stakeholders also can be employees, a local municipality (in which the business is located), or other businesses that depend on the company’s products, services, or presence. The company also is dependent on stakeholders to perform their function. How sensitive to the needs of stakeholders is the company? What are their needs? Is the company satisfying shareholders, debt holders, and employees? Could their needs change? If so, how would this impact the company? Anticipating the needs of stakeholders can be key to continuing the symbiotic relationship that exists between them and the company.

- Who are the key people who make the business run? Every business has its
key circle of employees. Whether it is the person who drives product development or the one skilled at garnering customers, the small and emerging business will always have a few employees who are critical. How is the business motivating them? Have thoughtful bonus or compensation schemes been put in place to retain employees? Does the business rely on cash-only incentive schemes, or does it use ownership (stock and options)? Are all key employees incentivized in a way that is not counter to the organization’s objectives? How is the business evaluating the options available in this area? Retaining key employees is a particular priority in the finance area since knowing the company’s fiscal history will be key to garnering financing and expansion. What would the company do if it had to deal with a lost generation of knowledge when and if key employees exit both in and outside of the finance area?

- What is the key competency or competitive advantage of the business? De
termining what makes the organization uniquely suited to do business is another challenge of the small and emerging business owner. Is the company’s key to success ownership of a certain patent or copyright, a location, or access to business and community leaders? Merely identifying the key is not enough, however. How are these aspects of the organization quantified for business valuation purposes? How will the business preserve these key competencies and advantages, and at what cost? Letting them exist without thinking about how and to what extent to preserve them may create difficulties for the company in the future.

- What is the history of the industry/business? How have past and present players fared in the industry? Understanding what survivors have done right may be just as important as knowing what the nonsurvivors did wrong. How will the business avoid the pitfalls that contributed to the demise of other businesses? Defining an objective and getting there as quickly as possible are often the most widely employed strategies when it comes to business. The numbers rarely lie—how did they look for the businesses that made it and those that did not? What inherent dangers in the business world exist that can derail the enterprise? How is the business going to avoid them? Waiting to deal with a crisis situation is not the preferred way to deal with a challenge. Can the business anticipate potential trouble in advance? How does information management fit into this aspect of anticipating and heading off trouble? Incorporating the success track that other businesses have employed makes the job of the small and emerging business owner easier.

- How well is the company balancing what it does best with what customers want? The business cannot be based solely on producing a widget in the most efficient way possible. Continuous improvement and best practices are necessary but not the ultimate objective of business. Just as generating customers alone is not the secret to success in a business, real success is balancing the mix of goals and objectives with core competencies. The company may be able to produce widgets quickly and cheaply, but who will buy them? Do customers want a variation of the widget? Assuming that a variation of the widget degrades production time and heightens costs, will demand and pricing make it worthwhile? The ability to decipher the business environment and customer needs may lie in the company’s capacity to anticipate needs and fulfill them. How will the finance function help the company do this?

What Not Having a Strategy Means

Positioning the company for success means understanding the business environment and the limitations of the company. Strengthening the company may mean diversifying the customer base or evaluating the mix of products and services offered to the public. Addressing the finance function and its capacity to serve the organization is key to strengthening the organization as well. Focusing on the data flow dynamic and analysis models can be just as important as assessing customers and products. Nowhere can this be better illustrated than the case of Daewoo Motor Corporation:

In July 2000, Daewoo Motor Corporation, a Korean car manufacturer, was poised for the pending acquisition by U.S. car giant Ford Motor Corporation. During the due diligence process, Ford executives found that Daewoo’s accounting and information systems were dangerously substandard. Among other things, they found that their multinational target was collecting data from its local operations in differing versions of GAAP. Daewoo’s financial data had been accumulated from its various operations across Europe and Asia, with no consistent use of Korean or other GAAP for that matter. Additionally, Daewoo’s capital structure included debts in India, Poland, and Uzbekistan that were unacceptable to Ford. All told, Ford executives spent 90 days foraging through a difficult maze of financial data. What began as a $7 billion bid for the company ended with Ford briskly walking away, in spite of Daewoo’s willingness to reduce the asking price to less than half of the original bid. Daewoo soon after filed bankruptcy, in spite of the host of suitors that Ford originally outbid.1

Daewoo was struggling with managing multinational finance data generated by its organization. Ignoring the deficiencies in its data flow dynamic proved fatal when Ford executives began reviewing their data. No doubt these were ongoing issues for Daewoo, which was relying on the same data that Ford used to make major policy decisions. Why had Daewoo forsaken its finance function? Was it a matter of passive or active neglect?

Interestingly, Ford had the opportunity to purchase Daewoo at a deep discount after its examination, an opportunity it chose to decline. What was it that made Ford retreat? Reviewing the numbers may not have been an exercise in determining whether the debits and credits were within their threshold of acceptance so much as it was an examination of the quality of Daewoo’s management. As a multibillion-dollar company, Ford could have absorbed Daewoo easily, warts and all. The substandard state of the finance function, however, may have fueled doubt regarding the quality of competencies it believed it was acquiring from Daewoo. Because the finance function is the life-blood of the company, Ford may have interpreted Daewoo’s financial disarray as indicative of the rest of the organization.