Assessing Strategic Opportunities - A Finance Perspective (and why the wrong analysis is being done
Updated: Jun 19, 2019
Finance is often considered as support. They produce numbers and process accounts.
When opportunities are identified, finance is often called in to ‘model’ and estimate the opportunity.
This is fraught with danger.
The Real Meaning of Strategy
One definition of Strategy is "a plan of action designed to achieve a ‘long term’ or overall aim."
If initiatives are driven by ‘short term’ incentives, a finance expert must be able to dismiss this and understand further.
In a corporate world where there is firing, hiring, bonuses, deadlines, etc.. this is not a natural thing. Where the finance expert plays 2nd fiddle, the pressure of 'other parties' can be too much to resist.
The finance expert needs to also be a business expert so it can identify flaws, weaknesses and opportunities like a prophet. And he or she needs to understand the cold hard reality of numbers, or be able to throw numbers out the window if it does not match the true model of 'what would happen'.
The Ideal Strategic Finance Individual - do you have Enough Personality?
Finance people (with the exception of CFOs) have generally been mild mannered people.
But without a sufficiently strong personality and certainty, they are often unable to resist the coercion of 'other parties' who do not have full grasp of the whole project / business and the numbers.
And if they lack the vision and business acumen to understand what would happen themselves, we are no longer talking about a finance voice. More a numbers processor.
It is not the norm for strong personalities and those who desire to see the whole picture, to gravitate towards finance. And those who do often rise to become the CFO.
The idea Strategic Finance person would need to know the numbers, but also the business better than any of the Sales, Marketing and Operations Directors individually. And then have the personality to stand up to and sway them, without coercion for 'to use a specific number instead' ever to enter their minds.
The Dick Smith example
Much as been made of Dick Smith – their sale by Woolworths to Anchorage Capital in 2012, then sold at an extreme profit to the public in Dec 2013 and now its collapse.
Forensic analysis suggests ratios and profits were manipulated to maximize apparent value. It then went on a semi-expansion agenda not supported by the real world.
One can argue an astute finance person should have been able to highlight these issues, not fall prey and submit to strong ‘business managers’.
But here’s the main thing about the Business Strategy.
Why is Dick Smith a good business anyway? Forget the accounting numbers.
JB HiFi or Harvey Norman sells Dick Smith’s products with greater range and cheaper prices with a much greater store distribution. Most customers can name 2 or more stores they’d rather go to.
The Dick Smith branded items (only items you can’t get elsewhere) look cheap and are rated poorly (check online reviews on its own website).
For online sales, Kogan has a stronger store presence for as an online competitor.
As for its original electronics supplies of plugs and wires and bits, that market has shrunk to almost negligible and is mostly done online via China (at 80% cheaper prices).
Its venture entering David Jones stores seems rational, but I’m not sure that Dick Smith branding adds a lot to David Jones.
Projections would have been made by finance. Marketing, Sales and Operations would argue their numbers, but from a good balanced ‘finance’ view – was it always going to fail?
The banks obviously saw it like that, they pulled the plug. They were finance acting with accountability with enough understanding of overall business.
Yes. There are ways out of that. To change and expand. But they didn't do those things. Instead, Dick Smith was more like a collection of corner shops or butcher stores threatened by 90's style shopping centres - and then announcing they would open more.
In other words, people should have seen it coming.
The Responsibility of Finding the Truth
It’s very easy to imagine raising such points at a Dick Smith boardroom. However, is it true?
It would not be very hard to test. Find a Dick Smith store in a shopping centre with a Harvey Norman or a JB HiFi. How does it do? How many have closed down after the others moved in? I’ve personally always found Dick Smith stores amazingly quiet.
One can imagine a boardroom scenario where the CEO talks about an expansion strategy that makes shareholders applaud. Sales aren’t convinced but happy to try and Marketing loves it because it gives them a chance to create a campaign.
Now Operations are thinking about new products it might want to do and Finance is nodding and doesn’t want to say we can’t do it as the buzz is too good.
Of course, this is hypothetical, but such a scene may have played out in many similar scenarios and organisations.
At some point, projections will need to be made or a financial model done. The questions is – will it be right?
In my experience – mostly NO. But the spotlight doesn't fall on the poor under equipped analyst. Expertise on advice falls too broadly on areas without enough knowledge or too many vested interests.
In descending levels of failure in answer to the question – ‘did the numbers turn out right?’:
Not sure, we never checked afterwards.
No, but I was asked to put through certain assumptions.
Not quite because of the factors of…
The person who can advise on this strategy is the person with enough big picture understanding of the business to get it right, have a strong enough personality to resist the wrong and be in a position where others can hear 'yes' or 'no'.