Finance for Executive Leaders

Learning Outcomes  

• Be able to build a low-risk, profitable growth business.
• Be able to guide the finance leadership team in financial strategy choices, considering the firm’s growth strategy.
• Be able to assess the impact of strategic decisions on business and shareholder value.

Approach to Learning

• Self-learning Material, including module notes, recorded interviews and lectures, etc.
• Virtual Classroom, including faculty-led sessions, group-discussions and conversation forums.
• Classroom, learner-centric sharing by faculty, numerical exercises, decision simulations, reflective-practice exercises, case studies, etc.
• Reflective Practice, post-programme conversation with lead-faculty, when required.

IASCC Advantage

Access to our research in specific areas through Analytical Studies, Insights and Perspective papers, Reviews and Critiques, Working Papers and Information Resources.

Module Structure and Questions

Choice of Growth Strategy: Financial Perspective

Research informs us that a typical firm tends to choose between a volume-focused and a value-focused strategy. However, we don’t see a large firm that does not offer multiple products and services.

As consumer preferences evolve, a firm is expected to add a range of products, services and solutions to its portfolio. It is entirely possible that a firm may either offer a relatively large portfolio of products, services and solutions (focusing on creating and delivering greater value) or choose a specific segment that allows it to focus on volume with a narrow range of offerings.

It may also vary its offering by geography, i.e., offering a full-range in one geography and a much smaller range in another.

Considering that the choice of growth strategy involves building a platform (a portfolio of technologies, products, services, solutions and markets) for growth, it is a set of complex choices – choices that need detailed evaluation from market as well as financial perspectives.

Our module questions, therefore, are:

• What is the impact of volume-focused growth strategy on a firm’s margins and operating cash flows, when compared with a value-focused strategy?
• How does the choice of strategy impact the magnitude and timing of investment in building capacity and the capabilities to grow?
• What is the impact a specific strategy on risk and uncertainty associated with the firm’s margins and operating cash flows?
• How do we choose between an acquisition-led versus an organic growth strategy from financial as well as business perspective?

Evaluation of Financial Performance: ‘Knowing the Drivers’ and ‘Identifying the Determinants’

We often use relative references for evaluating a business’ performance. Relative Evaluation involves reviewing the firm performance with reference to time (historical), plan, another firm (e.g., competition) or simply an independently determined benchmark. Variance Analysis is the most often used tool for this purpose, as it helps determine the impact of each driver of performance (e.g., price, volume or mix) on sales, profits and cash flow levels.

While the executive leaders need a good understanding of drivers of performance, the effectiveness of their role is largely dependent on their knowledge of determinants of performance, which involves establishing cause-effect relationships, i.e., asking what or the why question.

For example, the variance analysis can inform us that the sales volume has gone up due to an increase in market size and/or our market share. But we still need to determine the causes for such an increase. An understanding of specific and proximate causes is expected to raise the probability of our success.

The causes could be the changes in consumer preferences, firm or its partners’ actions, competitor actions or changes in the firm’s operating environment. In such situations, we use hypothesis-testing and pilot-project based approach to decision making, which involves building a hypothesis and testing it for results in a controlled environment.

Our module questions, therefore, are:

• What is the nature of relationship between financial performance parameters (including the stock price) and various leadership choices (decision-performance linkages)?
• What is the nature of relationship between external variables, leadership choices and the financial performance of a firm (context-decision-performance linkages?

Investment Strategy: Market Coverage

A firm’s portfolio of products, services and solutions is the platform that enables growth. Given that a firm’s growth is function of the volume it sells and the value it delivers to its customers, it needs investments in expanding the market coverage. That is, it must find new customers and new geographies for its existing products, services and solutions and/or develop new products, services and solutions for existing customers in existing or new geographies.

Our module questions, therefore, are:

• What are the investment requirements underlying each of the coverage strategies?
• How do we prioritise among different coverage strategies, considering the financial as well as the strategic perspective?
• What is the nature of risk and/or uncertainty underlying each of the coverage strategies?
• How does the variation in market and financial performance across the product life-cycle impact the choice of coverage strategy?

Investment and Financing Strategy: Managing the Cash Flow Imbalances

A growth strategy is as good as the operating cash flows that it generates and their variability. As a first step, we study the variation from the expected values (our own estimates) and then identify the factors that have caused the estimation error. These estimation errors arise from changes in regulation, consumer preferences, technology, economic conditions, etc. The estimation error could take the form of changes in magnitude, direction or the timing of cash flows.

A highly variable cash flow stream implies higher risk and, therefore, must be funded through higher amount of equity. Given that equity is always more expensive than debt, an increase in equity implies in an increase in weighted average cost of capital. It is, therefore, important that we have a deep understanding of determinants of operating cash flows, allowing us to choose a financial strategy that increases the probability of success and helps create long-term value for shareholders as well as its customers.

Our module questions, therefore, are:

• How do we assess the impact of different strategies on operating cash flows (magnitude, direction and timing and their variability) of the firm?
• How do we decided about the degree of financial leverage (ratio between debt and equity), allowing us to minimise the cost of capital as well as the financial risk?

Pricing for Value

‘Pricing for Value’ is key to building a low-risk, profitable growth business. While it is not hard to win market share by either subsiding the consumer at the cost of shareholders or cross-subsidising one segment/product by the other in the short-term, the long-term success of a strategy is determined by the firm’s ability to price for value. Pricing for value not only enables a firm to be profitable, it also allows it to invest consistently in building the capability to grow. A firm’s ability to grow is defined by its ability to invest in research, portfolio (products, services and solution) development, market development, marketing and in providing superior customer experience.

Our module questions, therefore, are:

• How do we align our pricing strategy with the value we are delivering, given the stage of economic cycle, the nature of competitive conditions, firm cost structure, regulatory context and the growth strategy?

Resource Allocation for Market Effectiveness

One of the most important responsibility of the executive leadership team is to ensure that the firm’s spends (costs and investments) create value for its customers and do that better than competition. We describe that as the effectiveness test. We measure market effectiveness of any effort or spend by assessing the extent to which it serves the customer purpose, i.e., delivers value or benefits to a customer.

Our module questions, therefore, are:

• How does a firm align its investments with creating and delivering contracted, promised and expected value to its customers, when compared with the competition?
• How do we assess the impact of our investment on market effectiveness of our business?

Building the Structural Cost Advantage

Research informs us that we can build structural cost advantage by realising economies of scale and scope, through higher productivity and enhanced expenditure effectiveness. While the economies of scale are largely dependent on choice of technology and the size of business operations, the economies of scope are a function of the complexity of a firm’s portfolio of offerings, organisation design and the choice of technology. A decision involving an expansion in scale or scope requires identifying an inflection point where the diseconomies of scale may set in or the cost of complexity outweighs the economies of scope. Target cost, life-cycle costing, and activity-based costing combined with concurrent engineering, value-chain analysis, lean and design thinking, etc. help deliver a structural cost advantage, higher value to the customers and excellence in operations – all at the same time.

Our module questions, therefore, are:

• How do we build structure cost advantage and ensure that diseconomies of scale and scope don’t hurt our ability to compete?

Business and Equity Valuation

As we know that the shareholders realise a large share of their returns in form of capital appreciation, it is important to evaluate the impact of different strategic choices on value of business and the value of equity. Given that the value is a function of magnitude and timing of cash flows and the associated risk and uncertainty, it becomes important to understand the causes behind variability in cash flows.

Our module questions, therefore, are:

• What are the factors that drive changes in value of equity and debt in financial markets?
• What is the impact of different strategic choices on value of a business and that of equity?
• How do we value business and equity of a firm?

Management of Economic Risk

It is often argued that economic and business cycles are becoming shorter as the demand and supply balances are being disrupted by changes in consumer preferences, availability of credit for consumption and investment, and the shortening of technology life-cycle. In such a situation, a firm needs to build strategic flexibility and be able to respond to the market as different demand and supply scenarios unfold themselves.

Our module questions, therefore, are:

• How does a firm align its costs and investment spends to business cycles and consumption patterns of an economy?

Management of Financial Risk

Changes in commodity and financial prices (interest and exchange rates), combined with changes in general inflation, can have significant impact on a firm’s revenue and cost structure. It is, therefore, imperative to assess the impact of these changes on firm performance. The adverse impact of these changes can be mitigated either by passing on the related costs to the customers or by building a structural cost advantage or by hedging in financial markets.

Our module questions, therefore, are:

• How do we manage financial risk through our strategic choices?
• How do we use risk management products like swaps, options, forwards and futures to manage commodity price, interest rate and exchange rate risk?