Corporate strategy is the key topic for Top Management and Executive Committees as they are the ones who decide on the strategic direction and shape the future of the company.
A bank’s Top Management needs to take a stance on Fintech, assess digital disruption opportunities and threats, evaluate Blockchain’s business impact or simply determine which type of clients or products to focus on.
However, can a financial analyst, a fund manager, an M&A specialist or a Senior Banker ignore corporate strategy? If they do so, they will undoubtedly remain good technical experts, but will not excel at advising clients. Good bankers not only need to understand but more importantly to anticipate the strategy of their clients.
But what is corporate strategy? Strategy as a discipline didn’t come to the fore until the 1960’s. Before that, strategy was practiced empirically, without proper scientific tools and frameworks. Since then, research studies led by consulting firms and business schools, such as the Boston Consulting Group and Michael Porter, among the most famous ones, have helped theorize and conceptualize corporate strategy and develop analytical models.
Strategic topics have been summarized around 3 key questions:
- Within a given industry, how to develop a competitive advantage and outperform competitors?
- How can a corporation increase performance by diversifying and investing in new areas – or on the contrary by refocusing on core businesses?
- How to translate the brilliant ideas formulated at steps 1 and 2 into actions, and plans into facts?
The first question concerns Business Strategy. And the answer can be found in the industry’s structure: Who are the participants? Are they numerous and fragmented? Is there one leader or several? Is the market growing or declining? Is the industry threatened by a new technology? Can this threat become an opportunity? What is the bargaining power of the firm, both uphill (suppliers) and downhill (clients)?
I’m not going to list all the questions here! My message is to highlight one important point: such questions are also raised by the financial analyst, the lender and the shareholder. These three have to analyze the past to understand the present in order to try and predict the future. How could they make valid projections without a good understanding of the industry they’re in?
Will the firm be able to refund its debt in full and on time? Does it have the capacity to create value? Those are the questions answered by the financial analyst. And creating value, in strategic terms, means outperforming competitors.
The second question concerns Corporate Strategy. Which activities to invest in? Which areas to diversify into? Should we exit certain sectors?
Alliances, mergers, and acquisitions are different ways to implement a growth strategy. They call upon the notions of value creation, of good or badwill. In this area, it is actually difficult to determine what comes first: finance or strategy.
No company valuation makes any sense outside of its industry environment and without performing a proper industry mapping and answering questions such as: is the sector growing? is it fragmented and how fierce is the competition…
We can see that business Strategy and Corporate Strategy actually echo the goals of corporate finance: diagnose, evaluate and decide.
Which in fact comes as no surprise, as the role of finance is to serve strategy.
Can a banker provide financing solutions without a proper understanding of the firm’s roadmap and strategy? Finance is about risk and return. The risk element cannot be properly addressed without a clear understanding of the corporate strategy.
Let’s suppose now that the banker is perfectly happy with the client’s strategic plan. Should he provide financial support immediately?
No! It’s still too early!
Strategy formulation might be right… but how will the firm implement it? Is the corporate culture compatible with the new direction? Is management able to drive change? Is the organizational structure aligned? How will the planned acquisition be incorporated? This is the third strategic topic to study: Strategy Implementation. There is no good strategy without proper implementation and financiers should make sure the firm is able to turn good ideas into the right actions.
Beyond these considerations, the banker’s role is not only to provide technical expertise but to provide strategic advice, to contribute to and challenge his/her client’s strategic thinking process. This is the senior banker’s mission.
Over the last 15 years or so, we’ve seen long-standing companies go bust, start-ups become the largest caps of the stock-exchange and ailing companies turn into shining stars. Eastman Kodak, Google, and Apple certainly illustrate the fact that proper financial analysis and valuation exercises can only be made as part of a global strategic analysis.