Mastering Finance In Business - The Role And Impact Of Financial Management On Strategy, Operations And Business Performance

INTRODUCTION

From mining in South Africa and commodity production in Asia to

sales and service networks in North America, the business

operations of some of the world's largest and most

sophisticated industrial enterprises are experiencing a quiet

revolution. It is led by finance.

With their complex webs of production facilities and

distribution centers, customers and suppliers, and the resulting

flows of products, services, finance, and information, global

manufacturers find tracking financial performance hard enough; to

many, mastering finance may seem like a pipe dream. Yet, a

number of the world's leading companies are increasingly

turning to finance as a lever for transforming their enterprises

and driving business — with impressive results.

Findings from our ongoing benchmark study around how

manufacturing companies are using finance to transform their

companies are dramatic. Among the companies analyzed to date, the

group we called "finance masters" — companies

with the strongest finance capabilities to support business

transformation — are leading the pack with superior

business performance. The research not only links the

transformation of finance and business to performance, it also

shows how finance masters differentiate themselves from the

competition.

While many companies have pursued business transformations over

the last decade or more,1 the results remain mixed. Our

research suggests that to effectively transform the entire

enterprise toward a more successful and sustainable path, companies

need to integrate business and finance transformation. Companies

that combine the transformation of both business and finance

operations — finance masters — are far more

likely than their competitors to succeed in their industry (figure

1).

Over the last five years, we have benchmarked the global

strategies, financial and operational capabilities, and business

performances of more than 1,100 manufacturing companies across the

Americas, Asia Pacific, Europe, the Middle East, and Africa.

To develop a deeper perspective on how companies can build and

leverage financial management capabilities to help improve and even

transform business strategy and operations and drive performance,

we have initiated a multi-year benchmark study specifically focused

on how companies are transforming their enterprises through

finance. So far, more than 70 companies have participated in this

specific finance and business benchmark research around the world.

Seventy-five percent of respondents have corporate revenues higher

than US$1 billion. Industries represented include aerospace and

defense, automotive and commercial vehicles, consumer products,

diversified industrial products and services, process and

chemicals, high technology and telecommunications equipment, and

life sciences and other industries. (See appendix for further

details.)

According to our research, many companies are indeed struggling,

despite large-scale investments in global expansion, new product

development, production facilities, and information systems.

Shortcomings in performance management, alignment of organizational

structures and incentives, and decision-making support for business

investments and execution create barriers to improve and sustain

business performance. Companies often fail to overcome these

obstacles because they lack the financial management capabilities

to remove, or at least reduce, these barriers to profitable

growth.2

THE CHALLENGE OF BUSINESS AND FINANCE TRANSFORMATION

The list of obstacles and opportunities facing manufacturers

seems endless, including globalization and expansion into new

markets; low-cost country sourcing; pursuit of growth through

innovation; product proliferation; service competition; going

green; the war for talent; mergers, acquisitions, and divestitures;

enterprise risk management, and compliance requirements. Addressing

each of these areas present an enormous challenge to manufacturers

in their own right; taking together, the task is mind-boggling.

Beating the competition and driving profitable growth to exceed

investor expectations in this context is a daunting

task.3

Raising The Bar

Yet, despite challenging business environments, ambitions remain

very high for most companies benchmarked.

Revenue growth tops the agenda, with 89 percent of the

companies considering it important or very important over the next

three years (figure 2). Such companies tend to focus on growth

through product and service innovation (65 percent), new-market

entry (60 percent), and service sales growth (40 percent).

Cutting costs and boosting margins represents another major

priority. Among surveyed companies, 78 percent are planning to

reduce cost of the goods they sell; 59 percent are striving to

reduce selling, general, and administrative expenses; 46 percent

are aiming to optimize their global supply-network structures; and

27 percent are aspiring to improve their global tax

management.

Managing structural costs and improving asset efficiency is a

priority for 63 percent of participating companies. Sixty-two

percent of companies plan to improve asset efficiency by improving

long-term strategic investments in R&D, human capital, and

alliances, among others. Twenty-seven percent plan to reduce

structural costs like healthcare, pension, infrastructure and

taxation cost.

Finally, the expectations held by a company's investor

community are a major factor in driving enterprise value. This

"future value" — essentially, the expected

value of a company's future investments — is a large

part of the enterprise valuations, with 80–90 percent of

the total enterprise value of top-performing companies typically

attributed to future expectations. Increasing those expectations

means improving the valuation of the company.4 A number

of companies are focused on developing prospects through new

sources of supply (48 percent), mergers and acquisitions (43

percent), divestitures (11 percent), better communications to the

external marketplace and investors (47 percent), and better

management of enterprise risks (39 percent).

While these targets in themselves are worthy pursuits, many of

them come at the cost of more complexity and greater risk, which

few companies are able to manage effectively. Our research reveals

three primary barriers to business performance (figure 3):

Alignment: A key barrier is insufficient

alignment between strategic and operational decision making and

lack of talent to support it. Seventy-two percent of organizations

call conflicting objectives across the organization a medium to

high barrier; 55 percent report lack of strategic and operational

flexibility; and 50 percent face lack of global optimization in

operations, investments, tax regulation, risk, and so on. While

improving asset efficiency is a priority for more than 60 percent

of companies studied, 41 percent consider their inability to

control structural costs a barrier. Innovation in new products and

services is at the top of the revenue-growth agenda for many

companies, but 50 percent report that the complexity of their

product portfolio prevents them from improving business

performance. Thus, the very same areas in which companies see the

greatest opportunities to boost performance also contain the

biggest barriers blocking their growth. Adding to their woes, 64

percent of respondents do not believe they have adequate

capabilities for talent management and leadership development.

Information: Lack of up-to-date information

for strategic and operational purposes is hampering the pursuit of

business improvements. Insufficient visibility into key areas of

business strategy and operations is a fundamental problem for most

companies. Even worse, many companies are also not satisfied with

the quality of information on the very metrics they want to

improve. For example, companies want to improve revenue growth, but

25 percent of them are either dissatisfied or very dissatisfied

with the quality of information available around revenue growth by

product, customer, geography, and channel, among others (figure 4).

Forty percent of the respondents are not satisfied with the

profitability information available for those categories. Thus,

companies have a limited understanding of where to focus

investments to achieve revenue growth and profitability

targets.

Standardization: Inadequate process and data

standards is an underlying problem for a majority of the companies

studied. Nearly seven out of ten companies rate the lack of process

standards, clarity, or discipline as a high to very high barrier to

improving business performance (figure 3). Shortage of uniform data

standards (for example, on products and customer relationships) is

a high or very high barrier to improving business performance,

according to about three out of five companies.

Common among these barriers to improving business performance is

a general lack of financial management competencies necessary for

driving business performance. Indeed, many of the executives

indicate that they need to make significant enhancements to their

finance capabilities over the next three years.

To uncover the role and impact of finance on business

transformation and performance in more detail, we analyze and rate

the companies participating in the research along four dimensions

of finance and business-capability maturity.5 (See

appendix for further details.) The following four key roles of

finance reveal an organization's ability to enable and drive

enterprise transformation (figure 5).

Finance Capabilities:

Steward: Ensuring company-wide compliance with

financial reporting and control requirements, managing risk, and

providing high-quality business and operational information across

the enterprise

Operator: Defining and adapting the operating

model to balance efficiency and service levels in financial

processes and ensuring the availability of highly skilled talent

for financial management

Business...