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...
To continue reading
Request your trial