Most strategies are developed with clear objectives, genuine opportunities, and the best of intentions. Yet some succeed while others fail.
The common explanation is poor execution.
Poor execution is frequently the consequence of not fully understanding a strategy’s financial implications.
That distinction is important.
Every strategic decision commits resources. It commits capital, people, management time and capability. Those commitments are based on assumptions about the future, and every assumption carries risk.
The quality of a strategic decision therefore depends not only on choosing the right strategy, but on understanding its financial implications.
For me, understanding a strategy’s financial implications means understanding:
- the resources it will actually require;
- whether it is financially viable and sustainable;
- the assumptions on which success depends;
- the risks and trade-offs involved; and
- whether it can still achieve its objectives if reality differs from those assumptions.
A growth strategy, for example, may look attractive on a P&L forecast yet still destroy value if the working capital required to support that growth, or the margin pressure from a competitive response, hasn’t been properly understood.
Understanding the financial implications doesn’t tell you which strategy to choose. It helps you make a better-informed decision about the strategy you’ve chosen.
Better strategic decisions begin with a better understanding of their financial implications.
If you’re facing an important strategic decision, or advising a client who is, I’d welcome the opportunity to discuss how a better understanding of its financial implications can improve the quality of that decision before significant resources are committed.
