What is business strategy?
Business strategy is a relatively modern notion. We cannot go back to Victorian times or to the beginning of the 20th century, but it is clear that the early entrepreneurs did not have the benefit of an MBA or a Master's in strategic thinking and did not mull over terms such as 'competitive advantage'; however, they did identify opportunities - a gap in a market; they identified new or improved products; they were innovative. Without sales or revenues a business will eventually cease to exist.
Thus, is the business strategy to sell and, if so, should financial strategies focus principally on sales? Why did the business giants of a century ago invest their time and money? Was it because there was a market for their goods and services? Most assuredly so. Was it because they had a strategy? Because a business model told them to go for it? No doubt they had a strategy and tactics to deliver it, and also a model in their heads if not on paper. But above all their driver was to make money, to make a return on their investment.
Business strategy is nothing without finance: finance binds the business and a business is bound by finance.
So what does strategy mean when used in a financial context? Are strategies revealed by financial reports and models that lead to improved results that will make more money and profit? Yes. Are there reports that reveal efficient use of capital, plant and equipment - strategic utilization? Yes. Are there reports that can reveal appropriate levels of working capital, inventories and receivables etc? Yes. Are there reports that reveal appropriate levels of borrowing, gearing or leverage, strategically structured balance sheets? Yes.
Financial strategies are to be found pervading every part of a business. Or is it rather that, as indicated above, finance merely reveals or can model the effect of physical strategies? It would seem obvious to most that using a machine continually to produce products that generate revenues, cash and profits is a good strategy - financial reports only reveal and quantify the effect of applying this physical strategy. It would seem obvious to most that holding only the inventories that will be sold soon is a good strategy - financial reports and models only reveal and quantify the effect of applying this physical strategy.
The examples above of reporting the physical or practical strategies are all related to the operational activities of running the business. You could argue that there are no financial strategies but rather indicators, revealers or illuminators of strategy.
The above examples of physical, operational strategies will all deliver enhanced results to shareholders. However, a 'true' financial strategy that will deliver enhanced results to shareholders could be purely structural, an example being a private equity strategy. Private equity investors will have every intention of, and should be highly committed to, improving performance, what might be termed operational financial strategies as above. However, the private equity financial strategy that really delivers to investors is the structural financial strategy - the gearing up of the balance sheet, aided and abetted by the currently favourable tax treatment.
Returning to the above definitions of 'finance' and 'strategy', financial strategy means to plan or scheme to achieve an objective - a financial objective. But what is this financial objective or goal? What is any financial strategy meant to achieve?
There are many related terms used when discussing strategy and some are reviewed and put into context below. All of them have links with financial strategy but the one that is core or essential when considering any financial strategy is: 'What is the objective?'
Objective, aim, goal or even vision (as long as it is not vague and potentially mirage-like) - exactly what is a strategy meant to achieve?