1.1 Introduction:
Corporate strategy is the plan action of an organisation. Such plan of action will lead to the achievement of corporate objectives when implemented. It involves broader issues like the type of business a company should embark upon. We can also describe corporate strategy as a corporate course of action that includes the specification of the resources that are required in achieving the stated corporate objectives. They are the medium to long term plans about how the established corporate objectives are to be achieved. Therefore, corporate strategy cannot be considered before the firm’s goals are clearly established.
Finance (strategic finance) has a crucial role to play in corporate strategy. These roles relate to the financial aspects of such strategic decision making of a firm that bother on the corporate choice of entering or exiting from a market or business. This may be through corporate merger, acquisition, take-over, organic growth, buy-out or divestment.
The basis of corporate finance is the assumption that management objectives is to maximise the market value of the shares of the firm. Finance is therefore involved in the identification of achievable strategies that are capable of maximising the net present value of the firm, allocating scarce capital resources among competing opportunities and implementing/monitoring the financial strategies towards achieving the stated corporate objectives. Some of these objectives which are key to the success of the company are market share, growth, profitability (return on investment), cash flow, added value, quality products etc.
Finance is the lifeblood of any business. It is the duty of finance managers to ensure that finance plays it roles by ensuring that funds are available when required. In achieving the corporate strategy, we require corporate finance for fixed assets, working capital and fluctuating cash requirements (bridging finance).
Corporate finance involves planning, raising and the use of fund in an efficient manner to achieve corporate financial objectives. This involves financing and investment decisions, dealing with the financial markets and forecasting, coordinating and controlling cash flow. The finance function in a corporate organisation is expected to focus its activities on the financial aspects of the management corporate decisions.
2.1 Finance Function within Corporate Strategy
Managers of finance are expected to provide answers two key strategic questions. These are:
i. which assets to invest in?
ii. how would the assets be financed?
Therefore, in implementing the corporate strategy, the role of finance is to plan, raise and use funds in an efficient manner to achieve the corporate strategy. The criterion of managers of finance in evaluating corporate strategy is the maximisation of the wealth of shareholders and corporate value. In doing these, the finance function in a corporate organisation is expected to play the roles discussed in the following subsections.
2.1.1. Linking the Company with the Wider Financial Environment
Funds for the company are going to be raised in the financial market as well as the shares of the shares of the company and other financial instruments that are traded in the financial markets.
The finance division of a firm provides the vital link between the firm and financial markets. Corporate finance is therefore is much about “understanding financial markets as well as about good financial management within the firm.
2.1.2. Making Strategic Investment and Divestment Decisions
Basically, the strategic investment decision is a decision on how to acquire assets. These assets may be real assets or financial assets. Real assets (plants and equipment, land and building, stock etc) are employed within the business to produce goods and services to meet customer demands. Financial assets may be short term securities and deposits.
Investment decision making is the most important role when considering the creation of value for shareholders. In playing this role toward achieving corporate strategy, capital is allocated to investment proposals whose benefits would be derived in the future. Because of the risk involved, it is the function of the finance division within a corporate establishment to evaluate capital investment in relation to the risks involved and expected capital. Paramount in investment decision is the use of acceptance criterion and the appropriate required rate of return for investment projects.
Merger (when two firms joined to form a new one) and acquisition (when one company acquires the controlling interest in another) are strategic investment decisions. The essential role to be played by the finance function of a company is the thorough evaluation of such proposals, using the same criteria as of capital budgeting.
Another important role played here is the divestment or reallocation of capital when assets no longer economically justify the capital committed to it. This is a major role of finance in corporate strategy.
2.1.3. Making Financing Decisions
This is about determining the best financing mix or capital structure that will ensure the success of the corporate strategy. Financing decision is a decision that addresses issues pertaining to how much capital should be raised by the company (as equity or debt) to fund the existing and proposed operations of the company and to determine the mix of financing (debt or equity) that is best for the company in achieving the corporate strategy. As the company can hold financial assets, it can equally sell claims on its own real assets by issuing shares, raising loans, undertaking lease obligations.
The significance of this role lies in the fact that a firm can achieve an optimal financing mix/capital structure when its finance division is active in changing its total valuation through variations in its capital structure towards maximising the market price per share.
2.1.4 Making Dividend Policy Decisions
Dividend policy decision making is a critical function of finance. It deals with returning value to the shareholders through dividends while being conscious of the need for profit retention and other external financing available. A capital hungry company faces the choice between retaining earnings (restriction of dividend payout) or paying out high dividends, but ploughing back capital in the form of subsequent right issues. These decisions have merits and demerits and are not without risks as markets and shareholders may react either way. Therefore decisions on dividend are strategic because if such decisions are ill-judged, they could subvert the overall strategic aim of a company.
2.1.5 Managing Risk
There is uncertainty when one is not sure of what will happen in the future. Risk is uncertainty that ‘matters’ because it affects personal and corporate welfare. The role to be played here by a finance unit is to:
· formulate the benefit-cost trade-offs of risk reduction; and
· decide on the course of action to take (including the decision not to take action at all).
In managing risk, a finance division is expected to:
i. identify risk – by figuring out what risks exposures are for the firm;
ii. assess risk – by quantifying the cost associated with the identified risk;
iii. selecting risk management techniques – which may be risk avoidance, loss prevention and control, risk retention or risk transfer (through hedging, insuring and diversifying);
iv. implement the risk management technique;
v. review the risk management technique.
2.1 6. Managing working capital
Working capital is company’s short term asset and liabilities. The role played by finance in this respect is to ensure that the firm has sufficient resources to implement the corporate strategy, continue operations and avoid costly interruptions. The management of working capital is a day-to-day activity. In the performance of this role, the finance division will answer the following questions:
· How much cash/inventory should be kept on hand?
· Should sales be on credit? If so, what are the credit terms? Who should be the creditors?
· How will short term financing be obtained when needed? Will it be through short term borrowings or credit purchases?
3.1 Conclusion
If finance divisions of corporate organisations carry out these expected strategic finance functions in effective and efficient manner, the strategic aim of the firm would be achieved while shareholders value would be maximised and the corporate value of such firm will increase.
