Thought Leaders I
 Connecting Strategy to Finance

To John Percival, good finance is good strategy. Period. "It's nonsense to say there's a difference between strategy and finance; that's what finance boils down to — good strategy," he said. "We hear all these platitudes about how finance people are oriented to the short term and strategic people are looking at the long term. But if the long term is not profitable, then what's the point?"

Through executive education programs, Percival has brought this perspective to companies such as GE Capital, Pitney Bowes, IBM, Fiat, Chubb, American Skandia, Siam Cement, and Bankers Trust. He has acted as a financial consultant to both public and private organizations, including the Federal Trade Commission, the Commonwealth of Pennsylvania, the U.S. Department of Labor, AT&T, Ford, DuPont, and PricewaterhouseCoopers.

Percival uses traditional financial tools in a strategic framework. "In The CFO: Becoming a Strategic Partner program, we look at how Airbus used discounted cash flow in a bet-the-company decision," he said. "Using this method doesn't make the decision for you; instead, it helps you to better see the possible risks you are taking. By using these financial tools, you can take a back-in approach. These tools help narrow down the options for your company's future strategic decision."

The challenge for today's CFOs is finding profitable growth paths for their companies. "Investors expect 10 to 15 percent growth per year, but as companies get bigger, it's harder to realize such growth," Percival said. "There's an important role for chief financial officers to help the management team make selections among growth strategies."

But he warns of growth for growth's sake. Companies must not forget their core competencies, their "cash cows that made them what they are," Percival said. He says it is important to have alternate ways of looking at the future. "Many companies today are beginning to realize that although in the past they were good in one area, continuing to do that may not be enough for them to remain successful in the future." Each new growth path — from acquisitions or mergers to creating new business ventures based on core competencies — carry unique risks. For instance, riskier ventures require higher rates of return to justify the risk. Lenders prefer stable, predictable companies, and your costs of borrowing may rise, for example, he said.

"I've seen bricks-and-mortar companies want to become Internet-based companies; chemical firms want to become pharmaceutical firms, regulated financial services companies want to become full-service financial consultants. But without considering the downside risks of making these changes — for instance you may need new employees with different skills — companies can end up killing the good business they had by creating a new business that they're not very good at," Percival said.

"Strategy is really just looking ahead to the future," Percival said. "Using some financial tools won't tell me what's going to happen in the future, but it helps me narrow down the plausible options. After using some of these tools, strategy becomes a matter of good judgment by smart people who really know their business."

Professor Percival also teaches in:
Executive Development Program, and Creating Value Through Financial Management,

    

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