Strategic Finance and Technology
Businesses rely heavily on technology in order to obtain a competitive advantage. In todays world, most successful companies have a technological advantage over their competitors. However, just like business strategy, the technological strategy also involves long-term decision-making. Technological advantages are not developed overnight. Instead, they are the result of decision-making over extended periods of time. This is the reason that it is important to ensure coherence between business strategy, financial strategy as well as technological strategy.
In this article, we will understand what technological strategy is and how it can be optimized using the principles of strategic finance.
The Relationship between Financial Strategy and Technological Strategy
The technological strategy ideally depends upon the amount and nature of resources that the company has to spare on improving its business. This, in turn, depends upon the financial wherewithal of the firm. Hence, there is a clear link between strategic finance and strategic technology. However, the link is not one way. This means that it is not only finance, that impacts technology but also the other way round. For instance, companies that have more advanced technologies earn more profits, and these profits can then be plowed back in order to advance the technology even further. Hence, it can be said that finance and technology have a recursive relationship. This recursive relationship is also an important part of the overall business strategy. There are many leading companies in the world that have made technology their core competence. This can be difficult as compared to other cases since here there are three types of strategies that need to be aligned.
The Link between Technology Strategy and Business Strategy
The link between technology strategy and the overall business strategy is relatively straightforward. This is because technology enables the business strategy and not the other way round. It is common for many companies to realize their technological competence and then search markets where they have an advantage over their competitors. The companies then enter these markets and gain advantageous positions. Once again, in order to be able to execute this strategy, there needs to be close coordination between strategy, finance as well as technology teams. This means that there must be a seamless flow of information amongst these departments.
The Technological Choice
The operations of any company are based on a wide variety of technologies and sub-technologies. It is not possible for the company to upgrade each and every technology. This is because corporations have resource limitations. They do not have unlimited amounts of funds at their disposal. Instead, they have a limited amount of funds whose application needs to be prioritized. Hence, corporations have to decide which technologies are vital to their competitive strategy.
In order to be able to make the above-mentioned decisions, corporations should be able to know exactly how much funds, they will have at their disposal. This is the reason why technology strategy can only be made in conjunction with the overall financial strategy of the firm.
It is very important for organizations to rank the priority of their technological needs before they go about creating a technology strategy and aligning it with their business and financial strategy. If the firm is unable to do so at the early stages, a lot of the efforts that they undertake at the later stages may end up being wasted.
Internal R&D vs. Outsourced Technology
Companies that have a technological edge over their competitors need not necessarily develop this technology in-house. A lot of the time, companies partner with other firms which act as their technology consultants. This is because companies may realize that they do not have the technical human resources which are required for this task. As a result, they may opt to simply buy the patents or partner with other technological firms in some other form. There are financial advantages to using this strategy. The firm can avoid making risky research and development investments. Instead, they can straight away procure technology that is tested and found to be useful. However, the more tested and reliable a technology is, the more expensive it becomes. Also, it is then easily available to everyone including the firms competitors.
Using Scalable Technologies
In other non-strategic areas, companies can also decide to avoid upfront costs. This can be done by using cloud-based services such as software-as-a-service. In such cases, companies do not have to invest large sums of money in order to modernize their technological architecture. Instead, they can use pay as you go models. This helps the company scale its requirements up and down. The cost of installing and maintaining the servers is also prevented.
Hence, companies can use a wide variety of operational arrangements which have very different financial implications. The exact combination of these arrangements is decided on the technological strategy. This technological strategy is based on the long-term financial strategy and also influences the business strategy.
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