Strategic Finance and the Outsourcing Decision
February 12, 2025
We live in a world which idolizes innovation. We tend to idolize companies which have produced some products which can be considered to be innovative. The underlying belief in the capitalistic system is that innovation is beneficial. It is innovation which creates more value, and since the capitalistic system allows the creator of innovation to […]
The common perception is that companies need to cultivate relationships with investment bankers only if they are unlisted and need to go public. It is believed that once they have already gone public, the services of investment banks have limited utility for these firms. However, that is not true. There are many already listed companies […]
Finance and sustainable business practices have traditionally been considered to be separate fields. It was common for companies all over the world to participate in activism related to sustainable business practices. However, this activism was more a part of their social responsibility and would not have any impact on their bottom line. This has changed […]
The term short selling is often seen in the news. This tactic is regularly used by well-known investors. They are also very public about the shares they have shorted. This prompts many retail investors to follow suit. While, it may be true that many funds and high net worth investors make a lot of money […]
The gender gap in pension systems around the world is a very real and pressing issue. Numerous studies have been conducted on this matter and almost all of them have concluded that the gender gap is a systematic problem that needs to be addressed by pension funds as well as by pension fund regulators across […]
There is no philosophy in the management domain which has not been criticized. The strategic financial management philosophy is no exception.
Although it has been proven that there are numerous benefits to implementing this framework of decision making, there are some associated costs as well. This is because of the various disadvantages that accompany the implementation of strategic financial management.
In this article, we will have a look at some of the common disadvantages which are associated with this philosophy.
These managers must have an overall understanding of how strategic thought has evolved over the past few years and how it is likely to evolve in the future. There are very few personnel who have this skill set. Hence, they are expensive to hire.
Besides, these personnel will also need access to research reports and data in order to discharge their duties effectively. All these things cost money. Hence, only organizations that have deep pockets can actually afford to implement strategic financial management.
Companies where strategic management has been implemented often complain that this philosophy takes away a lot of their time and hence the daily productivity of employees is negatively impacted.
Since strategic financial management is an ongoing exercise, companies must budget for extra hours that their employees will have to spend if they want the implementation to be truly successful.
The problem with strategic management is that the future does not unfold as the organization has expected. Hence, a lot of the time, the strategy created by this function gets invalidated. However, it must be understood that organizations are not looking at an absolute competitive advantage. Instead, they are trying to obtain a relative competitive advantage.
Therefore, companies that engage in strategic financial planning are better than companies that do not. This gives them a competitive advantage and justifies the existence of the field even though the absolute accuracy rate of their predictions may not be as impressive.
Over the past six decades, the world has seen at least four different schools of strategic thought. All of these schools of thought were quite different from one another. Hence, companies had to adapt to these changing strategies. The adaptation process was not simple or cheap. Companies had to sell off companies which they had earlier acquired. This process of first buying and then selling off companies proved to be quite expensive for some companies.
Similarly, the excessive focus on data and technology which is being displayed by the current school of strategic thought may become obsolete in a few years from now. The rapidly changing external environment and the inability of strategic financial management to keep up with the speed of change make it a disadvantage for many organizations.
Any negative signal in the short-run results of the company leads to a collapse in the share price of the firm. Hence, strategic financial managers do not have the freedom to perform their tasks. They cannot take tough decisions since it might hurt the company in the short run. Management and board of directors are wary of any decision which causes a drop in their share price and hence does not give full freedom to strategic financial managers.
It has been observed that organizations which follow strategic financial management are less flexible as compared to their peers. This means that they take longer to change in response to a change in the external environment.
The above-mentioned points make it clear that there are some significant disadvantages to strategic financial management.
However, the advantages are even more significant. This is why many companies continue to use the strategic financial management framework to guide them while making long-term decisions.
Your email address will not be published. Required fields are marked *