If you snooze, you lose: flexible, strategic finance

31 May 2013

McKinsey partner and moderator to the latest FDE round table Michael Birshan explains why CFOs need to be flexible and responsive to changing market conditions in their growth strategies. At the same time, they must be willing to engage in strategic dialogue with a broad range of executives, in order to ensure a competitive edge, he tells Steve Dunkerley.

McKinsey's first international office was established in London over 50 years ago, 33 years after James Oscar McKinsey founded the Chicago-based firm in 1926. The company now has some 17,000 employees across the world and global revenues of around $7 billion. In its Jermyn Street office near London's Piccadilly, partner Michael Birshan, who leads the firm's strategy and corporate finance practice hubs in the UK and Ireland, has seen a shift in the role CFOs play at the top table, where value creation, flexibility and responsiveness are key.

"The role has moved far beyond that of accounting and control," he says. "CFOs can now take a deep look at value creation across the company outwards from the finance function. Our research indicates that most companies don't reallocate their resources - capital expenditure, marketing, R&D dollars, talent - but those that do enjoy higher returns and lower volatility. It's a story of 'if you snooze, you lose'. CFOs are uniquely placed to lead that resource reallocation."

This concept is key when it comes to future-proofing strategic business models, as according to Birshan, CFOs need to be able to react quickly and effectively to business intelligence.

"It's about avoiding being disrupted, trying to see around corners and picking up weak signals that come from many different places including emerging markets," he says. "For instance, cheaper technologies are developed for emerging markets, which the developed world cottons on to and then appropriates, in the belief that the quality is actually perfectly acceptable and the price is terrific.

"Then there are the new competitors. Executives can be blindsided by new types of competitor as they're naturally focused on the traditional. Thirdly, there are new technology trends such as social technology or the rise of big data. Companies will increasingly be able to use their data as a competitive weapon and we'll see a lot of disruption of intermediaries."

The importance of strategic dialogue

In today's more volatile environment, one way of coping better is to increase the time a company's top team spends on strategy. However, rather than formalising the strategy role further or increasing the number of those setting it, more senior leaders need to be more involved in strategic dialogue.

"Our experience, based on our research and work with executives developing strategies, suggests that even some with direct accountability for the strategy function don't feel adequately prepared, and the challenge can be greater for senior managers who have grown up in other functional or business unit leadership roles," he continues. "Developing the strategic muscle and capabilities of all members of the top team will make it easier to stay ahead."

For example, expanding the group of executives engaged in strategic dialogue should boost the odds of identifying company or industry-disrupting changes that are just over the horizon - the sort of changes that make or break companies.

But those insights don't emerge magically. Consider technological disruption. For many executives, the rise up the corporate ladder requires a deep understanding of industry-specific technologies - those embedded in a company's products, or in manufacturing techniques - but much less knowledge of cross-cutting technology trends, such as the impact of sensors and the 'Internet of Things'.

Many senior executives are happy to delegate thinking about such technology issues to their company's chief information or technology officer. Yet it's exactly such cross-cutting trends that are most likely to up-end value chains and dramatically shift profit pools and competitive advantage.

"So what to do?" asks Birshan. "Some executives choose to visit a technology hub to meet companies, investors and academics. Others ask a more technophile member of the team to update them periodically. Others, meanwhile, develop reverse-mentoring relationships with younger, more junior colleagues that focus on technology and innovation."

Assessing strategic threats

Equally, there's no substitute for seeing what customers are doing with technology. For instance, during several store visits, an executive at a baby-care retailer saw parents compare the prices of products on their smartphones at the store and leave if they could get a better deal elsewhere. These visits underlined how modern parents research their buying decisions, the interaction between mobile technology and store visits, and the importance of advertising a price-matching scheme to keep tech-savvy customers buying in stores.

Nascent competitors are another easy-to-overlook source of disruption. Senior strategic thinkers are well aware of the need to keep an eye on the competition, and many companies focus on competitor intelligence.

"However, in our experience," Birshan says, "often, too many resources are devoted to following the activities of long-standing competitors rather than less conventional ones that may pose an equivalent or greater strategic threat. For example, suppose you're an executive at an oil company with assets in the UK continental shelf. It's natural for the competitors that you meet regularly at board meetings of Oil & Gas UK, the regional industry association, to be more top-of-mind than Asian players only just acquiring their first positions in the region. And that's why many long-standing industry leaders were surprised when Korea National Oil Corporation, the Republic of Korea's national oil company, clinched a hostile takeover of Dana Petroleum in late 2010 - the largest oil and gas transaction in the UK in several years. The transaction was a harbinger of future investments by less traditional players in the North Sea industry."

Similar dynamics prevail in mining: developed world majors, who have long competed with one another globally, must now also take into account players from Brazil, China, India and elsewhere.

Picking up weak competitive signals is more often than not a result of careful practice: a systematic updating of competitive insights as an ongoing part of existing strategic processes. Executives with diverse backgrounds can boost the quality of dialogue by contributing to issue-based competitive analyses. Who is well positioned to play in emerging business areas? If new technologies are involved, what are they, and who else might master them? Who seems poorly positioned, and what does that mean for acquisition opportunities?

Focusing competitive reviews on questions like these often yields more significant insights than the more common practice of periodically examining competitors' financial results. Birshan says: "It also helps push the senior team away from linear, deterministic thinking and toward a more scenario-based mind set - one better suited to today's fast-moving strategy environment."

Michael Birshan is a partner at McKinsey & Company.