Executives who can turn a competitive analysis into a strategic advantage are at a premium. “Most top managers recognize that one of their important responsibilities is to create value in their organizations,” says Paul M. Healy, the James R. Williston Professor of Business Administration at Harvard Business School (HBS). “But they don’t always appreciate how their decisions on firm strategy are actually reflected in financial outcomes and, ultimately, market valuation.”
Strategic financial analysis is a powerful, value-creating framework that helps senior executives assess strategy, analyze performance, and value a business. Executives can learn how to leverage this framework in the Strategic Financial Analysis for Business Evaluation program at HBS Executive Education, explains Suraj Srinivasan, Professor of Business Administration at HBS.
“The program allows participants to take an inside-out perspective and do a deep dive into an acquisition, initial public offering, or internal strategy change from the perspective of a general manager,” Srinivasan says. “It also allows participants to examine issues from the vantage point of a chief financial officer or any senior executive looking to present the firm to an audience of outside investors. And it lets them take an outside-in perspective of an acquirer trying to value a target or an activist or private equity investor looking to drive value creation in a company.”
To support the application of these varying lenses to analyze an enterprise, the program provides a framework for evaluating financial information. This empowers executives to make a range of business decisions, such as:
- Perform an in-depth competitive analysis in light of the company’s strategy
- Evaluate current performance and its sustainability, given the strategic focus and competitive conditions
- Analyze financial statements to assess the effective management of key success factors and business risks
- Assess appropriateness of capital structure, given the business model and risk exposure
- Determine if valuation multiples are reasonable, given performance expectations
- Examine the benefits and disadvantages of corporate transactions, such as potential mergers and acquisitions, IPOs, and spin-offs
- Value the company or business unit, given its business model and forecasted performance
The Analysis Framework
The first step in strategic financial analysis is to understand the firm’s business model, its risks and rewards, where the firm makes money, and what the challenges are. Consider questions such as: How does this firm add value? How do I understand its performance?
The second step is to assess performance. In other words, ask: How do I measure how the company is executing on a strategy? This helps measure performance and provides insights into how to improve strategy execution.
The third step is to think about the future. Consider questions such as: What factors will drive growth and profits? What tools do we use to better forecast growth and profits? Finally, apply a valuation methodology and ask: Given the forecast, what is the value of the firm?
“The reason for starting with strategy is to better understand the drivers of performance, whether it’s for internal decision-making, investing, purchasing stock, or executing a merger or an acquisition,” adds Srinivasan. “Once you understand the strategy, you can analyze your execution using financial numbers.”
To assess performance over time or across companies, the program includes competitive analysis and benchmarking. Executives need to consider questions such as: How well am I executing this strategy? Is it an execution or a strategy-design problem? How have we performed over time? How will we do in the future? How have we done compared to competitors in the field?
The Strategic Financial Analysis for Business Evaluation program leads executives through a process of conducting financial analysis and valuation. Participants measure how any strategy will impact financial performance and how investors assign value to that performance.
The program also provides executives with the tools they need to develop better judgment about strategic and financial decisions, such as how to acquire a company or take a company public. “One of the goals is to help executives build judgment to avoid the common valuation mistakes in M&A,” Healy notes. This includes anticipating and tempering any bias toward optimism about the future, as well as providing “reasonableness” checks along the way. Without such checks, strategic plans are “just numbers on paper,” concludes Healy.
Professors Healy and Srinivasan are the faculty co-chairs of Strategic Financial Analysis for Business Evaluation, a program offered by Harvard Business School Executive Education. Whether you are focused on improving performance, identifying growth opportunities, evaluating an acquisition, restructuring your business, assessing investment opportunities, or facing activist pressure over performance, this program enables you to analyze financial information more accurately and make critical decisions more effectively. For more information, visit the program website.