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STRATEGIC FINANCIAL MANAGEMENT '

Managing an organization's financial resources so as to achieve its business


objectives and maximize its value. Strategic financial management involves a
defined sequence of steps that encompasses the full range of a company's finances,
from setting out objectives and identifying resources, analyzing data and making
financial decisions, to tracking the variance between actual and budgeted results
and identifying the reasons for this variance. The term "strategic" means that this
approach to financial management has a long-term horizon.
INVESTOPEDIA EXPLAINS 'STRATEGIC FINANCIAL MANAGEMENT '
At the most fundamental level, financial management is concerned with managing
an organization's assets, liabilities, revenues, profitability and cash flow. Strategic
financial management goes a step further in ensuring that the organization remains
on track to attain its short-term and long-term goals, while maximizing value for its
shareholders.

Strategic financial management also means that short-term goals may occasionally
need to be sacrificed to meet longer-term objectives. A typical example is when a
loss-making company trims its asset base through factory closures or headcount
reduction in order to reduce operating expenses. While such actions have a
detrimental effect on near-term results because of restructuring costs and other
one-time items, it positions the company to achieve profitability in the longer term.

What is a financial strategy?


To get the most out of your financial resources and achieve sustainability you'll
need to successfully manage all your funding and financing sources in an
overarching strategy for your organization. Find out how to go about this and who to
involve.
Why have a strategy?
Many organizations manage income from a number of different funding and finance
sources - from donations, grants, contracts and income generated from trading.
A financial strategy enables your organization to assess your financial needs and
the sources of support required to meet your objectives and fulfill the organizational
mission, whilst also planning for continued growth to enable stability.
You're financial strategy will derive from your mission. So the first step is to clearly
define why you exist and you plan to achieve your mission before preparing any
budgets.

1. Cornering a fledgling market


One very common business strategy is for larger firms to gain a stronghold in a
growing market through aggressive M&A activity. Think of the Fortune 500 firm that
buys out a competitor, or when a larger firm merges with a competitor to corner a
young market.
Example: Facebooks Instagram acquisition
In April 2012, Facebook changed the mobile startup scene overnight by acquiring
the photo sharing startup, Instagram, for an unprecedented $1B. Keep in mind that
until then, Instagram had *just* 30M users and did not have an established
presence on the Android OS. To most outsiders and pundits, this looked like a rather
rash decision from a pre-IPO Facebook.
Fast forward to 2014 and Instagrams user base has shot past 150M. It is the
dominant photo sharing app on all mobile platforms. More importantly, it attracts
the adolescents and teens that are leaving Facebook in droves.
The Strategy
Facebooks strategy in acquiring Instagram was to a) corner the fledgling mobile
image sharing market, and b) hedge its bets for future growth. The $1B price tag
may have seemed exorbitant in 2012, but looks almost cheap today. Instagram
allows Facebook to compete in a market where it doesnt have a very strong
presence, and helps it retain younger users. Furthermore, by buying Instagram,
Facebook ensured that it has a competitive advantage over Google, Microsoft, and
other competitors.
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2. Product differentiation
Standing out from the competitors is a key requirement for business success. Unless
consumers can spot your product from me-too competitors, youll have a hard time
making sales. Businesses can do this either by highlighting their products superior
technology, features, styling, heritage, pedigree or price. You can see this strategy
at play in virtually every business, especially B2C businesses.
A great example of this can be seen in Apples approach to products.
Example: Apple iPad Air vs. competitors
The new Apple iPad Air costs $274 to make and retails for $499 a margin of 45%.
Competing tablets often cost nearly $200 less. Apple is able to command such

premiums because it has successfully differentiated its product from competitors.


The Apple iPad marketing, for instance, highlights following features:
Lightness: The iPad Air is lighter, thinner than competitors.
Display Quality: The Retina display is visually superior to competing tablets.
Software: Apple highlights both the base iOS and the bundled Apple software as
being better than what competitors offer.
Engineering: Apple seldom fails to highlight its superior engineering and material
quality than competitors.
Ease of Use: Since Apple makes both the hardware and software, it often
emphasizes its products ease of use.
Note that Apple almost never plays up its products price. The same is true for the
iPad Air, which is priced not to sell in volume, but to become an aspirational
product. This preserves Apples reputation as a superior, aspirational brand.
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3. Gaining a technological advantage
In our technology-centric world, technological advantage can often translate into
improved productivity, better sales, or even market domination. Nearly every large
firm spends millions of dollars in R&D to develop even better technology. It isnt
uncommon for organizations to even buy up smaller firms just to gain access to
their technology (as shown in the Facebook-Instagram example above).
A technological advantage doesnt always have to be in terms of actual technology.
It can also mean acquiring and retaining key employees that can help a business
gain a technological advantage. The recent trend of acqui-hires among startups is a
good example of this approach.
Lets look at a couple of examples of this business strategy.
Example: Apple-Google-Microsoft-Samsung patent war
Some of the largest technology firms in the world, including Apple, Google,
Microsoft, Samsung and RIM are locked into a long and ongoing war to acquire and
hoard patents. In 2011, for instance, a consortium of companies led by Apple and
Microsoft, bid nearly $4.5B for thousands of patents held by Nortel. The business
strategy behind this move was to:
Gain a technological advantage over competitors
Prevent competitors from gaining the same advantage

This is just one example; companies often engage in lengthy legal wrangling to gain
a technological advantage through patents (case in point: the ongoing AppleSamsung patent lawsuits). The message is quite clear: superior technology can offer
tangible real-world benefits to businesses.
Example: Amazon invests in delivery drones
A couple of months ago, Amazon stirred the imaginations of futurists and sci-fi fans
everywhere when it announced that it was developing drones for delivering small
packages. Although drones have been around for some time, most of them were
used in military applications. Using drones is a sound business strategy for Amazon
for four reasons:
By using drones, Amazon will gain a real technological advantage over competitors
who must rely on less efficient ground transportation
Nearly 86% of Amazon packages are under less 5lbs, which makes drones the
perfect delivery vehicles.
Drones will allow Amazon to reach rural areas where delivery networks arent as
efficient.
Drones can significantly improve delivery times in dense urban areas.
This is one example where a near-futuristic technology offers real-world advantages
to a business.
4. Pricing strategies
Businesses essentially have two choices when pricing their products:
Keeping prices low to attract more customers. Since profit margins are very low, the
business must sell a lot of products to make money.
Pricing a product beyond the reach of ordinary consumers, and hence, giving it
aspirational value.
Lets look at some examples of these two approaches:
Example: Walmart, Ikeas low prices
Walmart uses its position as the largest retailer in the world to bargain for low prices
with suppliers and manufacturers. At the same time, Walmart keeps its profit
margins very low, selling in volume instead. This enables the company to price its
products far below competitors which ultimately helps it sell more.
The Swedish furniture brand Ikea follows the same approach. By selling its selfassembled furniture pieces in large volumes (the retailer has 338 stores in 40
countries), Ikea is able to price its products very aggressively.

Example: Ferarri prices its cars for exclusivity


Italian auto maker Ferrari pulled in revenues of $3.3B in 2012 with a net profit of
$334M. It sold a total of 7,318 cars over the year which translates into a profit of ~
$45,640 per car.
In contrast, the Hyundai motor corporation sold 2.94M cars in 2011 and made a
profit of $9B. This works out to a profit of ~ $3,058 per car.
This illustrates Ferraris pricing strategy. By pricing its products beyond the reach of
ordinary consumers, Ferrari is able to retain the air of exclusivity. This (and the
exceptional quality of the cars, of course) enables the company to retain such a
huge profit margin per car.These are just some examples of strategies used by
different businesses. Every business will be different and will have to adopt different
strategies for successIf youre starting a new business, you need to create a
business plan. This course on creating business plans will point you in the right
direction.