Strategic Financial Management’s Drawbacks
There is no philosophy in the management domain that 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 that are associated with this philosophy.
Developing a strategy is not an easy task. It cannot be done by operational managers who run the day-to-day operations of a firm. To develop a long-term financial strategy and align it with the overall strategy of the company, managers with different skill sets need to be hired. 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 people who have this skill set. Hence, they are expensive to hire. Besides, this person will also need access to research reports and data 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.
2. Time Consumption:
The designing of the financial strategy of an organization is not a task that can be performed by a single department. The behaviors and objectives of the entire organization need to be aligned for the strategy to be effective. This means that the implementation of strategic finance requires time from line managers, the human resources department, the marketing department, and other such departments within the organization. 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 entire philosophy of strategic financial management is based on making predictions about events that are far away in the future. Typically, strategic financial management makes decisions based on their perception of what the external environment will be like two decades from the current date. The problem with strategic management is that the future does not unfold as expected by the organization. Hence, a lot of the time, the strategy created by this function gets invalidated. However, it must be understood that organizations are not looking for 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.
4. An Uncertain External Environment
In a previous article, we have already shown that the strategic environment is not static. 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 that 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 that is being displayed by the current school of strategic thought may become obsolete 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.
The major issue with strategic management is that a lot of the time, short-term goals conflict with long-term goals. In theory, the answer is simple, and the organization must focus on its long-term goals. However, in practice, this is easier said than done. Companies often face a lot of pressure from their shareholders to deliver results every quarter. 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 make tough decisions since it might hurt the company in the short term. Hence, management and the board of directors are wary of any decision that causes a drop in their share price and hence does not give full freedom to strategic financial managers.
It implies adaptability:
Lastly, strategy is about choosing certain goals. If certain goals are chosen, that also means that certain other goals have been excluded. The exclusion of these goals limits the agility of an organization. It has been observed that organizations that follow strategic financial management are less flexible 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.