Financial Strategy
Financial strategy in SL2
Financial strategy is the top-level domain: it tests whether you can translate mission into financial objectives, choose between strategic options and judge whether a strategy creates value after financing and risk. Expect questions on the strategy hierarchy, PESTEL/SWOT, Porter's five forces and value chain, Ansoff's growth matrix, the BCG portfolio matrix, and SAF (suitability, acceptability, feasibility) evaluation.
Core rules
- Mission and vision are qualitative; objectives must be SMART and expressed in financial and non-financial terms.
- Strategic choice compares options against the organisation's risk appetite, funding capacity and stakeholder expectations.
- Ansoff ranks market penetration as lowest risk, then product development, market development and diversification as highest risk; a higher hurdle rate is normally required for diversification.
- BCG classifies cash cows, stars, question marks and dogs by market growth and relative market share; classification informs funding, not automatic disposal.
Worked example
A Sri Lankan conglomerate has a base WACC of 12% and proposes diversification into a new export product. Because the move is new market and new product, the board adds a 4% strategic risk premium, giving a 16% hurdle. Expected project return is 15%. The project is suitable and feasible, but not acceptable on financial grounds: 15% is below 16%, so NPV at the divisional rate is negative. If the premium were only 2%, the 14% hurdle would accept it. The risk premium, not the narrative, changes the decision.
Traps
Do not call a mission statement an objective; do not recommend diversification merely because growth is higher; do not reject every BCG dog without considering cash generation or synergies; and do not use accounting profit as the value test.