Tools to improve finance teams’ strategic thinking

We can agree that most organisations did not have a global pandemic on their strategic scorecard or built into their strategy prior to the COVID-19 outbreak. By now it should be a firm fixture in strategic risk reporting and backed up with key scenarios exploring possible directions as organisations move from a lockdown state into a post-pandemic world.

However, some organisations have not changed their strategies significantly, or not adjusted their target objectives to reflect the new environment.

In a pandemic, strategic thinking has never been more important — or more difficult. One reason for this is that individuals confuse tactics with strategy. In times of complexity and with situations changing rapidly, it is easy to go on autopilot. Our brains go into the fight-or-flight mode of survival, and we don’t properly assess the changing situation. We “fire from the hip”, focusing on internal operational activities that can be cut or reduced without linking them to the organisation’s strategic objectives.

However, the pandemic has demonstrated we need a more creative, strategic way of problem-solving and the ability to experiment with a range of scenarios for our businesses’ futures. This means taking time to think strategically and not going with the instant answer.

When I’m talking about strategy in its simplest form, I’m talking about choices. Strategy reflects a preference for a future state and determines how best to get there. It is also important to remember that strategy is proactive and anticipatory, not predictive.

Your strategic choices must consider the external environment, including the competitive, economic, regulatory, and legal landscapes.

Strategy issues

There are three key strategic issues businesses face, with more discussed in the AICPA & CIMA white paper Re-inventing Finance for a Digital World: Strategic Thinking Supplement. This was a deep dive into the 2019 CGMA research Re-inventing Finance for a Digital World, which led to the update of the CIMA professional qualification syllabus and CGMA competency framework.

First, confusing tactics with strategy. Many organisations fail to realise the difference between tactics and strategy. Strategy should be at the top of an organisation, using all the company’s capabilities to achieve its communal interests.

Many organisations, however, pursue a purely tactical approach to strategic problems, focusing on internal operational activities without linking them to the organisation’s strategic objectives. This rarely leads to an organisation achieving its strategic goals.

Organisations also fail to realise that tactics and strategy require different ways of thinking. It is becoming clearer that traditional ways of tactical thinking do not work in the move from a rational, complicated world to a complex world. Tactics are based upon the assumption of a linear cause-and-effect relationship in a stable environment. Increasing complexity requires a more creative, strategic way of problem-solving.

Second, the impact of social media and Integrated Reporting (IR) on strategy. The new transparency created by social media means that everything an organisation does is in the public domain. Traditionally, an organisation’s strategic thinking and decision-making was an internal process. Its strategy document was a secret to the outside world. Today, partly in reaction to the IR movement, more organisations are publishing their strategies in their integrated annual reports.

Stakeholders want reports that do more than merely focus on financial capital and shareholders. They increasingly want to understand how the shared value an organisation creates benefits wider society and the environment. The direct impact of this call from stakeholders for transparency is on an organisation’s strategic purpose. Stakeholders are challenging a long-held view that the sole purpose of an organisation is to increase profits.

It is also important to understand that an organisation’s strategic transparency is not then taken at face value in the wider ecosystem. Stakeholders now have access to other sources of data and information to compare against an organisation’s strategy.

Third, businesses need to examine how technology is impacting feedback loops. In the military, the use of narrow artificial intelligence (AI) within automated drone weapon technology provides an example. When comparing a human pilot and an automated drone in their Observe, Orient, Decide, and Act (OODA) loop speed, the AI technology is 101 times faster.

This raises many ethical and legal questions about the importance of control in these AI systems, which are currently being debated at the UN. A number of countries have called for them to be banned.

The issue for organisations is how will they control strategic direction and operational activities if machines are making decisions at extraordinary speeds? Eventually, AI could force human decision-makers out of the OODA loop of key organisational strategic decisions.

In the short term, when your strategy changes, you will need to check that your automated processes and algorithms have been updated to reflect the new direction.

Strategy execution

Our strategic thinking research reveals that when finance functions lead the way in defining and reporting strategic key performance indicators, they are more likely to describe their organisations as being in high-performing companies. Strategy teams within these organisations were also likely to report into the finance function, and their diagnostic processes were more likely to be automated.

In the pandemic, high-performing organisations with strategic thinking finance functions are more adaptable and able to rethink their business models to meet new challenges.

The Association’s strategic thinking research showed that 44% of finance professionals are already taking the lead in performing scenario analyses for their organisations’ strategic initiatives. This demonstrates the increased value that finance functions are delivering when given the strategic mandate.

Management accounting importantly connects the organisation’s strategy to its business model. It helps organisations to simulate different strategic scenarios to understand their impact on generating and preserving value.

The Global Management Accounting Principles also remind us that strategic development and execution must be an organisation-wide conversation. Discussions about strategy execution must take place at all levels of the organisation and should involve all employees.

As finance functions work with the rest of the organisation, they can break down siloed activity and thinking. They can also encourage diverse strategic thinking from across an organisation. This is because they can circumnavigate the usual top-down “chain of command” approach in favour of a “chain of communication”.

Information and data within an organisation fly in many directions. However, they generally flow in and out of the finance function. This provides the finance function with numerous entry points of communication between itself, other internal business functions, supply chain partners, and external stakeholders.

Skills required

The greatest skills challenge relates to the balance needed to be a specialist and a generalist at the same time. You need the technical ability to zoom in and document the minute detail alongside the wider vision to understand the bigger picture.

Once you have expanded your strategic capability and understand how your areas of expertise help change finance function performance, stop. Further “hyperspecialisation” can be damaging to your strategic thinking and make you complacent.

The challenge now is to build up your interdisciplinary thinking and focus on gaining a breadth of diverse experience that will complement your finance expertise. It’s not about what you know. It’s about recognising what you don’t know and having the curiosity to explore “known unknowns”.

The ways of the polymath can help here. A polymath is simply a person of great learning across several fields of study. Gaining a wider knowledge and breadth of learning is at the heart of strategic thinking. Traditionally, the “finance business partner” embeds financial and management skills into a business area. But going forward, the “finance business polymath” could facilitate knowledge exchange across an organisation and its supply chain, linking strategic choices with business models and the wider ecosystem.

Practical tools and techniques

We want organisations and finance functions to do two things: rediscover creative strategic thinking and construct safe environments in which we have the time to think strategically.

Professor Lawrence Freedman in his book Strategy: A History describes the abilities of the strategist as: “A student of the present who must be aware of the past, sensitive to the possibilities of the future, conscious of the danger of bias, alert to ambiguity, alive to chaos, ready to think through the consequences of alternative courses of action, and then able to articulate all this with sufficient precision for those who must execute its prescriptions.”

With all these competing facets, the tools and techniques explored in AICPA & CIMA’s Strategic Thinking Supplement Tools and Techniques are not an exhaustive list, and there are many more out there. Hopefully, at the very least, they will stimulate debate and help you when you need to think strategically.

There are techniques that explore personal biases, how to deal with the unknown, and chaos and complexity theories.

We also look at lessons in creativity, different ways of thinking, and the types of meetings that are more likely to foster strategic thinking.

And finally, we explore the difference between deliberate strategies, such as the CIMA Strategic Scorecard, and emergent strategies that bring innovation through trial and error, such as scenario planning.

Summary: Three steps to strategic thinking

Finance teams can enhance their strategic thinking capability by doing the following:

• Pay attention to the speed and automation of AI decisions within your organisation. Think about the impact this could have on your ability to control future strategies.
• In a world increasingly experiencing the “weaponisation of information” and fake news, make sure the finance function becomes the guardian of evidence-based debate and decision-making.
• Embrace the “finance business polymath” inside yourself and nurture it with CPD or CPE subjects that are not directly relevant to your area of expertise.

— Martin Farrar, Ph.D., is an associate technical director–Management Accounting at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.