Financial Flexibility and Opportunity Capture: Bridging the Gap Between Finance and Strategy |
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| Authors: | Stephen V. Arbogast Dr. Praveen Kumar |
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| Affiliation: | 1. STEPHEN ARBOGAST is Professor of the Practice of Finance and Director of the Energy Center at the Kenan‐Flagler Business School, University of North Carolina at Chapel Hill. From 2004–2014 he was Executive Professor of Finance at the University of Houston's Bauer College of Business. From 1972–2004 he worked for ExxonMobil Corporation, serving as Treasurer of ExxonMobil Chemical Company. He is the author of Resisting Corporate Corruption, 3rd Edition (Scrivener/Wiley) and numerous articles and case studies. Since 2010 he has been a member of the Technical Review Panel at the National Renewable Energy Laboratory.;2. PRAVEEN KUMAR is the Cullen Distinguished Chaired Professor of Finance and the Director of the Gutierrez Energy Management Institute in the Bauer College of Business at University of Houston. Praveen received his Ph.D. in Economics from Stanford University and his A.B. and MPA from Princeton University. His research has been widely published in the top international journals in finance, economics, management, and accounting, and has been cited and discussed in major business publications. He has lectured in and consulted for numerous energy companies. |
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| Abstract: | Logically, the practice of corporate finance and corporate strategy should be closely coordinated, but in reality there remains a massive gap between the two. This can lead strategically oriented firms to de‐emphasize or even discard NPV. Neither financial theory nor competitive strategy has been very open to the economic value of investment opportunity capture. Strategy must recognize that financial flexibility provides powerful advantages and financial theory must evaluate entire strategic programs rather than discrete, stand‐alone projects. Necessarily, the financial discussion of cost of capital and capital structure has to change. The authors offer two specific concepts to bridge the Gap between Finance and Strategy: 1) Reserve Financial Capacity is the annual sum of Free Cash Flow, Financing Flexibility and Cash Reserves over the period envisioned for strategy execution. Individual projects must belong to strategic programs in the sense that they either: 1) keep the base business running; 2) preserve an existing competitive position; or 3) form part of a program to enhance advantage or fashion a strategic breakout. 2) Strategically Sustainable Cost of Capital is the true, blended cost of capital required to complete an entire capital program. These concepts provide financial rigor to firms with well‐defined strategies and allow managements to wield Financial Flexibility as a strategic weapon, creating options on unique buying opportunities, such as at the bottom of industry cycles. |
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