Myers, S.C. (1984). “Finance Theory and Financial Strategy”. Interfaces, 14.

782 Words May 13th, 2013 4 Pages
Myers, S.C. (1984). “Finance Theory and Financial Strategy”. Interfaces, 14.

This journal explained how to bridge the gap between strategic planning and finance theory. Myers wrote this journal to explain why finance analysis had only slight impact on strategic planning, even though strategic planning needs finance. Strategic and financial analysis are not reconciled. When low net present value (NPV) projects are nurtured "for strategic reasons," the strategic analysis overrides measures of financial value, and vice versa.

Relevant Financial Theory
The financial concepts most relevant to strategic planning are those dealing with firms' capital investment decisions. To select the projects to be financed, we calculate
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There are several problems when dealing with DCF calculations: * There are few problems in using DCF to value safe flows, for example, flows from financial leases. * DCF is readily applied to "cash cows" ? relatively safe businesses held for the cash they generate, rather than for strategic value. It also works for "engineering investments," such as machine replacements, where the main benefit is reduced cost in a clearly-defined activity. * DCF is less helpful in valuing businesses with substantial growth opportunities or intangible assets. In other words, it is not the whole answer when options account for a large fraction of a business' value. * DCF is no help at all for pure research and development. The value of R&D is almost all option value. Intangible assets' value is usually option value.

The Bridges
The task of strategic analysis is more than laying out a plan or plans. When time-series links between projects are im portant, it's better to think of strategy as managing the firm's portfolio of real op tions [Kestler 1982]. The process of finan cial planning may be thought of as: (1) Acquiring options, either by investing directly in R&D, product design, cost or quality improvements, and so forth, or as a by-product of direct capi tal investment (for example, investing in a Stage 1 project with negative NPV in order to open the door for Stage 2). (2) Abandoning options that are too far "out of

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