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

795 WordsMay 1, 20134 Pages
Myers, S.C. (1984). “Finance Theory and Financial Strategy”. Interfaces, 14. Introduction 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…show more content…
There is also a lesson for current appli cations of finance theory to strategic is sues. Several new approaches to financial strategy use a simple, traditional DCF model of the firm, [For example, Fruhan 1979, Ch. 2]. These approaches are likely to be more useful for cash cows than for growth businesses with substantial risk and intangible assets. The option value of growth and intangibles is not ignored by good managers even when conventional financial techniques miss them. These values may be brought in as "strategic factors," dressed in non-financial clothes. Dealing with the time series links between capital investments, and with the option value these links create, is often left to strategic planners. But new developments in finance theory promise to help. Conclusion Myers argued that the standard discounted cash flow techniques will tend to understate the option value attached to growing, profitable lines of business. To bridge the gap between strategic planning and finance theory, Myers suggested that the financial theorist need to apply existing finance theory correctly and extend the theory on real option pricing to model time-series interactions between investments. Both sides should reconcile financial and strategic analysis to uncover hidden assumptions to have deeper understanding on strategic

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

Open Document