Download Managing for Shareholder Value and the Role of Strategy

Managing for Shareholder Value and the Role
of Strategy
Paul C. Godfrey
Marriott School of Management
Brigham Young University
What is Shareholder Value?
• Shareholder value is the share price of the firm
• The primary responsibility of management
– Milton Friedman: The social responsibility of business is to make a
profit
– Profit is primary, but not exclusive
• Share price allows comparisons between companies
across industries and sectors
• Share price is based on the future expected returns
(dividends and capital appreciation) of the firm
Divt
Pt
P0  

t
(1  r )t
0 (1  r )
t
Valuing Future Earnings
Management’s
Forecast
Current
Quarter’s
Performance
Earnings
Risk Discount
Time
Earnings
Defining Market Capitalization
Market Capitalization:
The present value of future earnings
discounted for risk
Time
Market Cap and Strategy
GAP
Earnings
GAP (Competitive Advantage Gap)
• Advantage over closest rival
• Creates superior returns
CAP
Time
CAP (Competitive Advantage Period)
• Barriers to competitor entry, customer exit
• Sustains superior returns
Earnings
 GAP
 CAP
Time
Time
Earnings
Earnings
Increasing Shareholder Value
 GAP & CAP
Time
What is Strategy?
• Strategy has to do with choosing among alternative paths
for translating goals into action in ways that create
competitive advantage
• Strategy is long term
• Strategy is the heart of GAP and CAP
• Strategy involves attitudes, activities, and assets
• Strategy is a “map” of where you want to go, what you
have, and what you need to get there
GAP and CAP: The Strategy Puzzle
External Fit
Scope
Added Value
Internal Fit
External Fit
• What is the structure of the
industry?
• How is the industry related
to the general economy?
Other industries?
• What competitive dynamics
drive the industry?
• What strategic positions
are available? Which are
attainable?
External Fit
Added Value
• How does the business add
value to its customers?
• How does the business add
value to society?
• Does the value added
justify the cost of the
product?
• What buyer benefits accrue
from using the firm’s
product or services?
Added Value
What is added value?
•
Net buyer benefit is the
essence of competitive
advantage
•
Net buyer benefit acts as a
shield against competitive
erosion
•
Net buyer benefits can be
cost or differentiation related
•
A great proxy for NBB is the
level of price discounting
needed to move a product
Net Buyer
Benefit
Margin
Total Costs
to
the firm
Price
Scope
• What businesses is the
corporation in?
• What businesses could the
corporation enter?
• Which new businesses
would add value to existing
customers?
• Can new products or
services give the firm
access to new customers?
Scope
Internal Fit
• How does the firm
structure its operations?
• How is authority spread in
the organization?
• What is the firm’s culture?
What are the shared
values?
• What level of alignment
exists between the internal
elements of the firm?
Internal Fit
Strategic Position
External Fit
Added Value
• How does the firm position itself in the industry to
maximize its value added return to its customers?
• 09 September—07 October
• Soft Drink Industry, Professional Sports, Computer
Industry, online auction business
Strategic Leverage
• How can the firm parlay its
existing resources in to
new value-added
businesses?
• 09 October—23 October
• Corporate Strategy
Scope
Added Value
Strategic Alignment
• How should the firm
structure its internal
operations in order to
maximize its value added?
Added Value
• 28 October—18 November
• Strategy Implementation &
General Management
Internal Fit
Conclusion
• Increasing GAP and CAP depends on:
• The ability of management to understand each piece of the
strategy puzzle, and
• The ability of management to successfully deal with
positioning, scope, and alignment
Two views of strategy
•
Strategy is an executive
function
•
Strategy matters at every
level of the firm
•
Top managers control
resources and set direction
•
Middle managers,
supervisors, and employees
all influence strategy
•
Top management has the
perspective and knowledge to
set strategy
•
Lower level employees have
deep knowledge of customers
and markets that is
strategically important
•
Strategy is something lower
level employees don’t need to
know
•
Strategy matters for everyone
Why does Strategy matter?
Finders
Partners,
Senior Managers
Minders
Managers,
Middle Managers
Grinders,
Staff
Employees
Internal
• Set direction for company
• Forge alignment
External
• Understand how firm adds value
to customers
• Effectively sell products or
services
Internal
• Forge alignment for
division or work group
External
• Understand how firm
adds value to customers
• Forge alignment
with company
objectives
• Sell services and
get promoted
Managing Me, Inc.
• The most important firm you will ever direct is you
– Professionally
– Personally
– Marriage & Family
• What role will strategy play for you?
Strategy and Cash Flows
Locus of Economic Value
Creators of Economic Value
Organization
Employee
Business Owner
Individual
Others
Self-Employed
Investor
Market
Taken from : Robert Kiyosaki, The Cash Flow Quadrant, Warner Books, 1999
Which Path Will You Take?
Locus of Economic Value
Creators of Economic Value
Organization
Employee
Business Owner
Individual
Others
Self-Employed
Investor
Market
Taken from : Robert Kiyosaki, The Cash Flow Quadrant, Warner Books, 1999
Questions to consider
• How much of your income will come from each quadrant in
– 5 years?
– 10 years?
– 20 years?
• What strategic position will help you achieve your goals?
• Where will strategic leverage add value?
• How will you maintain strategic alignment?