Managing for Shareholder Value and the Role of Strategy

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Managing for Shareholder Value and the Role of
Strategy

• Paul C. Godfrey
• Marriott School of Management
• Brigham Young University

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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

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Valuing Future Earnings
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Defining Market Capitalization
Market Capitalization The present value of
future earnings discounted for risk
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Market Cap and Strategy

• GAP (Competitive Advantage Gap)
• Advantage over closest rival
• Creates superior returns

GAP
CAP

• CAP (Competitive Advantage Period)
• Barriers to competitor entry, customer exit
• Sustains superior returns

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Increasing Shareholder Value
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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

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GAP and CAP The Strategy Puzzle
External Fit
Added Value
Scope
Internal Fit
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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?

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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 firms
  product or services?

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What is added value?
Net Buyer Benefit

• 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

Price
Margin
Total Costs to the firm
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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?

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Internal Fit

• How does the firm structure its operations?
• How is authority spread in the organization?
• What is the firms culture? What are the shared
  values?
• What level of alignment exists between the
  internal elements of the firm?

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Strategic Position

• How does the firm position itself in the industry
  to maximize its value added return to its
  customers?
• 09 September07 October
• Soft Drink Industry, Professional Sports,
  Computer Industry, online auction business

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Strategic Leverage

• How can the firm parlay its existing resources in
  to new value-added businesses?
• 09 October23 October
• Corporate Strategy

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Strategic Alignment

• How should the firm structure its internal
  operations in order to maximize its value added?
• 28 October18 November
• Strategy Implementation General Management

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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

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Two views of strategy

• Strategy is an executive function
• Top managers control resources and set direction
• Top management has the perspective and knowledge
  to set strategy
• Strategy is something lower level employees dont
  need to know

• Strategy matters at every level of the firm
• Middle managers, supervisors, and employees all
  influence strategy
• Lower level employees have deep knowledge of
  customers and markets that is strategically
  important
• Strategy matters for everyone

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Why does Strategy matter?

• Internal
• Set direction for company
• Forge alignment
• External
• Understand how firm adds value to customers
• Effectively sell products or services

Finders Partners, Senior Managers

• 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

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Managing Me, Inc.

• The most important firm you will ever direct is
  you
• Professionally
• Personally
• Marriage Family
• What role will strategy play for you?

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Strategy and Cash Flows
Locus of Economic Value Locus of Economic Value
Organization Organization
Individual Employee Business Owner Others
Individual Self-Employed Investor Others
Market Market
Creators of Economic Value
Taken from Robert Kiyosaki, The Cash Flow
Quadrant, Warner Books, 1999
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Which Path Will You Take?
Locus of Economic Value Locus of Economic Value
Organization Organization
Individual Employee Business Owner Others
Individual Self-Employed Investor Others
Market Market
Creators of Economic Value
Taken from Robert Kiyosaki, The Cash Flow
Quadrant, Warner Books, 1999
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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?