Managing for Shareholder Value and the Role of Strategy Paul C. Godfrey Marriott School of...

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

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Management’s Forecast

Valuing Future Earnings

Risk Discount

Current Quarter’s Performance

Time

Ear

ning

s

Defining Market Capitalization

Time

Ear

ning

s Market Capitalization:The present value of future earnings

discounted for risk

Market Cap and Strategy

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

Time

Ear

ning

s

CAP

GA

P

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

Increasing Shareholder Value

Time

Ear

ning

s

GAP

Time

Ear

ning

s

CAP

Time

Ear

ning

s

GAP & CAP

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 Added Value

Scope 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 BuyerBenefit

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

• 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

External FitAdded Value

Strategic Leverage

• How can the firm parlay its existing resources in to new value-added businesses?

• 09 October—23 October

• Corporate Strategy

Added Value

Scope

Strategic Alignment

• How should the firm structure its internal operations in order to maximize its value added?

• 28 October—18 November

• Strategy Implementation & General Management

Added Value

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

• Top managers control resources and set direction

• Top management has the perspective and knowledge to set strategy

• Strategy is something lower level employees don’t 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

Why does Strategy matter?

FindersPartners,

Senior Managers

MindersManagers,

Middle Managers

Grinders,Staff

Employees

Internal• Set direction for company• Forge alignmentExternal• Understand how firm adds value

to customers• Effectively sell products or

services

Internal• Forge alignment for

division or work groupExternal• 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 ValueOrganization

Individual

Employee Business Owner

Others

Self-Employed Investor

Market

Cre

ator

s of

Eco

nom

ic V

alue

Taken from : Robert Kiyosaki, The Cash Flow Quadrant, Warner Books, 1999

Which Path Will You Take?

Locus of Economic ValueOrganization

Individual

Employee Business Owner

Others

Self-Employed Investor

Market

Cre

ator

s of

Eco

nom

ic V

alue

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?