managing for shareholder value and the role of strategy paul c. godfrey marriott school of...
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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
t
tt
t
t
rP
rDivP
)()(
110
0
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?
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