Managing for Shareholder Value and the Role of Strategy

1. Managing for Shareholder Value and the Role of Strategy Paul C. Godfrey Marriott School of Management Brigham Young University

2. 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

3. Valuing Future Earnings Management’s Forecast Current Quarter’s Performance Risk Discount Earnings Time

4. Defining Market Capitalization Earnings Time Market Capitalization: The present value of future earnings discounted for risk

5. Market Cap and Strategy Earnings Time • 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

6. Increasing Shareholder Value Earnings Earnings  GAP  CAP Time Time Earnings  GAP & CAP Time

7. 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

8. GAP and CAP: The Strategy Puzzle External Fit Added Value Scope Internal Fit

9. External 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?

10. Added Value 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?

11. 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 What is added value? Net Buyer Benefit Price Margin Total Costs to the firm

12. Scope 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?

13. Internal Fit 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?

14. Strategic Position Added Value External Fit • 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

15. Strategic Leverage Added Value Scope • How can the firm parlay its existing resources in to new value-added businesses? • 09 October—23 October • Corporate Strategy

16. Strategic Alignment Added Value Internal Fit • How should the firm structure its internal operations in order to maximize its value added? • 28 October—18 November • Strategy Implementation & General Management

17. 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

18. 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 Two views of strategy

19. Why does Strategy matter? 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 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

20. Managing Me, Inc. • The most important firm you will ever direct is you • Professionally • Personally • Marriage & Family • What role will strategy play for you?

21. Strategy and Cash Flows Creators of Economic Value Taken from : Robert Kiyosaki, The Cash Flow Quadrant, Warner Books, 1999

22. Which Path Will You Take? Creators of Economic Value Taken from : Robert Kiyosaki, The Cash Flow Quadrant, Warner Books, 1999

23. 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?