Linking strategy to value
Communicating to the board
Shareholder value is derived from revenue growth, margin improvement, and asset efficiency. While such general value levers are useful they do not guide any particular organization regarding the critical decisions on where and how to compete. Similarly, strategic plans show how strategic initiatives support the overall corporate vision, but apart from ad hoc business cases, do not systematically link to shareholder value.
This article seeks to fill this gap by providing business executives a practical and systematic way of preparing for Board member questions on the shareholder value of proposed strategic initiatives.
Senior executives are often faced with a dual challenge. On the one hand, they need to demonstrate to the market – in commonly understood terms – that their enterprises are creating value for their shareholders. On the other hand, their effectiveness hinges on identifying and exploiting differentiated ways of serving customers faster, better, and cheaper compared to competitors.
Senior executives face this challenge very much in the public eye. Investors want to see how their investment can pay off. Lenders want to know how their funds will be used and returned. Analysts want to assess one company against others. Customers want a reason to bring their business, and assurances that their needs will be met. Employees want to know they will continue to have interesting work that pays the bills. And, finally, the Board wants to know the enterprise is prudently run while competing aggressively.
With the dual challenge comes a dual risk. If the company cannot differentiate itself from competitors, it may not be able to attract customers, and will cease to be in business. Yet, if it is too different, it may confuse lenders and investors, and not attract the funding necessary to stay in business.
Senior executives, therefore, should to be adept at both developing strategic plans that provide competitive advantage, and at communicating how they will provide shareholder value. They should be able to link strategy to value. The purpose of this article is to help executives understand these connections, and to provide them with a practical, systematic framework for tracing the impact of proposed strategic actions on shareholder value.
There is a significant body of knowledge covering how to identify value once it has been created or how to identify some of the actions that can create it. These actions apply generally to many organizations – they do not guide any particular organization regarding the critical decisions on where and how they should compete. That’s the role of strategy. Existing strategic frameworks can help organizations identify suitable industry segments, and define their competitive positioning, but don’t generally identify how shareholder value will be achieved. Although it is commonly recognized – or expected – that effective strategies result in value creation, there is no simple framework for connecting the two. This article seeks to fill that gap.