Strategic Value Management E-Book

Juan Pablo Stegmann

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 432

Veröffentlichungsjahr: 2009

Beschreibung

Innovative strategic management solutions for today's market Strategic Value Management addresses common problems among business managers and other professionals involved in thinking about developing and managing organizations. In it, author Juan Pablo Stegmann integrates all strategic management and business strategy into an innovative standard that introduces key metrics to strategic management and stock value creation. He argues that most complex business issues can be reduced to the three dimensions of stock value creation-profits, sales growth, and capital-that are linked to three critical strategic management decisions-competition, innovation, and resources. His new approach indicates that every strategy has a clear dollar metric, which can measure its consequences of the strategies in terms of stock value. * Competitive and growth strategies are analyzed along with economic, financial, dynamic, and contingent approaches * Includes a companion CD-ROM, which contains Stegmann's proven model for strategic management and stock value creation * Ethical consequences of strategic decisions are introduced-showing how ethics are linked to long-term stock value creation * Explains the roots of the current financial crisis by examining the link between the financial world and strategic management, and proposes possible solutions For any looking to enhance their understanding of this discipline, Strategic Value Management offers a new conceptual model for thinking about business strategy and its link to stock value creation.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

WHY YOU NEED THIS BOOK

PURPOSE OF THIS BOOK

IMPORTANCE OF BUSINESS ETHICS

ORGANIZATION OF THIS BOOK

SUGGESTIONS FOR READING THIS BOOK

Acknowledgements

PART One - The Foundations of the Model

REFLECTIONS: WHAT IS VALUABLE ABOUT PART 1 ?

SUGGESTIONS FOR READING PART 1

CHAPTER 1 - Introduction to Strategic Value Management

STRATEGIC MANAGEMENT’S HISTORY: AN ATOMIZED DISCIPLINE

PROBLEMS OF STRATEGIC MANAGEMENT TODAY

THE STRATEGY-VALUE MODEL

INTEGRATING EXAMPLES

A FINAL WORD

TAKEAWAYS

CHAPTER 2 - The Strategy-Value Model

PART 1: STOCK VALUE CREATION

PART 2 : THE STRATEGY - VALUE MODEL: A BRIDGE BETWEEN STOCK VALUE CREATION AND ...

PART 3: THE STRATEGY-VALUE MODEL AND THE STRATEGIC MANAGEMENT LITERATURE

INTEGRATING EXAMPLES

TAKEAWAYS

PART TWO - Stock Value Creation and the Strategy of the Firm

REFLECTIONS: WHAT IS VALUABLE ABOUT PART 2 ?

SUGGESTIONS FOR READING PART 2

CHAPTER 3 - Drivers of Capital

THE RESOURCES AS PILLARS OF STOCK VALUE CREATION

THE INTELLECTUAL CAPITAL AS THE MOSTCRITICAL UNIQUE AND INIMITABLE RESOURCE

THE VISION AND MISSION OF THE FIRM AS KEY RESOURCES , DRIVERS OF CAPITAL

KNOWLEDGE MANAGEMENT AND STOCK VALUE CREATION

INTEGRATING EXAMPLES

TAKEAWAYS

CHAPTER 4 - Resources Strategies

PORTER’ S APPROACH TO RESOURCES STRATEGIES

ALLIANCES AS A WAY TO SHARE RESOURCES

STRUCTURING THE RESOURCES

INTEGRATING EXAMPLE

TAKEAWAYS

CHAPTER 5 - Drivers of Profits

ENVIRONMENT ANALYSIS OF COMPETITION

INDUSTRY ATTRACTIVENESS

THE COMPETITIVE POSITION

THE ORGANIZATION ANALYZES THE COMPETITIVE ENVIRONMENT

INTEGRATING EXAMPLE

TAKEAWAYS

CHAPTER 6 - Competitive Strategies

INTRODUCTION TO COMPETITIVE STRATEGIES

PERFECT COMPETITION STRATEGIES

MONOPOLISTIC COMPETITION STRATEGIES

OLIGOPOLY COMPETITION STRATEGIES

MONOPOLY STRATEGIES

INTEGRATING EXAMPLE

TAKEAWAYS

NOTES

CHAPTER 7 - Drivers of Growth

IDENTIFYING OPPORTUNITIES AND THREATS

INTEGRATING EXAMPLE

TAKEAWAYS

CHAPTER 8 - Innovation Strategies

INNOVATION AND THE STRATEGY-VALUE MODEL

INNOVATION STRATEGIES AND RESOURCES

THE STRATEGY-VALUE MODEL INTEGRATES OTHER MODELS AND DISCIPLINES

INTEGRATING EXAMPLE

TAKEAWAYS

PART Three - Making Decisions

REFLECTIONS: WHAT IS VALUABLE ABOUT PART 3 ?

CHAPTER 9 - Strategic Planning and Control

STRATEGIC PLANNING AS A DECISION-MAKING PROCESS

THE STRATEGIC PLAN

THE STRATEGY-VALUE MODEL, THE INTELLECTUAL CAPITAL MODEL AND THE BALANCED SCORECARD

THE STRATEGY- VALUE MODEL INTEGRATES THE BALDRIGE NATIONAL QUALITY AWARD

THE DIFFERENT TYPES OF STRATEGIC PLANS ARE INTEGRATED INTO THE STRATEGY-VALUE MODEL

TAKEAWAYS

CHAPTER 10 - Business Ethics

WORK ETHIC AND WEALTH CREATION

MAXIMIZING STOCK VALUE: THE ETHICAL DEBATE

In Favor: Utilitarianism

THE ETHICAL CONSEQUENCES

FINDING BALANCE: THE CORE OF THE DEBATE

WORKING ON THE SUPPLY AND DEMAND SIDES: THE QUEST FOR VALUES

"TAKEAWAYS

APPENDIX - Deconstructing the EVA Model

References

About the Author

About the CD-ROM

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

Copyright © 2009 by Juan Pablo Stegmann. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Stegmann, Juan Pablo.

Strategic value management : stock value creation and the management of the firm / Juan Pablo Stegmann.

p. cm. - (Wiley finance series)

Includes bibliographical references and index.

eISBN : 978-0-470-53884-5

1. Corporations-Valuation. 2. Strategic planning. 3. Management. I. Title.

HG4028.V3S823 2009

658.15-dc22

2009014324

To Gabriela, Gabi, and Juanchi, my greatest values

To my parents, for their wisdom, leadership, struggles, strength, and support: the real capital

To God, who fills our lives with unique resources

Preface

You may wonder: Why another strategic management book? What does this book offer me? The goal of this book is to generate a radical change in strategic management and propose a new standard based on the link between strategies and stock value creation.

Michael Porter stirred up a revolution with his books, Competitive Strategy and Competitive Advantage, among others. He created a standard that integrated a large part of existing strategic management literature developed before the 1980s. Where Porter addressed only the competitive aspect of strategy, this book aims to integrate all existing strategic management and business strategy thinking. Consequently, this book, Strategic Value Management, is revolutionary, creating a new standard for all strategic management and business strategy disciplines.

However, the main reason to read it is related to business ethics. This book bridges strategic management and business ethics, provoking new awareness and insights. This book shows that the maximization of stock value is fully embedded in every single managerial decision, and this has wide consequences for our lives and happiness. The book shows how the current financial crisis is a consequence of such an approach.

WHY YOU NEED THIS BOOK

This book addresses common problems among business managers and students that the current literature is unable to solve.

Most books on current strategic management ignore the fact that low-cost strategies lead firms to destroy stock value. Many managers, perhaps following strategic management’s recommendations, believe that firms must follow a low-cost leadership, overlooking the fact that it normally leads to similar reactions from the competition and makes competition more intense, reducing margins further. Similarly, many managers believe that differentiation is an adequate strategy to increase margins and sales, while the reality is that most likely it can be imitated by the competition, generating a more intense competition, which then reduces stock value.

The systematization of these findings shows that strategies in perfect competition (typically low-cost strategies) destroy stock value, strategies in monopolistic competition (typically differentiation) barely create stock value, oligopolistic strategies (alliances and collusion) create stock value, and monopoly strategies based on unique resources create higher levels of stock value.

These examples show how critical the link between strategic management and stock value creation is.

Why does strategic management look so lame, so limited? Why do managers frown upon it and question the validity of its prescriptions? The following are some reasons:

• Ambiguity and lack of accountability. Strategic management lacks metrics, a clear set of indicators that enable analysis. It does not have clear costs and benefits associated with each strategy. The lack of metrics in strategic management produces a lack of clarity and transparency, creating a feeling that every strategy is valid and that everything is fine.

• Disconnection with the financial realities. Stock value creation is a primary responsibility of business managers, but 50 percent of business firms fail to create stock value. However, and surprisingly there is a complete void of literature related to the impact of strategic decisions on stock value. Finance and strategic management are two divorced disciplines. Finance ends up being a discipline for practical people with mathematical skills, and strategic management is for conceptual individuals. In reality they need to work together.

• Lack of modernity. Other books on strategic management fail to incorporate and especially integrate modern disciplines such as industrial economics, game theory, transaction costs economics, agency theory, the resource view of the firm, intellectual capital, and knowledge management, among others. The few books that partly incorporate some of these disciplines fail to integrate them into a single model. None of them link these disciplines with their ability to create stock value.

• Lack of critical thinking. Current strategic management literature fails to produce clear models linked to economic, financial, dynamic, and contingent approaches that foster critical thinking.

• Lack of simplicity. After decades of specialization, strategic management and business strategy have generated an extremely large number of atomized theories and models, which contradict each other and confuse the practitioner. Managers and students have a hard time finding simple solutions to solve complex business problems.

• Lack of a practical focus. Current literature does not always propose practical tools to implement strategic management prescriptions. It specifically lacks recommendations to implement strategic management throughout the organizations, focusing more on top-down prescriptions. This provokes an ivory tower type of strategic management that is not based on organizational processes.

PURPOSE OF THIS BOOK

This book proposes a brand-new approach, a new standard. It creates a new conceptual model, the strategy-value model, which bridges strategic management and stock value creation. It introduces metrics into business management disciplines. It integrates strategic management and business management disciplines, as well as existing theories and authors, providing a contingency approach. It modernizes strategic management by integrating disciplines such as industrial economics, game theory, transaction costs economics, agency theory, the resource view of the firm, knowledge management, intellectual capital, and others. It introduces practical tools to implement strategic management prescriptions. It also proposes processes so that the entire organization can develop organizational knowledge and unique resources.

This has very powerful implications:

• Simplicity. The most complex issues from any business discipline can be reduced to the three dimensions of stock value creation: profits, sales growth, and capital, which are linked with three strategic management dimensions: competition, innovation, and resources. The strategy-value model solves current atomization and specialization and explains the differences among theories as part of a contingent approach. It is easy to understand for practitioners, in spite of the high sophistication and complexity of the theories involved.

• Rationality. The strategy-value model links the strategic environment with the recommended strategies, and shows the consequences of the environment and strategies in economic and financial terms.

• Critical thinking. Simplicity and rationality create a brand-new, powerful, critical thinking platform. When managers analyze the strategic environments, propose their strategies, and assess the potential results, the model shows in a simple and logical way whether they make sense.

• Practicality. The tools and processes proposed by the book ensure an easy way to develop knowledge organization, and use such knowledge organization to analyze the environments, propose strategies, and implement and monitor them.

• Relevance for nonbusiness organizations. This book is also extremely valuable for people in nonbusiness organizations: government, armed forces, nonprofit organizations, churches, and others, because it helps to apply strategic management and business strategies to any organization with powerful insights.

IMPORTANCE OF BUSINESS ETHICS

This book makes a deep impact also on business ethics. It is alarming that most strategic and business management books in general do not address the consequences of managerial decisions on our lives and happiness.

This book creates awareness of the engine behind most business decisions: the maximization of stock value, and how deeply this is embedded in strategic and business management decisions. The final chapter shows its consequences in three dimensions of our lives: human development, social order, and the environment.

The current financial crisis unveils a reality: According to McKinsey & Company, global financial assets are four times larger and grow two times faster than global output (gross domestic product—GDP). What happens if such a giant does not have values?

We live in a wonderful world, filled with excellent resources so we all can be happy. As workers, professionals, managers, government officials, politicians, members of communities, parents, friends, and human beings, we must make decisions based on values. Values are what help us to maximize everyone’s happiness, family life, health, a good quality life, our spirituality, and many other aspects.

Last chapter proposes some ways to find a balance between the firms’ quest for stock value, and our personal values.

I hope this book can create some awareness and provoke a debate to help us make a better world.

ORGANIZATION OF THIS BOOK

The following framework presents the way this book is organized:

Part 1 : The Foundations of the Model

The first two chapters provide the foundations of the book; they introduce a new way to understand the strategy of the firm.

Chapter 1 provides an overall view of the subject, showing the difficulties of current strategic management and the benefits that this book introduces.

Chapter 2 introduces the model that structures strategic management and business strategy: the strategy-value model. This chapter provides the metrics that will be the foundation of all the strategies. From there, every strategy produces quantifiable effects. This model has a strong synthesizing power, which will help you to understand a large variety of business phenomena.

From now on all strategic management gets divided into the three dimensions of stock value: capital (connected with resources), growth (connected to innovation), and profits (connected to competition). Whatever decision is made in business, it addresses one of these dimensions. Finally, the chapter shows how all the theories are integrated under one single model and that all existing strategic management theories are contingent on a set of strategic factors.

Part 2 : Stock Value Creation and the Strategyof the Firm

Part 2 is the core of the book: it presents the three dimensions of stock value creation—capital, profits, and growth—linked with their three strategic drivers—resources, market power, and innovativeness.

Managing Capital and Resources Chapters 3 and 4 introduce the first component to create stock value: capital (driven by resources). Chapter 3 analyzes the resources as drivers of capital. It introduces the two types of resources: physical and intangible.

Intellectual capital represents the intangible part of the stock value. Eighty to 90 percent of the stock value of companies such as Microsoft, Intel, and Coca-Cola are based on intellectual capital.

The need to create stock value leads to a new definition of intellectual capital, based not only on intangibles such as satisfaction of customer needs, but also on the need to create market power and innovation.

This leads to the resource view of the firm. Modern successful firms base their success on their ability to outperform the competition, satisfy customer needs, and grow in a sustainable and unique way.

The chapter reformulates the concept of vision and mission under the umbrella of stock value creation. Not just any vision or mission helps create stock value. This is a new view of visions and missions that explains why many firms struggle to create stock value. Many do not realize that they have the wrong vision or mission; this does not help them create stock value. This chapter alerts managers to the inconsistencies of their current visions and missions.

The chapter introduces knowledge management in a practical way. It explains how to manage knowledge by connecting this to the two main topics of this book: the way to create stock value and the strategy of the firm. It presents several methodologies to analyze and develop knowledge based on matrices, mapping, brainstorming, simulations, and analysis. This presents a unique approach and discusses the organizational processes that a firm must implement to develop organizational knowledge.

This knowledge management process is used in further chapters to analyze the environment and to identify strengths, weaknesses, opportunities, and threats using the entire organizational knowledge. This approach is unique in the literature and is valuable for managers, as it details the processes and tools to implement strategic management using the entire organization. It translates the resource view of the firm and industrial organization prescriptions into practical managerial tools.

Chapter 4 focuses on resources strategies. It places resources at the core of strategic management, as recommended by all modern approaches.

The firm now has a set of resources and it needs to analyze the benefits of having them and how to organize them. To do so, the chapter introduces the portfolio models (Boston Consulting Group and General Electric/ McKinsey), showing their inability to analyze the benefits of having diverse resources.

It introduces the economics of alliances model (Reve), corporate strategy (Porter), and transaction costs economics (Williamson). It then presents the different ways to organize the resources and how they impact stock value creation.

Managing Profits and Competition Chapters 5 and 6 focus on the second component of stock value creation: profits (driven by market power).

Chapter 5 focuses on market power as a driver of profits. To do so it analyzes the competitive environment (linked to profits) by first analyzing its attractiveness based on the industrial organization’s concept of market power. It shows how the four competitive scenarios (perfect competition, monopolistic competition, oligopoly, and monopoly) produce different profit margins.

It introduces a new methodology to assess the firm’s strengths and weaknesses, connecting them to the margins of the firm. The use of game theory helps illustrate the dynamic dimension of the strengths and weaknesses and shows a way to introduce the concept of unique inimitable resources. In the competitive game, some competitive moves are based on actions (easily imitated by the competition), and some competitive moves cannot be imitated because they are based on unique inimitable resources.

One critical aspect of this chapter is the introduction of practical tools to develop organizational knowledge; strengths and weaknesses are not elaborated as an ivory-tower intellectualization, but as organizational knowledge. This is unique in the literature.

Chapter 6 focuses on competitive strategies. It presents industrial economics and game theory in a friendly way. Industrial economics provides rationality and critical thinking, but the literature is quite abstract because of its intensive use of advanced mathematics and economic modeling. This chapter makes it fully accessible for the nonspecialist.

It analyzes strategy by strategy, introducing metrics in the strategies by linking them to stock value creation. It also introduces a contingent approach: Competitive and marketing strategies make sense in some situations, but not in others. This provides critical thinking and rationality in decisions that up to this point seemed unclear. The chapter explores each strategy, providing analytical tools to define under what conditions they make sense.

Managing Growth and Innovation Chapters 7 and 8 focus on the third component of stock value creation: growth (driven by innovation). Chapter 7 focuses on innovation (new products, new customers, new markets, etc.) as a driver of growth. It analyzes the environment in order to identify growth potential, based on business opportunities and threats. Changes in regulations, new technologies, and changes in demand produce business opportunities and growth. It provides an outlook of the new economy with its growth potential.

Once again the approach of the chapter is new in the literature, as it proposes an organizational methodology based on knowledge management models in order to develop business opportunities and identify threats.

Chapter 8 focuses on innovation strategies. Innovation strategies came under attack during the 1980s because of the poor results many of them produced. By connecting them to market power, the chapter provides the conceptual framework to understand when they can be successful.

The analysis goes further: Why do some firms grow in a sustainable way? This leads again to the resource view of the firm, showing what resources must be deployed in order to grow. It shows how part of the success of growth strategies relies on their connection with organizational resources.

This chapter has a very powerful new methodology to develop innovation strategies, considering the resources they require. Once again the resource view of the firm is transformed into a practical tool.

The chapter ends by presenting other models as part of the strategy-value model (Miles and Snow typology, the Boston Consulting Group portfolio matrix, the General Electric/McKinsey portfolio matrix), and functional strategies (marketing, human resources, operations, and financial strategies). This simplifies matters for managers, as now they do not need to remember so many models; one is enough.

Part 3 : Making Decisions

Chapter 9 explains how to make decisions, based on the strategies developed in previous chapters, with the goal of stock value creation.

It focuses on strategic planning and control, both the process and the final document.

• The strategy-as-process approach is contingent on a set of factors; in some cases the strategy can be produced at the top of the firm, but in others it is necessary to establish it as an organizational process.

• The strategy-as-plan approach presents the strategic plan streamlined with all aspects discussed in previous chapters, especially in its connection to stock value creation.

The chapter introduces the agency theory as the backbone of the strategic plan. The agency theory has an excellent correlation with the strategy-value model; it explains the relationship between the management of the company (that develops the strategies) and the shareholders (that expect to create stock value). The strategy-value model permits the integration of both views: the strategies proposed by the managers and the stock value creation, as well as the views of Norton and Kaplan’s balanced scorecard and Edvinsson’s intellectual capital.

This chapter has an extraordinary conceptual and practical value, as it produces a perfect integration of the concepts presented in the book. The Baldrige national quality award, Norton’s balanced scorecard, Edvinsson’s intellectual capital model, the business model, business navigator, the operating plan, the control panel, and many others get integrated as part of the strategy-value model. Once again this creates an extraordinary conceptual and practical simplicity of strategic planning and control.

Chapter 10 presents the ethical implications of the need to maximize stock value creation. Most ethical approaches rely on the need to find a balance between the different stakeholders. However, stock value creation requires maximizing market power, growth, and resources, which put the shareholders in a privileged position, creating several conflicts with the other stakeholders.

The chapter shows the negative consequences of such stock value maximization and the initiatives of the society to limit them.

This chapter provides a very powerful wake-up call for managers, who normally do not assess the ethical consequence of their strategies. There is a surprising void in the strategic management literature related to the ethical consequences of strategic actions, and this book expects to create an important change into the right direction. The chapter specifically discusses the current global financial crisis, showing how global financial assets are four times larger and grow two times faster than global output (GDP), which reveals the tremendous risk for the economic system if such power is not managed with real values.

SUGGESTIONS FOR READING THIS BOOK

If you have only a little time, start by reading the “Integrating Examples” section at the ends of the chapters. They will show you the benefits of the book, its critical thinking approach. Then read the “Takeaways” at the end of each chapter, a fast way to have a taste of the book.

You will see throughout the book that each chapter references existing literature on the topic. This is very important, because it shows that the new knowledge that this book proposes expands upon existing knowledge. This lends reliability and trust to the entire book.

I hope you enjoy it.

—JUAN PABLO STEGMANN March 2009

Acknowledgments

Creating this book has been a long journey, walked with excellent friends. I would like to thank every one of them, for their wisdom, values, fellowship, and support.

Thanks to Bill Falloon and Meg Freeborn, the editors at Wiley, for their support, trust, and extraordinary contributions to this book.

Many excellent friends at the University of North Florida were central in transforming some experiences and ideas into the dissertation that preceded the book: very special thanks to Jeff Steagall, Gene Baker, Earle Traynham, Jay Coleman, Cheryl Van Deusen, and Andres Gallo who were the backbone of my transformation into a full U.S. researcher; Adel el-Ansary, Reza Vaghevy helped me structuring the book; Steve Paulson taught me his business ethics wisdom. Thanks also to the several cohorts of students for their continuous source of research and experimentation.

Alojzy Nowak, University of Warsaw, Poland, my supervisor in my second dissertation, taught me how to research in the complex interdisciplinary waters of economics, finance, and strategic management.

Ruth Tuplin, Journal of Interdisciplinary Economics, U.K., who criticized and published some of my papers experimenting with the new interdisciplinary ideas of this book.

Leif Edvinsson, the global giant and pioneer in intellectual capital, spent days with me in Stockholm and Sao Paulo with extraordinary wisdom and generosity.

Chuck Newman, University of Maryland University College, allowed me to introduce this new view of strategic management with my MBA students.

Maria Decsy and Jospeh Bachand, Sacred Heart University, taught how to discern the real values that must guide our ethical decisions.

With Carlos Garaventa, Alejandro Llorente, and Carlos Hoevel, we developed an interdisciplinary business ethics—strategic management seminar, for our MBA students at the Universidad Catolica Argentina.

Ignacio Sanchez Chiappe and Victor Herrero, from the Institute for Business Excellence of the Universidad Austral, Argentina, helped me to teach my first interdisciplinary strategic management seminar. Alejandro Clausse criticized and helped me to structure my first doctoral dissertation.

Ralf Boscheck, from IMD, Switzerland introduced me into the interdisciplinary strategic management—economics field.

Thanks to many excellent friends from Telefonica: Carlos Falco, Eduardo Caride, Nelida Vazquez, Miguel Angel Ollora, and many others who supported me and allowed me to use Telefonica as a laboratory of these new ideas.

Juan Pablo Nicolini (University of Chicago) and Ernesto Schargrodsky (Harvard University) who introduced me into industrial economics and game theory, in experimental workshops at Telefonica.

Also, as part of the Telefonica experience, I was privileged to interact with state of the art consulting firms of the caliber of McKinsey, Boston Consulting, Andersen Consulting, A.T. Kearney, and leading firms such as IBM, EDS, Cisco, Siemens, Ericsson, and many others, which helped me to learn from the best.

Thanks to Juan Carlos Torviso (Stanford University) for his excellent financial simulation which helped me and thousands of my students to experiment with the ideas of this book.

Thanks finally to San Pablo High School, Maria, Benito and Luis Maria Etcheverry Boneo, for teaching me values, wisdom, leadership, and for their struggle to build a better world, for their constant support, and for making the impossible come true.

PART One

The Foundations of the Model

Part 1 introduces and explains the strategy-value model, which is the core of this book. Chapter 1 presents an introduction that shows the limitations of current strategic management and the benefits of this book. Chapter 2 develops the strategy-value model, which is this book’s backbone. It shows the model’s two sides: a firm’s stock value creation and how strategic management helps to create stock value. Further chapters build on this one; each strategy is integrated with a very simple model like a Lego.

REFLECTIONS: WHAT IS VALUABLEABOUT PART 1 ?

For many years I worked in areas of a company that required intense use of strategic management, and I followed its traditional prescriptions. In the past 10 years I was exposed to revolutionaries such as McKinsey & Company, Boston Consulting Group (BCG), and Harvard University and University of Chicago faculty, who introduced me to a new approach to strategic management, strongly connected to finance and economics.

I started to realize how confusing, contradictory, vague, and misleading the traditional approach to strategic management is. I experimented with new ideas for several years with my MBA and undergraduate students and found amazing results.

SUGGESTIONS FOR READING PART 1

If you have not done so, I strongly recommend that you read the Preface, which explains the rationale and need for this book, and (I hope) motivates and intrigues you enough to read the rest of the book.

The integrating example in Chapter 2 is very valuable, because it is not connected with a business firm, but with a government agency. Many of my MBA students work for the government or armed forces, and they benefit from these ideas as much as business managers do.

Chapter 2 has some pearls such as the integration of all existing theories and an enlightening time line that shows you how the strategy-value model can help you understand all strategic management approaches in connection with the environments that triggered them.

CHAPTER 1

Introduction to Strategic Value Management

Strategic management has produced an amazing number of theories and models in recent decades. However, so far it has not succeeded in producing a good integrative theory or model that can synthesize all the existing ones. This is especially serious considering that strategic management is the capstone, the integrator of all business disciplines: If strategic management is not integrated, then all business disciplines are in trouble. This intellectual failure produces large impacts on the real world, as practitioners lack a simple way to analyze environments and make decisions considering all required aspects.

This book presents the strategy-value model, which integrates all existing strategic management and business strategy theories and models. This integration intends to put an end to the high level of atomization of strategic management, because most existing theories and models can be reframed within the strategy-value model.

The strategy-value model links strategies with their ability to create stock value, showing how different theories and models proposed by strategic management have different impacts in terms of stock value creation.

Connecting all strategies into the strategy-value model creates a common language that is critical for managers who need to interact with different stakeholders.

The model produces a simplification of the disciplines, eliminates confrontations, shows that several different theories are complementary, and demonstrates that the different theories are contingent on other factors. Incorporating metrics introduces accountability into strategic management and provides a new and powerful critical way of thinking.

The goal of the strategy-value model is to change strategic management and business strategy, to create a new way to examine them, and to integrate most of the existing theory under a new model. Its ambition is to create a new standard for the business strategy disciplines; and such a standard applies even to nonbusiness organizations.

But furthermore, this integration of thinking aims to create awareness of the full effects of managerial decisions.

STRATEGIC MANAGEMENT’S HISTORY:AN ATOMIZED DISCIPLINE

Strategy is a very old discipline: Sun Tzu, Vegetius, Alexander the Great, Maurice Comte de Saxe, Frederick the Great, and Napoleon testify to that. However, strategic management as a formal discipline started to evolve only in the twentieth century. Alfred Sloan, CEO of General Motors, made the first contribution to strategic management while considering Ford Motor Company’s strengths and weaknesses.

During the 1930s engineers gave strategic management a very mechanistic view, focusing attention on the gaining of efficiency and cost reduction. The development of the learning curve concept in the 1920s, which was further improved by the Boston Consulting Group (BCG) in the 1970s, produced important cost reductions based on accumulated experience. Frederick Taylor introduced scientific management, which improved productivity. The use of statistics, operations research, and linear programming fostered rationality and cost improvements. Economists such as Joseph Schumpeter put some emphasis on growth, and Joseph Bain and Joan Robinson emphasized the impact of imperfect competition on the profitability of the firm.

During the 1940s the human side became a main focus, with the Hawthorne study, Elton Mayo, and Mary Parker Follett, among others, incorporating psychology and sociology in organizations. Peter Drucker made critical contributions by showing how the human side impacts the markets and competition.

During the 1950s the idea that everything could be rationalized and standardized led to a rather analytical approach. As de Wit and Meyer (2004) describe, the strategic management process was thoroughly analyzed in further developments by Ansoff’s (1965) analysis of different typologies; strategy as plan (Hax 1990); strategy as pattern (Mintzberg 1990; Andrews 1980; Quinn 1978); the balanced scorecard (Kaplan and Norton 1996); and intellectual capital (Edvinsson 1998).

Ghemawat (2002) outlined an interesting history of competitive and business strategy. According to him, during the boom produced by the reconstruction of Europe and Asia after World War II, competition was not a central concern. But as soon as economies were fixed, competition started to arise and a new generation of strategists put emphasis on how to deal with it. The concepts of purpose, goals, and the SWOT matrix—that is, analyzing a strategic environment’s strengths, weaknesses, opportunities, and threats—introduced by Andrews in 1971 showed the need for commitment to outperform competitors.

During the 1960s the focus of strategic management switched to the consumer market. Levitt (1960) promoted growth based on new products and diversification. Ansoff (1965) approached this differently, choosing to focus on what the companies knew best by concentrating on the products of the companies, making their competencies part of the companies’ missions. Strategy consultants such as BCG and McKinsey & Company strove to apply logic and rationality to the widespread diversification. They introduced portfolio models as tools to guide the diversification process.

During the 1970s an interesting turnaround started to evolve. The standardization, mechanization, and cost reduction trend of the prior decades started to show its weaknesses. As a consequence of its widespread use, competitive forces began to squeeze profit margins. In addition, expensive customer and employee satisfaction initiatives mushroomed, squeezing the margins even more.

During the 1980s economists came to the rescue. Michael Porter (1980), synthesizing the pioneering work of economists such as Bain and industrial organization academics, proposed an explanation for the falling profitability of firms through the imperfect competition model: Perfect competition was responsible for low margins, whereas imperfect competition was the cornerstone to success. A firm’s success depends on the level of industry attractiveness that is the result of imperfect competition. Porter’s five forces framework allowed analysis of the degree of perfect or imperfect competition of industries.

Porter (1985) introduced a second concept to explain a firm’s success through the relative competitive position of each firm within each industry. Using Porter’s value chain, firms can choose between a low-cost strategy that may lead to perfect competition and a differentiation strategy that fosters imperfect competition, helping firms increase their margins. Even though Porter’s differentiation efforts are expensive, if properly and consistently followed they can produce results, though not necessarily long-lasting results. This means constant repositioning is necessary to stay ahead of the competition. The cost of such a strategy may have an impact on the profit margins of the firm.

A first solution to the low margins produced by such strategies was the proposal to modify the external environment. In order to reduce the intensity of competition, firms resorted to consolidation of their industries by way of mergers and acquisitions. Although this competitive strategy became widespread, it was expensive and risky. As an alternative strategy, firms resorted to alliances, developing links with other firms. Reve (1990) defended the economic benefits of integration. However, Coase (1937, 1998) and Williamson (1975) analyzed the costs and risks of such alliances in their transaction costs economics and found them to be less beneficial.

A second solution was to gain a better competitive position by developing internal resources. The resource view of the firm (Barney and Ouchi 1986; Wernerfelt 1984) became popular, as well as its derivatives: core competences (Hamel and Prahalad 1996), absorptive capacities (Cohen and Levinthal 1990), time-based strategies (Stalk 1992), and intellectual capital (Edvinsson 1998). However, most firms do not have the ability to develop unique inimitable resources; consequently, they end up in perfect or monopolistic competition with negligible margins.

In parallel with that industrial organization, economists such as Tirole (1998), Shy (1995), Basu (1993), Besanko, Dranove, and Shanley (2000), Wilson (1993), Dixit and Nalebuff (1993), Dixit and Skeath (1999), Pindyck and Rubinfeld (1995), and Martin (1999) introduced econometric modeling based on game theory: It is not just actions or resources that matter, but also the reactions of the competitors, analyzed within economic frameworks. In other words, management has been very concerned about making customers and employees happy, but now is the time to also be profitable.

At this point the reader may feel very confused and notice that there is not a single cure-all proposal; they all have pros and cons. The history of strategic management mentioned in this book only scratches the surface; the list of theories is much longer. A knowledgeable strategic management practitioner should be familiar with 160 authors considered critical by academia.

PROBLEMS OF STRATEGIC MANAGEMENT TODAY

This historical view shows the existence of serious problems.

Strategic management today is complex and confusing for newcomers. Such variety and diversity are difficult to understand. Strategic management is a mosaic of different theories, all plagued with pros and cons, which in some cases overlap and in others seem divorced from one another. Some theories are in clear disagreement with each other, as is the case of the debate between industrial organization (IO) academics, who believe that a firm’s profitability is the result of industry factors, and the resource view of the firm (RVF) academics, who believe that a firm’s profitability depends on internal factors. All the strategies seem valid because they make some contribution to the understanding of the nature of a firm. Some strategists wrongly conclude that the more strategies they use, the better. One typical error that we often observe is the case of managers who develop their projects incorporating as many strategic actions as they can as a proof of how much they know, which is strategic suicide that leads firms to destroy stock value and waste resources irrationally.

The financial consequences of each strategic recommendation remain unclear. For example, most people ignore that low-cost strategies normally lead to perfect competition, which destroys stock value; or ignore that differentiation strategies based on actions have a very limited life, because competitors can imitate such actions and soon start destroying stock value; or ignore that innovation strategies destroy stock value if they are not protected by some degree of market power. And the list of such ignorance of the financial consequences of strategies actions continues.

Stakeholders such as investors, shareholders, bankers, and financial controllers, who are used to a high degree of financial rationality and who quantify the impact of each decision, feel hopeless faced with the ambiguity of strategic management. Ignoring the financial consequences of a strategy is like taking some medicine and not knowing its side effects. Managers and practitioners distrust what seems to be a discipline of intellectuals that is conceptual and divorced from financial reality. They prefer to resort to their intuition and experience. The typical criticism is that strategic management is good at explaining success after it happens, but it promises results that most of the time do not materialize.

Disciplines such as marketing, management, finance, and economics seem to have a hard time understanding each other because they lack a single language. Specialization has a cost, as it generates a “tower of Babel” syndrome. Strategic management may have some good dialogue with marketing and management, but has very poor communication with finance and economics.

THE STRATEGY-VALUE MODEL

What is the solution to these problems? How can these theories be simplified and integrated? How can they be explained from a single point of view, eliminating high atomization and making the subject more simple, clear, and intuitive so that anyone, specialist or not, can understand strategic management?

How can an analytical model be introduced with a mathematical and rational dimension? How can it connect strategic management prescriptions with their financial consequences?

Most managers know that firms need to create value for the shareholders; how do the different strategies and theories mentioned earlier create that value? How can a logical approach help cultivate critical thinking, providing anyone with the ability to question the validity of strategic management prescriptions? This book introduces the strategy-value model, which provides a solution to these problems.

Conceptual Benefits of the Strategy - Value Model

The strategy-value model is based on metrics: finance, economics, stock value, time, market power, and organizational knowledge.

The incorporation of metrics impacts the theory, producing several conceptual benefits: It shows the financial impact of strategic decisions and the costs that strategic actions involve; it illustrates the dynamic implications of strategy; and its actions produce reactions. The strategist must consider the economic impacts of both theory and practice; metrics introduce rationality and critical thinking.

Specifically, one of the metrics is stock value creation. It has very powerful benefits. It allows a firm to see the entire strategy as it would be viewed through the eyes of the shareholders. It separates the strategy of the firm into three dimensions of stock value creation: profits (connected to competition), sales growth (connected with innovation), and capital (connected with resources). This splits strategic management into three worlds: competition, growth, and resources, producing a powerful simplification of the business disciplines.

The impact of these aspects on the business disciplines is dramatic. It enables quantification of conceptual disciplines, fosters rationality, and promotes critical thinking. It solves the atomization that the specialization produces. It simplifies and integrates all business disciplines, permitting an explanation of complex concepts in simple terms. It introduces a powerful contingent approach: The strategies must be applied through contingent factors.

It also affects business-related disciplines, especially business ethics and international business, as a result of the central role of stock value creation for business firms.

In addition to the metrics, the strategy-value model incorporates tools and processes. This way the entire organization can participate in the strategic management process. Environmental analysis, strategy development, planning, and control are performed by the entire organization.

Practical Benefits of the Stategy- Value Model

The incorporation of metrics, integration of the disciplines, simplification, rationalization, incorporation of critical thinking, tools, and processes have a dramatic impact on the users of such theories: the stakeholders and the organization. The benefit of this approach is that it helps development of organizational knowledge as a unique resource. It allows the organization to incorporate complex theories using simple models and processes and foster a learning organization.

These factors facilitate communication, which promotes consistency and helps to integrate stakeholders. The different areas of a company can better understand each other as well as communicate with shareholders and other organizations. Better communication and integration help to develop a knowledge organization and unique resources, which in turn foster competitive advantages and innovation. They help to consolidate all the knowledge that the organization receives or produces.

The strategy-value model incorporates the most advanced strategic management thinking: industrial organization (IO), resource view of the firm (RVF), economic value added (EVA), intellectual capital, knowledge management, transaction costs economics, and agency theory, among others.

INTEGRATING EXAMPLES

The goal of the following examples is to show the critical thinking power of linking strategic management to stock value. This is one of the backbones of this book. It is easy to assess the simple but powerful analysis that they encompass. Further chapters present similar examples. I used some of these examples in the debates in my strategic management courses with MBA students at the University of Maryland University College.

Figure 1.1 Evolution of the Stock Value: Exxon Mobil versus Dow Jones Industrial Average, S&P 500 Index, and NASDAQ Composite Index

Source: Yahoo! Reproduced with permission of Yahoo! Inc.® 2008 by Yahoo! Inc. YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.

Mini Example: Exxon Mobil Corporation

Exxon Mobil Corporation is the largest energy company in the world in terms of market capitalization. Figure 1.1 shows how Exxon Mobil’s stock value has outperformed the Dow Jones Industrial Average, the S&P 500 index, and the NASDAQ Composite index.

The evolution of the stock value depends on three variables: profits, sales growth, and capital. Let’s examine each one of them.

Profits Driven by Market PowerTable 1.1 shows Exxon Mobil profits from previous years.

Such excellent performance is the result of the very high price of a barrel of oil during the past few years especially. This is a consequence of the oligopoly operated by the Organization of Petroleum Exporting Countries (OPEC) cartel. Therefore a collusive oligopoly strategy explains why such a good financial performance is achieved.

Growth Driven by InnovationTable 1.2 shows previous years’ revenue growth.

Sales growth has been quite erratic, high during some years fueled by the increase in the price of oil produced by the OPEC cartel, and probably external factors such the growth of China, India, and other emerging countries, along with the pressure of speculative funds. It is not the result of innovation.

TABLE 1.1 Profits: Exxon Mobil Corporation

Source: Morningstar, Inc. © 2009 Morningstar, Inc. All Rights Reserved.

Capital Driven by Resources According to Morningstar the average price/ book value for 1999-2006 (a proxy of its intellectual capital) was 3.45× for Exxon versus 3.41× for S&P 500. The oil industry does not have unique inimitable resources that may justify such high profits, as the equipment oil companies use is supplied by the same manufacturers and therefore their products can be characterized as a commodity, a standard with low margins. They also do not have unique resources that allow them to innovate and grow.

TABLE 1.2 Sales Growth: Exxon Mobil Corporation

Source: Morningstar, Inc. © 2009 Morningstar, Inc. All Rights Reserved.

Their only resource is the ability to collude (oligopolistic behavior) of the oil-producing countries. The future of such evolution therefore depends on the ability of these countries to continue with their oligopoly.

Conclusions

This simple example shows the following:

• To create stock value, Exxon Mobil needs to have profits and eventually to grow. Therefore, in our further analyses we will always show the evolution of the stock and its components: profits and sales growth.

To have profits, Exxon needs to have market power, driven by unique resources, in this case, the ability of the oil producers to behave as an oligopoly, keeping oil prices high. This in a very simple way is the key to Exxon’s success: profits driven by market power, which is based on a unique resource, the ability of oil producers to collude.

• To have positive sales growth, Exxon needs to have the ability to innovate (an internal resource), which does not seem to be the case. The lack of the resource explains the lack of innovativeness (a strategy), which explains Exxon’s poor sales growth.

A FINAL WORD

The best way to realize the potential of the strategy-value model is by using it. I have used it in the corporate world and with business students during classes at both MBA and undergraduate levels.

My business students must choose a firm from financial web sites such as Reuters, the Wall Street Journal, Morningstar, or Yahoo! Finance. They must assess the firm’s EVA and growth and locate each firm in the strategy-value model. This is the first surprise, as systematically they reconfirm the connection between the EVA and the degree of competition (perfect competition, monopolistic competition, oligopoly, or monopoly).

After that they must develop their strategies, and this leads to very rich discussions. They are often startled by the coherence of the model. The students understand complex, strategic management concepts and implement them easily and quickly.

TAKEAWAYS

• Chapter 1 presents a history of strategic management showing how its approach switched from an engineering focus on efficiency, productivity, standardization, and costs (1930s), to a sociological and psychological concern for the personnel and their motivations (1940s), to a rational and analytical view of strategy (1950s), to a focus on the consumer markets and customer satisfaction (1960s), to growth by diversification (1970s), to a focus on competition (1980s), to a concern on profits, imperfect competition, and cooperation (1990s), to the need to develop unique resources basing the analysis on econometric models that incorporate game theory in order to make firms profitable (2000s).

• The chapter stresses the difficulties that the atomization and different views of theories, some in clear disagreement, produce in the practitioner.

• The chapter then presents the benefits of the approach proposed by this book, both conceptual and practical.

• The strategy-value model impacts the theory: It introduces metrics and processes that help to integrate the disciplines. The model allows visualization of the financial impact of strategic decisions, introducing a dynamic view, rationality, and critical thinking.

• But it also impacts its implementation on the real world. The simplification of the theory helps to simplify its implementation. This fosters a common language that allows integration of all business areas and promotes the creation of a learning organization.

CHAPTER 2

The Strategy-Value Model

To present an integrated view of strategic management requires examination of the strategy-value model. This chapter introduces the financial part of the strategy-value model beginning with an explanation of the financial aspects of the economic value added (EVA) equation.

I was first exposed to the EVA during the 1990s, when McKinsey & Company popularized its use in strategic management. McKinsey based its business recommendations on the concepts introduced in two books: TheQuest for Value (Stewart 1990) and Valuation (Copeland, Koller, and Murrin 2000). I had the opportunity to see McKinsey’s recommendations in action in a group of companies where I worked. According to McKinsey, in order to create stock value, all managerial decisions had to be scanned and filtered by the EVA model. The EVA measures the profitability of a firm, minus the profitability of similar firms, incorporating a competitive or strategic dimension.

The first part of this chapter introduces the EVA equation and explains its components: profits, growth, and capital.

The EVA has amazing wisdom: the concepts of operating capital and market value added (MVA) measure the tangible and intangible resources, providing metrics and integrating modern theories such as the resource view of the firm and the intellectual capital model; the EVA measures competitiveness and market power, providing metrics and integrating competitive strategies, industrial economics, and game theory; the increase in revenues is an easy indicator for innovation. This chapter shows how enlightening the EVA is to bridge stock value creation and strategic management.