The CEO, Strategy, and Shareholder Value E-Book

Peter Kontes

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 435

Veröffentlichungsjahr: 2010

Beschreibung

A new look at delivering effective shareholder value from Peter Kontes, a true leader in the world of strategic management

In The CEO, Strategy, and Shareholder Value, Peter Kontes, a true leader in the strategic management field, outlines the key to creating and growing shareholder value. The proper focus, contends Kontes, is in using quantitative measurements as guideposts on the path to success. The book first outlines the basics of the argument Kontes is making. He then briefly covers the five most important areas for business leaders, followed by a more detailed look at each of the focus areas. Finally, Kontes provides readers with a road map to implementing his suggestions.

• Presents an argument for a more holistic approach to delivering shareholder value
• Defines and then elaborates a new approach to strategic management
• Written by a true thought leader in the field, regularly featured in publications such as Fortune and BusinessWeek

Never before have business leaders experienced the kind of tough decisions they are being forced to make as the economy undergoes incredibly rapid shifts. The common sense guide to successful leadership, The CEO, Strategy, and Shareholder Value delivers exactly the kind of solid, dynamic advice that will keep your organization moving on an upward path.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

SCOPE

TIMING

Acknowledgments

Introduction

CHAPTER ONE - Foundations

THE PURPOSE OF STRATEGY

THE ROLE OF THE CEO

FIVE CHOICES THAT SHAPE STRATEGY

A STRATEGIC MANAGEMENT FRAMEWORK

CHAPTER TWO - The Economics of Strategic Management

ECONOMIC PROFIT

ECONOMIC PROFIT AND STRATEGY VALUATION

THE FINANCIAL DRIVERS OF ECONOMIC PROFIT AND EQUITY VALUE

THE STRATEGIC DRIVERS OF ECONOMIC PROFIT AND EQUITY VALUE

DEALING WITH MYTHOLOGY

CHAPTER SUMMARY

CHAPTER THREE - Choosing the Right Performance Objectives

ASPIRATIONS

BUSINESS UNIT OBJECTIVES

COMPANY OBJECTIVES

THE TYRANNY OF TOP-DOWN TARGETS

CHAPTER SUMMARY

CHAPTER FOUR - Making the Right Participation Choices

GENERAL CONSIDERATIONS

ASSESSING PARTICIPATION OPPORTUNITIES

OFFERING CHOICES

GEOGRAPHIC MARKET CHOICES

CUSTOMER SEGMENT CHOICES

CORPORATE PARTICIPATION CHOICES

CHAPTER SUMMARY

CHAPTER FIVE - Making the Right Positioning Choices

POSITIONING CHOICES AND COMPETITIVE ADVANTAGE

BUSINESS MODELS

EXECUTION CAPABILITIES

CORPORATE POSITIONING CHOICES

CHAPTER SUMMARY

CHAPTER SIX - Making the Right Organizational Choices

THE INSTITUTIONAL IMPERATIVE

GOVERNANCE PRACTICES

EXECUTIVE PROCESSES

EXECUTIVE CAPABILITIES

CHAPTER SUMMARY

CHAPTER SEVEN - Making the Right Risk Management Choices

CLARIFYING “RISK”

SETTING RISK THRESHOLDS

PORTFOLIO CHOICES

BALANCE SHEET CHOICES

ETHICAL CHOICES

CHAPTER SUMMARY

CHAPTER EIGHT - Making It Work

CONDITIONS CONDUCIVE TO SUCCESS

PRIORITIES FOR CHANGE

THE PRIZE

CHAPTER SUMMARY

APPENDIX ONE - Economic Profit Growth, Earnings Growth, and Total Shareholder Returns

APPENDIX TWO - Economic Profit and Equity Value

APPENDIX THREE - Economic Profit and Equity Value: Illustration

APPENDIX FOUR - Reconsidering the Corporate Center

APPENDIX FIVE - CEO Pay Practices: An Alternative

Notes

Index

Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Kontes, Peter W.

The CEO, strategy, and shareholder value: making the choices that maximize company performance/Peter W. Kontes. p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-59630-2 (cloth); ISBN 978-0-470-87590-2 (ebk); ISBN 978-0-470-87591-9 (ebk); ISBN 978-0-470-87592-6 (ebk)

1. Strategic planning. 2. Organizational effectiveness. 3. Corporations—Valuation. I. Title.

HD30.28.K6654 2010

658.4’ 012-dc22

2010009569

To my sons, Chris and Alex, who tolerate with reasonable grace the distracted curiosity and tedious work habits of their father, and without whom there could never be enough joy to offset the more mundane demands of life.

Preface

THE DECISION TO WRITE this book was stimulated by a conversation with the CEO of one of the world’s most admired companies in which he expressed his concern that “we are not very good at strategic planning.” This statement struck me as remarkable because his company is the largest and, by nearly any measure, the most successful in its industry. The company has a history of formulating and executing very profitable strategies, with a record of tremendous innovation and bold competitive initiatives, and the company’s shareholders have enjoyed spectacular increases in the value of their investment. Thus, even if it were true in a formal sense that the company was “not very good at strategic planning,” that did not seem to have been much of a handicap.

The CEO understood this. What he was saying, I think, was that after delivering exceptional results for several decades, the company’s embedded beliefs and practices were beginning to show signs of diminishing effectiveness. It was time to begin challenging some of the old precepts, to consider new ways of doing business, and to bring fresh thinking into the organization—all without destroying what was still good and effective from the old paradigm. This would be a tremendous task for any company, and his sense of urgency was no doubt justified. But this was not a task that could be addressed through the strategic planning process, which is at best a useful analytical exercise. The real task was to determine whether and how the company needed to change its approach to strategic management—to reexamine how the biggest choices affecting the company’s future performance would need to be made.

This book presents a strategic management framework that has been developed through my consulting experience and my teaching at the Yale School of Management. It contains concepts and ideas that are new and some that are well known. My goal is to show how these ideas fit together into a pragmatic framework that can help CEOs lead their companies to significantly higher levels of performance.

A few words on the scope and timing of the book follow.

SCOPE

As with any book on management, there is a balance to be struck between the breadth and depth with which subjects are treated. The framework I wanted to present here is necessarily broad, focusing much more on the “what” than on the “how” of strategic management. It is about the responsibilities of the CEO and business unit leaders, defining the most important choices they are responsible for making, elaborating on those choices, and laying out general recommendations for addressing them. Some specifics pertaining to measurement and analytical techniques are included in the endnotes and appendices, but I have deliberately kept these to a minimum to avoid digressing into long and, for most readers, mind-numbing explications of various finance, accounting, and strategic methodologies.

The book is written from the perspective of a large, public, multibusiness company, with almost all examples and cases drawn from U.S. and European companies many readers will recognize. This perspective simply reflects my own experience in management consulting, as nearly all of my clients have been companies fitting this profile. However, I believe the principles and practices put forward here are equally valid for smaller companies and private companies, though their implementation might have to be modified to suit a more entrepreneurial environment.

TIMING

The book was written during 2009 and 2010, tumultuous times for the U.S. and world economies. Many companies have, of necessity, been focusing on their immediate survival and shorter-term liquidity issues. Reducing head counts, rationalizing product portfolios, consolidating production facilities, selling assets, deferring investments, and finding financing have been top priorities. Also during this time, at least in the United States, there has been massive government intervention in many of our most important industries including housing, banking, insurance, health care, automobiles, and energy, resulting in what may be permanent but as yet not fully predictable changes to the economics of these and related sectors.

So this was perhaps not the best time to be writing about long-term strategic management.

One very practical problem in writing a book during this time has been the rapidly changing situation at many companies I had intended to use as case examples. Some, like the Saturn division of General Motors, and as a practical matter General Motors itself, either ceased to exist or were so completely changed as to no longer serve my original purpose. Others, like the NBC/ Universal unit of General Electric, became involved in ownership changes. There were many of these moving targets to contend with, and some no doubt will have changed yet again by the time the book is published and read. I have tried to select cases that will still resonate with readers in the coming years, but recognize that some may fade from relevancy sooner than I hoped.

In early 2010, the question remains as to whether CEOs are ready to turn their energies back to the longer-term strategic choices about which this book has been written, and on that score I am optimistic. As bad as the Great Recession has been, there are already signs that businesses are beginning to stabilize and start growing again. So long as the smothering and wasteful influences of state control can be minimized, the world’s economies will resume their upward path of increasing wealth for all people. With that happy future in mind, I hope this book can play a role in improving the strategic management practices at many companies.

Acknowledgments

OVER A CAREER OF advising several dozen chief executives, I find each has added to my own knowledge of the special demands of that role and the ways in which CEOs can, for better or worse, affect the performance of their companies. Two giants who deserve special mention are Roberto Goizueta (The Coca-Cola Company, 1981–1997) and Sir Brian Pitman (Lloyds TSB, 1983–1997), each of whom led his company to perform at levels seldom matched among large public corporations. Roberto was an early adopter of some of the basic tenets described in this book, and he showed as much as any CEO how powerful these ideas can be in revitalizing an organization, raising it from modest to exemplary performance. Brian Pitman was also an early adopter in the UK and Europe, showing the way for many other companies through the spectacular rise of Lloyds TSB from a second-tier UK bank to one of the most valuable financial institutions in the world. Sadly, neither of these great leaders is still with us, but perhaps a small part of their legacies can be found in these pages.

Among the many colleagues who have influenced my thinking over the years, the late Dr. William Alberts stands apart for the enormous intellectual contributions he made to his two beloved institutions, the University of Washington and Marakon Associates. Bill, more than anyone, started me on the journey that led to writing this book. I also wish to acknowledge Deans Sharon Oster and Stan Garstka of the Yale School of Management for allowing me the time off to write, and professors Rick Antle, Jake Thomas, and Nick Barberis, who graciously responded to some of my decidedly unscholarly questions.

Special thanks are due to my three “readers,” Andy Bryant, David Coulter, and Peter Mulford, who did me the great favor of providing their reactions and suggestions to the late stage drafts. They were encouraging, as I hoped they would be, and challenging, as I knew they would be. My gratitude goes also to David Pugh of John Wiley & Sons, who was most helpful in improving the clarity and flow of ideas throughout the book.

Other friends and colleagues who made important contributions and deserve recognition are Alan Hamilton, Michael Mankins, James Mossman, and Greg Rotz.

I was fortunate to be joined in this effort by three associates without whom it would have been impossible to complete the job. Sarah Gross and Noel Bottjer were my resourceful researchers, overcoming fickle databases and a sometimes fickle author to carry out the necessary searches and analyses. My longtime assistant Mary Jo Amato made sure I had the uninterrupted time I needed to write, produced many of the graphics, and generally would not let me off the hook until the book was done. To all three, my deepest thanks.

Finally, the responsibility for any errors or omissions rests with the author.

Introduction

MANAGEMENT HAS A DUTY to produce goods and services with real and growing value for both customers and shareholders. Companies that provide customer value without earning adequate returns for shareholders do not last long. Or, like General Motors, they simply bump along in corporate intensive care awaiting an ignominious takeover by a competitor or a government. Even shorter life expectancies await companies that try to fool investors into thinking they are providing customer value when they really are not, becoming the failures we know as Enron or the hundreds of now defunct “dot-coms” from the late 1990s.

All great companies focus intently on their customers’ needs and work constantly to add more customer value to their offer, as well as more customers who value their offer. Customer feedback, in the form of changing market share, changing prices, or requirements for new or different product attributes, is constant, challenging all competitors to adjust their strategies in ways that, at a minimum, can sustain good revenue growth year in and year out.

But there are myriad ways that companies can drive revenue growth, and not all are equal: Some create a great deal of shareholder value, some result in adequate but not exceptional increases in shareholder value, and some, unfortunately, actually destroy shareholder value. If increasing customer satisfaction and revenue growth were the sole objectives of business, formulating at least adequate strategies would be relatively easy. It is the duty to increase value for both customers and shareholders that makes formulating great strategies interesting, and hard.

Much has been written about accounting and financial market metrics that management should employ when evaluating investments and strategic options. Most of this literature is technical, tedious, and extremely difficult to relate to high-level strategic decision making. This book is about management, not measurement, but a solid economic underpinning is essential to successful strategic thinking and action. When it comes to financial metrics, choices are not without controversy, including the three that will be mentioned most frequently: economic profit, equity value, and total shareholder returns.

EXHIBIT I.1 Economic Profit Illustrated

Source: Datastream.

The General Electric Company (2007)Earnings$22.5 billionEquity$112.3 billionCost of equity× 10%Capital charge–$11.2 billionECONOMIC PROFIT$11.3 billion

The concept of economic profit is so central to the framework proposed here that it deserves special mention at the outset. Most executives have had some experience with economic profit, which is simply a measure of earnings minus a charge for the equity capital employed to generate that income. A simple calculation of economic profit is illustrated in Exhibit I.1.

The significance of economic profit, its measurement, applications, and its advantages will be developed more fully in Chapter 2. Here, it is not being argued that economic profit is a new idea, or that it is the holy grail of business management, or that it is the best measure of economic benefit in every circumstance, or that its measurement and application cannot be manipulated by executives who are intent on doing so.

The principle argument is that economic profit, both as a single- and a multiperiod measure, offers executives substantial pragmatic advantages for the purposes of generating insights, formulating options, and making strategic decisions. In particular, three recurring themes of this book—the role of the CEO, the choices that shape strategy, and the creation of shareholder value—can each be described in economic profit terms, allowing them to be integrated into the overall strategic management framework, which is described in Chapter 1.

For readers skeptical of the validity or usefulness of economic profit and the other financial measures to which it will be related, try not to put the book down quite yet. As the broader framework unfolds, perhaps their conceptual and practical utility will prove greater than you might imagine, and greater too than any of the alternatives.

CHAPTER ONE

Foundations

THIS BOOK IS ABOUT strategic management, the process by which the chief executive shapes a company’s strategies and drives its financial performance over time. Strategic management is not strategic planning, or strategy formulation, or setting the strategic direction of the company, though these activities may be part of it. It is a broader concept, encompassing all of the CEO’s major decisions and their ultimate impact on the quality of a company’s strategies and the height of its economic success.

Strategic management comprises five high-level choices every CEO must make:

1. Performance objectivechoices—deciding what the company will define as success

2. Participationchoices—deciding where the company will compete to achieve its performance objectives

3. Positioning choices—deciding how the company will compete to achieve its performance objectives

4. Organizationalchoices—deciding how to build an institution that can sustain high performance over time

5. Risk management choices—deciding how the company will protect its performance from catastrophic setbacks

Companies vary enormously in how, and how well, they make these choices. Many factors can influence these choices, including a company’s history, industry practices, its understanding of customers, its competitive situation, its embedded resource allocation processes, the quality of information available to its executives, and the effects of its reward systems. These and others factors combine in unique ways that predispose one company to make certain strategic management choices one way, while other companies facing similar choices tend to make them in entirely different ways.