Ever had that feeling you’ve got a great business, but that it’s not delivering the results it really deserves? More likely than not, you do have a great business – it is simply that all its strengths are not being directed towards the right opportunities, or that those opportunities are not being properly exploited.
This book provides a new and refreshing approach to creating shareholder value and driving share price performance. As a business leader, a key aspect of your modus operandi is the need to get to the bottom line as quickly and efficiently as possible; issues must be prioritized, as must be the resources marshaled to address each of them – even your own time. We have written this book specifically to deliver the key messages on how to drive shareholder value performance in a highly prioritized and non-technical manner; the result is a very practical path for business leaders to travel; one that rapidly creates substantial amounts of shareholder value, and maintains that higher level of value creation performance over time.
Rapidly Create Lots of Shareholder Value
As we shall see, this tall order can be achieved by focusing on, and adopting a new approach to, Market Strategy; a component of business strategy that has the greatest impact on the intrinsic value of a business – by several orders of magnitude. Specifically, we take a long-term, economically-oriented view of Market Strategy; one that is centered on cash-based Profit Pools. With this approach, and with an integration of marketing and finance skills, your organization can rapidly deliver large untapped sources of cash flow.
In fact, we have found this approach is intuitively very appealing to business leaders and shareholders alike. Why, one might wonder, is it not already a part of management doctrine? The answer to this is mostly driven by management’s inability to actually see issues and opportunities:
1. Most businesses have a very poor visibility of their own internal Profit Pools:
a. The right information is simply not available: Most businesses do not have usefully granular views of profitability by customer, channel, offering, or geography. What information does exist is grossly insufficient in granularity and not well integrated with other performance measures.
b. The accounting profession, through Generally Accepted Accounting Principals (“GAAP”), heavily distorts the profit picture: Large non-cash and other adjustments, poor expense allocations and the exclusion of substantive costs basically make GAAP-based measures of profit unusable for management purposes, and in many cases they are actually misleading.
2. Management is not prioritizing opportunities based on the market’s potential to deliver economic returns:
a. Management does not explicitly orient investment decisions around market long-term profit potential.
b. Market profitability information is not readily available: Market profitability is dependent on understanding the existing profitability achieved by competitors, customer economics, and alternative business models that may be adopted to serve customers. This is complicated by the need to obtain future views. Businesses typically expend very little effort to cultivate this forward-looking, economically based view of the market and its opportunities.
Almost all businesses are organized in functional silos—a Finance group, a separate Marketing group, and many other functional groups—a structure that is mostly driven by the skills needs of day-to-day operations and their needs. As a consequence there tends to be few cross-skills in each silo; Finance recruits and trains accountants, while Marketing develops product managers (for the most part). Insightful dissections of markets to understand long-term cash profitability require a blend of both skills; cutting through GAAP is itself a challenge, to say nothing of properly segmenting a market in an actionable and measurable way. Layered on top are other familiar inhibitors; differing motives (GAAP/financial reporting in Finance, revenue in Marketing), differing incentives, turf-stakes and other issues - all driving a separation between Marketing and Finance.
The net result? Businesses are not able to take a long-term, economic view of their market choices and positioning. This one weakness opens the door for savvy competitors to gain superior economic strength – and win in the product markets first, and then in the capital markets. This book points out these high-value issues and opportunities, illustrates them, and outlines how to address them.
We advocate an approach to Market Strategy that stems from an integrated set of tested intellectual capital on the topic. We have packaged it all in a relatively simple and easy to communicate notion; that of inviting business leaders to recognize, focus on and exploit “Profit Pools.”
Long-term Cash Flow and business value is a subject very close to the hearts (and wallets) of C-suite managers, particularly in public companies. As a result, our primary audience is C-suite management and those aspiring to join them. As agents of shareholders, you have the awesome responsibility of maximizing the shareholder value creation capability of the business you have been entrusted with. In short, we outline what the right opportunities are, how to find them, and how to fully leverage their potential.
In serving C-suite managers we also hope to help shareholders, debt-holders and their advocates (such as boards, etc.) gain a greater understanding of business economics and market management, and the interaction between the two. Armed with this, we hope they will be more focused in their demands for information, and become better informed as they provide guidance to C-suite managers.
Policy makers and information industry vendors will also gain from an improved picture of what business leaders and others need from their reporting systems. Policy makers need an improved picture of the information needs of business leaders; State and Federal lawmakers’ understanding of business information needs are currently grounded in GAAP, which as this book reveals, is tremendously difficult to effectively use as a basis for business decisions. Information vendors (particularly ERP and business process software providers) also need greater insight into the specific information needs of C-level managers, so they can enhance the utility (and attractiveness) of their offering.
Other professionals (accountants, consultants, academics, etc.) will also get an improved picture of the economic and other issues involved in Market Strategy, and what business leaders need from their reporting systems (and they also need to understand the limitations and shortcomings of accounting/information systems they oversee and utilize). As a result they will also be better positioned to advise clients on business issues and information systems.
The Path We’ll Take You On …
In recognition of your need to rapidly get to the bottom line, we have organized this work to efficiently deliver highly usable management notions and practical steps.
Part One sets out the premise; that a Profit Pool driven Market Strategy provides leaders in most businesses with a short cut to rapidly create shareholder value – and to sustain higher levels of value creation over time. Chapter 1 sets out the basics; briefly addressing what the various kinds of business value are, and outlining the dominating impact of Market Strategy on value. Chapter 2 introduces Profit Pools, examines them and their characteristics at a high level, and shows how they can be applied to Market Strategy with great effect. Lastly, in Chapter 3, we identify some of the issues management have in seeing Profit Pools (both Internal and Market Profit Pools), and provide insights on why these issues exist and how they might be dealt with.
Part Two outlines a path management can adopt to secure results rapidly and efficiently. Chapter 4 advocates starting with a review of Internal Profit Pools – to identify areas for immediate action, and to identify opportunities and issues for further consideration as the process unfolds. Chapter 5 takes an external perspective – gathering a fact base of information on existing and potential markets, and leveraging that fact base to put together a strategic view of those markets (including a view of Market Profit Pools). Chapter 6 pulls this strategic view together with traditional and advanced Market Strategy and economic analysis tools to chart a path forward for the business. It also sets out how to deal with the uncertainties involved, such that the business is able to chart the value maximizing path – no matter how the uncertainties actually unfold.
Finally, Part Three provides tips and insights needed for sustained higher performance in value creation. Chapter 7 discusses the importance and challenges of corporate renewal, and outlines best practices the new business development organization can adopt. Finally, Chapter 8 reviews the impact of organizational configuration on value creation, and sets out break-through structures that help focus the organization and maximize value.
In short, you will walk away with a concise set of insights and management approaches – highly focused on maximizing the value of your business, while prioritized to make good use of your time.
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