Managers generally consider strategy development a vital part of their job. Consequently in many organisations a lot of time is invested in the strategic planning process. The key aim for any commercially focused company should be to maximise shareholder value – while of course behaving ethically and meeting environmental, health & safety and customer service objectives.
Sound strategy is a fundamental for any company that is committed to growing shareholder value. The crucial link between corporate performance and shareholder wealth creation is the existence of distinctive capabilities which define a company’s competitive advantage.
Because strategy fundamentally involves making choices to allocate scarce corporate resources, the concept of opportunity cost of capital is basic to business strategy formulation.
Sound corporate strategy will be underpinned by realistic return on capital objectives to ensure that capex programs generate the sort of good growth that enhances shareholder value.
Because strategy is pivotal in maximising shareholder value, companies need to develop a meaningful strategic framework. The planning processes must not impair strategic thinking by becoming an endless form filling exercise involving countless SWOT and matrix analyses. If it does, then it will drive out the thinking and innovation that it is meant to stimulate.
Any business needs to innovate to create competitive advantage – thereby ensuring that it achieves enduring growth in shareholder value. Innovation is defined here as invention that produces economic value. The US based, Boston Consulting Group’s global head of innovation, James P Andrew, defines innovation as a process that uses new knowledge to generate payback. “Without payback, its just an invention, just an idea” , he said.
There may be several reasons why companies do not innovate: fear of taking risk; short term budget pressure; lack of leadership support, and bureaucracy. Whatever the reason, failure to innovate threatens the firm’s survival prospects.
Strategic thinking is therefore crucial and it needs to identify competitive advantage and the link between this and the creation of economic value (EVA). As part of the strategic planning process, any company should consider whether they may have had too much capital tied up for too long in markets where they have no demonstrable competitive advantage and have therefore not been able to achieve their cost of capital and consequently create shareholder wealth.
From the shareholders’ perspective, competition is a curse because it destroys a firm’s ability to grow economic value. Yet competition is inevitable for most so companies must demonstrate a strong competitive advantage based on a distinctive capability.
Companies therefore need to develop an entrepreneurial culture that encourages risk-taking and empowers individuals to innovate. Strategic planning must embrace this, and there must be a strong management discipline to ensure that value is maximized and that tough decisions are taken.