This article is a first in a new series that will discuss what the key dilemmas and opportunities are that face American business and CEOs trying to grow shareholder wealth. How do these issues compare to the issues for the mostly private, family businesses in our region of Northwest Louisiana? The series will help answer the question – what really grows the valuation of firms and a corollary – why do some firms in any industry consistently outperform their competitors and peers? The series will offer surprising facts that can debunk some myths, short diagnostic questions for businesses to consider and brief suggestions for quick improvement.
Growing the value of a firm, whether it is publicly traded or a private firm, is a key goal of most businesses and the CEOs who lead them. Did you know it has been estimated that the average life span of an organization that makes it past its startup phase is 40 years before it merges out of existence or outright fails in bankruptcy? What are the management and leadership factors that allow a firm to survive and thrive for longer than the average and continue to grow its value? Most business people have their own list. What would your list be?
But what do we really know, beyond perhaps rules of thumb, about what drives profitable growth and firm valuation? Based on twenty eight years in the field as a strategy consultant in a few global firms and corroborated by practical academic findings, the answer at this time is blend of five areas of practice:
1. robust competitive strategy formulation
3. growth that is profitable (not just revenue growth)
4. world class strategy execution
5. enterprise wide risk management
If blended properly, these five areas will favorably impact a firm’s valuation in comparison with its peers.
This may seem like lot to juggle but we find it is the minimum number of crucial areas on which to focus. Much of what is considered best practice – like “vision, mission values”, customer relationship management, latest information technology, balance sheet maneuvering skill, etc. is nice to work on, but can be counter-productive when the five areas are not at world class levels first.
What is the common denominator for results in these five areas of strategic management and leadership? Answer: the strategic initiatives your firm puts into play to try to keep up with competitors or to move light years ahead of them. Strategic initiatives are things like brand new products and services, new geographic expansion, making a key acquisition, deciding to invest in your own R&D efforts, greatly improving quality, etc. How good is your firm at thinking up winning strategic initiatives and then implementing them in world class speed and done way ahead of a crisis?
Here is a quiz that surprises many management teams: How many key strategic initiatives does your firm have going on in the typical year? During that same typical year how many strategic initiatives are completed according to the original plan for those initiatives? Say you mention ten strategic initiatives in play during the normal year and you complete two during the normal year. Now divide the first question by the second question. This is a form of Little’s Law and it says on average it takes five years to complete any one key strategic initiative!! In diagnostic work with many firms this is the actual situation and management teams do not believe it at first. But they come to see the truth that a myriad of factors are causing confusion between mere effort and valued results. And most firms’ markets and customers are moving much faster than five years. This slowness and lack of agility is a formula for merging out of existence or failing through bankruptcy.
What is a firm to do then? Start by improving your strategy execution prowess first then move to the other four areas of strategic management in the order that gives your firm the most headaches. Here is a great tip using Little’s Law: Lower the number of initiatives in play to the top priority ones. The discipline is to not start any other initiative until the top priority ones are completed or terminated early. Only then should the next priority initiative move into active status. Next, remove the barriers that are causing the denominator (completed initiatives in the typical year) to be so low. This one discipline can increase the rate of growth of the market value of your firm by as much as 20% per year.
Next up: Your organization’s competitive strategy, the cornerstone for wealth creation and firm valuation.