Value Creation -- The Path to Value

Dec. 21, 2004
Deploy resources and capabilities for long-term benefits.

The principles of the path to value (P2V) are as applicable to mature manufacturing companies as the emerging high-tech companies from which the term originated. The path to value is simply management's blueprint for deploying the company's unique capabilities and resources in a way that will boost corporate value by a multiple of two, three, or more. When milestones are clearly identified and resources properly deployed, the P2V becomes an effective tool for significantly increasing the worth of your business. Here's how to map your company's path to value:

  • Identify the company's existing resources and assess the strengths and weaknesses of each.
  • Identify the company's existing skill set (its capabilities or core competencies).
  • Assess the value of current resources when combined with the company's existing skills; that is, what is their potential to increase sustainable profits?
  • Identify the gaps that exist between resources and skills that limit maximization of your company's value, and then determine how best to fill these gaps.
  • Draft a strategy to deploy existing and future resources in the most advantageous manner. Value-enhancing resources and capabilities are actually assets purchased or developed throughout the overall process of running a company. The more valuable they are, the harder they are to acquire. A good example is an essential technology for which a company owns a patent. For example, Gemstar International Group Ltd., Pasadena, Calif., possessed an enormous resource in its proprietary online television remote-control technology. The value of a resource also rises as it becomes central to a company's ability to implement its value-creating strategies. For example, Gemstar, through its purchase of TV Guide Inc. and creation of Gemstar-TV Guide International Inc. (finalized in July) created a strategic venue for deployment of this Web-enabling technology. Certainly, Wall Street saw the value of this convergence when it almost doubled Gemstar's stock price between January and March as the merger took shape. When identifying the resources and capabilities essential to your P2V be sure to include the financial impact of their deployment when implementing the strategy. Use the following indicators to help select the essential resources and capabilities that will be part of your company's P2V strategy: sales revenue generated, net operating cash flow, and return on investment required to obtain the cash flow. Sustainability of these indicators also is critical. Short-lived benefits from increased sales revenue and cash flow are not nearly as valuable as those a company can sustain. But sustainability isn't easy. Most likely, there will be threats to any competitive advantage achieved. Substitutes offered by other companies will attempt to erode your profitability and cash flow. To the extent that you can protect against this kind of attack, your P2V will be that much more enhanced. A good example is Rolls Royce's timeless and unyielding reputation for quality. Further, it's not duplicable by the competition. Therefore, Rolls Royce's reputation figures prominently in its P2V strategy. As companies approach the ideal of industry dominance, they increase their value in three ways:
  • Weakened competitors have less power to set market prices; this privilege goes to the big dogs.
  • Dominant players can lower prices while maintaining margins; competitors may be unable to withstand resulting profit pressures.
  • Market dominance often leads to greater customer familiarity and the ability to further differentiate your product from the competition. The path to value takes strategic thought. It requires management to determine what strengths the company's unique resources and capabilities can produce. When put together in a way that produces sustainable profitability and a competitive advantage through a dominating market position, the enterprise can dramatically increase its value. Chris Malburg is director of value-creation services at a consulting organization in Southern California. He is the author of The Controller's and Treasurer's Desk Reference (1994, McGraw-Hill Inc.) and The Cash Manager's Handbook (1992, Prentice Hall).
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