The best way to develop a robust value creation strategy is to take a holistic approach that addresses three important areas of the company—business strategy, financial policies, and interactions with investors.
When building a business strategy, start by developing a fact-based forecast of the cash flow and future performance that each part of the business is likely to contribute. Then, translate those business plans into an estimated contribution to the company’s future TSR. Finally, expand the realm of the possible. Explore alternatives that can take the business beyond the current status quo.
Decisions about how to allocate capital and other resources and what strategic moves are likely to create the most value need to be put into the broader context of creating sustainable competitive advantage. They also need to be assessed against the value creating potential of alternative uses of capital.
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Most financially healthy companies generate cash well in excess of their reinvestment needs. What should they do with the excess cash? Although executives often overlook this question, it’s important to strike the right balance between cash kept on the balance sheet, share buybacks, and dividends returned to investors. Getting it right is a powerful way for companies to create alignment with their investors. What’s more, these alternative uses of capital have a direct impact on TSR and an indirect impact on a company’s valuation multiple. Therefore, decisions about a company’s financial policies need to be an explicit part of the company’s value creation strategy.
A good financial strategy should have a clear plan for the balanced use of equity, debt, and free cash flow. It is the product of many decisions about issues such as capital structure, preferred credit rating, dividend policy, and the company’s share repurchase plan. Instead of approaching these decisions as discrete issues, they should be considered as part of a comprehensive value creation strategy.
A successful value creation strategy needs to reflect the priorities and expectations of the company’s most important investors. Sometimes, that means listening carefully to what your current investors want. Sometimes, it means migrating the investor base to new types of investors who are more likely to be in sync with management’s strategy.
In either case, the trick is to start thinking of investors more like a company thinks of customers. That is, segment them into different categories based on investment style and priorities, and identify the right investor type for the company. Among the key questions to consider: