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What do successful companies say?

What is your strategy? Too often strategies emanate or are derived from 'visions'.

Who first uttered 'We have a corporate vision' - a well-meaning CEO? My jocular advice is that if your CEO has a vision, maybe it is time to call the doctor!

Your vision or mission may be clear in your mind, but how can it be manifest? Phrases and words are often misinterpreted or capable of having a myriad of meanings, but numbers cannot be denied. Finance and accounting reports and models can quantify visions and mission objectives in undeniable amounts. Questions to be answered include:

- What is adding shareholder value?

- Where does your financial strategy lead?

- What is the outcome of your strategy to be?

In a wide-ranging interview about the future of capitalism, Jack Welch, former CEO of GEC, was asked what he thought of 'shareholder value as a strategy'. His response was that the question on its face was a dumb idea.

Shareholder value is an outcome - not a strategy. Quite right, as the first definition of strategy says that 'strategy is a plan of action or policy designed to achieve a major or overall aim' - that aim being to add shareholder value.

Investopedia - definition of 'shareholder value'

The value delivered to shareholders because of management's ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm's ability to efficiently increase the amount of free cash flow over time.

Investopedia, 2014

That is a definition with many facets. I would define adding shareholder value as delivering returns on investment by dividend payments and/or increasing over time the real worth of the business backed by real value arising from the identifiable and physical net assets of the business.

Both definitions may be clearer when we consider the need to make a return on investment and look at some simple models below.

 
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