Strategic Value Analysis

Module 10 - Strategic Value Analysis

Strategic Value Analysis is a technique for quantifying business issues and

opportunities across the entire value chain for an industry. ... SVA evaluates each stage
of the chain on an economic value basis, cutting through the distortions often imposed
by historical cost, transfer prices and accrual-based accounting.

Strategic Value Analysis for Competitive Advantage: An Illustration from the Petroleum
Industry

Managers can do a far better job if they understand how each process they manage
adds value. SVA is a tool for gaining that understanding.

This article will describe and illustrate a technique for assessing strategic positioning and for
understanding strategic challenges, which has wide applicability across companies and across industries.
We call it Strategic Value Analysis because it is based on the familiar value chain concept from the
strategic management literature.

What is different about Strategic Value Analysis is careful attention to quantitative relationships and
analytically grounded insights. Such attention permits much richer and more explicit awareness of the
underlying economic context shaping business choices.

Competitive advantage in the marketplace ultimately derives from providing better customer value for
equivalent cost (that is, differentiation) or equivalent customer value for a lower cost (low cost).
Occasionally, but not often, a company achieves both by providing better value at a lower cost -- I.B.M. in
PC's in 1984 or Microsoft with Windows 95. What-ever the focus for a company, value chain analysis is
essential to determine exactly where in the chain customer value can be enhanced or costs lowered. It is
shortsighted to ignore linkages upstream from the company as well as downstream.

The value chain framework is a method for breaking down the chain -- from basic raw materials to end-
use customers -- into strategically relevant activities in order to understand the behavior of costs and the
sources of differentiation. We are aware of no companies that span the entire value chain in which they
operate.

A company like Chevron spans wide segments of the petroleum value chain, from oil exploration to
service stations, but it does not span the entire chain. Fifty percent of the crude oil it uses comes from
other producers, and more than one-third of its refined product is sold through other retail outlets. Also,
Chevron is not in the auto business, the major user of gasoline. More narrowly, a company like Apache is
only in the oil exploration and production business. The Limited has downstream presence in retail outlets
but owns no manufacturing facilities. Reebok is a famous shoe brand, but the company owns very few
retail outlets. Reebok does, however, own its factories.

To recapitulate, a company is typically only a part of the larger set of activities in the value delivery
system in which it participates. Since no two companies of which we are aware, even in the same
industry, compete in exactly the same set of markets with exactly the same set of suppliers, the
positioning within the overall value chain for each company is unique.

Suppliers not only produce and deliver inputs used in a company's value-adding activities, but they also
importantly influence the company's cost/differentiation position. For example, developments by steel
"mini-mills" lowered the operating costs of wire products users who are the customers of the customers of
the mini-mill -- two stages down the value chain. Similarly, customers' actions can have a significant
impact on the company's value-adding activities. For example, when printing press manufacturers created
a new press of three meters width, the profitability of paper mills was affected. If paper machine width
does not match some multiple of printing press width, scrap is generated, which is paid for by someone
somewhere along the value chain. Mill profit was affected by customer actions even though the paper mill
is two stages upstream from the printer who is a customer of the press manufacturer.
As we will discuss more fully, gaining and sustaining a competitive advantage requires that a company
understand the entire value delivery system, not just the portion of the value chain in which it participates.
Suppliers and customers and suppliers' suppliers and customers' customers have profit margins that are
important to identify in understanding a company's cost/differentiation positioning, since the end-use
customers ultimately pay for all the profit margins along the entire value chain.
In short, focusing only on a company's "value added" (revenues minus purchases) instead of its value
chain involves two major shortcomings. It starts far too late and stops far too soon.

While Strategic Value Analysis can be a useful tool for explaining the relative position of companies in an
industry, by far its greatest value is in helping to guide a plan for management action. In particular, SVA
points to an overall structure, including markets and assets as well as the "lines and boxes" of reporting
relationships, most likely to succeed in a specific part of an industry. These findings can be applied either
in the context of a smaller niche player or for operating units of a multidivision corporation.

IS SVA APPROPRIATE FOR MY COMPANY?

There are four tests that can be applied to determine whether SVA would be a helpful strategic tool for
any company:
1. Are there new or emerging players in my industry (within any portion of the value chain) that may be
more successful than existing players?
2. Are these companies positioned in the value chain differently from current players?
3. Are new market prices emerging across segments of the value chain? Are these markets sufficiently
deep to reflect arm's-length trading?
4. If I used these market prices as transfer prices in my company, would it fundamentally change the way
that my major operating units behave?

If the answer to these questions is "yes," SVA is likely to be an insight-provoking tool.

In the section below, we provide an illustration of SVA applied to the United States petroleum industry as
it underwent dramatic change in the past three decades. We believe SVA is uniquely helpful in
understanding that restructuring.

THE OIL INDUSTRY: 1960'S TO PRESENT DAY

In the 1960's, the oil industry in the United States was predominantly in the hands of a small group of
companies, each operating with a business model based on the integration of the value chain from raw
materials through to retail sales. These dominant companies drilled for crude with company-owned
leases, shipped crude in company-owned tankers to company-owned refineries, moved refined products
along proprietary pipelines to company-owned terminals, and then retailed these proprietary products
through company-owned service stations.
Of course, vertical integration was never completely achieved, and notable exceptions to the integrated
model existed, such as Amerada in exploration and production and the independent jobbers who played a
role in gasoline retailing. Nonetheless, the dominant players in the industry were the integrated major oil
companies. In 1975, the integrated companies controlled 89 percent of U.S. refining capacity. This
organization reflected the historical growth of the industry, where securing a market outlet for crude was
of primary concern. Without a significant downstream presence, a company was considered to be at a
disadvantage in the monetization of its crude reserves. The notion of "balance" across the chain was a
company-specific challenge, so a vertically integrated organization was entirely appropriate.

By the late 1980's and early 1990's, however, the U.S. oil industry looked dramatically different. The
precipitating event in this transformation was the oil price crash of 1986, when average world oil prices fell
by more than 50 percent. As a result, between 1985 and 1986, major integrated U.S. oil companies'
upstream return on invested capital dropped from 12 percent to 3 percent. On its own, the U.S.
downstream was not in great shape either. While vertical integration and cost-based transfer prices
muddy the economic picture, there were clear warning signs. New refinery and terminal construction
virtually ceased by the early 1970's, and the absolute number of retail outlets was in decline. Earning
integrated returns well below the cost of capital (Exhibit I), the major oil companies were faced with a
crisis. The "integration" paradigm broke down, with the upstream (exploration and production) decoupling
from the downstream (marketing and refining). The remainder of this article focuses on the downstream,
the restructuring of which was, as discussed in the example on the paper industry, largely caused by an
event elsewhere in the value chain.
With the first big move toward decoupling, the downstream had to fend for itself. The majors first
rationalized their asset base, selling off underperforming retail outlets, terminals and refineries to retain a
more profitable "core." Further, they invested heavily in the core, recapitalizing their entire downstream
asset base (Exhibit II).

Yet, rather than seeing these new investments paid off by growing margins, downstream profitability
declined in real terms from 1985 to 1995 (Exhibit III).
As a result, downstream returns for the U.S. majors have languished since the late 1980's (Exhibit IV).
The majors' response seemed rational -- painful but necessary under the circumstances. What
happened?
We believe SVA can help to understand why the asset rationalization/reinvestment failed to produce the
desired effects, and how the rapid adaptation of a more focused, flexible operating model could have
helped.

THE SVA TEST APPLIED TO THE PETROLEUM INDUSTRY

Question 1: Are there new or emerging players in my industry (within any portion of the value chain) that
may be more successful than existing players?
An SVA analysis of the U.S. petroleum industry during this period would have revealed the rise to
prominence of a variety of new players, particularly in the downstream segment of the value chain. Often,
these new players were purchasing assets that the majors had deemed uneconomic.
In the refining segment, Tosco aggressively acquired assets divested by majors, notably Exxon's Bayway
refinery ($175 million) and Unocal's refining and marketing assets ($1.2 billion). GATX developed an
independent business out of product terminaling by buying assets once viewed as a key link in the
integrated value chain. Similarly, one of the major's distribution channels, the independent jobber,
increased its role in the retailing segment as the majors sold off their marginal service stations. The
balance clearly was shifting: in 1972, the majors sold less than 40 percent of their product through
independent marketers; by 1995, the figure had grown to approximately 60 percent. New entrants, such
as QuikTrip and Racetrac, were able to capitalize on the advent of self-serve gasoline. These companies
aggressively developed gasoline retailing chains utilizing innovative retailing formats to optimize station
economics.
The impact of new entrants is evident in the change in market share of the majors, for both upstream and
downstream segments. For example, in 1974 the large integrated companies sold 43 percent of total U.S.
volume through company-owned stations. By 1995, the majors held a market share of only 22 percent of
total U.S. volume through company-owned stations.
The major integrated companies' share of refining output decreased over this period as well (Exhibit V).
These new players generally were not considered by the majors as "competitors." Outside companies
purchasing assets were often viewed as bottom feeders of secondary importance. Branded distributors
were viewed as still part of the team since they carried the company brand upon sale (at least for a fixed
period of time). The majors generally preferred to compare themselves only with other majors; they saw
no reason to compare their integrated downstream structure with that of a distributor.
SVA Test No. 1 provides a clue here: New companies were entering a mature industry with poor returns.
What were they up to?
Question 2: Do these companies utilize a different structure occupying a single value-chain segment or
running multiple segments in a nonintegrated fashion?
These new companies were almost always structured in a dramatically different way from the industry's
incumbents. They generally chose to focus on a narrow section, or even one segment of the value chain
(Exhibit VI). For example, Tosco focused primarily on the refining segment. GATX focused largely on the
product terminaling business, and Racetrac and QuikTrip were (and continue to be) retailing-only
businesses.

The benefits of a focused strategy are evident in the performance of QuikTrip, a 300-plus-store
convenience and fuels retailer. By focusing solely on the marketing segment of the value chain, QuikTrip
developed a superior retail offering distinguished by excellent customer service, competitive pricing and
innovative merchandising techniques. As a result, QuikTrip's convenience sales per store were more than
twice those of the average integrated major. QuikTrip viewed gasoline as simply another product, not as
the cornerstone of the business or of site profitability. In addition, QuikTrip's nonintegrated flexibility
allowed it to "colonize" new areas quickly, often constructing up to 50 locations in a given city in five years
or less. QuikTrip bought its gasoline from many sources, so a major's question of "Do we have the
refinery capacity to support a market expansion?" simply would not apply. QuikTrip is built on a retail
concept, rather than an integrated supply chain.
Once again, SVA helps to understand not only the fact that new players are emerging, but also how their
organizations differ from those of the major players. While there were literally hundreds of companies
expanding in the downstream in the later 1980's to early 1990's, none had an organization similar to the
major U.S. integrated companies.
Question 3: Are new market prices emerging across segments of the value chain that formerly have been
integrated? Are these markets sufficiently deep to allow entry by new players?

In the 1960's there were only a few low-volume spot markets available to nonintegrated companies. The
first and most visible spot market was for crude oil. The spot market for crude grew from 54 cargoes in
1973 to nearly 6,000 cargoes in 1987. Trading in the spot market led to the New York Mercantile
Exchange's creation of a crude oil futures market, which began trading in 1983. By 1984, more than 80
percent of the 50 largest companies were using futures contracts (Exhibit VII). Shortly thereafter, refined
products, once strictly controlled by the majors for their proprietary retail networks, began to trade in New
York Harbor and other major ports and in the futures market. While the development of a deep spot
market for gasoline at major trading centers was important, by no means was it the only decoupling of the
downstream value chain. Similar to the gasoline spot market, deep arm's-length markets developed at
several other points in the downstream value chain, creating the transportation, terminaling and retail
segments as identifiable, measurable niche businesses (Exhibit VIII). This market evolution occurred
most quickly on the Gulf Coast and Eastern Seaboard. Yet, the majors still tended to view their
downstream businesses on an integrated basis, with each asset class viewed as a "cost center" with a
budget but little power over its own profitability.

With Test No. 3, SVA explains how this different (decoupled) view of the business evolved to become an
industry standard. The emergence of these multiple arm's-length markets indicated that the new players
were viable in the marketplace.
Question 4: If I used these market prices as the basis for my company's transfer prices, would it
fundamentally change the position that I want to occupy in the value chain? Would it change the way that
my major operating units behave?
The possibilities suggested by these new operating models and new markets offered a dramatically
different vision to the integrated oil companies. By using a market-based transfer price for intercompany
sales, an integrated company could assess each segment of the value chain as an independent profit
center. In addition, company performance now could be compared directly with new competitors despite
their different operating practices. For example, a refinery no longer constrained to run its own company's
crude might choose to purchase a different product slate that offered greater margins. A marketing
organization run as a profit center would need to be competitive with both independent branded jobbers
and unbranded retailers. The world would be different indeed.
In fact, the newly emergent players have acted in ways suggested by their value chain choices. Where
captive refineries generally produce only up to the need of their marketing networks and adjust the
product slate to satisfy those networks, Tosco operates its refineries strictly as "merchants," producing as
much as possible of whichever product the market desires most. Whereas most integrated majors prefer
not to lease space in company-owned terminals to unbranded retailers for fear of "tanking" the retail
markets, GATX leases space to all paying customers and enjoys over 90 percent utilization.
It appears that the new players possess two common advantages, based at least partially on their
approach to the value chain. Internally, they possess greater operating flexibility because they have no
"commitment" to other company operations in different parts of the value chain. Their only commitment is
to maximize their own segment profitability. Second, this flexibility allows them to focus externally on
efficiently meeting market demand. The combination of these two factors allows these new players to
thrive in spite of overcapacity and declining real margins.
SVA Test No. 4 is oriented toward the materiality of the observed changes on existing players. The
majors viewed their asset classes (refineries, terminals, stations) as fundamentally linked. Instead, the
emerging arm's-length markets suggested that this linkage was unnecessary and possibly dangerous.
The early adoption of these arm's-length prices in the integrated U.S. majors would have allowed them to
"face the market" more directly and better understand the attack of the new players.

AFTERMATH
The U.S. petroleum industry is now thoroughly decoupled, with significant players existing at each stage
of the value chain. The integrated majors reacted to this restructuring at different rates, but most have
now made strides to decouple their operations.
Majors and merchant refiners regularly trade product through exchange agreements. And, as noted
previously, the majors have consistently reduced their direct ownership in the retailing business.
However, downstream operations have only recently begun to decouple in an organizational sense -- as
late as the early 1990's, many companies did not manage retail operations as stand-alone profit centers.
Indeed, only now are the majors recognizing that the new players have, in some cases, established
superior capital efficiency and operating practices. This latent realization is driving a search for the next
organizational model that will deliver consistent profitability. It is a search that could have started much
earlier.
In a future issue of Strategy & Business, we will delve into the operating practices of a set of emerging
downstream players to explain how they were able to expand profitability in a mature business at the
expense of better established major companies.

CONCLUSION: THE SVA PERSPECTIVE FOR OTHER INDUSTRIES

The oil industry's SVA story presented here has parallels in many other industries. Consider, for example,
the following industries in which SVA also represents a too-little-appreciated perspective:

Electric Utilities: The traditional model of integration across the three stages of power generation,
transmission and distribution in regional monopolies is rapidly disintegrating. Decoupled regional, national
and international markets by value chain segments are replacing monopoly restrictions. Where, across
the value chain, is the profit earned today? Where will it be earned tomorrow?

Forest Products: Major uncertainties have led to widespread disagreement across the industry about the
relative importance of fiber ownership, pulp manufacturing, paper manufacturing, conversion operations
and downstream marketing in terms of sustainable profitability. Where in the value chain will profitability in
the future support currently diverging investment patterns?

Food Products: This entire set of linked industries is undergoing fundamental restructuring, as illustrated
in the widely publicized Efficient Customer Response (ECR) project. The relationships among
manufacturing, factory distribution, wholesale distribution, retail supply logistics and retail merchandising
are being rethought as the traditional value chain is totally revamped. The goal of the ECR project is to
eliminate more than $35 billion a year in non-value-added costs along the food products value chain.

Financial Services: Major disagreements exist among the largest banks about value chain issues in such
businesses as mortgage lending and credit cards. For a typical home mortgage, for example, is the
overall aggregate profit that is earned between inception and payoff concentrated in origination,
syndication (whole mortgages and "strips"), trading or servicing? NationsBank has divested origination
and servicing operations while Fleet is expanding there. And, is credit card profitability over time more
closely linked to growth in overall penetration (First USA) or to cost leadership in transaction processing
(Citibank)?

Information Technology: Fifteen years ago the "small" computer business was dominated by companies
like I.B.M. and Digital and NEC, which were highly integrated from microcircuits and hardware platforms
through to operating systems, application software, distribution and field service. Today, the "small"
computer business is a decoupled industry, with va
lue chain linkages re-forming all the time in new ways. Virtually no one competes successfully all along
the value chain anymore. There are now separate businesses in memory chips (Motorola),
microprocessors (Intel), operating systems (Microsoft), hardware (Compaq), software (Oracle) and
distribution (Dell). And, the boundaries among the segments are changing all the time.

We believe that variations of these stories can be told in virtually every industry today. A manager needs
to be able to tell the SVA story for his or her company, for its current competitors and for future
competitors, as the value chain in which the company competes reconfigures. In a subsequent issue we
will pursue the SVA perspective further in the oil industry by analyzing the changing dynamics of retail in
the United States in 1997.

DEFINING SVA
Strategic Value Analysis is a technique for quantifying business issues and opportunities across the entire
value chain for an industry. It differs in two very important, and underappreciated, ways from typical
business analysis:

1. SVA disaggregates activities into the fundamental building blocks of the full value chain, from suppliers
all the way through to end-use customers, and then groups activities consistently with the way markets
actually work. Most firms focus their analyses on only those activities where they are currently players.

2. SVA evaluates each stage of the chain on an economic value basis, cutting through the distortions
often imposed by historical cost, transfer prices and accrual-based accounting.
What emerges with SVA is a clearer, more actionable view of competitive advantage, sources of
profitability and areas for improvement at all stages of the value chain. This stage-specific understanding
is critical in all multistage industries, because changes in one stage almost always impact businesses all
along the chain.

Reprint No. 981034 by John K. Shank, Eric Spiegel, and Alfred Escher
https://www.strategy-business.com/article/9797#share-to-twitter

The Strategic Value of Values

by Thomas E. Ambler

Daily our headlines shout of blatant disregard both for the law and for right vs. wrong by
obscure and prominent businesses alike. We see headlines like “If you violate the law, you
will pay for it”, quoting Harvey Pitt of the SEC in response to questions related to the Enron
debacle with its possible auditor complicity, witting or unwitting. Or headlines like “Tyson
 Foods Executives Indicted” for smuggling illegal aliens, aiding them in
obtaining false documents and paying INS undercover agents “recruiting
expenses”. Deplorable? Yes. Shocking? Maybe. New? No. The products of
human greed and moral expediency have been with us ever since Adam
and Eve decided they wanted to be God.

Unfortunately, seldom do we see headlines that highlight those companies

and organizations that consistently live out positive values. Our guts tell us that these
businesses must benefit from their positive, Values-centered approach. But how much? Do
the benefits rise above simply having well-rested employees with easy consciences? Does a
Values-centered approach produce a payoff that makes these companies significantly more
successful at achieving their strategic goals over the long run than they otherwise would be?

Values - A Definition

Let’s define the term “Values”. Consider first what Values are not. They are not operating or
cultural practices, processes or policies. These are subject to continual revision in response
to environmental changes. These may be values-based, but are not Values themselves.
Instead, (borrowing from the definition of “Core Values” in Built to Last), Values are the
organization’s essential and enduring tenets - a small set of general guiding principles; not
to be compromised for short-term financial gain or expediency. Values are the “proven,
enduring guidelines for human conduct” called “Principles” by Covey. Values include both
the Commitment Statement portion of the Mission Statement and Goals in the Simplified
Strategic Planning (SSP) process. For example, statements like “establishing Trust and
Respect as the basis for relationships with all stakeholders”; “the Company exists to
alleviate pain and eliminate disease” (Johnson & Johnson Credo); the biblical Golden Rule
and “respecting and encouraging each individual's ability and creativity” (Sony); would all
qualify as Values.

The term “Values-centered” applies to an organization that only makes decisions which
satisfy its Values. A Values-centered organization is more likely to take a profit hit in order
to better satisfy other Values.

Values’ Value

Now we can address our question “does a Values-centered approach make companies
significantly more successful at achieving their strategic goals over the long run than they
otherwise would be?” Studies resulting in hard information are very difficult to structure.
The best-known and widely accepted study is the one reported in Built to Last. As you are
probably aware, this study selected 18 world-class Visionary Companies that were the best
of the best, enduring winners in their industries, and compared each to a similar
Comparison Company whose long-term performance was substantially less stellar. One of
the major areas explored was the difference in the existence and role of a core ideology in
the paired companies. The following statements encapsulate the findings:

 “In nearly all cases (of Visionary Companies) we found evidence of a core ideology
that existed not merely as words but as a shaping force.”
 Although profit is consistently a value in all Visionary Companies, profit maximization
does not rule. They pursue their ideological aims profitably.
 Visionary Companies tend to have only a few core values - 3 to 6.
  “In a Visionary Company, the core values need no rational or external justification.
Nor do they sway with the trends and fads of the day. Nor even do they shift in
response to changing market conditions.”

The points above clearly indicate that companies with Values they live out enjoy greater
success than those that don’t. If there is strong logic as to why this indication should be
true, we can elevate its status from being simply a statistical correlation to that of a cause-
and-effect relationship.

Enterprise is composed of transactions. Behind every transaction lie relationships--some

good, some bad. Constructive, long-term relationships require Trust and Respect,
inseparable, intertwined Values. Trust and Respect depend on fulfillment of the expectations
of one party by the other. Expectations are based on Values. Everything else being equal,
two parties sharing deeply held Values in common are drawn toward one another and
develop a productive rapport. Conversely, where Values conflict, developing rapport and
“Getting to Yes” becomes much more difficult.

Clearly, Values are logically a cause and the type and strength of relationships are direct
effects, anywhere relationships occur.

Market Value

Now let’s shift attention specifically to the impact of Values in the marketplace. If you have
been highly successful in the marketplace you likely have consistently done an excellent job
at answering three Strategic Questions:

 What are you going to sell?

 Who is your market?
 How are you going to beat or avoid your competition?

All three questions are totally wrapped up with Values. For example, will you offer only
products and services that provide social benefit? Which customers (and suppliers) should
you “fire” because they cause you to constantly spin your wheels over a misfit of Values?
What benefits can you provide that differentiate you and your offering from your
competitors’. Even if you have to compete on a Commodity basis, where price is king, what
can you do to get your act together internally to reduce your customer's total transaction
costs and still satisfy your Values, including profitability?

Everywhere you look you see anecdotal evidence that Values and market success are
causally related. Scores of our clients report that their Values such as trustworthiness and
integrity are the reason their customers choose them over their competitors.

Values will become even more critical determinants of market success in the future as the
marketplace evolves. What is known as the Experience Economy is superseding the Service
Economy and will itself be superseded by an emerging Transformation Economy, in which
the highest product forms are the customers themselves, transformed the way they want to
be. So it is not hard to conceive of markets where Values become the most important,
explicit part of an organization's offering.
Conclusion? Values of organizations cause market success today and in the future.

Internal Value

Now, how about the internal operation and culture of an organization? Can we logically
support the assertion that Values cause success there too?

Nowhere are relationships more important than in the internal workings of an organization.
Unity in those relationships is crucial for fostering the synergistic cooperation that produces
high performance. Colonial theologian Jonathan Edwards' statement, “one alone is nothing”
rings true. Creating unity in a team is a crucial leadership function. It depends heavily on
shared Values as well as shared vision. Cultures attract leaders with like Values and Leaders
attract followers with like Values and, thus, build strong cultures based on shared Values.
This implies that even strategic alignment, which we know causes success, is dependent on
Values alignment.

Values-driven organizations win because they utilize leadership power properly. As Covey
points out in Principle-Centered Leadership, power in an organization has three forms that
lead to different results:

 Coercive Power - based on the fear that the leader can do harm to the follower;
promotes ultra-reactivity among followers;
 Utility Power - based on leader and follower each offering something of value to the
other; tends to foster individuality and situational ethics on the part of followers; still
tends toward follower reactivity;
 Principle-centered (Values-centered) Power - based on the trust and respect earned
by the leader over time; results in high follower proactivity.

So Values-driven leaders enjoy more power and greater follower productivity, loyalty and
teamwork. That permits them to implement more effectively the changes demanded by
their strategies. Paraphrasing Covey--“the ability to make change is limited unless the
leaders driving the change are secure in their Values, and their Values are fundamental
values that do not change and are, therefore, not challenged by the change.”

Clearly, a focus on shared Values causes long-term success. This conclusion should not
come as any surprise. After all we have on supreme authority that, “if we set our hearts
first on God's rule and His goodness, we will receive the material things we spend so much
time and energy worrying about - He already knows we need them.” (Paraphrase of
Matthew 6:31-33)

Hopefully, everything we have covered to this point motivates you to make sure your
organization has a well-defined set of Values at its core and is consistently living them out
everywhere. Two related questions beg to be addressed.

1. What process should you use to clearly define your Values and recognize them in
your strategic planning?
2. How can you achieve alignment with the Values throughout the organization?

Defining Your Values

Workable processes for initially defining your Values are available in plenty of books. For
example, check out the Mission Statement and Goals sections, pages 178 to 183,
in Simplified Strategic Planning, by Robert Bradford and Peter Duncan.

Here we will limit ourselves to mentioning several key principles and techniques as follows:

 Define no more than 6 Values at the deepest, most fundamental level possible,
without regard for how they match up with the outside environment; these are your
Core Values.
 Don’t try to define your Values using a democratic process - the top leaders have
much greater weight in selecting the final set because they must authentically
exemplify Values which inspire their followers.

Once established, these Core Values should be subjected to two tests. The first test is the
Credibility Test. Have the behaviors of you and your people inside and outside of the
organization been consistent with these Values over the past year? If not, are they really
core and/or what must change?

The second test determines which individual Values or combinations of Values have
particular strategic worth, in that they can provide sustainable competitive advantage. The
technique, borrowed from Simplified Strategic Planning, is the same as that used with
Competencies to determine which are strategic. (See page 86 of Simplified Strategic
Planning.)

Recognizing Values in Strategic Planning

When you analyze and strategize your markets, be sure to consider the Values dimension
explicitly, looking for competitive openings within which you can leverage your
distinguishing Values.

Use your Core Values as a “gate” through which any new opportunity must pass. If an
opportunity can't be structured in such a way to pass, dump it!

Deal with the strategic issue mentioned earlier, “which customers and suppliers should you
'fire' because they don’t fit your Values?” If your participation in a core market segment
becomes too small due to a Values conflict, challenge your Values only to the extent of
seeking a deeper, more timeless value or principle to replace the one that conflicts with
your market. For example, a hallowed practice of making your product “super-rugged” may
need to be challenged by a deeper Value like “satisfying the customer”.

Alignment of Values Within The Organization

Dr. Deming contends that quality, the result, is a function of quality, the process. The same
can be said about Values. Essentially the same principles and processes for aligning Values
within your organization apply where major changes are required as where you are simply
trying to sustain your Values at a high level. Interestingly, the process for changing Values
involves the same steps as farming.

Preparing the soil

If followers are expected to accept new Values, they must be the Values that their leaders
model with authenticity and passion over an extended period of time. Establishing the soul
of an organization demands that top management set the tone by being real, Values-driven
people. Cultural change percolates down through an organization and that takes time and
patience.

Planting
An organization changes one person at a time. The process must, then, be individually
tailored to permit leaders to discover and deal with each person's specific Values conflicts.

Do a mini-version of G.E.’s Crotonville Management Development Institute, which

indoctrinated 10,000 managers per year and changed the culture of a huge, staid
corporation in just a few years. Jack Welch made this change a personal priority with bi-
weekly, eyeball-to-eyeball contact with individual managers attending the Institute. (Refer
to Control Your Own Destiny, by Tichy and Sherman.)

Hire the “brightest and best,” where “best” deals with character and “Values fit”. This is
particularly desirable when Values are threatened by the cultural dilution that accompanies
rapid growth.

Fertilizing and Cultivating

Celebrate frequently your progress in making the change.

Don’t confuse conforming behavior for the real thing--shared Values. Make certain that your
processes/policies/procedures reflect your Values and promote peer accountability.

Promote from within whenever possible - it motivates performance and preserves culture.

Borrow from Jack Welch:

 “Believe that corporate cultures will change in response to clearly articulated ideas -
if the ideas are endlessly repeated and backed by consistent action.”
 Hold “town meetings” with employees to establish direct communication and
information flow.
 Systematically weed out the poorest 10% every year.

Harvest
Look for your harvest. Continually build on initial harvests. Enjoy the fruit of your harvest,
but be sure to save some of it as next year’s seed.

Feel great satisfaction--you have accomplished a noble purpose. You have confirmed the
Old Quaker adage, “Thee can do well by doing good.”

So remember, your Values have Strategic Value far too great to permit them to be taken for
granted and drift along in the background. Force them to the forefront, establish them and
commit the energy and resources to keep them there. Reap the benefits!

AND START NOW!

Tom Ambler is a consultant with Center for Simplified Strategic Planning, Inc. He can be
reached via e-mail at ambler@cssp.com.

https://www.cssp.com/CD0402/ValuesAndStrategy/default.php
Strategic value is where a buyer can make more from a business than it would have otherwise
realised, and is the gravy that makes an otherwise square meal a picnic. By TOM McKASKILL

By Tom McKaskill

If you have some unique underlying assets or capabilities, you might be able to get a premium
on sale if you sold to a strategic buyer. But, the key question is – what is your strategic value
worth?

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Strategic value is created when a buyer extracts greater value from the acquisition than can be
provided by the inherent profit generating resources of the business being acquired. That is, the buyer
is able to generate greater profits than those which the acquired business is able to achieve, or could
achieve, in the future if it continued as a stand alone business.

The stand alone value of a business can be calculated by working out the net present value of the
future stream of earnings which the business in its own right could generate. Any premium paid
above this by the buyer is considered to be the value of the strategic value of the business.

Strategic value is created when the buyer utilises the assets or capabilities acquired to produce profits
through the buyer’s organisation, which may mean cross selling to their customers or distributing the
acquired products and services through their own distribution channel.

Other forms of strategic value accrue when the buyer is able to take costs out of the acquired
company by merging activities or by leveraging their brands or unique processes in the newly
acquired business.

The problem the vendor has is to figure out if a strategic premium is possible and then to work out
what size the premium might be. Sometimes this is relatively straight forward and other times it is
pure guess work.

For example, calculating what revenue and profit your product or service might generate in a much
larger customer base or distribution channel when you have good data on take up rates might be
relatively easy. But working out what contribution your incomplete technology might have is
problematic.

Sometimes you can look to equivalent deals to see how large corporations have valued similar
contributions. This has generally proved to be useful with recent acquisitions of internet community
businesses where a price can be estimated per member.
In the end, it really comes down to two factors. First, are you certain that you can generate a price for
your business above the value which could reasonably be calculated from its inherent future earnings,
in which case you are better off with a strategic buyer.

Secondly, you need to ensure you have multiple buyers competing in the deal. Smart buyers will be
able to undertake their own calculations of the strategic value of your business. Let them fight it out
for the privilege of taking it to market.

In several of the businesses that I sold, I was clearly generating a sales price well above the fair
market value of the business based on its going concern value. All I had to do was to ensure I had a
number of potential buyers who could exploit the full potential of the business and let them push the
price up through the bidding process.

https://www.smartcompany.com.au/finance/economy/what-is-the-strategic-value-of-my-
business/

What is 'strategic' value in a business sale?

Strategic value is the value a purchaser is willing to pay for a business, over and above what an impartial
business valuer might determine is ‘fair market value’.

As we have discussed in our eBooks, one common method of determining a business’ fair market value is
to use a multiple of earnings.

Multiple of Earnings is the term for how many years or months a purchaser is prepared to wait before they
recoup the value they paid the outgoing business owner, based on an assessment of business
maintainable earnings (or sustainable earnings).

In Australia’s small to medium-sized business market, purchasers are generally looking from one, to four
and a half years, to recover the money they’ve invested.

So how much more than its fair market value will a purchaser pay for a business with strategic value?

The answer is largely determined by the potential purchasers’ individual circumstances which impact
their appetite for the opportunity, but it can also be influenced by the vendor’s management
decisions long before sale time.

How is strategic value created?

There are a number of factors which contribute to a business’ strategic value. These include:

 Competitive advantage – This is what you as a business do better than anyone else and which
another business can’t easily or quickly replicate.
 Business characteristics – These characteristics – which include customer diversity and brand
strength – are largely quantifiable and can be influenced by a business owner’s management
decisions and actions.
 Complementarity – This is the extent to which the business’ offering complements a potential
purchaser’s business, or their investment and strategic objectives.
 ‘X’ factor – This is the qualitative side of the equation and comes down to whether or not the
business opportunity prompts a positive emotional response in a potential purchaser.
Competitive advantage
Competitive advantage is determined by the strength of the value proposition you are providing to
customers i.e. are you as a business meeting hitherto unmet needs of customers and how hard is it for
your competitors to quickly replicate your offering?

We’ll examine competitive advantage in more depth later, as it is significant contributor to strategic value.

Business characteristics
These business characteristics can usually be counted on to lead to an enhancement or detraction from
strategic value, and many of them can be influenced by the business owner, to a greater or lesser
extent.

They include:

 Customer base diversity

 Supply contracts certainty
 Brand strength
 Point of difference
 Team capability
 Established processes
 Ownership of trademarks, patents, licences etc.
 Market pressures
 Customer expectations
 External advancements

We have created a checklist of business and industry characteristics which influence strategic value, plus
some ideas to help you manage them so as to grow your business’ potential strategic value.

Complementarity
Complementarity is the extent to which a business’ offering complements a potential purchaser’s
business, or their investment and strategic objectives.

For complementarity to occur, a sale opportunity needs to offer something to a potential purchaser that
they don’t already have, or which will significantly strengthen their own value proposition, beyond the
benefits of organic growth.

In many respects the market dictates whether there is strategic value or not, and this is definitely the
case when it comes to complementarity.

Here’s an example:

You are a business owner.

Over the years you have worked hard to establish and maintain great relationships with your customers.
You believe these strong customer relationships will offer strategic value to a potential purchaser, over
and above fair market value.

Along comes a potential purchaser.

This potential purchaser operates in the same industry as you, in the same geographic location, selling
another product to the same customers.

In this situation your ‘strong customer relationships’ don’t necessarily complement the potential
purchaser’s business, instead they simply replicate it.

If, on the other hand, you also have the exclusive distribution rights for a product line the potential
purchaser would love to get their hands on, you have complementarity and a case to argue for strategic
value.

‘X’ factor
I like to describe strategic value as being the X factor associated with a business.

Think about the X Factor TV program. It features a number of different performers who can all sing, dance
and so on to a high standard, but the ones with ‘X’ factor give more than just a great performance.
Somehow they have a ‘vibe’ that connects with the audience.

Strategic value is like that in business.

‘X’ factor – it’s the vibe

I’m a bit of a motorcycle tragic and a year or two ago I was lucky enough to attend the MotoGP at Phillip
Island.

While perusing the motorcycles on show I was interested to read some promotional material about
Yamaha, which happened to be celebrating its 60-year anniversary.

Here’s a little extract:

For 60 years, the Yamaha Motor group has created innovative high-quality and high-performance
products that empower our customers by bringing greater joy to their lives. This is the essence of Kando.
Kando is a Japanese word for the simultaneous feeling of deep satisfaction and intense excitement that
people experience when they encounter something of exceptional value.

Kando is an emotional reaction to an objective offering.

There is no telling what will produce that feeling in some people and not others, but it is just that sort of
visceral, emotional reaction that causes some people to value a business (or product) more highly
than others.

Strategic value is – at least in part – an emotional value. It’s not fully quantifiable.

What is 'strategic' value in a business sale?

Posted by James Price | JPAbusiness on 21-Jun-2017 05:57:00

https://blog.jpabusiness.com.au/blog/what-is-strategic-value-in-a-business-sale