By John Howard
Strategy is the keystone, continuous and decision-focused, for business success. Growth is a consequence of strategic choice. We build strategy via effectual and causal thinking. Effectual thinking is our entrepreneurial logic while also applying a resource reality model of causal analysis and structure (cause is greater than effect) with the understanding that performance depends on resources that change over time as they accumulate and deplete (Warren, 2008). And by applying these resources to the equity growth levers we can change the growth trajectory of a business. In other words, build an activity system that differentiates your business in the marketplace.
Tangible resources are purchased. They consist of…
- Demand side resources: customers (segmentation), distribution channels / intermediaries
- Supply side resources: supply chain, capacity, staff, cash, product or service and range (also operating assets)
Another classification of resources are the intangibles (ask for our intangible capabilities chart). They include psychological factors, information-based resources and quality-related items and contribute significantly to competitive advantage. Intangible resources are intrinsic to the people in the organization and despite being difficult to observe, describe and value, their impact on a firm’s performance and economic value are very well known.
High quality in particular, is one of the most significant factors driving market share and correlates exactly to lower costs and premium prices. Value is the relationship between quality and price. Brand recognition would be another and has an assigned seat on the balance sheet. All of these productive assets must be developed. In addition, we assess other aspects such as relational resources and competencies within this resource area. Intangible factors and capabilities can only impact on performance outcomes by influencing the development of tangible resources.
At the next higher level, we can look at the nine levers of building equity value to assess the risk of current strategy. If you get them right, you’ll build a real valuable business and drive up your salable price (if that is of interest). Get them wrong and you may have to live off just your annual income for a long time!
Each lever is an area of opportunity to either increase or decrease the probability of your business delivering predictable and robust profit growth. By assessing the resources and your performance in each lever and giving it a weighted score (some levers are more important to buyers than others), an overall risk factor can be developed. This can be used to determine an equity value for your firm.