Activity that is normally thought about in terms of substantive outcomes such as market share and revenue growth, or present value and internal rate of return, is seen to be inextricably related to organizational and administrative questions.
Resource allocation processes at multilateral organizations working in global health
The findings presented here should inform the research of economists, strategists, and behavioral scientists. Thoughtful executives and those who consult with them will also find the bookprovocative. The processes described are complex, but clear enough so that the way toward effective management is apparent. The models developed provide a basis for building the systems and organization necessary for today's competitive world.
Professor Bower is a leading expert in the fields of corporate strategy, organization, and public policy, and has devoted his research and teaching to the problems top managements face as they deal with the rapidly changing political economy and competitive circumstances of the contemporary world economy, as well as publishing many books and articles on these issues. Clark G. He teaches the Entrepreneurial Manager Course in the first year of the MBA program and has served as the co-director of faculty recruiting for his unit.
Professor Gilbert's research focuses on corporate innovation and the challenges of entrepreneurship in large, established firms.
Today he consults widely to the media, healthcare, and technology industries. The first step is to align management on the objective of creating long-term value for shareholders. The only way to balance the ever-present growth versus return tradeoff is to consider long-term value. When companies focus on either growth or return, resources are allocated sub-optimally.
And our research in many industries, including, for example, healthcare and tech , shows that delivering long-term value through growth and return produces higher TSR. But the facts tell a different story. The high TSR companies created 1. The second step is developing a clear line-of-sight into long-term value creation. This creates a significant opportunity to redeploy resources and boost performance but to do this, management must know exactly where value is being created and destroyed.
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They must know which businesses, product lines and customer groups create value to know where they should invest for growth. Whether or not a business should grow is determined by current and expected profitability measured using Residual Cash Earnings RCE , which is calculated after all cash operating costs, taxes and the required return on capital.
The current and past RCE of a business, product line or customer group is an important signal of value creation. By forecasting RCE, management can determine long-term value creation which may differ from current performance.
Strategic Consistency Revisited: From Resource Allocation to Temporal Continuity
We must understand why value creation and destruction is occurring. The root causes of high, sustainable RCE, or recurring negative RCE, can be traced to the economics of the market and strategic position. Market economics refers to the growth and return of the market as a whole -- is it economically attractive? Strategic position in a market refers to whether a business has a competitive advantage in product differentiation or costs.
Businesses that are advantaged in attractive markets will show high, growing RCE, while disadvantaged businesses in unattractive markets will have negative or declining RCE.
MATERIALS AND METHODS
The combination of market economics and competitive position will determine how fast a business can grow and how much value the growth will create. It is far easier for a business to create value when its market is profitable and growing as there is less need to attract customers from competitors. And advantaged businesses also have the opportunity to gain market share to achieve above market growth without price discounting or expensive promotions.
Everyone waxes eloquently about competitive advantages in investor presentations, but is your business truly differentiated? If so, your products either sell at a premium price while maintaining market share, or they gain market share with parity pricing. Do you have other competitive advantages such as a unique manufacturing process or superior distribution? These can propel RCE too.
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Be dispassionate in evaluating competitive advantages and considering investments in innovation to increase competitive advantages. Instead of smearing resources across the organization based on size, concentrate resources in business opportunities that can and should grow with strong RCE improvement.
The third step is instituting an effective process for creatively developing and rigorously evaluating resource allocation options. Once good line-of-sight is available, we must determine if we can create more value. For high RCE businesses, look for all possible ways to accelerate growth without overly damaging returns. This is an exercise in creative thinking grounded in market economics, competitive position and RCE.
Assess the incremental RCE for each viable option, after contemplating how customers and competitors will respond. Compare the options based on ease of implementation, likelihood of success and scale, which is the quantum of RCE and value. The best options can then be selected and converted into a strategic plan. This review, evaluation, selection and planning process requires candor, transparency, thoroughness and discipline, with pace and decisiveness, in order to drive action and results.
Three client examples illustrate how SRA can deliver step-changes in results.
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The first is a specialty chemical company with two global businesses. The company had high returns but growth had stagnated. Management measured revenue and gross profit for the segments but extensive sharing of costs and assets stood in the way of a clear line-of-sight.