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Evolution Not Revolution: Aligning Technology with Corporate Strategy to Increase Market Valuation
     

Evolution Not Revolution: Aligning Technology with Corporate Strategy to Increase Market Valuation

by John R. Logan
 

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John R. Logan, the visionary founder of the Aberdeen Group consulting firm, has launched a call to arms for executives and managers with Evolution Not Revolution. In this book, Logan challenges executives and managers to use IT as a powerful tool to create and execute superior strategies that will help develop:

  • Marketing skills for

Overview

John R. Logan, the visionary founder of the Aberdeen Group consulting firm, has launched a call to arms for executives and managers with Evolution Not Revolution. In this book, Logan challenges executives and managers to use IT as a powerful tool to create and execute superior strategies that will help develop:

  • Marketing skills for strengthening existing customer bonds and finding new customers
  • Financial skills to pursue beneficial changes
  • Information systems management skills to organize a flexible, expandable info systems structure

Editorial Reviews

bn.com
This book will be of great value to executives who wish to bridge the conflict that often rages between the business operations and information systems groups in many companies. John R. Logan, founder and chairman of the Aberdeen Group, challenges both businesspeople and technologists to look beyond the conventional limits of their professions: The new breed of technology managers that Logan envisions will be able to survive in a highly competitive marketplace by deploying high-tech products and services to meets basic organizational goals, like profitability, enhanced customer service, or greater internal cohesion. Evolution Not Revolution is a challenging, thoughtful book that goes beyond the breathless hype of other technocentric business books to deliver a substantial, real-world program for corporate success.

Product Details

ISBN-13:
9780071384100
Publisher:
McGraw-Hill Companies, The
Publication date:
12/26/2001
Pages:
223
Product dimensions:
6.16(w) x 9.28(h) x 1.02(d)

Read an Excerpt

Competency 1: Focusing on Market Valuation

"Business planning meetings are boring. Why do we even bother to get together? All we do is disagree. Nothing is ever accomplished!" Sound familiar?

Every executive knows the excruciating pain of sitting through marathon management planning meetings. Moreover, these encounters can become absolute agony when the subject is the use of new information systems technologies to improve current business processes.

These same meetings can be turned around into exciting, productive sessions with one critical change. In the center of every conference room should be a large plaque with the inscription, "Increase Our Company's Market Valuation." Whenever a discussion appears to be drifting aimlessly, all the chairperson must do is point to the "Increase Our Company's Market Valuation" sign and ask, "How?" Increasingly, the answer to "How?" requires the use of enterprise-level advanced information technologies. Enterprise-level means computer and communications systems that an entire corporation can rely on to improve both the effectiveness with which it manages its customer relationships and the efficiency with which it delivers its goods and services. Advanced information technologies describes products that high-tech suppliers generally have made available only recently to their corporate customers.

Then the next question becomes, "Who?" Who is capable of leading the efforts to apply the latest and greatest information systems technologies to the corporate objective of increasing market value? The answer is the technology executive. Technology executives are the 2000's style of managers who are as comfortable evaluating the potential benefits of new technologies as they are running the company's most critical business operations.

Winner Corporations and Market Value

Every technology executive's objective is to build a winner corporation. Of course, the immediate question for many managers is how to define a winner corporation. It is a point over which executives have fought and debated for decades.

Winner companies must be defined the way the investment community evaluates public corporations-in terms of both their current market value and their year-to-year increase in market value compared with market indices. A corporation that meets the positive-valuation criteria of investors has the greatest probability of flourishing in the long term; maintaining high levels of customer satisfaction; providing its employees with higher levels of compensation and job satisfaction; working in a responsible manner with its customers, suppliers, and government oversight agencies; and generating above-average returns for its investors.

Increasing the market value of their firms, therefore, becomes the primary decision-making criterion for technology executives and those who follow them. It underlies the entire rationale for why corporations adopt advanced information technologies. While individuals will have many different opinions about how and where advanced technologies should be deployed, if they work together with the common, overriding objective of increasing the market value of their companies, they will be able to improve their business policies and operations most effectively.

Focusing every executive on the ultimate goal of increasing market value by leveraging the capabilities of advanced technologies to improve the business processes of their firms channels their energies in the most appropriate direction.

However, when senior corporate executives review requests for resources to invest in technologies, they generally find that individual departments are more interested in optimizing their own operations than those of the entire corporation. For example, the accounting staff may look for the primary benefits of technology-based change as a means to obtain more accurate, faster-responding reporting systems. The management information systems (MIS) staff may view a corporate executive's request for ways to leverage advanced technologies as an open invitation to experiment with the latest resumé-enhancing computer operating environments. Manufacturing has been known to regard an explicit emphasis on the use of advanced information technology as a way to prepare more compelling capital appropriation requests for upgrading marginally effective departmental production systems. And so on. Demanding that all technology-based initiatives show a means to increase the entire corporation's market value significantly changes the types of projects that will be recommended and approved.

An Aside: Calculating Market Value

The most straightforward way to calculate a corporation's current market value is simply to multiply its stock price by the number of shares of stock outstanding. However, rather than referring to total market value, investors tend to focus on a more commonly reported number-stock price. The movement of a corporation's stock price is directly equivalent to its market value as long as the number of shares outstanding remains the same.

While private companies, government agencies, and nonprofit organizations do not have a public market to provide them with a market valuation, they do have quantitative measures that they can and should use to estimate their relative change in value from year to year.

Obviously, private companies can use their size, profitability, and changes in both to estimate their value in comparison with similar public companies.

Organizations outside the commercial sector have a responsibility to their constituents to establish a quantitative valuation index against which the worth of the services they deliver can be judged. For a college, this might include the number of applicants, the percentage of applicants who enroll on acceptance, the number of seniors accepted by graduate schools, the preparedness of seniors as rated by recruiters, the value of research grants awarded, professor turnover rates, etc. For government agencies, valuations might be based on the amount of work processed per year, cost per unit of work, accuracy of work results, and turnaround time required to respond appropriately to constituent requests or inquiries.

Competing for Higher Market Value

A startling insight one finds from observing publicly traded companies over time is that with the creative and pioneering use of information systems, numerous companies in many diverse industries have increased their market values relative to the market indices. And conversely, without the intelligent deployment of technology-based capabilities, any company can lose market value relative to its direct competitors. This has numerous and significant implications for running a business successfully and building one's own career.

The first and most obvious issue is that building value is a key responsibility of senior management. Value is defined as market valuation for publicly traded companies, director-determined valuation for private companies, and constituent valuation for government agencies and nonprofit organizations.

Investors reward fast-growing, profitable companies with higher valuations than slower-growing ones whose margins are continuously in jeopardy of eroding. For example, in the rising bull stock market of 1998-1999, slow-growth, profit-pressured consumer products companies lost value compared with the overall stock market indices and especially in relation to high-growth, high-tech suppliers. While consumer products companies normally may not be in competition for the same customer dollar for their products as high-tech suppliers, they are in competition for the same investors' and shareholders' valuations.

During 1998-1999, senior executives at several leading consumer products companies were shown the door because they had not understood how advanced technologies could and should be used to increase market value. Their companies were now competing in the electronic information age and had the opportunity to increase their effectiveness and efficiency with advanced technologies-but they did not have a plan of action.

The inability of veteran executives who knew the consumer products business well to direct their companies to take advantage of the new opportunities being created by advanced technologies became a career-ending problem. Investors were not putting their monies into these consumer products companies because, they said, they did not have confidence in the current management to alter their operations to take advantage of the new technologies available to all organizations-including their competitors.

The axed executives, without a rational strategy for deploying marketed-in-their-face Web-based technologies to lower manufacturing and other internal costs or a vision of how to use information-based marketing techniques to increase sales, simply had lost the competitive battle for higher valuations in the next chapter of the information age. And yes, technology stocks dropped dramatically from the end of 2000 through 2001 as investors placed less importance on growth and more on profitability for the first time in 8 years. Even so, only the few consumer products companies that are managing with the aggressive use of technology, such as Anheuser-Busch, seem able to beat the market indices.

Table 1-1 shows the largest 20 public companies in the United States as ranked by their market value at the end of 2000. Do not rely on this table to draw conclusions about individual companies -there is a lot of history, including acquisitions and divestitures, different fiscal years, special accounting charges, etc., behind the individual numbers. The growth numbers that are important to the investment community are the growth rates of individual lines of business, and these results are not always readily apparent from the top-revenue lines of corporations that have multiple lines of business.

However, the general conclusion that can be drawn from such a market-valuation table is that corporations with fast-growing, profitable lines of business (such as AOL Time Warner, Berkshire Hathaway, Cisco Systems, Home Depot, and Intel) are rewarded with higher valuations compared with their revenue sizes than those which are growing more slowly and are less profitable. To put this in perspective, we can see that the third largest public U.S. company at the end of 2000, General Motors (GM), with revenues of $185 billion but a market valuation of only 26 cents per revenue dollar, or $48.6 billion, is not even on the top 20 highest market valuation list-it came in at number 50.

While size matters in establishing a corporation's market value, projected growth and profitability are the most significant factors in determining current value-and are even more important than size when the investment community decides on the appropriate changes in valuations it should make.

In 2000 AOL Time Warner entered the top 20 for the first time because the company demonstrated high growth in 2000, and many investors projected high growth rates for its multiple lines of business into the future. In addition, companies such as Microsoft, IBM, and Bristol-Meyers Squibb that had only single-digit or negative growth rates in fiscal year 2000 were awarded relatively high market valuations based on the investment community's projections for higher growth rates in the near future (1 to 3 years out) on top of already relatively high profitability levels.

On the other hand, many 1999 high-tech members of the top 20, including Oracle, Lucent Technologies, Dell Computer, Hewlett-Packard, Sun Microsystems, and Texas Instruments, fell out of their previous high standing and did not make the 2000 top 20 because the investment community believed that both their growth rates and the profitability of the sum of their lines of business would decline substantially from previous years. Clearly, market valuations change as the investment community adjusts its perceptions of a corporation's future growth and profitability prospects. The threadbare argument that only high-tech suppliers need to have a vision that shows insightful business technology planning falls apart when it is made to the investment community. After all, investors have witnessed such diverse firms as Enron, originally a distributor of natural gas, redeploy its physical and intellectual assets to become both a provider of broadband communications right of ways and a highly effective electronic broker and market maker of natural gas, pipeline services, and multiple other supposed commodity items. It should be noted, moreover, that Enron shot up from being the seventeenth largest company in the United States in 1999 to seventh in 2000. Financial services companies, such as Charles Schwab, Fidelity, and Wells Fargo, have learned to take advantage of the latest Web technologies to grow their businesses profitably by reaching customers they had not even identified 5 years previously. In addition, the list of technology-based successes goes on as airlines have increased customer loyalty, automobile makers are communicating more clearly and directly with their prospects and customers, oil companies have improved their internal production efficiencies, and retailers have added "clicks and mortar" operations.

The hard reality is that senior executives are competing today for relatively higher valuations than other companies with comparable revenues, assets, and profitability, not just against other firms in their own industry. To win this battle, the investment community is demanding both a credible strategic vision for profitable growth and proof of an ability to execute against that strategy. And one key component of any winner strategy must be taking the actions necessary to obtain a competitive advantage based on the aggressive use of advanced information technologies. A strategy based on deploying advanced technologies to both gain market share and lower production costs is key to being successful in the critical area of obtaining and holding investor confidence.

This same competition for increasing market valuation through the use of advanced information technologies extends beyond the private sector and into both the public and educational arenas. One does not have to look beyond the U.S. 2000 presidential election to see that political candidates now believe that they must demonstrate their technology vision and acumen to gain the confidence of the public. Dedicated government agency heads report that they must show credible plans for improving the services they are chartered to provide and increasing their internal efficiencies at delivering core services with the use of technology if they are to hold onto their positions and obtain the funding they believe their departments deserve. Moreover, the heads of educational institutions, from kindergarten through graduate school, without an information systems technology-inclusive 5-year plan for the future simply are not going to gain the necessary support from oversight boards, parents, and students to remain in their leadership positions. All must become technology executives if they wish to be successful.

Finally, from a personal career perspective, the executives in charge of a company that is losing value run a high likelihood of being removed from their positions. Either the board of directors will ask them to resign, or a more successful rival will acquire the company and eliminate their redundant positions. Increasing market value through the use of advanced technologies really does become a matter of corporate survival.

The Market Valuation Golden Equation

There is nothing magical about obtaining a higher market valuation than other firms in an industry category. It is really a quite simple formula that we call the golden equation. The golden equation states that having the largest market share of the industry's target customer base plus obtaining the highest profitability compared with all other suppliers to the this target customer base equals a winner corporation with the highest-in-class market value. Sounds simple? Yet, when other firms are striving for the same goal and not all the members of your corporation understand that working toward the objective of increasing the firm's market value should be their ultimate objective, managing to the golden equation can get very complicated.

Increasing Corporate Value

The predicament that executives face continuously when strategizing about ways to advance their corporation's market value is how to increase both revenue growth rates and profits. However, the serious problem they face is that these actually are two conflicting goals.

Investing in growth opportunities lowers total company margins in the short term. The tradeoff, however, is that while not investing in a line of business generally results in higher margins over the short term, this tactic also will result in lower intermediate- and long-term growth rates. Figure 1-1 illustrates how two companies with identical revenues and unit sales at a specific point in time might be managed-one for current profitability and one for future growth.

Technology executives have evolved from both traditional business executives and professional information systems managers because they want it all. And they have learned that they can obtain above-average growth rates and profitability through the skillful deployment of advanced technologies throughout their companies and ahead of their competition....

Meet the Author

John Logan is founder and chairman of the Aberdeen Group, a consultancy that provides IT market intelligence, positioning, and market acceleration services to companies in order to identify new market opportunities, enter those markets successfully, and accelerate the adoption of new technologies. He is a popular speaker at venues around the world including the MIT Leaders Forum and Gillette's Global Information Executives Annual Meeting, and a former associate with the prestigious Cambridge Research Institute.

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