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The fault line -- that dangerous, unstable seam in the economy where powerful innovations and savage competition meet and create market-shattering tremors. Every company lives on it; no manager can control it.
In the original edition of Living on the Fault Line, Geoffrey Moore presented a compelling argument for using shareholder value (or share price) as the key driver in management decisions. Moore now revisits his argument in the post-Internet bubble world, proving that the methods he espouses are more germane than ever and showing companies how to use them to survive and thrive in today's demanding economy.
Extending the themes of Crossing the Chasm and Inside the Tornado, his first two books on the dynamics of the high-tech markets, Moore shows why sensitivity to stock price is the single most important lever for managing in the future, both as a leading indicator of shifts in competitive advantage and as an employee motivator for making necessary changes in organizations heretofore impervious to change.
This revised and updated edition includes:
- A deeper emphasis on core versus context, which has emerged as the key distinction in allocating resources to improve shareholder value
- A new Competitive Advantage Grid that will aid managers in achieving and sustaining competitive advantage, the most important component in managing for shareholder value
- An expanded Value Discipline Model as it relates to the Competitive Advantage Grid
- Analysis of the powerful new trend toward core/context analysis and outsourcing production duties
- Updated models of organizational change for each stage of market development
As disruptive forces continue to buffet the marketplace and rattle the staid practices of the past, Moore offers a brilliant set of navigational tools to help meet today's most compelling management challenges.
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About the Author
Geoffrey A. Moore is the author of Escape Velocity, Inside the Tornado, and Living on the Fault Line.
Read an Excerpt
Living on the Fault Line
Understanding Shareholder Value
What is a share of your stock worth? By definition a share entitles its owner to a percentage of the future returns of your business. Owning all the stock in your company would entitle one to 100 percent of all your future earnings forever. What, exactly, should that be worth? And how would or could one know?
The challenge lies in the word future—how to value what is essentially a bird in the bush, not a bird in the hand. Investors and analysts must find some way to understand your business and its future trajectory so that, at any given price, they can decide whether to buy, sell, or hold your stock.
This has led to something of a consensus around the following as the fundamental valuation formula:
The total value of a company, its market capitalization, is equal to the present value of its forecastable future earnings from current and planned operations, discounted for risk.
Let's parse this sentence one phrase at a time. We're interested in the present value because the initial competition for all investment is cash-investors keeping their cash in hand and not parting with it to anyone. How much of this cash in hand today is your company really worth? Only a buyer and a seller agreeing to trade shares for cash at a given price can truly testify to that amount, with each new trade bearing witness to a new act of valuation. The stock market continuously reports on the fluctuations in this ongoing stream of cash-equivalent valuations in the form of a running series of stock price quotes. Multiplying any given quoteby the number of shares outstanding, you can calculate your company's current total value, or market capitalization, at any time.
The price of the last trade sets the historical value for your company. It is a benchmark for the next trade, but it does not set the value of that trade. Instead, future considerations do. Specifically investors focus on forecastable future earnings for the following reasons:
- It is earnings, not revenues, that are tracked because that is what an investor is entitled to a share of.
- They are future earnings because investors are not entitled to past earnings, only those coming up. When these earnings move from a future promise to a present achieved reality, they can either be distributed to investors in the form of some kind of a dividend or they can be reinvested in the company. If they are:, reinvested, the investor defers their reward in hopes of future additional earnings that such reinvestment might generate.
- And finally, they must be forecastable earnings because investors need some current foundation for incorporating the future into their present calculations.
Forecastability is fundamental to investability in that the higher the probability of the forecast, the lower the risk of investment.
Companies with high forecastability are typically market leaders in robust markets, such as IBM in enterprise systems, Microsoft in PC software, and Intel in microprocessors. When a company is a market leader in a weak market, such as American Airlines or United Airlines, or when they are in a strong market but not the market leader, such as Motorola or Ericsson in the mobile phone handset market, then forecastability becomes a much greater challenge, and stock price suffers.
The forecastable future earnings investors focus on must come from the company's ongoing current and planned operations. That is, although investors are entitled to a percentage of any bonanza earnings the company gets—say by finding gold on its corporate site or, more likely, by investing in a strategic partner whose stock subsequently appreciates—they have no practical basis for incorporating the chance of such gains into their valuation of the stock. Thus, although Adobe made over $300 million when it sold its investment in Netscape, the windfall had no appreciable impact on its stock. Moreover, although a company can indeed create earnings outside of operations—say, via the actions of its corporate treasury, by investing in derivatives, for example—it will not please its investors by so doing because it is inherently changing the risk to which the earnings stream is exposed. indeed, in the 1990s the CFO of Dell Computers was taken to task precisely for such actions. If investors want to take derivative risk, they would like do so on their own time; they don't want someone else to do it for them.
And that leads directly to the last phrase, discounted for risk. This discount is what compensates investors for the use of their capital. After all, in committing their capital to your company, investors are taking a risk that it may be consumed without a return, or that it may generate a substandard return, or that had they invested it somewhere else they could have earned a better return. You pay for that risk by promising to return them more money than they invest. The question is, how much of a premium would be fair?
Risk is the true wild card in all investment decisions. It can never be known, only probabilistically assigned. Moreover, perceived risk changes dynamically with new information about any of the myriad of variables incorporated in its view. So rather than try to calculate it, free markets use the mechanism of many investors buying and selling to let the price seek its own level. That is why the stock market is so jittery. It is continually rebalancing its equations to account for streams of information that may have bearing on risk. The market does this not through some grand mathematics but rather through the simple expedient of free exchanges, Some right, some wrong, but all having the effect of automatically rebuilding the new equation. We may never be able to write this equation down, but with the ticker tape we have its output before us at all times.
To recap then, your market capitalization is equal to the present value of your company's forecastable future earnings from current and planned operations, discounted for risk. That's the definition, if you will. But it is one thing to define a concept and another to really get it. To really get shareholder value, I think you have to visualize it.Living on the Fault Line. Copyright © by Geoffrey A. Moore. Reprinted by permission of HarperCollins Publishers, Inc. All rights reserved. Available now wherever books are sold.
Table of Contents
|Part I||The Investor Perspective||1|
|1||Understanding Shareholder Value||5|
|2||Core Versus Context||25|
|Part II||Managing for Shareholder Value||49|
|3||Line Management for Shareholder Value||53|
|Part III||Competitive Advantage||79|
|4||The Competitive Advantage Hierarchy||83|
|5||The four Value Disciplines||95|
|6||The Competitive Advantage Grid||108|
|Part IV||Living on the Fault Line||129|
|7||The Technology Adoption Life Cycle||132|
|8||Stage one Adoption: The Early Market||139|
|9||Stage Two Adoption: Crossing the Chasm into the Bowling Alley||148|
|10||Stage Three Adoption: Inside the Tornado||158|
|11||Stage four Adoption: On Main Street||169|
|12||Examining the Foundations||181|
|13||Triage in the Line Functions||198|
|14||Recrossing the Chasm||207|
|Part VI||Building to Last||219|
|15||Modeling Business Cultures||223|
|16||Managing Culture for Shareholder Value||237|
|Epilogue: Shedding Context, Embracing Core||253|