Every company faces innumerable options for where to play and how to win. Often it has to sort out seemingly conflicting objectives, such as the need for both long-term growth and short-term profitability, to choose which options to pursue. To “maximize long-term value” means — when there are mutually exclusive options — to select those that will give the greatest sustained increase to the company’s economic value. We once heard a corporate leader ask, “But how can you ever know when you have maximized value?” The fact is, you can’t, because you can never know with certainty if there’s a better option than those you’ve considered so far. To “maximize long-term value” is to never stop looking for those higher-value options.
It’s worth emphasizing that “maximizing long-term value” is not the same thing as “maximizing share price” or “maximizing shareholder value.” Those objectives typically represent the more short-term demands of current shareholders or their advisors, and they do not always align with what is best for all shareholders, particularly long-term owners. On the other hand, “maximizing long-term value” does not mean forgetting about the short term. Economic value takes into account growth and profitability, the short term and long term, and risk as well as reward.
To define the fundamentals of your business strategy, you need only to answer three questions:
1. Who is the target customer?
2. What is the value proposition to that customer?
3. What are the essential capabilities needed to deliver that value proposition?
Without clear and coherent answers to these three questions, you may have an exciting vision, a compelling mission, clear goals, and an ambitious strategic plan with many actions under way, but you won’t have a strategy.
Reprint No. cs00002
- Ken Favaro is a senior partner with Booz & Company’s enterprise strategy practice, and is based in New York.
- Evan Hirsh is a partner with Booz & Company’s engineered products and services practice, and is based in Cleveland.
- Kasturi Rangan is a principal with Booz & Company’s engineered products and services practice, and is based in Cleveland.