The Valuation Filter

Here, a guide to the analytics necessary to test how future strategy creates value is provided. The starting point is the use of statistics and regression methods to facilitate strategic planning and forecasting. An ability to model and forecast key business drivers is important. Intrinsic value techniques are utilized to estimate future financial results. Ability to consistently achieve sustainable growth rates and still maintain a positive financial spread over the cost of equity is a key factor for future success.

Dealing with uncertainty poses special problems requiring sophisticated financial forecasting techniques. Simulation models refine the inputs to shareholder value analysis.

The outcome of this filter is to determine if the Strategic Alternative creates shareholder value. Shareholder value is created when there is an increase in intrinsic value. "Intrinsic or estimated value is the present value of the expected cash flows from that asset".^[1]

Now that an analytical arsenal has been built, we offer our final thoughts on the deployment of the approach in the business environment. Change is invariably meet with resistance. The barriers that may be encountered in implementation of analytical and quantitative systems from consulting experience are delineated here. These will prove helpful as you migrate your organization to a value-based company.

This work is not intended to be an exhaustive in nature. Our objective is to provide the reader with an approach to bridge the gap between strategy and shareholder value that has been tested in client settings. New tools are continually introduced into the marketplace, and there are other Strategic Alternatives that companies can use to increase value. This book provides a foundation from which new strategic and financial innovations can be added.

^[1]Charles P. Jones, Investments: Analysis and Management, 7th ed. (New York: John Wiley & Sons, 2000), p. 198.