Chapter 1: Value and Value Proposition

Overview

THE STEP-WISE Approach to Value (SWAV) is a method to assess the value derived from a Strategic Alternative (SA). Following the path illustrated in Exhibit 1-1, we need to understand what we are looking for (shareholder value) and how it is generated (value proposition) before discussing the value filters. This chapter will deal with the concept of value; more specifically, what it is and how it is derived.

Exhibit 1-1: The Step-Wise Approach to Value.

Value has become a buzzword. We constantly hear executives say things like:

• They are adding value.

• The value added of a product is …

• This is of great value.

Value seems to be an ubiquitous term, yet if you speak with a hundred executives, you will get a hundred different definitions. The major problem is that there is no clear definition with regard to the concept of value. If the objective of a business is to create value, then it needs to be clearly defined. We need to clear up this issue for the purposes of this work. This problem also exists in finance. This chapter will look at three concepts of value: book value, market value, and lastly the valuation concept upon which this book is based. Intrinsic value is the best form of value for our purposes because it is based on cash flow; it is forward-looking and can be quantitatively measured.

After establishing this concept, we will present a way to understand how value is created. More specifically, we will answer the question, "How are we adding value?" It is critical to understand the value proposition for an SA. The value proposition will be described in terms of three distinct sources of value: revenue increase and maintenance, competitive repositioning, and efficiency. It is important to clearly describe the value proposition so that it can be assessed using the filters of the SWAV. When it comes to creating intrinsic value, there are a limited number of ways to do it. Using this method of categorizing value propositions will help to eliminate confusion and will tend to eliminate value propositions that do not increase shareholder value. This keeps the company focused on Strategic Alternatives that will tend to increase shareholder value.