Revenue Increase and Maintenance

One aspect of this value proposition is in many respects self-explanatory. A Strategic Alternative will increase value if it generates cash from increasing revenue. The relationship is that rising revenue will drive increasing cash flow. The assumption here is that costs and taxes do not exceed the revenue boost. Increasing revenue becomes more difficult in established industries. This occurs because there is greater competition for the same dollar of revenue. This intense competition tends to drive down cash flow because of pricing pressures (see the Porter Model in Chapter 5). This value proposition is normally associated with mergers and acquisitions.

The maintenance aspect of the RIM value proposition is less intuitive. Revenue maintenance is thwarting the loss of revenue driven by market conditions. A company may invest in a technology initiative to improve customer retention. For example, computer telephony interface (CTI) technology improves the flow of information from core systems to the point of contact with the customer. The benefit is improved customer service through improved access to account information and less wait time. The key assumption here is that a Strategic Alternative will protect the existing stream of cash flow. The underlying premise is that revenue and hence cash flow will be lost if the investment is not made. Revenue maintenance investments are normally made if companies feel that they are catching up to their competition. In the CTI instance, the other competitors would already have this technology. The evaluating company would consider a CTI investment as a "strategic necessity". In the past, managers would use the strategic necessity argument to move forward with SAs that did not have strong quantitative support. With the analytical rigor of the SWAV, SAs will need to be validated through the generation of intrinsic value.