Advanced Management Program
Strategies for Creating Value and Building Advantage

How do companies build value and advantages? In a series of sessions in Wharton's Advanced Management Program, faculty explored this issue from different perspectives. Among their insights:

Choose a value strategy: To build value, companies need to start by deciding how to create value for customers. Wharton Marketing Professor George Day noted that customers look for three different kinds of value:

  • Price value (low cost)
  • Performance value (superior functionality)
  • Relational value (such as personalized treatment)

To offer superior value to customers, companies need to achieve differentiation along one of these dimensions while maintaining parity with competitors along the other two.

The choice of a value strategy has implications for the organization's overall design and processes. Value is created by a "value-creating system that leverages and integrates a whole lot of different elements," Day said. For example, Dell Computer offers a value proposition that includes best price, easy access, customized products, and a trusted brand. This value proposition is supported by a web of elements that work together to deliver it. A company with a price value strategy obviously needs a different organization than a firm pursuing a strategy of customer responsiveness.

The importance of these value dimensions to customers evolves over time, so companies need to change their strategies. This path often starts with a focus on performance and then moves to either price or relationship. "A market-driven strategy is one that looks ahead, tries to anticipate where the market is going, and puts in place strategies to address that," Day said. "We need to be careful about how we manage that evolution."

Calculate value after earning cost of capital: While companies sometimes bandy about positive profit numbers, Wharton Adjunct Professor of Finance John Percival points out that the true test of value creation is not merely in earning more than expenses. Value creation is what the company provides over the cost of capital. The average U.S. company produces a return on equity of roughly 13 percent, and investors earn average returns of about 11 percent over long periods. This should form the baseline. By this standard, Emerson Electric, a company studied in the AMP, did well, with an average of about 18 percent annual return from the 1950s to the early 1990s. An investor who put $15 into the company in the 1950s, reinvesting dividends, would have been holding $2,500 less than four decades later.

While the media and markets often focus on charismatic leaders and rapid growth, value creation is something different altogether. John Percival points out that while Fed Ex grabbed the limelight in the mid 1980s and mid-1990s, its boring, brown rival, UPS, delivered the value. Looking at key metrics such as Market Value Added (the difference between the market value of the company and its book value), Fed Ex's MVA dropped from $1.9 billion to $1.3 billion between 1985 and 1994. "This is a $600 million decrease at a time when the market was one of the best, when a rising tide was supposed to lift all boats," Percival said. At the same time, UPS, with slower growth, increased from an estimated MVA of $3.5 billion to $9 billion. "Is anybody seeing this?" Percival asked. "Do you think sometimes charisma is overrated? Do you think sometimes growth is overrated?"

Overcome limits of thinking to see opportunities for advantage: To achieve advantage, you first have to see the opportunities, but we are limited by thinking traps such as myopic frames, overconfidence, distorted information, and anchoring, said Paul Schoemaker, co-author of Winning Decisions, in a session on critical thinking at Wharton's AMP.

For example, General Motors' frame in the late 1960s contributed to its failure to see opportunities for advantage that were apparent to Japanese rivals. "GM believed that it was in the business of making money, not cars, and that success is the result of rapid adaptation, not technological leadership," Schoemaker said. Company leaders also saw cars as a status symbol, requiring constant upgrades, considered the U.S. market as separate from the rest of the world, and expected fuel to be cheap and abundant. "These assumptions proved to be false," he said. "The dilemma is that while frames help to simplify and focus our attention, they also filter out relevant information."

We also may fail to grasp new advantages because we suffer from overconfidence. Consider the Decca Recording Company executive who met with an oddly named, four-member rock band in 1962. He refused to sign them, saying confidently that, "We don't like their sound. Groups of guitars are on their way out." His overconfidence cost him a chance to sign the Beatles, causing his company to lose a significant advantage to rivals. This overconfidence plagues all of us, even experts (particularly experts, in fact), and causes us to miss opportunities or threats.

To overcome these traps, Schoemaker urged AMP participants to challenge their own thinking. "Ask yourself: What don't we know that we should and can know? Where might we be overconfident or anchored? Is some of our information slanted or biased?"

 

    

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