Finance

Avoiding the Misstep that Erodes Value

For those with a long memory, McDonald's recent headlines touting its growth strategy in India seem like déjà vu. When it opened its first restaurant in New Delhi in 1996, McDonald's was in the throes of expansion. Its strategy? Open a set number of new restaurants every year, no matter the circumstances. What that strategy — a singular focus on growth — failed to consider was a wealth of key factors. In India, they included infrastructure inadequacies, prices that were set too high, and local dining preferences that excluded beef and pork.

Wharton Adjunct Assistant Professor of Finance David Wessels explains, "McDonald's growth focus allowed it to take its eye off the ball. For a company that prides itself on ‘Quality, Service, Cleanliness, and Value,' opening restaurants that fell short on all four counts was a serious mistake. Eventually, they had to scale back growth and refocus on their core values."

There's Value in Balance

Wessels cites the problems of McDonald's in the 1990s as an example of a problem common to many organizations. "No matter where you are in the organization, your decisions must balance the needs of three key constituencies: your employees, your customers, and your investors. Too often, executives ignore at least one leg of this critical tripod. Creating value — which is ultimately about decision making — won't happen unless you're consistently focused on all three. Because ultimately, every decision you make will have an impact on them all.

"Let's say you decide to raise prices. At the most basic level, this decision is about moving wealth from the consumer to the investor. Have you considered whether the consumer will tolerate your decision? If your shareholders are pleased but you lose your customers, value is eroded.

"It sounds pretty simple, but the fact is that most people move up within one area of their organization, so they know it well. It becomes their focus, and the basis for every decision they make. Typically, it's either the consumer or the employee. But as you move into general management, you need a broad understanding of all three.

"The weak link in the tripod is most often investors. Executives either fail to understand the investor mindset, or they focus on it too heavily to the detriment of their workforce and their customer base. It's imperative that first, you've got a thorough understanding of how your decisions affect the investor, and second, that you can balance the needs of the investor with those of your employees and your consumers. The need becomes even greater for senior management."

Developing an Investor Mindset

In order to make decisions that add value, considering the perspective of the investor is essential. Wessels leads participants in the Advanced Management Program and Creating Value Through Financial Management through a series of case studies to develop the investor mindset. "When you are facing an execution decision, such as where the next dollar is going, investors are watching for superior margins. They want you to invest for growth, and take some well-calculated risks. In the programs, we think through all possible scenarios. Before you make a decision, you need to ask, ‘What drives negative outcomes? Is it the economy? Emerging markets? What factors are in your control?'

"It's important to understand that whatever your position, leadership wants you to be able to think not only through the eyes of the consumer and the workforce, but also through those of the investor. When your eyes are open to them, you can see how decisions will affect all three. There's always a tradeoff — you can't make everyone happy all the time. But there must be balance, and when you achieve that over time, you build credibility as a leader."

Says Wessel, "Continually taking from one to reward another eventually erodes value, so the quality of your thinking and your decision making is vital. You don't print money — you earn it."

• Advanced Management Program
• Creating Value Through Financial Management