Strategy P. 16

A misapplied bottom-up approach can often lead to unintended consequences.

Stakeholder theory may be more conducive than shareholder theory to curbing company impropriety.

Intellectual property assets now account for 50% to 70% of the market value of all public companies, and corporate America is intensifying efforts to maximize the return on those assets. That explains why a small but growing number of Fortune 500 enterprises are moving away from a strict reliance on the “exclusivity value” of their patents and other intellectual property & #8212; that is, their power to exclude or hinder competitors & #8212; and are instead seeking to tap the often enormous financial and strategic value of their core technology assets by licensing them to other companies, including competitors. The practitioners of this strategic licensing, as it is called, are betting that any loss of market exclusivity that may result from making available their “crown jewel” technologies will be more than offset by the financial and strategic benefits gained. For this article, the author interviewed some of the pioneer practitioners of this emerging approach and got them to explain the nature and degree of the benefits their companies are now reaping. Although patent rights should always remain an important weapon in a company’s competitive arsenal, strategic & #8212; licensing initiatives are encouraging managers to rethink what it means to create and sustain competitive advantage in business.

In the wake of corporate scandals and ensuing concerns about board oversight, various suggestions for reforming boards and redefining the role of directors have been put forward. The proposals have focused on issues such as board composition and ways to ensure board independence from management. Such recommendations, while useful, do not deal with the fact that directors, no matter how dedicated and diligent, cannot serve as adequate monitors of management without sufficient information and the means to analyze it. The author urges companies to provide directors with that information in the form of detailed discounted-cash-flow (DCF) valuation models & #8212; the tool that can help them understand how the company intends to create value over time. In conjunction with observed financial results, review of the evolution through time of the valuation models can give directors the critical information they need to discharge their duties to shareholders. The author stipulates that DCF models are not the silver bullet that will forever safeguard investors from management chicanery & #8212; the models can be manipulated. But a sequence of DCF models serves two important purposes. It forces management to translate its vision into specific numbers that show how shareholder value will be created, and it forces the board to continually monitor and evaluate those numbers in light of ongoing financial performance and stock market valuation.

Many managers in traditional product-oriented organizations are struggling to turn their companies into solutions-oriented businesses, widely considered the route to success in the 21st century. A good shortcut may be to establish corporate consultancies & #8212; consulting units that offer customers solutions based on the traditional business’s products or expertise. Thus computer companies such as IBM are moving toward integrated information-technology solutions, and telecom-equipment manufacturers such as Nokia are providing turnkey network solutions. Changing from a product-oriented manufacturer to a customer-focused solutions provider can be rewarding, but because it involves a sweeping reorientation of the organization, it is also difficult. That’s why the less radical approach of a consultative component often works best. But even that strategy has its challenges, with success depending on determined managers who know what the pitfalls are and how to avoid them. Without firm management, the consultancy may be swept away by forces that draw it too far into the product business or too far away from it. By thinking through the mission, identity and structure challenges and choosing the right strategy for handling them, leaders can both manage the consultative component and attain synergies between the product-centric business and the corporate consultancy’s customer solutions.

As the shadow of corporate scandals looms ever larger, government’s role in regulating and influencing core business practices also has grown more prominent. As a result, businesses are struggling to reconcile the spotlight of increased regulation with the goals of corporate strategy. To navigate these difficult straits, businesses need to understand how governments can help or hinder their business objectives while they develop hybrid strategies that focus on shaping the rules. It becomes essential that companies better understand the games business and government play and the roles of each in making and enforcing the rules. Michael D. Watkins, associate professor of business administration at Harvard Business School, identifies two major types of games: value-net games, which relate to cooperation and competition among businesses, and public-interest games, in which coalitions of businesses and industry associations are pitted against nonbusiness organizations, such as unions, consumer groups and environmental entities. Watkins believes that the most effective businesses craft their strategies by combining different approaches from each game, which in turn helps to shape how governments regulate future corporate activity.

Disruptive strategic innovations are not necessarily superior to the traditional ways of competing, nor are they always destined to conquer the market. Rushing to embrace them can be detrimental for established companies when other responses, including ignoring the innovation, make more sense.

New research shows that companies owned by founding families have higher profits and valuations.

A new study finds that only a few large retail firms have a genuinely global presence.