INSEAD Library

Includes bibliographical references and index

Digitized

Management Between Strategy and Finance The Four Seasons of Business Contents PART 1: INTRODUCTION...................................................................... 1 PART 2: BASIC PRINCIPLES .............................................................. 13 1 Market orFirm?......................................................................................15 1.1 Prudence and Cooperation.............................................................. 15 1.2 Hierarchy and the Firm.................................................................... 20 1.3 TheMarket and the Firm -- A Comparison..................................... 23 1.4 Innerand Outer Layers..................................................................... 28 1.5 Summary.......................................................................................... 31 1.6 Recommended Reading................................................................... 31 2 Resources.............................................................................................. 33 2.1 A Typology of Resources.................................................................33 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 Two Features of Resources......................................... 33 Private Goods with Externalities.................................34 Public Goods............................................................... 36 Eight Different Types of Resources............................ 37 Summary..................................................................... 39 Decisions Based on Strategy or Finance?................... 40 2.2 Lackof Marketability....................................................................... 43 2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 Introduction................................................................. 43 Transaction Costs........................................................ 43 Technical Transaction Costs....................................... 46 Specificity....................................................................48 Synergies..................................................................... 49 The Problem of Hold-up............................................. 51 2.3 Public Goods....................................................................................53 2.3.1 2.3.2 2.3.3 2.3.4 Knowledge ­ Definition.............................................. 53 Knowledge ­ Use ....................................................... 54 Knowledge and Investments....................................... 55 Types of Knowledge................................................... 58 2.4 Summary..........................................................................................61 2.5 Recommended Reading...................................................................62 3 Transfer pricing..................................................................................... 63 3.1 Internal Services.............................................................................. 63 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 The Story so Far.......................................................... 63 Decentralized Decision-Making..................................64 A Simplified Example................................................. 66 Interpretations............................................................. 68 Transfer Prices Equal to Marginal Costs.................... 70 How it Works in Practice............................................ 71 3.2 Chronological and Logical Connections........................................73 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 Phases of the Business Process................................... 73 Building a Decision-Tree............................................ 74 The Nature of Inputs................................................... 78 Backward Recursion................................................... 79 Theory into Practice.................................................... 82 Four Phases................................................................. 84 3.3 Summary........................................................................................ 86 3.4 Recommended Reading..................................................................86 4 Think Strategically................................................................................ 87 4.1 History and Tools of Strategic Management................................. 87 4.1.1 4.1.2 4.1.3 What Is Strategy?........................................................ 87 The Beginnings of Strategic Management..................88 Later Developments: The Market-Based View.......... 92 4.1.4 4.1.5 The Resource-Based View (RBV).............................. 94 Networks......................................................................99 4.2 Challenges for Strategic Management............................................. 103 4.2.1 4.2.2 Change Drivers............................................................ 103 Limitations of Traditional Strategic Tools.................. 109 4.3 Summary.......................................................................................... 111 4.4 Recommended Reading.................................................................... 112 5 Think Financially.................................................................................... 115 5.1 Some Basic Finance......................................................................... 115 5.2 Focus on Cashflows......................................................................... 117 5.3 Choosing the Best Total Cashflow...................................................119 5.4 Fisher Separation and Net Present Value......................................... 121 5.5 Summary.......................................................................................... 122 5.6 Free Cashflows.................................................................................124 5.7 The Capital Asset Pricing Model..................................................... 127 5.8 Company Valuation.......................................................................... 132 5.8.1 5.8.2 5.8.3 The formulas for DCF................................................. 132 EBIT, "Equity Value" vs. "Entity Value"....................134 Development of Capital Markets................................. 136 5.9 Summary.......................................................................................... 139 5.9.1 5.9.2 Principles of Financial Thinking................................. 139 Finance-based Management........................................ 140 5.10 Recommended Reading..................................................................142 PART 3: THE FOUR SEASONS OF BUSINESS ................................. 143 1 Establish the Basics and Choose a Position.......................................... 145 1.1 Selecting a Location.................................................................... 145 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 The Basics.................................................................. 145 Von Thünen............................................................... 146 Hotelling.................................................................... 147 Location Theory Today............................................. 149 To Choose the Center or not?.................................... 151 1.2 Shifting position............................................................................. 155 1.2.1 1.2.2 1.2.3 1.2.4 Kondratiev Waves..................................................... Organic Growth......................................................... Corporate Transformation......................................... Using Depreciation.................................................... 155 158 161 164 1.3 The First Season -- Conclusions................................................... 166 1.3.1 1.3.2 Identifying Phases...................................................... 166 Summary.................................................................... 168 1.4 Recommended Reading................................................................ 169 2 Develop and Build................................................................................ 171 2.1 Innovation................................................................................. 171 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 What is Innovation?................................................... 171 The Role of the Entrepreneur.................................... 173 Development and Scalability..................................... 174 Development and Variants........................................ 176 Innovation -- A Growth Engine................................ 178 2.2 Context and Influence -- Inspiration and Environment............... 179 2.2.1 2.2.2 2.2.3 Five Factors............................................................... 181 Macroclimate............................................................. 184 Schumpeter vs. Kirzner............................................. 185 2.3 Entrepreneurship as a Process...................................................... 189 2.3.1 2.3.2 2.3.3 Seven Steps................................................................ 189 Internal Capital Markets............................................ 191 Target Costing........................................................... 194 2.4 The Second Season ­ Conclusions................................................ 196 2.4.1 2.4.2 Identifying Phases...................................................... 196 Summary.................................................................... 198 2.5 Recommended Reading................................................................. 200 3 Grow....................................................................................................... 201 3.1 From Prototype to Market Success................................................ 201 3.1.1 3.1.2 Managing Resources and Risks................................. 201 From Capital to Talent ­ Required Resources .......... 205 3.2 Individualized Mass-Market Products........................................... 208 3.2.1 3.2.2 3.2.3 Four Stages of Development...................................... 208 Attributes and Add-on Services................................. 210 Technological Leap.................................................... 213 3.3 The Sales Process.......................................................................... 214 3.3.1 3.3.2 3.3.3 3.3.4 Market Introduction................................................... 214 Branding..................................................................... 215 Market Penetration..................................................... 219 Employees and Incentives.......................................... 221 3.4 Different Paths to Growth.............................................................. 225 3.4.1 3.4.2 Organic Growth.......................................................... 226 External Growth......................................................... 226 3.5 The Third Season ­ Conclusions..................................................... 231 3.5.1 3.5.2 Identifying Phases...................................................... 231 Summary.................................................................... 233 3.6 Recommended Reading................................................................. 234 4 Earn........................................................................................................ 235 4.1 Present vs. Future............................................................................ 235 4.1.1 Balance....................................................................... 235 4.1.2 4.1.3 4.1.4 4.1.5 Market Demands....................................................... Crises......................................................................... A Healthy Company.................................................. Indicators................................................................... 237 239 243 246 4.2 Value Orientation.......................................................................... 248 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 Judging the Future..................................................... 248 Profit or Cashflows?.................................................. 249 Sales, Goods and Services, Finances........................ 252 Ratios and Programs.................................................. 254 Economic Value Added............................................. 256 4.3 Continue or to Liquidate?.............................................................. 259 4.4 The Fourth Season ­ Conclusions................................................. 266 4.4.1 4.4.2 Identifying Phases..................................................... 266 Summary.................................................................... 268 4.5 Recommended Reading................................................................. 269 5 The Four Seasons of Business ­ An Afterword ................................ 271 5.1 The Question: Strategic or Financial Thinking?.......................... 271 5.2 Lifecycle ­ The Key to the Question........................................... 272 5.3 Other Lifecycle Models............................................................... 273 PART 4: The Art of Balance ­ A Closing Remark.............................. 279 1 The Tug of War ................................................................................... 281 1.1 Between Two Extremes............................................................... 281 1.2 The Devil is in the Details............................................................ 284 1.3 Shades of Gray............................................................................. 285 1.4 Integrated Approaches, Hidden Antagonism............................... 286 1.5 The Phase-Based Approach......................................................... 288 2 Management Between Strategy and Finance.................................... 291 PART 5: Test Your Understanding....................................................... 295 APPENDIX.............................................................................................. 313 1 Index of Persons.................................................................................... 315 2 Glossary of Terms................................................................................ 319 About the Authors................................................................................... 325