How Wealth-Creation Metrics Can Help Every Business Become More Valuable
In addition to the recommendations provided in this sidebar last year (see Chief Executive, Nov./Dec. 2012, pp. 58-9), here are five major takeaways from an analysis of the Index’s past six years’ Best and Worst Wealth-Creator profiles: the reasons why businesses did well or didn’t:
Design: Far and away, the most powerful reason for prospering, or failure to do so, was the design of the business—how it makes money. Amazon is a good example. Their customer-value proposition (product range and selection, information on and customer reviews of what it offers, the actual buying experience and the pricing) is compelling, combined with the overall design of its service and the business’s seemingly endless ability to scale. That said, Amazon’s choice to operate on razor-thin margins has both fueled its revenue growth and led investors to continue griping, (“When are we going to make some real money here?”) as it continues to reinvest in its business. But its three-year total return is 27 percent, so Jeff Bezos just might be right, long term. In contrast, Dell, once a business-design innovator, is now reduced to offering commodity technology and competing on price.
Capital Management: The next reason for notable success, or the lack thereof, is wise management of capital. While Gilead Sciences, one of this year’s top wealth creators, has proved adept at this practice by, for example, partnering rather than making “whole hog” investments, the Rowan Companies, one of this year’s worst, has a pattern of investing in oil-drilling rigs, on which there’s an uncertain return. It hasn’t exceeded its risk-adjusted cost of capital in the past three years.
Brand Building: A strong brand can make an enormous contribution to business value. Here, a great example is Brown-Forman’s Jack Daniels’ brand (another of this year’s profiled best wealth creators).
Product Design: The design of what your business offers—its products and services—is another pivotal factor in succeeding or not, witness Apple.
Leadership: And the last factor, for this year, in how well a business fares lies in the mindset of its leader—intent. What do you, as a leader, want, and how serious are you about it, really? This is not about beating up the sales force for better results. Rather, it’s about wanting to grow and then figuring how, specifically, your business will do so (harnessing a great business design, brand, suite of offerings, etc.). Amazon’s Bezos is the top-of-mind poster child for intent. Others come to mind, like David Novak, CEO of Yum! Brands (Pizza Hut, KFC and Taco Bell), with its energetic push to deepen its global presence. —Drew Morris