Chris Bradley, Marc de Jong, Wesley Walden

About one-third of US companies reallocate no more than 1 percent of their resources from year to year. Whether through bias, office politics, or plain old inertia, they simply roll this year’s plan into next year. It should, by now, go without saying that this is a terrible starting position from which to expect transformative change. Companies can escape the cycle by creating target portfolios, … [ Read more ]

Carolyn Dewar, Martin Hirt, Scott Keller

Resource reallocation isn’t just a bold strategic move on its own; it’s also an essential enabler of the other strategic moves. Companies that reallocate more than 50 percent of their capital expenditures among business units over ten years create 50 percent more value than companies that reallocate more slowly.

Thales S. Teixeira, Renato Mendes

Any business can — and should — classify their customers’ value chain into value-creating, value-charging (monetizing) and value-eroding activities.

Liz Sweigart

I’ve seen senior executives become entranced by profitability, resource production, asset utilization, top-line revenue, and any one of a number of other measures. As a result, they take their eye off cash. The outcome is predictable: The income statement strengthens while the balance sheet weakens and, ultimately, the company falters because it can’t pay its bills.

Liz Sweigart

If cash is king, why is it treated as a by-product rather than a focus? I argue that the most important thing to look at in evaluating business performance is cash accessibility, or the ability of a company to use its free cash when and where it needs it. Businesses may have cash tied up in different places for a variety of reasons — often … [ Read more ]

Deniz Caglar, John Ranke

Although executives intuitively know that taxes are important to the company’s ultimate profitability (and income available to shareholders), they don’t often evaluate these costs as part of the restructuring effort. Rather, they treat taxes as a cost of compliance, after the major decisions are made. Consequently, they are likely either to create tax inefficiencies or to miss opportunities to put their companies in a better … [ Read more ]

Aaron Gilcreast and Larry Jones

You can sometimes develop discrete measurements of what a company’s intrinsic value might be under different operators by conducting due diligence for a merger or acquisition. But even in the absence of a potential transaction, you should still assess the hypothetical intrinsic value of your businesses if they were operated by someone else. This can help you establish strategies that maximize value. If one of … [ Read more ]

Aaron Gilcreast and Larry Jones

Total shareholder return is typically analyzed as the sum of price appreciation and dividend payouts over a given time period. But this analysis is problematic, because both of these component metrics represent the allocation, not the source, of created business value. They don’t explain what created the value that drove the share price higher or generated the cash needed to pay a dividend.

The actual drivers … [ Read more ]

Aaron Gilcreast and Larry Jones

Intrinsic value is a forward-looking measure of the fundamental worth of a business. Defined as the present value of future cash flows generated by assets, it is a truer reflection than shareholder returns of the value of your strategies and your ability to execute them. When you use intrinsic value instead of TSR to guide decision making, you are less likely to worry about the … [ Read more ]

Aaron Gilcreast and Larry Jones

Share price matters, as do your shareholders. But your share price is, by its nature, an output: a complex, rolled-up reflection of company performance, conjecture, fickle asset-class preferences, risk appetite, ownership mix, supply–demand equilibriums, and fluid expectations held by millions of shareholders who can change their minds in a millisecond. Good luck trying to manage that.

Moreover, your share price is subject to a more fundamental … [ Read more ]

Rodney Zemmel

[Dividends and buybacks matter because] it’s a sign of companies not having the confidence to invest in the long term and instead handing the cash right back to their shareholders now. There’s nothing wrong with giving cash to shareholders. That’s what you’re supposed to do if you’re a company. But the idea that you would give all your current cash back to shareholders rather than … [ Read more ]

Chris Bradley, Martin Hirt, and Sven Smit

It is nearly impossible to make the big moves that successful strategies require if resources are thinly spread across all businesses and operations. Our data show that you are far more likely to achieve a major performance improvement when one or two businesses break out than when every business improves in lockstep. You have to identify those breakout opportunities as early as possible and feed … [ Read more ]

Chris Gagnon, Elizabeth John, Rob Theunissen

Given all the data and practical experience that supports working on [organizational] health, companies’ obsession with the P&L alone continues to puzzle us. It’s right that leaders manage their P&L meticulously, but why not do the same for their health? In fact, why not measure health frequently throughout the year, since it’s a leading indicator of performance, whereas financial results are a lagging one? Similarly, … [ Read more ]

Kyle Hawke, Matt Jochim, Carey Mignerey, Allison Watson

Standard cost-cutting programs typically start with a directive to reduce the previous year’s spending levels. As a result, executives naturally focus on the largest expense categories—the tallest trees in the forest. Xero-based budgeting (ZBB) instead asks everyone to rebuild their budgets from the bottom up, with no carryover from the preceding year. This process identifies many small pockets of waste that add up to big … [ Read more ]

Larry Jones, Joseph Duerr

Although activist investors are successful at improving margins, they struggle to drive growth. We analyzed 55 companies over the past 10 years in which shareholder activists had a significant impact on company governance and strategy, and compared their performance to that of their industry peers. (The aims of activist actions included business focus, board composition, business restructuring, director election, focus on growth, board representation, general … [ Read more ]

Camilo Becdach, Shannon Hennessy, Lauren Ratner

When embarking on cost-cutting programs, many consumer companies adopt a hands-off posture toward what they consider strategic functions—those they see as core to the business—and focus instead on finding back-office efficiencies. Companies have repeatedly searched for savings in their cost centers and support functions by implementing lean techniques as well as through more transformative changes such as automation and outsourcing. The core functions, on the … [ Read more ]

Steven Sinofsky

[Mike Maples] spent many years watching people fight to move expenses to other teams, claim revenue for their own team, or even fight against the price of shared corporate services. This “allocation” dynamic is extreme “finance gymnastics” that grows exponentially complex as the business cross-dependencies grow. Ultimately the meaning of P&Ls derived from allocations becomes the undoing of most rational thought in an organization — hiring, investing, … [ Read more ]

Steven Sinofsky

Going back to the history of accounting, a P&L is a tool used by executives to inform decisions around resource and capital allocation, pricing, etc. In a large organization, it is very difficult to assign revenue and costs to a specific unit within a company and even more difficult to offer true span of control or accountability to a unit leader. The creation of P&Ls … [ Read more ]

Warren Buffett, Charlie Munger

Borrowed money causes more people to go broke than anything else. Charlie Munger has said, smart people “go broke from liquor, ladies and leverage”

Marc Goedhart, Tim Koller, David Wessels

Our research shows that even if short-term investors cause day-to-day fluctuations in a company’s share price and dominate quarterly earnings calls, longer-term investors are the ones who align market prices with intrinsic value.