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Crafting business unit strategy is a prerequisite for effective business performance management, even though it is not part of the process itself. We will not give a full description of strategic planning here, but rather point out how discounted cash flow analyses, such as those developed in value driver analysis, can greatly assist management in choosing a business unit strategy.
Applying valuation to strategy can produce significant insights:
• The retail banking division of a money center bank had been following a “harvest” strategy and taking cash out of the business. The division’s new chief operating officer wanted to switch to an aggressive growth strategy to regain market share. This strategy had a price tag of $100 million for refurbishing branch bank facilities, installing automatic teller machines, better training for tellers, and a new advertising campaign. While the bank’s CEO originally rejected the new strategy because it would lead to reduced return on equity in the first year, he changed his mind when a DCF valuation showed that the value of the aggressive growth strategy was 124 percent higher than that of the harvest strategy.
• A consumer products company determined that pursuing accelerated category growth had twice the potential value increase and a fraction of the downside compared with expanding the brand into new products.
Another benefit of making a direct link between strategy and valuation is that this explicitly links the strategy development process with other efforts to make value happen. If the business unit strategy process is not set up with a value creation focus, then performance management will be less meaningful, as its goals may not be congruent with the chosen strategy.