PREFACE
AND
HOW TO USE THIS WORKBOOK
Welcome to Think Strategically, Think Value: The Complete Handbook for Creating, Sustaining, Analyzing, and Investing in Enterprise ValueTM. The creation of value in business enterprises is, and should be, the focus of every entrepreneur and business manager. Investors should be similarly concerned with the value that is being created in the enterprises in which they invest. This book is all about value creation, using the concepts developed in value driver theory, and picks up where value driver theory left off.
History of Value Driver Theory
Value driver theory was first introduced as a new theory in finance in December 2011, with the publication of A Theory of Value Drivers: A Grounded Theory Study (Wendee, 2011). This publication was the culmination of over three years of research into the creation of value by the value drivers that have an impact on a business enterprise. The complete paper is included in Part I of this workbook.
Since the publication of A Theory of Value Drivers: A Grounded Theory Study, (Wendee, 2011) in 2011, many people have been taught the basics of value driver theory through classes, workshops, private meetings, and publications. This number is growing significantly each month. The backgrounds of the people that have been taught value driver theory have ranged from the homeless (in job training programs) to PhDs at major universities; from students to entrepreneurs and business executives; to people working in business enterprises, non-profit enterprises, and government organizations; and to people in the United States and many other countries around the world. In short, value driver theory has been gaining a significant footprint in just a short period of time. The goal of this workbook is to expand this footprint significantly.
A Universal Adaptability
The fact that value driver theory has achieved such a large footprint in a short period of time is testimony to its versatility and adaptability for organizations of all types and for use by people with all types of backgrounds. If you work in a business enterprise, a non-profit enterprise, a government organization, or any other type of organization, you should be able to gain insight from and learn practical applications for the use of value driver theory in creating value in your organization.
What Is Value?
Before beginning an exploration of value driver theory, we should discuss the meaning of value. As discussed in A Theory of Value Drivers: A Grounded Theory Study (Wendee, 2011, p. 137):
Many definitions of value exist. The definition of value used in the current study was Buffett’s (1996) intrinsic value based on the discounted cash flow concept. Buffett (1996) stated, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life” (p. 11).
A more detailed discussion of the intrinsic value and discounted cash flow concepts can be found in Intrinsic Value and the Intrinsic Value Line in Part I of this workbook and A Primer on the Intrinsic Value Style of Investment Management in Part III of this workbook.
What Is Value Driver Theory?
In writing their book on managerial finance, Brigham and Ehrhardt emphasized the creation of value as the central focus for managers: “Our emphasis throughout the book is on the actions that a manager can and should take to increase the intrinsic value of the firm” (Brigham & Ehrhardt, 2011, p. xix). Others such as Damodaran ( 2002), Kazlauskienė and Christauskas (2008), and Rappaport (1998) have made a similar emphasis. These authors have suggested the use of the intrinsic value model (a discounted cash flow model approach) in the calculation of a firm’s value and have explored the role of value drivers in creating firm value. Value driver theory expands upon the various writings of theorists such as these to create a formal theory of value drivers.
A value driver can be defined as any variable that influences the value (i.e., the intrinsic value) of an enterprise (Kazlauskienė & Christauskas, 2008). The presence and use of value drivers is what creates or destroys value in business enterprises.
In addition to a list of 72 individual value drivers, the theory of value drivers presents a comprehensive value driver possibilities frontier and value driver chain, both of which are part of and are used to explain the theory of value drivers. The theory of value drivers is comprised of 28 propositions that work in concert with the possibilities frontier, the value driver chain, and other elements to explain how value is created in enterprises.
The rationale for having a theory of value drivers is that, if an investment or asset is to have value, there must be factors that give rise to that value. Those factors are known as value drivers, and the identification, analysis, and understanding of value drivers was the focus of the paper on value driver theory and the theory of value drivers. Enterprise managers continuously attempt to identify and implement the value drivers that give rise to value in their organizations. Up until the time of the paper on value driver theory, managers had no formal theory of value drivers and little discussion of the nature and characteristics of value drivers.
The relationships, characteristics, and properties of the theory of value drivers have always existed. They have perhaps evolved in certain ways over time, but as long as humans have been involved in some form of commerce, value drivers have been in the foreground and background exerting their influence. Value driver theory helps to recognize and understand those relationships, characteristics, and properties.
Who Can Benefit from Value Driver Theory?
A principal purpose of the theory of value drivers is to motivate business executives, entrepreneurs, business analysts, securities analysts, and others to focus on value drivers as the source of value creation, and more generally to enable them to understand how value is created. Others, particularly the younger generation of MBAs and managers, perhaps never learned the importance of creating shareholder value in the first place. The theory of value drivers is another important step toward a better understanding of what creates value and serves as a reminder of the importance of value creation, lessons that may have been taught but were forgotten or were never learned in the first place.
By centering the business strategy analysis and formulation process on the theory of value drivers, business managers, strategists, and analysts should be able to make more intelligent and informed decisions regarding value creation in the enterprises they study and manage. Use of the theory of value drivers can provide insight into the range of value creation possibilities and foster dialogue and analysis within organizations by providing a systematic and organized approach to value creation and by providing 72 value drivers and a set of management tools that can be used as a starting point for value driver analysis. The key is to understand which value drivers are affecting a particular organization. Understanding that value drivers are the source of value creation encourages managers and analysts to focus on the source rather than being distracted by activities that are not value creating or that provide little in the way of value creation.
The theory of value drivers is more than an exhaustive list of 72 value drivers and a set of characteristics and properties of value drivers. The theory is a way of thinking about and analyzing value creation within the business enterprise. The theory of value drivers provides a solid foundation for enterprise analysis and strategy formulation.
Managers and analysts who use the theory of value drivers and its methodologies will learn which value drivers are operating within their business enterprises, and perhaps more importantly, which ones should be operating. Managers and analysts will gain a much better understanding of how their organizations work and what drives value within their organizations.
How To Use This Book
Think Strategically, Think ValueTM is a workbook that is currently being developed to apply the principles of value driver theory to the management of business and other enterprises (e.g., non-profit enterprises); and to the analysis of investments in business enterprises. The workbook is a work-in-progress. It is substantially completed, yet it is intended that it will never be absolutely complete – as the author intends that new material will be continually added and old material continually revised. This is a dynamic workbook (in an eBook format) in the sense that it is online, has downloadable parts, and is continuously revised.
There are four main sections in this workbook. They are labeled as: Part I – Overview of Value Driver Theory; Part II – Creating and Sustaining Enterprise Value; Part III – Analyzing and Investing in Enterprise Value; and Part IV – A Look Under the Hood. In addition to building on and enhancing value driver theory, the workbook provides many practical applications for using value driver theory in the creation and analysis of enterprise value.
It is suggested that you begin your study of value driver theory by reading Chapter 5 from A Theory of Value Drivers: A Grounded Theory Study (Wendee, 2011), which can be found in Part I of this workbook. Next, continue your study of value driver theory by reading the other articles in Part I to gain a further understanding of value driver theory and how it can be used in the value creation process and in making better investment decisions.
The workbook is designed so that one progresses from learning the basics of value driver theory in Part I, to learning how to create value in the enterprise in Part II, to analyzing the creation (or destruction) of value that has taken place in an organization in Part III, to looking at the technical aspects of value driver theory in Part IV. It is recommended that in learning value driver theory, one should follow the same progression in studying the workbook – i.e., reading from Part I through Part IV, in that order. Once the reader has gone through the workbook in this fashion, the reader can easily access the articles and sections of the workbook that are of particular interest for later purposes.
Each of the four parts of the workbook begins by giving a brief overview of: (1) the purpose of the section; and (2) what is in the section. Each section is comprised of short articles, templates, and/or spreadsheets. A brief description of each of the four parts of the workbook follows:
Part I – An Overview of Value Driver Theory. Part I includes Chapter 5 from A Theory of Value Drivers: A Grounded Theory Study (Wendee, 2011). This writing describes value driver theory in detail and provides the rationale for using value driver theory. It also has other articles and charts which explain value driver theory.
Part II – Creating and Sustaining Enterprise Value. The process of value creation starts here. A chart of the value creation process is included.
Part III – Analyzing and Investing in Enterprise Value. Investors are, or should be, concerned with the creation of value in the enterprises in which they invest. Part III examines ways to ascertain if value is being created. Also included in Part III are investment research and management techniques that have been developed by Dr. Wendee over many years of successfully researching securities and businesses and managing investment portfolios.
Part IV – A Look Under the Hood. Value driver theory can be understood and successfully used by anyone, regardless of their academic or professional background. Value driver theory, in its most basic forms, has been taught to homeless people in job training programs, for example. Part IV is for those who want to understand the more technical aspects of value driver theory. Most people can benefit by reviewing Part IV. MBAs and others with a background in finance may find part IV to be particularly interesting.
References
Brigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice (13th ed.). Mason, OH: South-Western Cengage Learning.
Buffett, W. E. (1996). Berkshire Hathaway Inc.: An owner’s manual. Omaha, NE: Berkshire Hathaway.
Damodaran, A. (2002). Investment valuation: Tools and techniques for determining the value of any asset (2nd ed.). New York, NY: John Wiley & Sons.
Kazlauskienė, V., & Christauskas, C. (2008). Business valuation model based on the analysis of business value drivers. Engineering Economics, 57(2), 23-31.
Rappaport, A. (1998). Creating shareholder value: A guide for managers and investors. New York, NY: The Free Press.
Wendee, P. (2011). A theory of value drivers: A grounded theory study. Phoenix, AZ: University of Phoenix.