The note is on creating value for a corporation and sustaining it over long term.

1. Value Creation - Strategies
One of the challenges for corporates today is creating value out of operations and once
having created the value , sustaining the created value going forward. There are many
examples in the world where companies created value and not able to sustain it for a long
time. The good examples are Sony, Nokia, RIM in the recent past and there are several
examples and many companies which created value , not able to sustain the value for a
long time. The following strategies need to be adopted to create and sustain value.
1.The value creation starts with a Competitive strategy. Every company has a strategy but
the strategy adopted by a company should help in creating a competitive advantage over
others. This should result in faster growth and higher profitability compared to the
competition.
2. There are five strategies available to create a competitive advantage. A) Cost
Leadership b) Differentiation 3) Focussed cost leadership 4) Focussed Differentiation
and 5) Integrated Strategy ( cost leadership as well as differentiation). Depending on the
technology and marketing capability ,cost structure and competition in the particular
product segment, one of the above strategies and combination of them have to be chosen.
The objective should be to minismise the impact of competition on growth and
profitability.
3. Keeping the age of the product portfolio young. To ensure a sustained good
performance , there is a need to introduce new products at regular intervals and keep the
average of age of the products very. Low. This does not assure sustenance in cases where
there are technology break throughs . Hence, apart from age of portfolio , it is necessary
to make sure that there is an adoption and absorption of emerging and new technologies.
The focus for new products should be the segments where there is a good potential for
growth, less competition and good profit potential.
3. Many companies develop good strategies but there is a poor implementation due to
slow decision making, organisational inertia and poor discipline in implementation.
Allowing so many exemptions from the planned strategy leads to slippages and not
continuously monitoring the performance and taking course correction leads to poor
results compared to the plan.
4.Good corporate governance. The starting point of value creation is good corporate
governance. The books of accounts should be closed on time every month. The actual
performance should be compared with the plan and reasons for variance in performance
should be identified and without much delay the course correction should be put in place.
There should be a fit administration which looks into the governance discipline and
adoption of best practices in each functional area of operation. Many companies do not
have well defined SBU’s ( Investment Centres ,Company within companies ) , Profit
centres and Cost centres. This is the starting point for good corporate governance. There
is a need to review whether the organisation is well structured and appropriate
organization structure and robust systems and procedures.

2. 5. Good governance and good performance creates a good image in the minds of all
stakeholders ( investors, bankers, customers , suppliers ). .The market gives a premium to
the quality of governance and company starts commanding good multiples. It is true for
even unlisted companies, wherein it would be possible to command good premium for
the products and achieve above average profits..
6. In Capital intensive industries where there is hyper competition , scope for
collaborating with the competitors should be explored. This is a general practice in
electronic hardware industry . telecom , auto and financial services. This provides a full
flexibility to an organistion to adapt to variations in economic performance.
7. It is essential in general those companies maintain market leadership. But there are
cases, where, even smaller companies command a high premium. Good example is
HDFC’s market cap is higher than ICICI and SBI. The bank had given a sustained
performance over the years, which helped to keep its P/E ratio at the highest levels, ever
since the bank allowed FII’s to invest in the bank. So far, the bank was able to maintain
its lead.
8. The companies / groups which have created a big value, generally grow at a CAGR of
25% . The stretch target of 25% CAGR is very stiff but it is better to keep this target and
identify opportunities for faster growth. ( It has to be a combination of old product – old
market , old product – new market , new product –new market , new product – old market
, new technology – old market , new technology – new market ). Both organic and
inorganic routes to be pursued.
9. Reputation. When one of the companies came for an IPO, the inherent value of the
stock was even less than Rs.10 per share and no project was on. Since the group was
known for creating value for shareholders, the investors were ready to pay Rs.500 per
share for the stock. Cognizant technologies are able to win more projects and have
become the number one software provider in US over taking TCS. This was mainly on
account of Cognizant is seen as a US company and it is parent was Dun and Bradstreet
corporation. Further the company adopts an integrated strategy which is helping it to over
take others.
10. Constant Restructuring. At any point only a few industries grow and some industries
decline and some industries are at a maturity stage. The fortunes of industries change and
the portfolio of a corporate should be well balanced to generate enough cash and sustain
the growth levels. The strategy is not only about growth but also about keeping the
portfolio healthy. The portfolio should be churned to ensure that the businesses
generating negative cash flow and where scope for future revival is limited should be
removed from the portfolio through divestment and sale. Many a times, the poor
performance of corporates is due to keeping the businesses where there are continuous
cash losses. There should be well defined criteria for entry in a business and criteria for
exiting a business.

3. 11. Not Succumbing to herd mentality. The high growth businesses after the entry of few
players start attracting many new investors. This results in overcapacity in the industry
and the players who enter late find it difficult to adopt the cost leadership or
differentiation strategy. In a few cases, new entrants come up with new business models
and redefine the industry. If the industry is overcrowded and there are many players, then
the best form of entry in the industry is through acquiring a company which is doing very
well in the industry rather than starting a green field venture. In many industries, the
feature of herd mentality leads to entry of many entrants and those who are not able to
create competitive advantage report poor performance affecting the overall performance
of an industry.
12 Constant interactions with the Investor community. This is the one way; the value
created could be taken to higher levels. One of reasons for faster growth of Infosys
compared to its peers few years back was due to early listing of the stock in a market
where most of its customers were coming from . Whenever analysts brought out analysis
on companies growing fast and reporting higher profits, Infosys was always coming on
top of the table in USA. This has created awareness among the CXO’s in US who were
the decision makers and investors in the stocks. Since the company was growing very fast
and profits were growing faster, inventors felt the company was well managed. So when
bids were opened for awarding assignments, even when Infosys quoted 10% higher price
compared to competition, they were willing to pay the premium , despite the competitors
were as good as Infosys. But Infosys lost this advantage , after listing of TCS and TCS
moving away from the strategy of cost leadership to differentiation like Infosys.
Cognziant also started growing fast which had reduced the attraction for this stock.
To create and sustain value, a corporate has to use the combination of above strategies to
achieve a sustained competitive advantage.
R.Kannan