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Strategic Corporate Finance: Applications in Valuation and Capital Structure by Justin Pettit

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MANAGING FOR VALUE

Measuring and analyzing the sources of value creation and value destruction within a corporate portfolio is only the beginning. Ultimately, improvements must be made to mitigate sources of value destruction while leveraging sources of value creation. Changes might include pricing, terms, promotions, selection, availability, process control and quality, packaging, or other aspects of the value proposition.

Much ado is often made of loss leader strategies, that is, intentionally losing money somewhere to make up for it elsewhere. For example, retailers drop their prices on select visible items (e.g., milk, diapers) to establish an image of value pricing in the minds of shoppers. We have heard how Polaroid sold cameras at a loss to make it up in film. However, these strategies, their performance, and their value need to be quantified and monitored. Once a star, Polaroid fell into bankruptcy as its markets evolved more quickly than the company.

A loss leader strategy creates its own challenges. Though it might appear that dropping a loss leader would improve profitability, this action can reduce sales of profitable products and overall profitability. For example, after lobbying for a price increase and working capital improvements, one supplier was still losing $2 million per year on a product to a large retailer but retained the customer because of $4 million of related, and profitable, sales.

Pricing and Terms

Pricing is a primary lever in the value proposition. ...

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