Sources of Value—Profits
Innovation distinguishes between leader and follower.
—Steve Jobs (1955–2011), American entrepreneur
A PERENNIAL QUESTION asked by countless boards of directors is: “How can we improve the value of the firm?” There are only two possible answers—increase benefits/profits/cash flows, or lower capitalization or discount rates by greater expected growth or reduced risks. The former is more significant, as growth, resulting mainly from innovation and the elimination of money-losing operations and customers, improves both profits and capitalization rates. This chapter deals with the profit side of the equation; the next will cover risks.
STRUCTURE OF BUSINESSES
Nearly every business has a set of existing operations; most have, as well, emerging activities and future opportunities; as previously discussed in Chapter 4, all are sources of value. Emerging activities are projects in the course of becoming businesses. A common example is an in-process research and development (IPR&D) project being tested before general release; others are planned extensions of product lines or expansions into new geographic markets. Future opportunities are more nebulous, but certainly include early-stage innovative prospects expected to be profitable but far from proven, as well as potential new products or services together with markets in the course of investigation. The latter may turn out to be “pie in the sky”—that is, not a business—but, if successful, may have a potential ...