Value Creation Principles

4LIFE-CYCLE PERFORMANCE AND FIRM RISK

Because inflection points undermine the very assumptions on which a business is based and which have come to be taken as “facts” by most decision-makers, it is often difficult for leaders to imagine a different world. It is this failure of imagination that so often leads to strategic surprise.

It is crucial … that data that challenge embedded orthodoxies be presented along with information that supports the common view. Otherwise … people will continue to do business in the echo chamber of their existing assumptions.

—Rita McGrath¹

The proof that a firm has succeeded is the fact that people are willing to pay for offerings in ways that result in a greatly profitable business. That financial state is merely society's reward to the business for fulfilling its unmet needs.

—Mark L. Frigo and Joel Litman²

Figure 4.1 highlights life-cycle performance and firm risk—the primary topics in this chapter and two components of the pragmatic theory of the firm. The objective is to gain insights about the connection between a firm's financial performance and its market valuation, including the troublesome issue of risk and cost of capital.

The order of topics in this chapter follows the timeline for research done at Callard Madden & Associates beginning in 1969. This was a time when I wrote Fortran programs using punched cards. I remember late nights trying to get the attention of computer operators because the drum-and-pen printer was running out ...