Strategy and Enterprise Value in the Relationship Economy Bruce W. Morgan Competitive Survival in Today's Marketplace Requires New Approaches Adapted to New Conditions It means substantially revising many business and investment principles inherited from the industrial age. In the newly emerging service-based, relationship economy, a company's most important resource is its value to shareholders, both internally and in the marketplace. The key to a firm's competing successfully in this new economic environment? Understanding the power and value of its own "relationship capital," and maximizing its potential. But how do you measure the value of your company's experience, creativity, and relationships with customers and employees? In confronting the most significant economic transformation since the Industrial Revolution, what business principles are obsolete and which endure? How do you develop a sound strategic and decision-making approach that lets you play to your strengths as a company? Strategy and Enterprise Value in the Relationship Economy represents a major break-through in providing enterprise managers, investors, and even economists, with answers to these crucial questions. Bruce Morgan's incisive, read-it-now volume articulates a comprehensive relationship-based business theory, pinpoints common misconceptions about today's economic environment, and offers specific, proven measures for linking and enhancing the relationship between shareholders' value and corporate objectives to the utmost. Strategy and Enterprise Value in the Relationship Economy provides the foundation, the blueprint, and the toolkit necessary to construct a value-based decision framework consistent with the relationship-based realities of today's business world.
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Why did I write this book? I am not a professional writer, expected any royalties to be modest, and, being semi-retired, have little prospect of career reward. Rather, because of some unique experience as an economics consultant, I have developed some important new insights into key characteristics of the emerging business environment. A technology-based service economy is replacing the familiar industrial age. Yet, business practices have for the most part avoided recognizing and confronting what this transformation requires..
Much of the material for this book began to develop in the mid-1970's, when a bank took over the deposit business of another bank that had failed. It had paid a "premium" of some $16 million for the privilege, and my role was to determine what that premium represented. If the acquirer could show that it represented an asset with identifiable value and wasting characteristics, it might amortize that premium--write it off as an expense--for tax purposes.
The "asset" in question was a base of depositor relationships, whereby the acquirer could expect the depositors to continue to supply funds that it could lend or invest. The acquired relationships would, of course, erode over time. Meanwhile, their value derived from an excess of income over expense that lack of competition or innovation could not explain. Rather, it could only represent future recovery of prior investment in developing those customer relationships.
Thus was born the concept of customer relationships representing invested capital in the same manner as plant and equipment. To accountants, however, these relationship assets are "intangibles"--being internally developed and non-physical, they lack the historical cost basis required for balance sheet recognition. Accountants simply record outlays on their development as current expenses. The result is to cause corporate financial reports to be distortions of reality.
We soon discovered that relationship values arise in virtually all types of business pursuits, even if more prominent in some, such as services and communications. While relationships with customers are the most important, other types, such as with suppliers and employees, often have substantial value as well. Significantly, new information and communications technologies have a major and growing role in developing, servicing, and enriching these economic relationships. The value of economic relationships to a corporation enterprise can be enormous, frequently exceeding its reported net worth.
One would think that the growing significance of these relationship values would attract widespread attention. Nothing of the sort has happened. With few exceptions, the only interest in analyzing these assets was for tax purposes associated with certain types of acquisitions. Tax law revisions in 1986 and 1992 first reduced, then eliminated these applications. While hundreds of analyses of these assets were conducted in the interim, only a few valuation consultants and tax professionals paid them any attention. The resulting information is at best inaccessible, and much of it has probably been discarded.
Almost totally overlooked was that the tax applications of these concepts, while the most immediately and obviously remunerative, were probably the least important. Unsurprisingly, that information on these intangibles became an enormously useful tool in analyzing prospective corporate acquisitions. More intriguing was its eventual extension to valuing corporate stocks. Understanding these relationship intangibles is nevertheless most important for management decisions and business strategies. Shareholder values, as reflected in share prices and acquisition terms, must converge with the net values of underlying assets and liabilities, including the oft-ignored intangibles. Thus, managing an enterprise on behalf of shareholders absolutely requires understanding those underlying sources of value, however invisible due to their accounting treatment.
Moreover, the future dimensions of these economic relationships imply that in a technology-based service economy, virtually all management decisions have future consequences. They are investment decisions requiring value criteria. In contrast, management decisions relying on reported earnings, in addition to being distortions of reality, ignore the time dimension. Thus, the present widespread myopic preoccupation with reported earnings perversely affects management and investment decisions, undermining shareholder values and eroding competitiveness.
Yet, no one seems interested in the long-run advantages of adopting comprehensive value-based decision-making that recognizes the intangible components of capital and value. Why is this so if these intangibles are so important and the logic demonstrably irrefutable? The answer seems be complacency arising from apparent prosperity, however comparative and fragile. Only visionaries--entrepreneurs in a business context--are likely to break loose from the establishment wisdom. Others comfortably follow the old sub-optimal rules as long as their rivals do likewise.
This book merely crosses the threshold into important new lines of inquiry that will eventually be part of the mainstream. For myself, these ideas suggest an economics text with practical relevance for business practices. With enough additional case studies, I could also look forward to writings on corporate stock selection. Yet another area even more lacking an economics foundation is human resources management--a topic that I only began to explore while writing the present book.
Nevertheless, such undertakings seem hardly to be worthwhile in the present climate of self-satisfied indifference. The disinterest that has met my prior writings applying these ideas to financial services provides no encouragement. If bankers had paid more attention, some might have understood that they exaggerated the significance of lending, assuming excessive risks, with too little focus on their other services and customers.From the Inside Flap:
Strategy and Enterprise Value in the Relationship Economy Bruce W. Morgan In the 19th century, the world’s predominantly agrarian economy evolved into an industrial-based system. As the 21st century dawns, a new type of economic activity dominates: a primarily service-based system, fueled by new information and communications technologies, dependent on the nurturing of long-range relationships with customers, suppliers, shareholders, and employees. Old news, right? Everyone knows this. Yet many businesses still cling to outmoded conventions, stubbornly relying on practices that ignore and squander a firm’s most precious asset: the value of it’s collective experience, creativity, corporate culture, and above all, customer relationships. Measuring that seemingly intangible value in clear, quantifiable terms may seem speculative, but it can be done. It must be done. Understanding the nature and value of "relationship capital" is the necessary first step toward maximizing both it and the total value of the enterprise — the key to making smart, forward-looking investments that ensure a successful future. Bruce Morgan’s Strategy and Enterprise Value in the Relationship Economy is the first book to present new strategies and techniques for enhancing corporate value based on a comprehensive, well-articulated business theory for operating in a relationship economy. It is an insightful, authoritative guide to developing "valued-based" strategies, decision making, and investment criteria consistent with today’s relationship marketplace. Strategy and Enterprise Value in the Relationship Economy:
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Descripción Wiley, 1998. Hardcover. Estado de conservación: New. book. Nº de ref. de la librería 471292842
Descripción Wiley, 1998. Hardcover. Estado de conservación: New. 1. Nº de ref. de la librería DADAX0471292842