Strategy Formulation

Computing a strategy's value

In the Action Plans chapter, I went through the calculations to estimate the cash flow for one action plan. In this chapter, I'm going to demonstrate how to compute, using discounted cash flow, the value added from a multi-year strategy with many action plans. In essence, how to set the financial stretch, big hairy audacious goal (BHAG).

As we go through the calculations, I'll describe some questions about and approaches for selecting the discount rate, and using net present value (NPV), present value (PV) and calculating the terminal value. I recommend you read the entire chapter.

A Story — Your boss called and asked you to come discuss “our strategy”

A brazen, talented salesperson, a gray haired contrarian from the 18th century, and our heroine chanced to meet at Starbucks an hour later and got into a discussion about estimating a strategy's value. (Right - its a fairy tale.)

The brazen, very successful salesperson said that the challenge is most important. Stretch. Reach for the stars. Prove over and over again how great we, our company, is and will be. Don't take no for an answer, find a way to get it done. Put me in the game, now, coach. We are the best! A positive attitude and relationships. There is no limit to the up-side. Numbers are about possibilities, about expectations.

The contrarian said we know how to be successful, through ups and downs, great ideas and bad. Been there, done that. Play to your strengths, be respected by your customers, lots of smarts, little steps will take you to the top of the mountain. Shortcuts, over-confidence, will bury you under an avalanche of loses. Our history has taught us about what it costs to get new customers. We know what numbers are reasonable and when someone is blowing smoke.

The boss sipped her coffee and thought a minute.