The Value Mindset

Returning to the First Principles of Capitalist Enterprise

Wiley, 2004

15 min read

10 take-aways

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What's inside?

A good business outcome is simple to define: nothing matters but value.

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Editorial Rating

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Overview
Background

Recommendation

To discuss how your company can create value, authors Erik Stern and Mike Hutchinson first offer a gloss on financial issues beginning with the basics. The book’s point of departure is a presentation of core knowledge about efficient markets, shareholder value creation and the motivational use of compensation. The authors’ primary business in the first half of the book is recapping these foundation issues in a digressive style replete with tangents and asides. In the second half of the book, they offer a stew of recommendations and suggestions that range from how to build value in your company to how government should increase overall value creation. The authors’ opinions are plain, although some of their interpretations of history and finance may be open to debate. Stern created the Wealth Added Index (WAI), which measures value. He and his co-author now step forward with their explanation of how to create lasting value. The presentation is weakened by their scattered approach, but getAbstract.com agrees with their contention that any individual can build value and appreciates their case histories. Overall, the book is better suited for those who need an overview of the basics, rather than those seeking an advanced perspective on value creation.

Summary

Value Basics

Value makes the world go round. The greatest companies in the world, such as Four Seasons Hotels, Inc., and The Coca-Cola Company, are those that create the most value. Value does not depend on what a company owns, but rather on what it can do with what it owns.

Consider Four Seasons. This hotel chain owns relatively few hotels, and owns those reluctantly. The management of the Four Seasons is expert in managing properties, and creates most of its value by managing hotels that actually belong to others. Four Seasons has not made the mistake of confusing success with the accumulation of capital. Capital is not the reward for success. Rather, it is a tool for success. The company that delivers the most profits while using the least capital wins the value creation contest.

Under its late chairman and CEO Roberto Goizueta, Coca-Cola was a champion value creator. Goizueta was a former chemical engineer who ascended to the top spot at Coke in 1981. Coke’s market at that point was $4.3 billion. By 1997, when Goizueta was diagnosed with the lung cancer that eventually led to his death, Coke’s market value had grown to $180 billion. The reason was Goizueta...

About the Authors

Erik Stern is managing director of European Operations and Senior Vice President of Stern Stewart & Co. He co-authored The Capitalist Manifesto. Mike Hutchinson is a professional writer and former vice president of Stern Stewart & Co. Both authors have written for various publications internationally and have appeared on numerous television programs.

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T. T. 7 months ago

A relatively good summary to digest. In the world of business, the creation of true value is paramount. Companies like Four Seasons and Coca-Cola have excelled by understanding that value lies not in ownership but in the efficient use of assets. Roberto Goizueta, the former CEO of Coca-Cola, epitomized value creation by minimizing capital expenditure and maximizing gains. However, some companies create fake value, emphasizing short-term earnings over long-term sustainability. Recognizing the cost of capital is vital; in an efficient market, stock prices reflect a rational assessment of a company's value. Mergers should aim to create value, not overpay for synergy that often doesn't materialize. Compensation programs must align with long-term value creation. The focus on value applies to governments as well, urging them to prioritize efficiency and let the private sector excel in areas where it can create value more effectively.

Mike Hutchinson and Erik Stern