What’s your theory?

THEORYThe classic question “What builds value for a company?” often finds its answer in a strategy. But that’s the wrong answer, Todd Zenger, a professor of business strategy at Washington University, argues in the June 2013 Harvard Business Review. The right answer, he says, is the corporate theory. The distinction matters to IR professionals who influence messaging on shareholder value.

In “What Is the Theory of Your Firm?” Zenger says value does not come from strategy, at least not military-style plans for targeting attractive markets and conquering your rivals (“competitive advantage”):

Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices.

What Zenger calls the theory of your firm is a view of life that runs deeper than any particular strategy:

Essentially, a leaders’ most vexing strategic challenge is not how to obtain or sustain competitive advantage – which has been the field of strategy’s primary focus – but, rather, how to keep finding new, unexpected ways to create value. [The corporate theory] reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position – it is a guide to the selection of strategies.

Three kinds of “sight” go into a corporate theory, Zenger says:

  • Foresight: beliefs and expectations for the future of an industry or its customers
  • Insight: deep understanding of what is rare, distinctive and value in your company’s assets and activities
  • Cross-sight: ability to spot complementary skills or assets that will fit together to create something new

Apple is one example Zenger cites. With PC makers chasing cheaper, faster and bigger computers that basically were interchangeable, Steve Jobs took a different view of how to create value. It was a theory:

… essentially it held that consumers would pay a premium for ease of use, reliability, and elegance in computing and other digital devices, and that the best means for delivering these was relatively closed systems …

This theory guided Apple into a wide range of markets:

Apple was not the first to design a digital music library, manufacture an MP3 player, or market a smartphone. But it was the first to craft and configure those devices and their user environment with elegant, easy-to-use devices and with tight control of complementary products, infrastructure and market image.

So what’s your firm’s theory? One way to find out is to often ask, Why?

Why this, and not that? Is a particular view of the future driving your CEO’s choice of strategy? Does a unique set of assets or skills energize success, across products or markets? Is a novel perspective leading your company to build or acquire new skills and assets to drive growth?

As Zenger suggests, a good theory not only guides a business; it gives power to the value creation story. And if investors buy your theory – well, they buy. We investor relations people should always seek to better understand – and better explain – how our companies are creating value.

© 2013 Johnson Strategic Communications Inc.

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