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The Article’s Central Theme
The article provides an analysis of the evaluation dynamics in the capital markets. Zenger observes that most market analysts favor easy-to-assess, but less valuable corporate strategies because investors rarely discount ventures that promise quick returns. On the other hand, analysts dismiss complex, but valuable strategies on grounds that they are difficult to evaluate and costly to implement.
The article’s thesis is that the evaluation approaches employed by the financial market analysts are imperfect as they “undervalue companies with complex or unique corporate strategies”, which, however, turn out to be valuable (Zenger 53). Complex strategies not only require more time and information to evaluate but are also hard to understand. Thus, analysts incorrectly undervalue such strategies or fail to evaluate such companies.
To address this problem, the author suggests that companies with complex strategies should reveal more strategic information to the analysts and seek long-term investors (55).
The author supports his argument with cases of undervalued, but promising corporate strategies. For instance, he writes that a Payne Webber analyst recommended that Monsanto should unbundle its portfolio businesses, which involved agricultural products, pharmaceuticals, and food products in order to be correctly evaluated. It later turned out that the analysts was wrong and the portfolio strategy was profitable.
This motivated the author to analyze the challenges of evaluating complex strategies. The analysis revealed that analysts often focus on companies with easy-to-evaluate strategies and high “trade volume and size” (54). In contrast, unique strategies attract less coverage from analysts, which reduces a company’s market value. This creates ‘lemon’ capital markets, which, according to the author, do not favor quality strategies.
In his argument, the author shows that analysts’ evaluations should not be perceived as an assurance that a company’s strategy is valuable. Rather, hard to understand strategies, which are often ignored or undervalued because they are difficult to sell in a ‘lemon’ market, may in fact have a higher sustainable value than the ease-to-assess strategies.
However, since strategy evaluations rely on historical data, the evaluations give investors vital information about the relative risk of investing in a particular company. The author’s argument that analysts’ evaluations undervalue the investment merit of a company fails to address factors such as price fluctuations, which also influence investor confidence.
While the limited analyst coverage of firms with unique strategies reduces their market value, investors consider a number of factors before investing in a company. The evaluations by analysts are just one way of evaluating investment merit and thus, have less impact on a company’s market value.
Strategic Decision-Making in the Hospitality Industry
The article provides important insights regarding the challenges of strategy evaluation. It theorizes that market analysts often ignore or undervalue companies with complex strategies, a practice that affects their market value. The article suggests that to prevent such lapses, companies with unique strategies should reveal strategic information to the analysts and seek ‘sympathetic’ investors to support their ventures.
This would help a company to create a sustainable competitive advantage even when it is poorly rated in the financial market. Thus, the information provided in the article can help companies in strategic decision-making and value creation.
Implementing strategies that are unique and difficult to evaluate can be challenging to company CEOs. Nevertheless, a competitive strategy must be different from those of other companies. For portfolio business strategies, which are difficult to evaluate, certain trade-offs are needed to sustain strategic positioning and attract investors.
The author suggests that to sustain complex strategies, “going private ensures that your investors have an incentive to incur the costs of accurate analysis” (56). This implies that companies with complex projects should seek capital investments, which promise to be beneficial in the future.
Because it is difficult to evaluate future benefits, capital investments often involve certain investment risks. Thus, though analysts may not consider a unique strategy as a valuable one, with a capital investment, such strategies can turn out to be profitable.
An example is the McDonald strategy. McDonald Corporation, a leading food company, ventured into the hospitality industry by launching its first four-star hotel in Switzerland in 2001 (Michel Para. 4). The diversification of its hotel business was one way of ensuring sustainable future growth for the company. However, most market analysts did not perceive this expansion as a viable investment.
Many were less optimistic about McDonald’s future performance in the hotel industry and could not foresee the company doing well in the hospitality industry. An analyst with Stearns, Robert LaFleur, held the view that McDonald’s hotel venture may not expand as rapidly as the restaurant business (Michel Para. 6). He observed that although the company had a positive brand image, it might not be competitive in the hospitality industry.
McDonald’s stocks on the New York Stock Exchange (NYSE) have been an important component of the Dow Jones Index. However, in 2000, the company’s stock declined by $16 to trade at $32 per share (Michel Para. 3). The sharp decline, according to financial analysts, was caused by market saturation.
As a result, the company pursued a diversification strategy, whereby the General Manager in each country would invest in core competencies to create a sustainable competitive advantage. The Swiss hotel was one of the corporation’s diversification ventures.
As discussed in the article, understanding the potential value of complex strategies is often difficult. However, CEOs have the responsibility of “carrying out the corporate strategy and revealing strategic information” to investors. McDonald adopted the same strategy; the key profit drivers of this venture were revealed to the investors.
A breakdown of the profit maximization approaches, the fixed costs, the market segments, and the expected revenues was done based on the Swiss hospitality industry standards.
The analysis established that the new venture would require an investment of $23.13, but will yield $936,950 in profits (Michel Para. 4). Based on these figures, McDonald went ahead with the venture despite some analysts’ expressing strong disapproval of this diversification strategy.
The Strategic Management Theory
The argument in the article provides CEOs with a framework for evaluating and exploiting opportunities brought about by complex strategies in a way that creates a sustainable competitive advantage. It highlights the inadequacies of financial analyses, which often favor easy-to-evaluate strategies and undervalue complex strategies involving product diversification or portfolio expansion.
The strategic management theory focuses on the synergy between business resources and organizational strategy. The article points out that the analysts’ evaluations determine a company’s market value.
This explains why most firms prefer easy and popular strategies for complex ones, which, however, have high profit potential. Thus, based on this information, strategic managers can align a firm’s strategic goals with the external environment to enhance investor confidence and market value.
Often, strategic decisions rarely reflect financial market trends. As Zenger notes, the management must “improve the markets’ access to strategic information” to motivate analysts to evaluate their investments. Moreover, the article shows that strategic managers, besides relying on empirical data to make decisions, must consult the market before making decisions.
Thus, with market indicators and dissemination of information, managers can align organizational goals with the current and future market trends in order to promote a firm’s success. The creation of future business scenarios based on market indicators underpins the strategic management theory.
The article’s analysis of complex strategies like the Monsanto portfolio strategy, which, analysts suggested, should be ‘unbundled’ underscores the importance of synergy in strategic planning (53). Monsanto’s product lines enhanced R&D, which led to improved business performance. Thus, Zenger’s work provides evidence that synergy in strategic management can yield better results for a company.
The article also highlights various concepts that are important in strategic management theory development. An organization should take into account the values, risks, and technical capacity of an organization. These elements make up the strategic planning approach used by companies.
Zenger indicates that a company should evaluate its internal ability and resources during strategic planning as analysts’ evaluations may be incorrect. Based on this argument, companies should establish mechanisms that nurture their technological ability and organizational culture, both in the present and future business environments.
The concepts of diversification and integration are also evident in Zenger’s analysis. Diversification means the expansion of a company’s product portfolio while integration means combining different strategies. Complex strategies often involve diversification or integration.
Product diversification is one-way companies avoid the effects of market saturation. Zenger highlights the importance of having complex, but promising strategies. Although these strategies may be difficult to evaluate, their profit potential exceeds the effects under-coverage, or inaccurate evaluation may have on a company’s market value.
Works Cited
Michel, Stefan. McDonald’s Adventure in the Hotel Industry. Web.
Zenger, Todd. Strategy: The Uniqueness challenge. Harvard Business Review 12.3 (2013): 53-58. Print.
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