Market Strategy Environment Essay

1104 words - 4 pages

Many managers are confounded by the conflicting messages the market sends them. Strong improvements in the financial performance of a company can be followed by a sharp fall in the price of its shares. Results that moderately exceed consensus forecasts can propel its share price to new heights, leaving managers to wonder how they can possibly achieve the superhuman feats the market expects from them. Either way, they throw up their hands, rail at the market's irrationality, and go on running their businesses as they always have.Given the market's habit of regularly defying logic, it is not surprising that many managers do not use total return to shareholders (TRS)--dividends plus appreciation in share prices--as their primary decision-making tool. They often look instead to measures of postfinancing returns, notably net present value (NPV) and economic value added (EVA). Such metrics focus on the cash flows of the underlying business and on the ability of initiatives to provide economic returns above and beyond a company's cost of capital.But running a company is like managing a sports team: owners and fans want a winner. Like it or not, TRS is the way they keep score. NPV and EVA can give you a clearer sense of whether strategies and projects are worthwhile, but these tools don't tell you what you need to know to generate a superior TRS: will the resulting performance exceed the market's expectations?Of course, most managers frustrated by the share prices of their companies understand that traditional measures, such as price-to-earnings ratios (P/Es), provide some insights into what the market anticipates: a high P/E suggests that they need to deliver strong growth; a low one suggests that the market expects static or declining performance. This understanding is cold comfort, however, because those managers do not know whether their companies are on track to satisfying the market's expectations.In reality, the answer to this vexing problem lies no further away than the nearest copy of your daily newspaper: in your company's share price and those of your competitors. But our way of analyzing this information differs significantly from traditional techniques: it not only provides additional insights, turning much of the market's black magic back into science, but is also a valuable strategic toolInvestors and analysts make explicit forecasts about the short-term performance of your company. The market implicitly values its longer-term performance as well. This readily available information allows you to quantify both the magnitude and the timing of the market's expectations for your company. By carefully analyzing these short- and long-term performance expectations and making an honest effort to decide whether the market is actually right, you can come to understand what it is telling you about your strategy.What does the market expect?To increase the share price of your company, you must know what the market expects of it today. If the market...

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