Disciplined decisions - Aligning strategy with the financial markets

The goal of strategy is clear - to increase shareholder value. But in volatile markets, it's difficult to predict how a particular investment will affect a company's value. Drawing on their own experiences and perspectives, managers come to different conclusions. It's hard to sort out whose answers are the right ones. In fact, there is only one right answer the answer of the financial markets. The markets are adept at calculating the value of an investment under uncertain conditions - exactly the challenge faced by business strategists. By applying the discipline of the markets, executives can avoid basing important decisions on subjective judgments about the future. The application of market discipline to strategy involves three components. First, the decision is framed in terms of the real options it creates. Second, in evaluating an investment, all the relevant information on value and risk available in the financial markets is taken into account. Third, actual financial transactions are used, when appropriate, to acquire options or otherwise mitigate risk. In a series of cases, the authors show how applying market discipline can help illuminate a range of common business decisions - whether to add production capacity, or to invest in a new venture, or to upgrade an information system, for example. By providing disciplined insight into the uncertainty present in all markets, the real-options approach lets executives think more clearly and realistically about complex and risky strategic decisions. Reprint 99101.