A TOWER OF BABEL

"Around five years ago, I noticed that faculty in business schools operated like they worked in different silos," said Morin. "They didn't talk to each other. They were all doing their own thing. There was little cross-pollination."

"Corporate America mirrored that pattern.You could take an elevator in any large company, and on the first floor would be the marketing people with their talk of market share and sales. On the second floor you'd find engineering with discussions about net present value. The third level would house the finance people, who viewed the company in terms of earnings growth and payback, and the fourth floor would hold the accounting department with discussions in terms of net income. They would all be speaking different languages, like a tower of Babel."

Morin knows his subject matter well. As a frequent expert witness on energy matters and telecommunications around the world, he has more than a quarter century of experience in executive training and corporate consulting with Fortune 500 clients. He talks hard and fast about his observations as both an academic and a hands-on participant in business.

Another reason Morin spent the last two years researching and writing Driving Shareholder Value was the proliferation of value-based management strategies by corporate consultant firms. A Iist of the most prominent of these would include Stern & Stewart's economic value-added metrics, Boston Consulting Group's cash flow return on investment and L.E.K. Consulting's association with shareholder value-added measures. Morin saw a need for objective data presented in one comprehensive book.

FROM STRATEGY TO FINANCE

Driving Shareholder Value presents a value-based management framework with four main components: valuation, strategy, finance and corporate governance. Valuation is built on the notion that all companies, particularly public ones, should be managed to create as much wealth as possible for their owners - the shareholders, according to the authors.

Strategy must account for the degree of competitiveness in an industry. A company may enter or create economically attractive markets in which favorable industry conditions generate rates of return above the competitive level. Or a company may build and maintain a position of relative advantage over competitors through cost leadership or product differentiation.

The authors identify Dell Computer Corporation as one example of a company that has become a market leader through operational excellence, leading to customer convenience and cost efficiencies. "In essence, the company created a radically different and efficient delivery system for personal computers based on build-toorder manufacturing and mail-order marketing:' they explained.

Real options are another important tool in making strategic decisions, Morin said. He refers to the real options approach as a new paradigm from the field of finance, calling it "the most revolutionary break-through in business in the last 50 years." In Driving Shareholder Value, he defines real options as management's ability to adopt and later revise corporate investment decisions in response to unexpected or risky market developments.

Until recently it was far easier to talk about options than to calculate their value," he wrote. "However, with recent seminal developments in financial theory, everyday users of spreadsheet programs and financial calculators can find the dollar value imbedded in a strategic decision." Real options pricing can be applied to real estate, stock, a company's capital investments, a manager's flexibility, information technology platforms, new product development and new ventures.

"Real options pricing gives us a way to look at high-tech stocks," Morin said. "Despite the recent market drop in dot-coms, many of these companies are not overvalued in terms of real options, their potential to generate profits." EnRon, a company that bought old inefficient electrical plants with the strategy of only opening them when electricity is in high demand, offers another example of where real options pricing can help investors determine value. The company's strategy paid off, and the large profits are now rolling in.

"We used to call this a 'gut feeling'," Morin said. "Now we have insight into those decisions, and we can quantify them."