While the mission, vision and values of businesses differ; all publicly traded companies share one thing in common, the objective to maximize shareholder value. This objective is accomplished through stock price appreciation and dividend payouts. Stock price appreciation offers the greatest opportunity to increase value for the shareholder.
Over the past few decades, executives have used various strategies to maximize shareholder value. Companies have tried to own their supply chain in an effort to reduce costs. Others have implemented a Merger and Acquisition (M&A) strategy, focused on acquiring products and/or services to sell to their existing customers, and acquiring new customers to sell too.
Today, innovation is the strategy that seems to be driving corporate executives. Why? Because, Wall Street is no longer rewarding companies for M&A activities.
While analysts invest much time in evaluating organizations, only about 50% of a stock price can be attributed to the anticipated future value of current operations. The remaining, nearly 50%, is determined by the markets anticipation of future revenue which may be generated by the company through yet unknown sources.
This is why companies like Apple and Google have extremely high stock valuations. The market is rewarding them for anticipated future revenues from these yet unknown sources, because they have a track record of their innovations generating future revenue.
The path then, for maximizing shareholder value, is innovation.
If you ask 10 people, “What is Innovation?” you’ll likely get 10 different answers. Many view innovation as a great idea or the next new thing. We believe that innovation is anything that creates value for the customer and the organization. A great invention that people don’t buy isn’t valuable to either the customer or the company.
On Shark Tank, you’ll see the Sharks looking for exactly this. Has the entrepreneur demonstrated a demand for their product or service? Simply put, what are the sales numbers and over what time period? If the entrepreneur demonstrates that the market desires their offering, thru their sales numbers, the Sharks interest in investing goes up, dramatically.
There are many other types of innovation. You can innovate your business model, which is exactly what Dell Computers did when they started. You can innovate customer service, business processes, sales models, and marketing practices. But at the end of the day, the innovation must create value for the customer and the company.
Why Does Innovation Matter?
Innovation is the most effective way of achieving the ultimate goal that all businesses share, maximizing shareholder value.