Creating Value for Shareholders
New Perspectives on the Modern Corporation series
_________________________________ In this book we study the growth of the firm and the conditions for growth which creates value for shareholders. The approach of the first part of the book is normative; it uses a theoretical analysis to show what managers should do to maximize shareholders’ value through growth strategies and what the conditions are for favouring one or the other type of strategy. With this aim in mind we focus the analysis on the main strategies adopted by enterprises for growth: horizontal expansion, vertical expansion and product diversification. The order of presentation reflects the actual growth of many firms: expansion starts within a core industry and it is undertaken to enhance or protect a firm’s position in that business (horizontal expansion). Then, a firm moves outside its initial industry integrating its activities or phases along its value chain (vertical integration expansion) until over the years it becomes increasingly more and more diversified, entering different related industries and finally unrelated industries (product diversification expansion). Each growth strategy is viewed as a decision directed at creating value for shareholders, exploiting the various opportunities offered by the environment and the internal firm resources. Each growth strategy implies different changes in the firm’s system and causes different effects on the firm’s longterm cash flows. Therefore, defining a growth strategy which creates value requires examining the internal conditions of the firm to be analysed, evaluating the dynamics of the external environment in which the firm operates and estimating the expected effects on the value of...