The Strategic Discount
© 1985, John Wiley & Sons Ltd, ISBN 0 471 90748 0
To be successful a business must remain entrepreneurial. Likewise to be successful the modern strategist also has to be entrepreneurial. As businesses grow and become more complex this simple fact is often forgotten.
In this book Gordon Pearson introduces a new, and original concept – the strategic discount – a device to redress the anti-investment bias often inherent in financial appraisal methods. In a borader context, the book is a plea to consider those few factors which determine the long term success of a business. Those investments, products, customers, projects which could give a strategic advantage and should be favoured over those which do not, even if their strategic attractions are difficult to quantify. This favourable bias is the real strategic discount, counterbalance to the risk premium accounting methods add to the rates of return required of long term projects.
Unique in its approach, and possibly controversial, this book is not about planning systems and sophisticated analytical and quantitative methods. It is aimed at the person who actually has responsibility for business strategy and is based on widely accepted principles and many years of experience. It takes a fresh, simple and rigorous approach to the often confusing area of strategic direction and control and business objectives. It explains the failure of existing systems and describes a practical and straightforward method of developing and controlling an effective business strategy.
‘DCF is the means of appraising the financial effects of alternative courses of action. In the case of a single project appraisal, the alternatives considered are investing in the project or not investing in it. Both cases are equally important, because it is the cash flows which are incremental between the two cases, which are the basis of calculating the return. Accounting principles, however, tend, except in the most extreme cases, to lead to concentration on the investment case. The idea of the ‘going concern’ covertly takes care of the non-investment case. Thus the fact that part of the business will die is not often reflected in cash flow projections. The benefits from investment are therefore understated … Any financial appraisal routine can be modified so that the returns required on a project which offers strategic benefits are reduced rather than increased, as is otherwise the norm.’
‘The accounting approach to strategy results in companies placing their futures in jeopardy. The accountant, by professional training, is the one to apply the brakes, to prevent overtrading … when it comes to developing an effective business strategy, his professional rules and methods are about as much use as a knitting pattern.’