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Oct 28, 2004

DePaul Professors’ Research Reveals Five Lessons For Business Strategy And Valuation

Ongoing research by two DePaul University professors is shedding new light on what business strategies truly maximize financial value over the long term.

The research project, called the Return Driven Strategy Initiative, examines and benchmarks the strategic activities and financial value created at thousands of public and private companies. The initiative, and the Return Driven Strategy model produced from it, are the work of Mark L. Frigo, the Eichenbaum Foundation Distinguished Professor of Strategy and Leadership at DePaul, and his fellow researcher, Joel Litman, a DePaul clinical professor of business strategy and a director with CSFB HOLT at Credit Suisse First Boston. Frigo and Litman head the Center for Strategy, Execution and Valuation at DePaul’s Kellstadt Graduate School of Business.

Five lessons for business have emerged from Frigo and Litman’s examination of company strategies, historical cash flow returns on investment, asset growth rates, shareholder returns and other factors. They are: a great product seldom ensures a great business; being different is not a core strategy; a great company doesn’t necessarily mean a great stock; monopolies are not often great stocks; and growth is not necessarily a good thing for companies.

“There’s a myth that companies with great products always must be great businesses,” Frigo said, discussing the first finding. “But we have found that nothing could be farther from the truth.”

“Many companies that produce products or services that customers love are simultaneously terrible businesses. If a product is great but there are suitable competing substitutes, a company may be trapped at a price point that won’t allow it to generate the higher profits that are core to its strategy.”

One example, Frigo said, is BMW, which produces a respected brand of cars and motorcycles but faces competition from Mercedes, Audi and others. BMW’s return on investment has been below the average of most major industrial companies for the last decade, he pointed out.

The Internet bubble is a classic example of how “being different” doesn’t work as a core strategy, Litman said, explaining the second finding underscored by the research. “Great companies that are high performers definitely do things differently, but companies that are different are by no means great performers,” he said. The basic business tenet that value is created by successfully fulfilling unmet customer needs largely proves true, according the research. “Being different is only a byproduct of this strategy,” Litman said.

Another notion that the research dispels is that great businesses equal great stocks. “Some may assume that a change in stock price is always the result of changes in profits and cash flows tied to business strategy,” Frigo said. “But it also could stem from changes in investor expectations that have nothing to do with this.”

What about companies with monopolies? Shouldn’t businesses without viable competitors be great long-term investments? Not always, according to Frigo and Litman’s research. “Gillette, for example, has product dominance on a category-by-category basis, effectively creating monopolies in the areas where it competes,” Litman said. “But despite this, the company’s stock price dropped precipitously from 1996 to 2000 and hasn’t recovered to make up the loss since then.”

As for growth, companies too often believe growth is always good. “We have found that cash flow returns are at least as important as sales growth, if not more so,” Frigo said. “Growing sales or assets without adequately growing cash flows can lead to troublesome stock price consequences.”

“The overall conclusion of our research and model is that great business strategy and valuation must go hand in hand,” Frigo said.

The Center for Strategy, Execution and Valuation at the Kellstadt Graduate School of Business oversees education programs, executive seminars and research into strategies that lead to maximum financial value creation. The center links strategy design and development with execution frameworks, such as the balanced scorecard and value-based management, as well as strategic valuation. Education programs include a popular and innovative MBA concentration in strategy, execution and valuation offered at Kellstadt.

Note to Editors: Frigo can be reached at 312/362-8784 or and Litman can be reached at 212/325-5088 or Their ongoing research was published in the August 2004 edition of Strategic Finance posted on the Web site: