Value management is vital for any business, especially those whose main aim is to maximise shareholder wealth. Also value management is often the difference between succeeding and failing and in business the line that distinguishes that is a very small one.
A company that has been succeeding In creating value is everyone’s favourite streaming service Netflix, while these days they are famous for their streaming they originally started off as a DVD by mail company in 1997, and remember blockbuster? They had the opportunity to acquire Netflix back in 2000. Netflix was not always as successful as it is now and in 2001 following the 9/11 terrorist attacks Netflix were forced to sell there shares on the public market a decision that has since added a lot of value and extra cash flow to the company.
Fast forward to 2011 and the real shareholder wealth maximisation comes into play. Netflix decided to split there streaming and DVD by mail services, charging $7.99 each, although at the time shareholders and stakeholders reacted badly due to the DVD by mail by a cash cow with almost 50% profits, the streaming service was the future and had the potential to create the most value. The technology and broadband was changing and updating faster than ever and Netflix saw the opportunity for more profits and therefore creating and maximising the shareholder wealth. If I was a shareholder in 2011 when these changes were being made I would also be concerned because there was a risk that customers would not pay separately for the services and therefore profits would drop and so would my returns on investment. However, now looking back I understand that the risks taking by Netflix were completely necessary had they remained with the DVD by mail then ever changing technology would have left them behind and who knows they could have ended up just like blockbuster. Blockbuster and Netflix are the polar opposites of value maximisation, blockbuster did not take the risks and have the foresight to invest in technology like Netflix and by not doing this they did not extend the planning horizon which would have added value to their company and to their shareholders. Whereas, Netflix took the Initiative and divested assets, their DVD by mail service which released more capital for their streaming service.
Netflix share prices have fallen by 30% in the last six months
which as a shareholder I would be concerned about not making a return on my investment. However this is due to the increasing spend Netflix are using to create Netflix originals, which according to Goldman Sachs will drive subscriber growth and therefore in the long term bring in more cash and therefore their current outlays are an investment in the long term future of the business and as a shareholder I would rather reduce my profit on return for now in order to have a long term profit.
This case shows that as a manager I would take risks and invest in the future as in the long term it creates more value and maximises shareholder wealth which is my main goal. Also it is important to continue to add value and remove areas of the business otherwise there is a chance that the company will disappear into the history books.
A good first blog and you have displayed a good ability to put yourself in the position of a shareholder! Before completing this blog post did you have a good understanding of this topic or was there anything you learnt specifically during your time in lectures and seminars?
ReplyDeleteI think although I had some knowledge of value management it was interesting to learn more about the concept and how companies actually aimed and achieved shareholder wealth maximisation. I also found it interesting the ways in which value management could be achieved.
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