VALUE ENHANCEMENT CHAIN

We can categorize the range of actions firms can take to increase value in several ways. One is in terms of whether they affect cash flows from assets in place, growth, the cost of capital, or the length of the growth period. There are two other levels at which we can distinguish between actions that create value:

1. Does an action create a value trade-off or is it a pure value creator? Very few actions increase value without any qualifications. Among these are the divestitures of assets when the divestiture value exceeds the continuing value, and the elimination of deadweight costs that contribute nothing to the firm's earnings or future growth. Most actions have both positive and negative effects on value, and it is the net effect that determines whether these actions are value enhancing. In some cases, the trade-off is largely internal, and the odds are much better for value creation. An example is a firm changing its mix of debt and equity to reduce the cost of capital. In other cases, however, the net effect on value will be a function of how competitors react to a firm's actions. As an example, reducing prices to i....