Two main conflicting paradigms crosscut the debate concerning the Strategic Valuation: the maximizing and the satisfacing paradigms. The maximizing valuation is an old-age methodology based on the maximization of the Discounted Cash Flow. In the 1990s the shareholder maximizing value imperative became very popular in the academic and business literature (Rappaport, Copeland, Stewart). It is the main tool in Capital Budgeting context and in Finance area. On the other hand, the satisfacing approach characterizes the Managerial-Accounting approach perspective on valuation. H. Simon coined the term “satisfacing” to describe a not maximizing behaviour in decision making science. The Managerial-Accounting approach to valuation adopts Simon’s point of view: “we believe however that achieving satisfactory profit is a better way of stating corporation goals” (Anthony). Such a point of view has a long tradition in managerial and accounting literature (Anthony, Drucker, March, Simon, Cyert). The valuation of a corporate strategy is a genuine multicriteria decision problem; that is, it considers many different strategic criteria. This argument holds not only if we take into account different stakeholders, but also when we exclusively refer to the multidimensional shareholder point of view. In other words, this thesis is valid not only if we consider the many stakeholders (shareholders, customers, workers, etc.) as, for example, in a Balanced Scorecard, but even if we exclusively refer to the shareholder point of view. We argue that in order to avoid myopic valuation, from a shareholder point of view it is necessary to adopt a multidimensional firm performance metric. We show that, from the shareholder point of view, the Discounted Cash Flow or the Economic Value Added have to be integrated with other financial criteria, among which there are the Cash Flow ROI, the Value ROI and the Payback Period. In general, all these criteria are informative from the shareholder point of view and then, given a set of alternatives, we have to valuate them according to many different viewpoints. None of them can be discarded or considered the best one a priori. However, when many criteria are examined, the maximizing approach cannot be applied and then the shareholder value maximization paradigm should be discarded. As a multicriteria valuation is generally incompatible with a maximizing approach, we propose a multicriteria decision making approach that offers satisfying solutions. We will show that satisfying solutions to a multicriteria valuation problem may be rigorously obtained through an outranking methodology. In this paper, by limiting the operational focus to the valuation of a set of Porter’s basic strategic alternatives, we show that there is a class of algorithms, named Outranking Methods, which are perfectly compatible with satisfacing paradigm and able to deal with multicriteria valuation. In order to argue our thesis a tutorial example is considered.
On Shareholder Value Analysis: Maximizing and Satisfacing Paradigms
IAZZOLINO, Gianpaolo;
2007-01-01
Abstract
Two main conflicting paradigms crosscut the debate concerning the Strategic Valuation: the maximizing and the satisfacing paradigms. The maximizing valuation is an old-age methodology based on the maximization of the Discounted Cash Flow. In the 1990s the shareholder maximizing value imperative became very popular in the academic and business literature (Rappaport, Copeland, Stewart). It is the main tool in Capital Budgeting context and in Finance area. On the other hand, the satisfacing approach characterizes the Managerial-Accounting approach perspective on valuation. H. Simon coined the term “satisfacing” to describe a not maximizing behaviour in decision making science. The Managerial-Accounting approach to valuation adopts Simon’s point of view: “we believe however that achieving satisfactory profit is a better way of stating corporation goals” (Anthony). Such a point of view has a long tradition in managerial and accounting literature (Anthony, Drucker, March, Simon, Cyert). The valuation of a corporate strategy is a genuine multicriteria decision problem; that is, it considers many different strategic criteria. This argument holds not only if we take into account different stakeholders, but also when we exclusively refer to the multidimensional shareholder point of view. In other words, this thesis is valid not only if we consider the many stakeholders (shareholders, customers, workers, etc.) as, for example, in a Balanced Scorecard, but even if we exclusively refer to the shareholder point of view. We argue that in order to avoid myopic valuation, from a shareholder point of view it is necessary to adopt a multidimensional firm performance metric. We show that, from the shareholder point of view, the Discounted Cash Flow or the Economic Value Added have to be integrated with other financial criteria, among which there are the Cash Flow ROI, the Value ROI and the Payback Period. In general, all these criteria are informative from the shareholder point of view and then, given a set of alternatives, we have to valuate them according to many different viewpoints. None of them can be discarded or considered the best one a priori. However, when many criteria are examined, the maximizing approach cannot be applied and then the shareholder value maximization paradigm should be discarded. As a multicriteria valuation is generally incompatible with a maximizing approach, we propose a multicriteria decision making approach that offers satisfying solutions. We will show that satisfying solutions to a multicriteria valuation problem may be rigorously obtained through an outranking methodology. In this paper, by limiting the operational focus to the valuation of a set of Porter’s basic strategic alternatives, we show that there is a class of algorithms, named Outranking Methods, which are perfectly compatible with satisfacing paradigm and able to deal with multicriteria valuation. In order to argue our thesis a tutorial example is considered.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
