The Economic Filter

BUILDING A BRIDGE between strategy and finance requires an analysis of economic factors that affect a business. A macroview of market conditions provides the first level of validation of Strategic Alternatives. This chapter will discuss the economic filter in the Step-Wise Approach to Value (Exhibit 1-1). This filter tests whether Strategic Alternatives (SAs) create shareholder value based on future economic conditions. How do economic factors affect shareholder value? Economic factors impact shareholder value through their influence on market demand (MD). MD measures the total revenue stream for an industry.

We will examine the concept of MD, the economic factors that affect it, and how to vet a Strategic Alternative based on the future direction of MD. The economic factors that we will discuss are GNP, inflation, interest rates, and resource availability. Evaluation of Strategic Alternatives then involves analysis of two factors—MD alignment and equivalence of response. The alignment factor looks at how well the SA accommodates the expansion or contraction in MD. Equivalence of response vets an SA in terms of permanency of market change and market risk. On the basis of these factors, you can determine whether to dismiss the SA or move on to the next filter.