Value Based Management in Young Innovative Growth Companies

Abstract

Young innovative growth companies (in the following abbreviated by YIGC) are stunning investors and promise exceptional development: New media businesses like Apple, Google, Facebook, Netflix or Amazon have been showing enormous stock price performances which by far exceed the S&P 500. After an initiation period of negative cashflows, business innovations create trends and finally promise huge abnormal returns.

Previous academic research suggests a divide between value based and growth directed entrepreneurial orientation. Authors taking the perspective of neoclassical economic theory explain that value based orientation is inseparable from the sustainable generation of shareholder value and implies the comparatively slow long-term growth of a business. A balanced strategy weighing risk and growth potential is essential. Value based companies are traditionally associated to established business sectors here technologic progresses are clearly predictable. Their markets are stable and settled. Classical value based companies rely on traditional financing strategies. Growth orientation seems to be at odds with this traditional value based conception at first sight since in the start up phase usually little shareholder value is created. The potential of YIGC lies in future development and extraordinary technological advancements. Growth policy is exposed to risk to a larger extent than value based strategies since YIGC operate in a highly uncertain, rapidly changing technological environment and usually are exposed to high market dynamics. For this reason young innovative growth companies frequently have to rely on alternative and more risky financing strategies than value based corporations. Previous research in sum implies that classical value based theories are hardly applicable to young innovative growth companies. Intuition however suggests that extraordinary growth stories like Google‘s or Apple‘s would hardly be possible with sustainable value orientation. The key issues and research questions of this empirical study emerge from this supposed contradiction.

The study provides a synthesis of so far theoretical insights on VBM and YIGC, I conduct a systematic review of available empirical research on existing VBM applications in YIGC and - for lack of specific publications – on related businesses i.e. large growth corporations and innovative SME . Referring to previous insights on VBM applications in these businesses I conduct an own empirical research in German YIGC, concerning their value-based orientation in entrepreneurial practice in the form of a qualitative interview-based study. The study has made several important contributions which are valuable to both academic research and management practice. The contributions comprise novel methodologies of research an analysis in YIGC on the on hand and completely new insights on the value based management practice in German YIGC, which emerge from the case study research. The study has provided a comprehensive overview on the key facets of value-based management. While previous studies are either purely shareholder oriented or emphasize the stakeholder perspective mainly, this analysis has brought both aspects together into a comprehensive model of value based management. The study comprises a comprehensive review of YIGC related empirical studies in value based management and has shown that value based management in YIGC cannot focus on shareholder value only but has to include the stakeholder perspective. In the empirical part, the study has developed a novel stage model which drafts a prototypical YIGC growth and development cycle and includes a set of value based indicators. The model has been verified by case study analysis. A YIGC scorecard model is the second major methodological outcome. It originates in the analysis of 5 German YIGC and helps YIGC to analyse their value based principles and improve them, to encourage growth and development.

Then the extensive case study has enlarged empirical knowledge on German YIGC: The following important points have been made: YIGC correspond in value orientation, essentially all participating companies refer to the categories developed in the course of the review: value based human resource orientation, customer orientation, social responsibility orientation, supply-chain orientation and shareholder value orientation. While conventional growth is measured quantitatively, YIGC growth and shareholder value potential is based on a range of qualitative factors, which are born by all stakeholder groups. This makes an extension of the classical shareholder value concept for instance in the form of the suggested scorecard model necessary. YIGC pass a typical growth and development cycle, which here has been subdivided into three stages. At the emerging growth stage YIGC rise debt and external equity capital to finance an initial business idea which in the beginning does not yet create substantial benefit. At the accelerating growth stage, the business concept is profitable, cash flows grow strongly and the equity base increases. Debts can slowly be reduced. At the consolidating growth stage, cashflows consolidate and a young and innovative business concept allows no further exponential growth. Cashflows and the equity base now grow more slowly, unless the company decides to change its business structure and culture to become a large conventional growth organization.