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ACCOUNTING

Book Value
 

Reviews of four business books -- two wildly different takes on the state of shareholder value, one about why consumers rule now more than ever, and one on how to manage Gen-X workers. Plus: What Orit Gadiesh, chairman of Bain Co., recommends reading.
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You say tomato, I say to- mah-to

Different books, different viewpoints

  • The End of Shareholder Value, by Allan A. Kennedy (Perseus, 2000)
  • Living on the Fault Line, by Geoffrey A. Moore (HarperBusiness, 2000)

Reading Allan Kennedy's The End of Shareholder Value and Geoffrey Moore's Living on the Fault Line is very much like watching Akira Kurosawa's film classic Rashomon, in which the characters recount the same events in dramatically different ways. Both authors examine the state of shareholder value, but each arrives at a wildly different conclusion.

Kennedy compares the recent staggering levels of stock indexes with the European tulip craze of the 1630s, when the price of a tulip bulb was bid up to the equivalent of more than $20,000 before the bubble burst. He adds that the Internet bubble is only one recent phenomenon that's similarly gone out of whack.

Basing his assumptions on Security Analysis, the classic work of Benjamin Graham and David Dodd, Kennedy reminds readers that a company's P/E (price-to-earnings) ratio indicates the value investors put on that company's stock. He looks at the P/E ratio of General Electric, which was 40.6 when he wrote his book. Using Graham and Dodd's reasoning, Kennedy figures that GE should be able to increase its earnings year after year by 16% to 17%. But under the leadership of Jack Welch, GE's earnings have increased an average of only 12% a year. If that earnings trend continues, a more accurate P/E ratio would be roughly 30, according to Kennedy.

Based on the classic understanding of markets, the world, it seems, has lost all sense. When Kennedy looks at dot-coms, the picture is even bleaker. He wonders if even the leaders, like Amazon.com, will ever have sufficient margins to make a profit.

On the other hand, there's Geoffrey Moore. His vision stands as a testament to the power of hope over experience. Rather than bellowing about the demise of shareholder value, Moore argues that managing for shareholder value is more important than ever. It's perfectly reasonable to say that the stocks of companies like Amazon.com are worth what investors think they're worth, because investors will reward a company only as long as it is performing to their expectations.

Which vision is right? Are the markets so unreasonably bloated that they're ready to collapse? Or do we simply need to adapt to new ways of measuring a company's perceived value? The answer almost certainly lies somewhere in between.


Platform Cues

  • The Invisible Continent, by Kenichi Ohmae (HarperBusiness, 2000)

To understand how to thrive in business today, Kenichi Ohmae writes in The Invisible Continent, you have to understand "platforms." Ohmae borrows the term from technology and defines it as "de facto standards -- not decreed by government, but settled upon by the tacit agreement of pioneers and settlers in the invisible continent."

Unlike standards of the industrial era, when railroad gauges and telecommunications protocols were set by government decree, platforms on the invisible continent are mandated by customers. VHS, for example, beat out Betamax as the home-video standard because customers flocked to VHS machines, even though Betamax was said to be a superior product. Not all consumer decisions are made so clearly, so some product categories may share competing platforms for many years. Look no further than Visa and MasterCard or UPS and FedEx. Even when a platform is established, Ohmae argues, it can't be certain of dominance in the long run.

Ohmae's invisible continent has four dimensions: the visible, which consists of conventional businesses that have been operating for years; the borderless, which includes companies created by the growing interconnectedness of consumers and citizens around the world; the cyber, which insists that companies create a presence online if they have any hope of survival; and the high-multiples, in which companies experience market values of anywhere from zero to infinitely higher numbers.

In the invisible continent, the control of markets has shifted from suppliers to consumers. Consumers have so much choice, so much information, so much available to them by means of the Internet, that companies that don't address their needs will be left in the dust.

The big take-away lesson: in the invisible continent, customers rule.


What's the Matter with Kids Today?

  • Managing Generation X, by Bruce Tulgan (Norton, 2000)

Members of Generation X, born between 1963 and 1977, are not slackers. Nor are they anything like baby boomers, born between 1946 and 1962, who apparently don't get Gen X-ers. That's the message of Bruce Tulgan's Managing Generation X: How to Bring Out the Best in Young Talent. Tulgan says that if you know where Gen X-ers are coming from, you can harness the talent of these natural entrepreneurs and unleash their innovative spirit.

In 1994, Tulgan left his job as a Wall Street lawyer to start RainmakerThinking Inc., a company that researches the work lives of people born after 1963. His book is based on the thousands of interviews he's done with Gen X-ers, whose words are interspersed throughout the text. The result is a fascinating, although repetitive, look at how members of Gen X view themselves and their roles at work. The book bursts myths and exults in describing what a tremendous asset Gen X-ers would be if only they were better understood.

As much as Tulgan blasts stereotyping Gen X-ers, however, he doesn't blink twice at stereotyping baby boomers, whom he gives a particularly one-dimensional bad rap. Most X-ers' parents are boomers who were unable to give the kids their full attention, Tulgan asserts. Since X-ers had to fend for themselves, many developed an independent spirit, which is too often mistaken for arrogance or impatience with authority.

At its best, Tulgan's insight on the X-er mentality can be a helpful management tool. He loses credibility when he strays into generalizations about baby boomers. He would have been well advised to stick to X-er behavior, which, based on his voluminous research, is what he knows best.

Jeffrey L. Seglin is an editor-at-large at Inc.


Executive Reader

Orit Gadiesh
Chairman of consultant giant Bain & Co., in Boston

Favorite reference
The Mask of Command, by John Keegan. "Keegan demonstrates that a good leader chooses carefully what he will show or not show his troops -- there's a lot of theater associated with leadership," Gadiesh says. "It's fascinating to see how leaders across time share certain traits. For example, in each case Keegan writes about, the great leaders use technology and allow a different type of warfare to emerge. It's a great analogy for business."

Favorite business book
Frederick F. Reichheld's The Loyalty Effect. Says Gadiesh: "I have a bias because Fred works with me at Bain. That said, I recommend this book because in the age of the Internet, customer loyalty is very important. So is investor loyalty, although there's very little written about it. Losing employees, shareholders, and customers can be expensive in economic terms, and yet most people don't calculate how expensive it is. Fred's book offers a way to do that." --Mike Hofman


Please e-mail your comments to editors@inc.com.

Last updated: Aug 1, 2000




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