What have you left on the table?
The new value paradigm
Business narratives drive economic outcomes. Behavioural economics and finance have for decades challenged the assumption of human rationality prevailing in modern economic theory. In his most famous publication Thinking fast and slow (2011) Daniel Kahneman provided scientific evidence that about 95% of human decision making is driven by what he called the ‘lazy brain’. Due to our evolutionary past we make most decisions based on mental shortcuts, perceptions and emotions. This does not only happen in the fight for survival in the wilderness, but also in the sophisticated world of business and finance.
Robert Shiller, one of the most influential economists of our time, describes in his latest book Narrative Economics (2019) how financial markets are much more driven by narratives and stories rather than rational analytical thinking. Over the last 50 years the median fluctuation of the Shiller PE Ratio (cyclically adjusted) of the S&P 500 index between the major peak and through periods was about 100%.
The revaluation of Apple’s stock is a case in point. Between 2018 and 2019 Apple’s valuation multiples (Enterprise Value/EBITDA, P/E) increased by about 75% while the company’s operational performance was slightly declining. The main reason was a change in business narrative from a tech hardware business depending on selling iPhones to fickle consumers to a provider of a stable tech ecosystem integrating hardware, software and services at premium prices. Apple’s actual business had only marginally changed. The iPhone and other hardware products remain the main contributors to the company’s revenues, profits and cash flows. But investors and analysts have rerated the stock as a consumer staple.
In the early 2000s Samsung Electronics systematically changed its brand and business narratives with consumers, business customers, employees and investors. Within five years Samsung became the 20th most valuable global brand and today Samsung has the largest share of the global mobile phone market. Amazon’s stock market valuation has since its listing in 1997 been based on its brand and business narratives without any sensible relationship to its actual profit and cash flow generation. The same can be said for Tesla. While these examples are more at the extreme end, research from Stratosphere Partners shows that companies with strong brand and business narratives can command a valuation premium of over 200%.
What do we mean by business and brand narrative?
Simply put these narratives are perceptions and mental shortcuts that key stakeholders such as customers/consumers, employees and investors have about a business as well as its products and services. Business narratives drive economic outcomes such as customers’ purchase decisions (sales), employee motivation (productivity) and investor sentiment (valuation/multiples). They account for most of the intangible asset base of a business including brands, corporate culture and vision, customer relationships, IP. As intangible assets account on average for about ¾ of enterprise value, it is not surprising that attractive business narratives create substantial valuation premia.
Building and developing business and brand narratives does not require large investments and the ROI is extremely high. Stratosphere Partners have designed a business narrative process that has helped companies to more than double value of their business over 3–5 year period and much more beyond. If you want to know more about how our brand and business narrative process can increase the value of your business, then get in touch.