Introduction

We are now at about the halfway stage in this book and it is the right time to introduce the eponymous Sources of Value technique. The wait has been necessary for those who started as beginners because the technique can only be properly applied by people with a good understanding of both strategy and valuation. For those who started as practitioners the wait has been short and has simply concerned the need to ensure that we are working with a well-built economic model. For both groups we have now acquired the necessary skills and so can look at the new insights that Sources of Value offers to us. This technique will:

• allow us to explain an investment's value through its underlying strategic rationale;

• help us to make better assumptions in our investment cases and then explain the implications of these assumptions to senior decision-takers;

• guide us as to where to look for positive NPVs and how large we should expect these to be.

My approach will be to start with an overview of the technique. I will then look in more detail first at its theoretical underpinnings and then at its practical application. Finally, I will review some of the lessons that you can learn when you apply Sources of Value thinking. Although the approach has its foundations in some of the heavily used strategic concepts described by Michael Porter it does raise questions about some of the apparently accepted wisdoms that surround business strategy thinking.

In effect, therefore, this pillar will describe Sources of Value under the headings:

• what?

• why?

• how? and

• so what?