Strategy: The Uniqueness Challenge

CEOs often complain that the financial markets simply don't understand their companies' strategy. The author's recent findings show that they may well have a point. Many good strategies are complex and thus hard to understand. A proper analysis of Monsanto, for example, requires expertise in pharmaceuticals, agricultural chemicals, and agricultural biotechnology--but on Wall Street those three industries are analyzed separately. Back in 1999 one analyst wrote, "Monsanto will probably have to change its structure to be more properly analyzed and valued." Zenger was intrigued by the possibility that complex or unique strategies are systematically ignored by analysts or undervalued by capital markets. He and two colleagues undertook to investigate the question, by examining all 7,630 companies that were publicly traded in U.S. capital markets from 1985 through 2007. They devised a way to measure uniqueness and complexity and counted the number of analysts covering each company. Their analysis determined that although many factors--such as company size and trade volume--influence analysts' decisions about what companies to cover, the greater effort required for a complex or unusual strategy discourages coverage. And although their uniqueness measure is actually associated with higher market value, this premium is, on average, lower than it would be if the company got more coverage. CEOs who face the uniqueness challenge have two options: They can make strategic information more accessible--by issuing tracking stocks, marketing directly to investment banks, or paying for independent equity research--or they can find sympathetic investors who believe in the company, which may mean taking it private.

• Strategic analysis
• Corporate strategy
• Finance and investing
• Stock markets