Evaluating the value of the firm as a function of the firm operating as a capability-based complex adaptive system

• Main Author: Richter, Stefan
• Published: Kingston University 2008
• Subjects: Business and management studies
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.555079

The researcher establishes, through review of literature on the theory of the firm, that the firm operates as a complex adaptive system, consisting of interdependent tangible activity indicators and intangible capabilities. These interdependent capabilities are ultimately the drivers for creating competitive advantage, which is made observable as the value of the firm. When evaluating firm value, experts in the field of capital appraisal make use of the standard DCF method that, however, accounts only for tangible activity indicators and does not explicitly examine the intangible capabilities of the firm. In an attempt to address the above limitation, the researcher develops a methodology aimed at explicitly evaluating firm capabilities in the context of firm valuation. In an effort to accomplish this task, the researcher adopts a qualitative and quantitative approach to identify and analyse the underlying constituents of firm capabilities. Through a series of discussions and group sessions with experts, the research identified 127 intangible activity indicators, which are summarised under eight higher order factors (capabilities). This structure is confirmed through PLS analysis that indicates the existence of the following eight intangible capabilities: (1) value for money, (2) product complexity, (3) distribution, (4) culture, (5) competition, (6) asset management, (7) environment and (8) market equity. Regression analysis confirms that intangible capabilities represent a better predictor for firm value than thangible activity indicators. The researcher also carries out bivariate correlation analyses in order to examine the interrelationship between tangible activity indicators and intangible capabilities. The results confirm that the tangible activity indicators are indeed embedded in the firm's intangible capabilities. Overall, the research adds knowledge in three areas. First, it extends the literature on capabilities and firm valuation by providing a superior way to DCF of evaluating firm value as a function of the firm's capabilities. Second, the research contributes to business practice by offering a step-wise procedure for explicitly evaluating firm capabilities. Third, the research adds knowledge to methods by identifying the intangible activity indicators through interviews and surveys with experts in the field of capital appraisal and reducing these activity indicators into capabilities using focus groups and PLS analysis.