Academic journal article The McKinsey Quarterly

A Case for Corporate Freedom

Academic journal article The McKinsey Quarterly

A Case for Corporate Freedom

Article excerpt

Market forces have pushed many countries toward economic freedom

Have our organiztions kept pace?

Early this year, the Wall Street Journal and the Heritage Foundation announced the results of their annual survey of economic freedom. Using criteria such as market access and the protection of property rights, the survey ranked countries by the level of economic freedom they permit. Hong Kong and Singapore top the list, Switzerland and the United States are fifth, and most European countries are in the upper middle of the range.

The survey noted that the political leaders of many countries - such as those in Latin America - have chosen to move in the direction of economic freedom. Moreover, there appears to be a strong correlation between economic freedom and growth. Countries blessed with natural resources or technological progress but with little economic freedom have not prospered, and aid to nations that lack economic freedom has had little effect on growth.

Strategic freedom

As I read the survey, I wondered if I could make a similar argument for strategic freedom in the world of business. What criteria would I use to assess it? Is the private sector choosing to become more strategically free, or do we run our companies like repressed countries? Is there a correlation in the corporate world between strategic freedom and growth? Is capital invested in strategically constrained businesses unlikely to generate wealth?

Now, McKinsey has not developed a ranking of companies based on their strategic freedom, but in a sense the market has. Let me explain. Our research indicates that a company's value is the product of market expectations of four variables:

* The net present value of cashflows from legacy assets

* The value of the growth opportunities the company has in hand

* The value of its ability to generate new options

* The option value of its flexibility to change its financial and ownership structure.

The last three variables provide companies with the biggest opportunity to change market expectations and increase shareholder value. After analyzing the success of one well-regarded multinational, for example, we concluded that the enormous rise in its shareholder value over the past decade has been due much less to legacy assets than to the creation of option value. Kevin Kelly of Wired magazine puts it this way: "Wealth in this new regime flows directly from innovation, not optimization. That is, wealth is not gained by perfecting the known, but by seizing the unknown."(*)

So the market clearly values strategic freedom. Are our four dimensions of freedom broader and more available to companies than they were a decade ago? The answer must be yes. The growing scope to exploit tangible and intangible assets worldwide has been well documented, as have underlying forces such as the decline in transportation and communication costs. The continuing fall of regulatory barriers, the expansion of liquid and global capital markets, the abundance of alliance partners, the emergence of new structures of ownership - all these developments would have given managers the opportunity to raise their ranking on an index of strategic freedom, if such a thing existed.

But freedom of whatever kind usually comes at a price. For politicians, economic freedom is not easy to embrace. Opening borders to foreign competitors brings accusations of lost jobs. For many business leaders, too, strategic freedom is a threat - one that multiplies the number of decisions they need to make. A would-be globalizer, for example, can no longer plan to expand gradually into a few more countries every year; instead, it must discover ways to reshape the structure of industries, control critical assets, and attract partners, worldwide.

In fact, any analysis of strategic freedom uncovers the same forces that are driving globalization. Next year, four of my colleagues will publish a book that argues that globalization is about to enter a second stage in which 80 percent of the world's GDP will be available to companies from any country. …

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