The Conceptual Imperative: Investments, Assets, and Enterprise Value

This chapter lays out the conceptual imperative for the dynamic strategy of a modern corporation. How can a modern corporation, which by assumption behaves as a boundedly rational firm, firstly continue to generate the requisite variety of competences and strategic assets, and secondly continuously leverage them to sustain profitable growth amidst the uncertainties that characterize its dynamic operating environments? The mainstream strategy literature has ignored the ‘investment’ problem of the dynamics of strategic behavior (e.g., intertemporal trade-offs to manage future returns). An elusive problem that constrains a rigorous theoretical conceptualization of dynamic strategy concerns how firms’ ex-ante investment choices generate valuable strategic assets that contribute to their ex-post enterprise value. The investment objectives and behavior of a modern corporation are consistent with evolution as a general theoretical framework for the analysis of dynamic strategy. Although a modern corporation seeks to benefit from an increase in capital stock, its investment objective, in a departure from the neo-classical theory of investments, is not to accumulate ‘optimal’ capital stock. A boundedly rational profit-seeking firm incurs various expenses and investments to manage its operations and to improve its operating efficiency and effectiveness. The outcomes of these path-dependent (and stochastic) expenses and investments, which accrue to the firm as intangible and tangible assets respectively, contribute toward increasing the firm’s enterprise value.