The 12-Week MBA Chapter 1: What Is Value and Why Should You Care?

If someone asked you “what is the purpose of a company?” what would you say? Most people go straight to “making money.” And that is not wrong. But it is not the full picture either.

This is post 2 in my 12-Week MBA retelling series.

The Big Question Nobody Agrees On

The authors open their training programs with exactly this question. And it is fun to watch what happens. First, everyone says “making money.” The more experienced folks say something about “creating shareholder value.” Then silence. Then slowly, people start adding other answers. Creating great products. Giving people jobs. Contributing something useful to society.

The real answer? All of the above.

A business creates value for many groups of people. Shareholders, yes. But also customers, employees, suppliers, and the community around it. The idea that only shareholder value matters has been called both “the biggest idea” and “the dumbest idea” in business. That should tell you something.

So What Is Shareholder Value Anyway?

Here is the one sentence that the entire first part of this book unpacks:

Shareholder value originates in a company’s discounted future net cash flows.

That is eleven words. It sounds like finance textbook nonsense. But stick with me because by the end of Part I of this series, you will understand every word. And more importantly, you will understand why it matters for your actual job, even if you are not in finance.

Let me break it down in simple terms.

When you own a piece of a company, you are basically buying a promise. The promise that this company will make money in the future and that some of that money will flow to you. That is the “future cash flows” part.

But here is the thing about promises. They can be broken. The future is uncertain. A pandemic can wipe out your restaurant. A new technology can make your product obsolete overnight. So when you are thinking about how much those future cash flows are worth to you today, you naturally trust the near-term ones more than the far-off ones. You “discount” the ones further away because you are less sure they will actually happen.

That is it. That is the whole concept.

The Nokia Story That Makes It Click

The authors use Nokia as an example and it is perfect because everyone knows how the story ends.

In early 2007, Nokia was on top of the world. Their phones were everywhere. Sales were growing fast. The brand was strong. If you were an investor, the story about Nokia’s future looked amazing. All those future cash flows seemed very real and very large.

Nokia’s stock went from about $21 per share at the start of 2007 to over $40 by November. Those numbers were not random. They reflected what investors believed about Nokia’s future. How much cash would flow in? How confident were they about it? The stock price was basically a summary of everyone’s best guesses about future cash flows, adjusted for risk.

Then something happened. On June 29, 2007, Apple released the iPhone.

At first, investors shrugged it off. Nokia’s numbers still looked great. Their 2007 annual report showed sales up 24 percent and profits up 44 percent. Cash flow had increased seven times over. By every measure you could put on paper, Nokia was crushing it.

But by March 2008, the stock was already down to $32. What changed? Not the current numbers. Those were fantastic. What changed was the story about the future. Investors started to wonder: can Nokia keep this up? Is the iPhone a real threat? Are those future cash flows still as certain as we thought?

We all know the answer now. But in 2008, nobody knew for sure. That uncertainty is exactly what “discounting” means. When the story gets shakier, the future cash flows get discounted more. The value drops.

Value Is in the Eye of the Beholder

Here is something that seems obvious but is actually important: value is subjective.

When Nokia stock traded at $29, that price existed because one person thought it was worth at least $29 (the buyer) and another person thought $29 was good enough to sell (the seller). They had different views of the future but their views overlapped at $29. That is all a stock price is. A point where two different opinions about the future meet.

This matters because it means value is not some fixed number sitting in a spreadsheet. It is a feeling. A story. A prediction about what will happen next. Different people look at the same company and see different futures. Some are optimistic, some are anxious. The market is just where all these different views get averaged out into a single number.

The Three Things That Drive Value

So as a manager, what can you actually do about all this? The authors boil it down to three things:

1. Profitability - Can you make the gap between what customers pay and what it costs you to deliver bigger? This is the most basic driver. If you sell something for $10 and it costs you $6 to make, your profit is $4. The wider that gap, the more value you create.

2. Growth - Can you get more customers to buy more stuff? Even if your profit per sale stays the same, selling to more people means more total cash flow. Growth is about expanding the pie.

3. Risk - Can you make investors feel more confident that you will actually deliver? This is the one people forget. You could have amazing profitability and great growth, but if investors do not trust the story, they will discount your future cash flows heavily. Keeping promises matters.

Nokia had profitability and growth locked down in 2007. The problem was risk. Once the iPhone appeared, the story about Nokia’s future became uncertain. And uncertainty kills value fast.

The Trust Factor

The authors make a point that stuck with me. They keep using the word “promise” when talking about value. And they say there are two parts to keeping promises: you keep the ones you make, and you do not make ones you cannot keep.

This is basically what trust means in business. Shareholders trust managers to make realistic promises about future performance and then deliver on those promises. When managers overpromise, they create inflated expectations. When reality does not match, trust breaks. And when trust breaks, value drops.

In business, numbers and people are connected in ways that are hard to separate. A stock price looks like pure math. But behind it is a story about human confidence, kept promises, and honest predictions about an uncertain future.

Key Takeaway

Value is not just about making money right now. It is about the promise of future cash flows, discounted by how much people trust that promise. As a manager, you influence value through three levers: profitability, growth, and risk. Most people focus on the first two and forget the third. But trust and predictability might be the most powerful drivers of all.

The next chapter will dig into the first lever: profitability. How do companies actually make money? Turns out the answer is more complicated than “sell stuff for more than it costs.”

Book: The 12-Week MBA by Nathan Kracklauer & Bjorn Billhardt | ISBN: 978-0-306-83236-9

Previous: Introduction - The 12-Week MBA Series

Next up: Chapter 2 - Profitability - How companies actually make money.

Part of the 12-Week MBA retelling series