xi
Preface
The first edition of this book appeared in 1990, and we are encouraged that 
it continues to attract readers around the world. We believe the book appeals 
to readers everywhere because the approach it advocates is grounded in uni-
versal economic principles. While we continue to improve, update, and ex-
pand the text as our experience grows and as business and finance continue 
to evolve, those universal principles do not change.
The 30 years since that first edition have been a remarkable period in busi-
ness history, and managers and investors continue to face opportunities and 
challenges emerging from it. The events of the economic crisis that began in 
2007, as well as the Internet boom and its fallout almost a decade earlier, have 
strengthened our conviction that the core principles of value creation are gen-
eral economic rules that continue to apply in all market circumstances. Thus, 
the extraordinarily high anticipated profits represented by stock prices during 
the Internet bubble never materialized, because there was no “new economy.” 
Similarly, the extraordinarily high profits seen in the financial sector for the 
two years preceding the start of the 2007–2009 financial crisis were overstated, 
as subsequent losses demonstrated. The laws of competition should have 
alerted investors that those extraordinary profits couldn’t last and might not 
be real.
Over time, we have also seen confirmed that for some companies, some of 
the time, the stock market may not be a reliable indicator of value. Knowing 
that value signals from the stock market may occasionally be unreliable makes 
us even more certain that managers need at all times to understand the under-
lying, intrinsic value of their company and how it can create more value. In 
our view, clear thinking about valuation and skill in using valuation to guide 
business decisions are prerequisites for company success.
Today, calls mount for changes in the nature of shareholder capitalism. 
As we explain in Chapter 1, we believe this criticism derives largely from 

xii  Preface
a misguided focus by corporate leaders on short-term performance that 
is ­inconsistent with the value-creation principles we describe in this book. 
­Creating value for shareholders does not mean pumping up today’s share 
price. It means creating value for the collective of current and future share-
holders by applying the techniques explained in this book.
Why This Book
Not all CEOs, business managers, and financial managers possess a deep 
understanding of value, although they need to understand it fully if they 
are to do their jobs well and fulfill their responsibilities. This book offers 
them the necessary understanding, and its practical intent reflects its origin 
as a handbook for McKinsey consultants. We publish it for the benefit of 
current and future managers who want their companies to create value, 
and also for their investors. It aims to demystify the field of valuation and 
to clarify the linkages between strategy and finance. So while it draws on 
leading-edge academic thinking, it is primarily a how-to book and one we 
hope you will use again and again. This is no coffee-table tome: if we have 
done our job well, it will soon be full of underlining, margin notations, and 
highlighting.
The book’s messages are simple: Companies thrive when they create real 
economic value for their shareholders. Companies create value by investing 
capital at rates of return that exceed their cost of capital. These two truths 
apply across time and geography. The book explains why these core prin-
ciples of value creation are genuine and how companies can increase value by 
­applying them.
The technical chapters of the book aim to explain, step-by-step, how to do 
valuation well. We spell out valuation frameworks that we use in our consult-
ing work, and we illustrate them with detailed case studies that highlight 
the practical judgments involved in developing and using valuations. Just as 
important, the management chapters discuss how to use valuation to make 
good decisions about courses of action for a company. Specifically, they will 
help business managers understand how to:
• Decide among alternative business strategies by estimating the value of 
each strategic choice.
• Develop a corporate portfolio strategy, based on understanding which 
business units a corporate parent is best positioned to own and which 
might perform better under someone else’s ownership.
• Assess major transactions, including acquisitions, divestitures, and 
restructurings.