Eric Hwang and Kathy Rudy All firms seek to build shareholder value. They do this by managing three key drivers: Revenue growth, margin improvement, and increased capital efficiency. Each of these generic drivers is a function of various, more specific drivers that reflect industry characteristics and market needs. For example, for an oil company, a key measure might be the price of a barrel of oil, while customer retention rates would be critical in the financial services industry. Drilling down deeper, value drivers that are the domain of specific functions within the organization can be identified. By constructing a Value Driver Tree, its possible to link specific, granular metrics of operational performance to strategic organizational goals. In the case of IT, this capability makes it possible to effectively demonstrate IT contribution to strategic business goals. Establishing Links and Priorities Once basic value drivers are identified, sensitivity and manageability analyses can help prioritize actions by determining which factors will have the most impact on improving performance. Specifically, stakeholders must address two key questions: What factors have a significant impact on the value of the firm? What factors can we influence or manage? In other words, by identifying the factors that are most important, and of those, the ones that can be most significantly affected by actions, an organization can maximize the positive impact of improvement initiatives, and accurately track the effectiveness of those initiatives. The Lost Customers Problem ACME Insurance has a problem the company is losing customers at an increased rate, and its not clear why. Because lost customers and new customers directly influence revenue growth, this problem directly concerns the CEO, because his number one priority is to increase shareholder value. To address the situation, ACMEs.
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An excerpt from Valuation: Measuring and Managing the Value of Companies, second edition. Recent years have seen a plethora of new management approaches for improving organizational performance: total quality management, flat organizations, empowerment, continuous improvement, reengineering, kaizen, team building, and so on. Many have succeeded—but quite a few have failed. Often the cause of failure was performance targets that were unclear or not properly aligned with the ultimate goal of creating value. Value-based management ( VBM) tackles this problem head on. It provides a precise and unambiguous metric—value—upon which an entire organization can be built. The thinking behind VBM is simple. The value of a company is determined by its discounted future cash flows. Value is created only when companies invest capital at returns that exceed the cost of that capital. VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating decisions. Properly executed, it is an approach to management that aligns a company's overall aspirations, analytical techniques, and management processes to focus management decision making on the key drivers of value. Principles VBM is very different from 1960s-style planning systems. It is not a staff-driven exercise. It focuses on better decision making at all levels in an organization. It recognizes that top-down command-and-control structures cannot work well, especially in large multibusiness corporations. Instead, it calls on managers to use value-based performance metrics for making better decisions. It entails managing the balance sheet as well as the income statement, and balancing long- and short-term perspectives. When VBM is implemented well, it brings tremendous benefit. It is like restructuring to achieve maximum value on a continuing basis. It works. It has high impact.
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