Value Systems, Value Chains and Value-Based Management

The Essence of Organizational Performance Is the Creation of Value

Copyright 2008 by Robert B. Carton

The Value System The Value System

Each Box represents a transaction between entities.
Supplier Value Chains Firm Value Chain Channel Value Chains Buyer Value Chains

Value chains differ among firms in an industry reflecting their histories, strategies, and success at implementation. Competitive advantage derives from creating more value for the next position in the value chain then competitors. Competitive scope, the industry segments it serves, differs between firms. Firms may exploit the benefits of broader scope internally or they may form coalitions with other firms to do so.
Copyright 2008 by Robert B. Carton

The The Value Chain Value Chain

Firm Infrastructure

Human Resource Management

Technology Development Procurement Margin

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Primary Activities Comparing firms value chain to competitors identifies competitive advantages where the firms activities are technologically or strategically distinct. Copyright 2008 by Robert B. Carton

Value Chain AnalysisChain Analysis Value

Divide the companys operations into specific activities or processes
Identify discrete activities within each process
Are these strengths or weaknesses for your firm? How do these activities integrate with each other?

Attach costs to each activity

Disaggregate costs of each activity to find opportunity

Identify activities that create value for customers

Focus analysis on these activities

Importance of activities varies by industry

Copyright 2008 by Robert B. Carton

Value-based Management

VBM is the process of maximizing the value of a company on a continuing basis.

It is an integrative process designed to improve strategic and operational decision making by focusing on key drivers of corporate value.
Value drivers are unique to each organization based upon their competitive advantages and industry structure.

Copyright 2008 by Robert B. Carton

Value Is Contextual

Value may be tangible or intangible, operational or financial

Public companies focus on return to shareholders Private companies may define value creation in may other ways
Lifestyle Combined returns to owners including family

Not-for-profit companies
Progress towards social ends Development of a cure

Our focus will be financial

Copyright 2008 by Robert B. Carton

Value Drivers Are Not All Financial

A value driver is any variable that affect the value of the organization. Non-financial objectives may be used to inspire and guide behavior of employees, many of whom will not care about financial value creation.

Customer satisfaction Product innovation Employee satisfaction

Non-financial objectives still ultimately translate into financial performance.

Copyright 2008 by Robert B. Carton

Organizational Key Value Drivers

Organizations cannot act directly on value.

They act on things that influence value. It is through these drivers of value that senior management learns to understand the rest of the organization and establishes strategy.

Those value drivers that have the greatest impact should be the focus of management. Value drivers must be developed down to the level of detail that aligns the value driver with decision variables under the control of line management. Key value drivers are not static so they must be reviewed periodically.
Copyright 2008 by Robert B. Carton

Company Valuation Is Based Upon Discounted Cash Flows

Value is created only when companies invest capital at returns in excess of their cost of capital

Entails managing the balance sheet as well as the income statement Must balance short and long term perspectives

ROIC and growth are the fundamental drivers of a companys value

A company must do one or more to increase value

Increase ROIC on existing capital Increase ROIC on newly invested capital Increase growth rate (so long as ROIC exceeds WACC) Reduce weighted average cost of capital (WACC)
Copyright 2008 by Robert B. Carton

Value Driver Identification

Opportunity Costs Your Money Market Value of Investment

+
Financial Capital

+
Other Peoples Money

Return on Investment

Cash Flow Paid Out Return to Owners

+
Retained Earnings Profits Creation of New Opportunities

+
Increase In Market Value

+
Remaining Value of Exiting Opportunities

Copyright 2008 by Robert B. Carton

Profit Value Drivers

Quantity New Customers

Price
Revenues Quantity

Existing Customers
Price Profits Cost of Goods Sold

Purchased Inputs
Labor

Costs Administration Sales and Marketing Research and Development

Copyright 2008 by Robert B. Carton

Overhead

VBM and Organizational Change

VBM and four key aspects of organizational change.

Helps define the specific financial performance objectives that a company should adopt.
Helps decide between alternative strategies and resource allocations. Requires clear performance targets and follow-up measurement. Provides focus on what is important key value drivers.

VBM is a marriage between a value creation mindset and the management processes and systems necessary to translate that mindset into action.

Copyright 2008 by Robert B. Carton

VBM Management Processes

Strategy development and alternatives evaluation

Achieve competitive advantage that translates into value creation

Target setting

Based upon key value drivers

Action plans

Performance measurement

Copyright 2008 by Robert B. Carton