Friday, August 13, 2010

Purpose-Profit balanced Shareholder Value Strategy

After the last week's blog on the topic of consumer value strategy – I heard back from some folks - asking, whether I am going to cover the remaining dimensions of value or not. More specifically, the questions were around Shareholder value and Organizational value – and so, I thought of covering “Shareholder Value Strategy” this week – just to be fair and balanced. Depending upon the interest level - I might also cover the organizational value strategy (employee ethics, code of conducts etc.) in one of the future blogs.

In nutshell, Shareholder’s value is the return shareholders get from their investment – as we had defined in last week's blog. With that said, the overall shareholder’s value is not just the financial return (i.e, capital gains, dividends and proceeds from buybacks etc. ), but also, the indirect value generated from company’s customers, employees/communities and last, but not least, its efficient operations – as they are the foundations for maximizing the shareholder value.

With this renewed thinking, let us develop a balanced score card (BSC) based Value Measurement Framework (VMF) - as outlined in the top of the page to understand, measure and maximize the sub components of value. Emerging methods such as Analytical Hierarchical Process (AHP) can help us to augment the balanced scorecard design using a relative weighting of the performance categories to align strategic objectives with operational processes with an end goal of understanding/measuring/maximizing shareholder value. This Value Measurement Framework (VMF) is a set of management and analytical processes based on a balanced scorecard design to measure shareholder value in meeting their expectations against pre-set strategic goals. In other words, VMF is more about strategic business thinking of interweaving analytics with business strategy.

Unlike other balanced score designs, our VMF approach is a “drill down dashboards” driven balanced scorecard, with a broad set of measures based on the four perspectives of Kaplan and Norton with the end goal of measuring and maximizing shareholder value. In addition, our VMF approach is also built using Lean principles that are being used to increase the efficiency and effectiveness of company’s operations. In their book Lean Thinking, James P. Womack and Daniel T. Jones state that lean thinking can be summarized in five principles: “precisely specify value by specific product, identify the value stream for each product, make value flow without interruptions, let the customer pull value from the producer, and pursue perfection”(italics theirs). Within this context, Lean can be defined as the effective utilization of various tools and techniques in a systematic, customer-focused manner that increases the flexibility of the operational processes with the goal of producing the highest-quality product within an environment of continuous improvement and thereby increasing shareholder’s value. The overarching values of lean are customer and shareholder’s prosperity and the view that the employee’s are the most important resource of an organization.

Within the context of this Lean/AHP/BSC based VMF solution, as a first step, we must determine specific objectives and drivers in alignment with the overall business strategy of the organization to effectively measure shareholder value. A clear linkage of drivers with causal relationship is critical for a successful VMF solution. In addition, our VMF solution will augment the original financial perspectives of BSC with VBM based CVA/EVA to simulate business reality and to help us to effectively measure shareholder’s value. To effectively measure this cause and effect relationship driven perspectives of balanced scorecard, appropriate metrics for each of the objectives and drivers are developed as part of our VMF design. This is where, Analytical Hierarchical Process (AHP) can help us to set the relative importance of the measures from each of the four perspectives within the balanced scorecard. The AHP uses paired comparisons of objects with the relative weighting of the performance categories to provide insights into a company’s strategy. By slightly augmenting the Thomas Saaty’s AHP model with “what if scenarios” in which every scenario has different weight factors for the KPI’s for measuring the performance of our organizations will truly give us the competitive edge we need in maximizing the shareholder’s value.

The VMF solution, in addition can also be designed to be dynamic and multi dimensional so that metrics can be changed or added to reflect the changes that are bound to happen within the business strategy. An example is that - while we are trying to justify a supply chain re-design initiative that may aim at achieving 20% reduction of inventory carrying cost might cause a sharp increase in short shipments with increases in transportation cost. This scenario might make us to create another delivery cost metric within the balanced scorecard. To enable such flexibility, our VMF is designed with a flexible meta-data driven approach in which measures can be added or changed dynamically.

Bottom line

Measuring shareholder value on a continual basis using Lean/AHP/BSC based VMF solution is yet another way we can entice high end shareholders to invest in our businesses. A composite score in a dashboard (along with what-if scenarios) format, will definitely help shareholders and senior management alike to compare the divisional (or LOB) value with other business units and/or with as that of our competitors and give us the true competitive edge we need in the 21st century. This unprecedented edge, not only will help us to increase shareholder’s value, but also will help us to change the rules of the game every step of the way within our industry vertical. In other words, a well established VMF solution, apart from measuring the value will also help us to clarify and update strategy, align organization goals to individual goals, and to learn and improve our strategic objectives - and above all, make our company the investor’s paradise within our industry vertical.

1 comment:

  1. Hello Charles,
    Your post provides interesting and brain provocative ideas. The balanced scorecard is excellent and reminds of two presentations I published almost a year ago. Even though the approaches are different; the conclusions are not.
    The incorporation of intangible values into the balanced scorecard adds value and weight to realistic measurements. Your post goes a long way in fulfilling this requirement
    That your posts urge me to take my fingers to the keyboard and comment testifies for the quality of your posts.