Life cycle View on Shareholder Value

October 10, 2010 § Leave a comment

by Randall Atkin

The concept of shareholder value enhancement, also known as value based management, has the objective of assisting management in considering the interests of shareholders, typically their financial enrichment through earnings power and cash flow optimization. As shareholder value is difficult to influence directly by any one manager, it is usually broken down into components of so called value drivers. A widely used model comprises seven drivers of shareholder value[1], giving some guidance to managers: Revenue, Operating Margin, Cash Tax Rate, Incremental Capital Expenditure, Investment in Working Capital, Cost of Capital, Competitive Advantage Period.

Based on these seven components, all functions of a business can plan and demonstrate how they influence shareholder value. A prominent tool for any department or function to prove its value are so called shareholder value maps that link their activities to one or several of these seven components.  However, organizations that possess a singular focus on shareholder value are not without their critics. What can inadvertently be neglected are social issues like employment, environmental sustainability, or ethical business practices. These aspects of corporate accountability are typically referred to as stakeholder values, and will be the subject of a separate discussion by our organization.

“Time-Based Value Management”

Plexius’ principle of time-based value management (TBVM) comprehensively deals with the issues of shareholder enrichment, management accountability and the dimension of time.

It can be defined as the analysis of external, or non-controllable, and internal, or manageable business cycle components (e.g., product, technology, regulatory, etc.) and the proper alignment of management processes and decisions to the activities that form a company’s strategy and execution plans. Interrelated to the cycle analyses are the elements of people (skills, knowledge, accountability, etc.), process (design, efficiency, cost, etc.) and technology (leverage, investment, alignment).  Combined, these assessments drive decisions regarding the key dimensions of competitive design that a company embraces.  These inputs are all used in suggesting a properly balanced portfolio of products, development initiatives, operational processes and investment plans that will optimize shareholder value interests.

What Management Should Do

Begin by measuring your current life cycle position by product/service offering.  This includes evaluating external life cycles: the market, competitive offerings, regulatory changes, and the underlying technologies driving the market.  Do the same for the controllable cycles.  This should be done for each of your current offerings, your planned next offering and for the 2 to 3 previous offerings.

The competitive design aspects (operational excellence v product excellence v customer intimacy) vary by life cycle stage.  For instance, one competes in a mature market more with operational excellence than with product superiority.  Misalignments of these relationships can be damaging shareholder value.  Look for these misalignments between the life cycle you are in and how you are competing.  Devise plans to eliminate them.  Within markets, make sure that pricing, promotion, and product development plans are aligned with the current life cycle.  For instance, it is during the growth phase that the next product must be planned and initiated, not before and not after.  With these analyses in hand examine each offering for its impact on shareholder value and how it could be improved.

[1] See: “Corporate Financial Strategy”, Ruth Bender, Keith Ward, 3rd edition, 2008, p. 17


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