DBA Value Management Assignment

1.3 Value-Based Management Measures

Value-based management was first invented by Taggart, Kontes and Mankins (1994). This concept was implemented to maximize shareholders value by working ultimately with the company’s strategy to its market value. Furthermore, there are five fundamental key approaches developed namely the government, to plan strategically, efficient allocation of resources, performance management, and top management compensation. All of them play a big role in sustaining value creation. Besides, VBM collaborates to enhance a company’s organizational behaviour through the use of performance metrics and decision-making tool such that it should match up with its institutional drivers, key functions and processes. In 2006 Rappaport came with a different understanding of shareholder value whereby it was reintroduced as the aggregate economic value of equity. Therefore, the corporate value of a firm is derived by the aggregate and the shareholder value is explained by the working capital.

1.4 Empirical Evidence related to the Value Creation and Value Measurement

Pablo Fernandez (2002) defined shareholder value as the difference between the market value and book value per share. The shareholder value is created when the market value surpasses the book value. On the contrary, when the Book value is greater than the market value, it results negatively upon the shareholder value. The equity market value is a synonym for market capitalization. Thus, a publicly-traded company will calculate its equity market value by taking the current market price per share and multiply it by the number of all outstanding shares in the market. Furthermore, an increase in the equity market value will give rise when the equity market value for the current year ended is less than the equity market value for the preceding year ended.

According to Bowman & Ambrosini (2010), the shareholder value is being determined over a long term basis of free cash flows. Therefore, a company aims will be achieved when its future returns over a long-term time frame exceed the cost of capital. The objective of maximizing shareholders wealth is to use the investment of shareholders effectively and efficiently. Hence, this can be achieved through the use of various strategies and operational key performances. Furthermore, the prime goal of a company is the maximization of its shareholder's wealth which can be attained only through proper management and maintaining a good relationship with its stakeholders. As such a company must tactfully handle its marketing strategy whereby neither shall it charge too much nor too less for a particular good or service (Johansen & Nielsen, 2011).

The purpose of this concept is to attract more customers and survive in the fiercely competitive market. As such some companies charging lower prices for a particular good or service might be able to attract more customers. But on the other hand, it will fail to meet up with its financial obligations and might be unable to come up with the development of new products and services. Therefore, having the same products and services in the market might lead to a negative impact on customer satisfaction. Henceforth, fostering and understanding customers is a very important aspect in maintaining shareholder value. So, a good value-oriented firm will always want to maintain good terms with both its customers and shareholders. As such, it will try to find a value-added price that will be beneficial beyond its present transaction and current time period.

However, the same concept shall be applied to suppliers, employees and the government.

Simon (1996) related the concept of shareholder value creation to the theory of firms. He explained how a firm’s real owners are the shareholders and how they are risk seeker whereby they even invest a huge amount of capital. Therefore, that money contributes much to the daily running operations of the organisation. Moreover, there are some ‘residual claimants’ such as the government who do not have preferences and will be receiving returns only after the distribution of all other factors. Furthermore, the value creation process tends to focus upon achieving customer satisfaction by producing better quality goods as well as emphasizing on the appreciation of shareholders stakes in value. However, the aims of many organisations dealing in a market-driven economy are to maximize shareholders wealth which can be achieved only by adding value to all other stakeholders like customers, suppliers, employees and government.

An empirical study carry by Petty and Martin (2001) emphasizes upon value creation whereby it can result in more than just having controlled upon a firm’s performance. Managers are thereby responsible to work on the creation value by identifying a good market for investment and gradually get the value into the hold. A model-based approach by Olson and Knight (1997), brought the concept that if a firm is creating value for its shareholders, it should also be creating value for the other stakeholders of the organisation. However, Pablo Fernandez (2002) elaborated the accounting-based measure (such as ROE) fails to measure value creation because it is based on historic values.

Jalaja (2008) had used accounting-based measures of shareholder’s value creation such as; ROI ROE. It was found that the accounting-based methods of shareholder’s value which is used by companies all over the world do not measure value creation. Therefore it was concluded that the traditional accounting-based methods of shareholder’s value measurement are not effective and hence should not be used for measuring value creation.

2. Conclusions for value management from a generic perspective

After reviewing the theoretical and empirical literature related with the value management it was identified that the accounting measures of value creation are historic in nature and fails to account for the cost of capital and cash flows of an organisation. Therefore any value management strategy based on accounting measures of value creation would not create value, rather destroy value.

In contemporary literature, the Free Cash Flows (FCF) is considered as an indicator of long-term value creation, where the value is created when the future free cash flows exceed the cost of capital. In this regards the Shareholder Value Added (SVA) model by Alfred Rappaport (1997) was found to be the most appropriate value measurement model to measure shareholder’s value-added for a company.

This value measurement model is based on estimating the future cash flows over a certain period of time, which is discounted back to its present value by using the cost of capital to find shareholder value. If the present value of the discounted future cash flows is more than the present market value then this is the share holder’s value created. The value management strategy should consider value drivers and focus on strategic objectives leadings towards value creation.

PART 3 - REFLECTION FOR EMPLOYABILITY ENHANCEMENT

In this part, the acquired knowledge and skills are highlighted which were acquired during the course of this assignment and had resulted in the improvement of future employability.

1. The account of the critical thinking and core capabilities which were needed to achieve this consultancy task for the client organisation are highlighted below

Various capabilities were needed to achieve this consultancy task for the client organisation. First of all, it was necessary to identify the concept of value management and value creation. It was identified that value management is based upon measure the shareholder’s value creation. Therefore the next step was to find how shareholder’s value is measured and created. Different methods which are available to measure the shareholder’s value creation were explored. It was found that traditional accounting-based measures were used to measure shareholder value, such as Earnings Before Interest and Tax (EBIT), Earnings per Share (EPS), Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity (ROE), however, it was identified that the problem with the accounting-based measures was that they are historic in nature and do not account for the cost of capital.

It was learned that even if an organisation can have positive accounting profit and returns it would not be creating shareholders value if the profits earned do not cover the cost of capital. It was further learnt that the economic value-based measures are more appropriate and accurate in measuring the shareholder’s value creation, as long as it accounts for the cost of capital. The Shareholder Value Added (SVA) model by Alfred Rappaport (1997) was identified as better in shareholder value measurement than other value measurement models because it measures the value of shares based on discounted cash flows using the cost of capital. Moreover, for value management, it was learnt that a Strategic financial objective with key value drivers is developed to create value.

2. Evaluation of my current knowledge, skills and competencies after completion of this consultancy assignment

Upon completion of this consultancy assignment my knowledge, skills, and competencies had increased in various aspects. I have learnt various value measurement methods which can be used for monitoring & interpreting financial-based performance. The value measurement models such as SVA and its application was learnt by which the value creation can be measured. I had learnt that cash flow and cost of capital are two important factors which can play a significant role in shareholder’s value creation. For value management identifying the key value, drivers are essential so that the financial objective can be achieved through these measurable value drivers.

By virtue of this consultancy assignment, I am now able to measure shareholder’s value. Moreover, through this assignment, I have come to realize that even when the financial performance of an organisation is good, still it may not be creating any value for the shareholders if its revenue does not exceed the cost of capital. In addition, another skill which was necessary to learn here was time management skill. There were time constraints and the assignment was to be completed within the specified time period. In view of this learning time management skill was highly worthwhile as it had not only enabled me to complete this assignment on time but will also prove helpful in my future professional career.

3. Review the related leadership skills required for future personal development and career succession.

During this course, I had realized that it is necessary to acquire various leadership skills to achieve future personal development and career. In this regards, I had acquired time management skills. I had also understood the importance of working in groups. I had realized that in professional career there could be various situations where a person may have to form groups or to work in alliance with others. Networking and relationship building is another highly valuable leadership skill which was acquired during this course. During this course, I had got a chance to interact with students from different countries.

By interacting and socializing with students from different countries I was able to learn about different cultures and develop friendship and coordination with them. This helped me in identifying that interacting and socializing is a successful way by which people from different origins can develop friendship and coordination. Therefore based on this experience, it was understood that in future career workplace socialization would also be required similarly to develop friendship and coordination with the fellow workers. To develop a friendly workplace environment the same interacting and socializing technique will be used in my future professional career.

The self-resilience skill was another leadership skill which I had acquired during this course. Initially, during this course, I was having much stress due to the study load and assignments. The stress was resulting in insomnia and had also started impacting my mental and physical health as well as my academic outcomes. Then I came to know about being self-resilient, which means to become flexible and adaptive so that you can face different situations without getting under stress. To become self-resilient it is necessary to learn to maintain confidence and a positive attitude. Rather than saying no, I learnt to accept challenges and develop tolerance. With this newly acquired skill, I eventually learnt to control stress. Moreover, exercise was identified as another way by which I was able to relieve my stress. Therefore this self-resilience skill eventually had helped me in overcoming my stress during this course and will enable me to be resilient during my future professional career. Besides, this value management assignment had enabled me to understand the impact which strategic decision can have on value creation for shareholders. Therefore it is necessary that the management decisions are focused on such which will result in value creation.