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
Value
Chain
The The
Value
Chain
Firm Infrastructure
Human Resource Management
Technology Development
Inbound
Logistics
Operations
Margin
Procurement
Outbound
Marketing
Logistics
& Sales
Service
Primary Activities
Comparing firm’s value chain to competitors identifies competitive
advantages where the firm’s activities are technologically or strategically
distinct.
Copyright © 2008 by Robert B. Carton
Value Chain Analysis
Value Chain Analysis
 Divide the company’s 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 company’s
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
Return on
Investment
+
Other Peoples’
Money
+
÷
Retained
Earnings
Cash Flow Paid
Out
Return to
Owners
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
Purchased
Inputs
Cost of Goods
Sold
Labor
Costs
Administration
Overhead
Sales and
Marketing
Research and
Development
Copyright © 2008 by Robert B. Carton
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