By Braun Jones, Partner, WWC Capital Group, LLC
Given most CEOs understand the ultimate objective is to increase the value of their business over time, it makes sense to develop a management style and strategy that embraces that core objective – to build company value. Simply put, building business value means growing cash flows while reducing risk. Therefore, a manager must determine the key aspects of a business that will drive value as well as any factors that will reduce risk. These “Value Drivers” and “Risk Drivers” are the essential building blocks used to develop a “Value-Based Business Strategy.”
Examples of top Value Drivers include growth, financial performance, management quality and depth, proprietary information and processes, high bid win-rates, large contract backlog, quality customer base, favorable industry conditions, and more. Common Risk Drivers, or those factors that can reduce cash flows and destroy value, include customer concentration, contingent liabilities, poorly maintained assets, high operating costs, thin margins, high employee turnover, reckless or lack of sound human resource policies, high financing costs, poor accounting and record keeping, low visibility or small backlog, and litigation exposure.
Although some Value Drivers like “revenue growth” are universal, closer examination is required to determine the most critical Value and Risk Drivers for any given industry. A key question to ask is “What will potential buyers of the business be most interested in and what will investors find most attractive when evaluating alternative investments?” The answers to this question will help a business owner determine the most critical elements to be tracked, measured, and managed to develop a Value-Based Strategy.
With a firm understanding of the key elements to build value, a business owner can work with the leadership team to develop periodic reporting that quantifies and tracks these Value and Risk Drivers. These reports can be assembled into a “corporate performance dashboard” and should be communicated, as appropriate, regularly throughout an organization. For example, the sales team may implement a scorecard system to adequately assess and prioritize all new business opportunities. Once qualified and approved for bid, the proposal process should be streamlined while tracking associated time and costs with producing each bid. Then of course, win/loss-rate metrics should be tracked and reported to management. With this reporting in place, the management team will naturally examine the information to identify any positive or negative trends, and then proactively make adjustments to improve business development performance.
These Value-Based principals and methods can be applied to most functional areas of a business including management effectiveness, sales, marketing, engineering, manufacturing, human resources, operations, finance, distribution, customer support, logistics, research and development, and more. Over time, management will identify opportunities to reduce costs and time associated with many business processes through automation or other means. As these Value-Based methods are implemented and embraced corporate-wide, a culture of goal congruence and teamwork can evolve that will motivate the entire organization to improve various business functions and processes that ultimately result in building organizational value.
As an investment banker that has assessed and sold many businesses, I can tell you with certainty that organizations that have embraced a value-based strategic management approach, are also typically well organized, have strong performance, maintain an attractive culture, and possess happy, productive employees. These characteristics in turn result in a high relative value in the marketplace.