KEY POINTS
- Define clear objectives and investor requirements for value management.
- Identify key value drivers and constraints impacting your project.
- Generate and prioritise ideas for value improvement strategies.
- Develop comprehensive strategies aligned with project objectives.
- Implement strategies with assigned responsibilities and clear timelines.
- Monitor progress using performance metrics and customer feedback.
- Foster a culture of continuous improvement and knowledge sharing.
- Document insights and best practices for future initiatives.
Establishing a Value Management framework is a powerful way to navigate market trends and optimise your business strategy. By following these key steps – from defining objectives to continuous improvement – you can create a structured approach to maximising the value of your business.
What is Value Management?
Value Management is a systematic approach that focuses on maximising the long-term value of a business. By focusing on key value drivers and aligning strategy, operations, and incentives around value creation, companies can make better decisions and achieve superior outcomes.
1. Start with a Current Valuation
The first step is to understand your business’s current value by preparing a valuation using appropriate methods (such as discounted cash flow analysis). This establishes a base case valuation for assessing and measuring future improvements.
2. Identify and Analyse Value Drivers
Determine the key factors that drive value in your business and industry. These might include:
- Revenue growth rate
- Profit margins
- Capital efficiency
- Customer satisfaction
- Employee productivity
Develop metrics to track these value drivers and understand their impact on overall business value.
3. Model Improvement Scenarios
Using your updated valuation as a starting point, model the effects of the following scenarios:
- Increasing sales by 1%
- Improving gross margin by 1%
- Reducing capital intensity by 1%
This analysis helps prioritise initiatives that will have the greatest impact on value creation.
4. Benchmark Against Industry Standards
Compare your company’s financial performance and key performance indicators (KPIs) to industry benchmarks. This identifies areas for operational and efficiency improvements that can drive value creation.
Prepare an updated business valuation that incorporates all of the value improvements identified thus far.
5. Develop a Value Creation Plan
Based on your analysis, create a comprehensive plan focused on enhancing business value. This plan should:
- Set clear, value-oriented goals
- Outline specific strategies for operational improvements
- Balance short-term needs with long-term value creation
6. Implement Value-Oriented Targets and Performance Measurement
Your value creation plan must include specific targets for different levels of the business. Develop a performance measurement system that tracks progress towards these targets and aligns with overall value creation goals.
7. Align Employee Incentives
Ensure that employee compensation and incentives are linked to value creation. This might involve:
- Redesigning bonus structures to reward long-term value growth
- Implementing stock option plans or phantom stock for key employees
- Providing non-monetary incentives that reinforce value-creating behaviours
8. Make Value-Based Decisions
Train managers at all levels to make decisions through a value creation lens. This includes:
- Evaluating capital allocation and investment opportunities based on their impact on long-term value
- Considering both quantitative and qualitative factors in decision-making
- Balancing risk and return in strategic choices
9. Communicate Value Creation
Develop a clear narrative about your value creation strategy and regularly communicate progress to investors and employees.
10. Continuously Refine and Adapt
Value creation is an ongoing process. Regularly review and refine your approach based on:
- Changes in market conditions
- New opportunities or threats
- Feedback from employees and customers
- Lessons learned from implementation
Remember, the key is to focus on the specific value drivers relevant to your industry and business model.
Conclusion
By following these steps, small and medium sized businesses can create a culture of value creation that drives long-term success and maximises business value.
It is not a one-time effort but an ongoing process. It requires commitment from leadership, engagement at all levels of the organisation, and a willingness to adapt and learn. As you implement and refine your Value Management framework, you’ll be better equipped to identify opportunities, mitigate risks, and deliver superior value to your customers and shareholders.