CC BY
43
Value based management: a modern and practical method
B. Dobiegala-Korona, A. Krzepicka
Abstract: The paramount goal of each company functioning is a company value increase, and thus the multiplication of a proprietor's asset. Competition globalization causes bigger and bigger management staff's interest in company value. Company value growth is a paramount purpose of all those interested in company development, as it relates investors, employees, deliverers as well as customers. Skillful company value management increases its market position and gives competitive advantage.
Key words: management, value based management, company value maximization.
Introduction
Management constitutes an essential as well as a distinguishing instrument of every company's activity. Dynamic changes in economy we have been dealing with over the last years cause a growing need for modern ways of management, better adjusted to contemporary world realities. At the turn of the 20th and 21st centuries in the economic reality, new tendencies in company management appeared. These changes concerned such aspects as: forms and conditions of running business, capital allocation, the growth of importance of some sectors and the decrease of importance of others or the use of modern technics, technologies and management methods.
1. The core of value and company value
Value, simply speaking, means how much something is worth in material terms. In economics there are three kinds of value distinguished the most often1:
• Utility value, which is derived from a function of goods' ability to satisfy particular needs;
• Exchangeable value, which expresses ability of particular goods to be a subjects of an exchange for different goods;
• Natural value, that is central value which all goods' value pursue.
According to a different definition „value is a thing's feature according to
which the thing is perceived as more or less desired, useful, esteemed or important2".
1 D. Zarzecki, Metody wyceny przedsi^biorstw, Fundacja Rozwoju Rachunkowosci w Polsce, Warszawa 1999, p. 22.
2 R. C. Miles, Basic Business Appraisal, John Wiley&Sons, New York 1984, p. 15.
Value is one of more important elements of company characteristics. In creating value, three main approaches play a vital role :
• Porter's value chain - analyzing in its original conception the creation of value on a company level by isolating activities and identifying its influence on efficiency. Value creation may take place due to differentiation on the level of each link by initiating activities lowering costs and increasing customer satisfaction.
• Resource approach - considering a company as a bundle of resources and skills. A unique mix of a set of complementary and specialized resources, difficult to copy and imitate, may create value.
• Approach based on transaction costs, formed by Coase and developed by Williamson - its core is defining boundaries between companies, and particularly proving why companies organize certain processes although they could realize them on the market by means of transaction.
While considering the core of company value it is worth drawing attention to different forms of its display4:
• Balance value - value of assets and liabilities, resulting from the use of rules included in accountancy law;
• Recreational value - value of contributions that should be born to recreate a company;
• Utility value (accountancy view) - it is current, estimated value of future cash flows whose occurrence is expected because of the further use of a company's assets elements and its liquidation at the end of a lifetime period;
• Change value;
• Value of business in action- it is company value considered as an organization functioning on the market. An alternative to this value is its liquidation value;
• Market capitalization value - it is a product of all issued company shares and a price of one share calculated on a specific day;
• Tax value - it serves as a basis for determining real estate taxes or other assets;
• Security value - it is assets value used to secure loans or other liabilities.
According to different authors, the notion of company value, depending on a
group interpreting its scope and importance, is definitely different. In literature and
3 Vide B. Ziólkowska, Reorientacja systemu tworzenia wartosci w swietle koncepcji organizacji wirtualnej, in: E. Urbanczyk, E. Mioduchowska-Jaroszewicz (eds.), Strategie i determinanty wzrostu wartosci przedsiçbiorstwa, Zeszyty Naukowe NR 685, FINANSE, RYNKI FINANSOWE, UBEZPIECZENIA NR 46, Uniwersytet Szczecinski, Szczecin 2011, pp. 295-296.
4 Vide E. Mackowiak, Wartosc przedsiçbiorstwa w swietle mierników ksiçgowych i opartych na wartosci; in: E. Urbanczyk (ed.), Zarz^dzanie wartosci^. przedsiçbiorstwa w warunkach kryzysu, Zeszyty Naukowe NR 635, FINANSE, RYNKI FINANSOWE, UBEZPIECZENIA NR 35, Uniwersytet Szczecinski, Szczecin 2011, pp. 513514 oraz D. Zarzecki, Metody wyceny przedsiçbiorstw, Fundacja Rozwoju Rachunkowosci, Warszawa 1999, p. 67.
in practice, apart from the above mentioned, there are the following, the most often used company value categories distinguished5 :
• Economic value - displayed through the company ability to generate for its owner cash flow streams.
• Book value - results from the records in the book, it is determined on the basis of historical data and constitutes a sum of the value of company assets ingredients financed by equity capital. The concept of book value plays a minor role in the investment project evaluation process and in company value estimation.
• Market value - means value determined by the market, it plays an important role while concluding sale and purchase transaction, it reflects the most probable price, which may be paid for a particular company on a competitive market.
• Fair market value - is a price, which a particular company may be the subject of conveniencing agreement for, assuming that both a buyer and a seller do not act involuntarily and have at their disposal appropriate information enabling them to make decisions concerning the transaction.
• Investment value - expresses company value perceived by a particular investor, considering their individual preferences, goals and requirements.
• Intrinsic, fundamental value - value stemming from indoor, real company abilities to generate a stream of future income, it is not determined by its features perceived individually by particular investors, so it does not depend on who will be the future company owner, and thus on the subjective estimation of a potential owner.
• Liquidation value - reflects a feature which may be gained from the sale of a company as a whole or of its particular assets ingredients after the acquittance and after defraying liquidation costs.
According to G. Golçbiowski and P. Szczepankowski value measure is divided into four main groups:
• Traditional, also called book, which are based on economic amounts stemming directly from standard financial reports based mainly on different forms of book profit, included in a profit and loss account;
• Economic profit, called and defined differently, and relations calculated on its basis;
• Market, mainly connected with the total rate of return for owners and with the category of market added value;
Cash, based on different forms of cash flows and economic relations connected with them6".
2. Factors creating company value growth
5 B. Nita, Metody wyceny i ksztaltowania wartosci przedsiçbiorstwa, PWE, Warszawa 2007, pp. 22-23.
6 G. Golçbiowski, P. Szczepankowski, Analiza wartosci przedsiçbiorstwa, Difin sp. z o.o., Warszawa 2007, p. 19.
Conditions of contemporary economy as well as changes in the surroundings make the functioning and development of contemporary companies determined by synergetic influence of many processes and factors. A very popular view is that company value growth is currently becoming the most important objective in the strategic perspective, as companies, wanting to survive and be successful on a competitive market are forced to undertake activities which will guarantee to them permanent advantage over the competitors.
In order to manage company value effectively it is essential to understand what the growth of this value depends on. What decides about company value is not only its productive capacity, but also loyal customers, who are eager to use a proposed market offer. The increase of company value constitutes a key management element. Company value is the best and universal measure of its evaluation.
In a contemporary company, value creation is connected with a complementary participation of all gathered value. In order to make their contribution to company development possible there has to be a feedback between them in the shape of a leadership idea which will constitute a biding element on one hand, and on the other it will be a way of strategy realization. Effective and efficient acquired resources management may contribute to its success. The process should be marked by a long-term perspective .
Company value creation constitutes a permanent development and growth process of an entity functioning on the market which in the period of an economic slow down is undoubtedly characterized by different kinds of susceptibility to direct or indirect influence of many different kinds of factors.
All the company resources contribute to creating value, and each of them is characterized by diversified management costs. Therefore, a manager is obliged to manage resources in such a way so that they do not depreciate company value but create this value .
Company value creation process is strictly connected with the value of the perceived quality of products and services, customer service style and credibility.
Company value maximization is possible when a company oriented toward the achievement of its own interests offers a product which, from a customer point of view, has higher value than competitive companies' products.
The total company value, both of equity capital and foreign capital sources, constitutes a sum of the following elements9:
7 Vide P. Skowron, Wartosci niematerialne jako determinanty wartosci przedsiçbiorstwa, in: E. Urbañczyk (ed.), Uwarunkowania wzrostu wartosci przedsiçbiorstw w warunkach konkurencji, Zeszyty Naukowe NR 634, FINANSE, RYNKI FINANSOWE, UBEZPIECZENIA NR 34, Uniwersytet Szczeciñski, Szczecin 2010, p. 375.
8 Vide P. Skowron, Znaczenie przywództwa jako wartosci niematerialnej w ksztaltowaniu wartosci przedsiçbiorstwa, in: T. Borys, P. Rogala (eds.), Zarz^dzanie jakosci^ i srodowiskiem jako determinanty doskonalenia dzialania organizacji, Wyd. AE im. O. Langego we Wroclawiu, Prace Naukowe Nr 1177 AE we Wroclawiu, Wroclaw 2007, p. 135.
9 B. Nita, Metody wyceny i ksztaltowania wartosci przedsiçbiorstwa, PWE, Warszawa 2007, p. 26.
• Current value of future incomes obtained from company operational activities in the forecast period;
• Company value out of the prognosis horizon;
• financing side effects value;
• owned cash value;
• value of the assets non-related with company operational activity;
• value of real operations inscribed in the company value.
Factors influencing economic entities value may be divided into three groups10:
• connected with creating income;
• connected with the optimization of economic processes taking place within the basic operational activity.
Identification and evaluation of the factors determining company value growth, stemming from its widely understood surroundings may simplify the creation of an effective company growth conception, which is based on real sources of signs of a chance for an economic entity.
According to A. Duliniec, the following factors are in the group of basic company value growth factors11:
• Pace of sales growth;
• Operational profit margin;
• Income tax stake;
• Growth pace of invested asset;
• Asset structure and cost;
• Length of growth period.
Moreover, while considering company value it is important to notice economic and financial factors creating this value.
Company value growth is of interest most of all for shareholders, investors,
customers and employees. Those groups expect the delivered value to be
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characterized by :
• Rareness consisting in the purse of that the offered products and services be different from others and unique;
• 'landmarkness' resulting not from the improvement of status quo, but from creating new markets, products and services, which means stepping out from a traditional approach to researching and satisfying customer needs and replacing it with a new approach whose core is to lead customers;
• uniqueness which intrigues, inspires with features of offered products and services or with a way of their purchase and use;
10 Vide J. Sliwa, S. Wymyslowski, Jak szacowac wartosc przedsi^biorstwa?, in: W. Szcz^sny (ed.), Finanse firmy. Jak zarz^dzac kapitalem, C. H. Beck, Warszawa 2007, p. 333.
11 A. Duliniec, Struktura i koszt kapitalu w przedsi^biorstwie, Wydawnictwo Naukowe PWN, Warszawa 1998, p. 147.
12 O. Hanari, Value in the New Economy, part 1 and 2, http:7mworld.mce.be.
• individualization, resulting from the facts that in a new economy the market is becoming less and less a mass recipient market in favour of an individual persons' market, which means a necessity of offering products and services for tailor made needs of particular recipients;
• features giving the sense of recipients' life quality improvement.
Company value growth takes place through its elements' value growth and
the provision of their effective use as a system. Nowadays there is a tendency to increase the significance of company intellectual asset. In numerous publications it is noticed that company value depends more and more on company intellectual
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potential and its efficient use .
Value maximization consists in the use of a structured approach, a systemic approach enabling to focus the efforts of managing staff of all degrees and the whole executive personnel on creating value.
The acquaintance and a proper formation of the factors which a company has influence on provide a possibility of an indirect company value creation. The managing staff, who knows factors influencing value, has a possibility of an appropriate choice of targets and a formation of company functioning rules. It is worth keeping in mind that what has also influence on company value i san country economic situation, company development strategy, sector and market attractiveness, employees, customers, etc. Value is always a subjective amount, since particular assets are worth as much as a customer is willing to pay.
3. Value based management
Management - generally it may be defined as a deliberate and rational formation of the dependencies between organization system elements. Management always takes place while making a deliberate choice of one from alternative possibilities. Company management, whose one of priorities is value growth, requires form managing staff bigger and bigger knowledge and skills of using this knowledge.
Value based management is nowadays a dominating company activity target. The best management practice applied today is believed in many branches to be the implementation of value based management system. Effective value management introduces changes in company functioning, in a way of taking important decisions. All company processes, strategies, targets, activities, planning, reporting and controlling systems, evaluation and motivation systems are currently translated into the language of company value. Company value is a perspective of an investor as a supplier of capital for a company and constitutes currently a basis of management and its most important goal.
Value based management constitutes an integrated process realized on all company levels and all decision levels which has as its purpose long-term company
13 Vide B. Lev, B. Sarath, Sougiannis: R&D Reporting Biases and Their Consequences, Working Paper, University of Illinois at Urbana-Champaign 2002; B. H. Hall, A. Jaffe, M. Trajtenberg, Market Value and Patent Citations: A First Look, Working Paper 7741, Cambridge Map., National Beureau of Economic Research, 2000.
value growth, owners' wealth multiplication, satisfying customer expectations, and thus gaining competitive advantage14. In the management theory and practice it is assumed that company value, that is company value for shareholders, is defined by current value of future cash flows generated by a company and discounted by a weighted average cost of capital diminished by company liabilities value.
Value based management (VBM) „[...] is in fact a management system of a company in which its particular elements are correlated and subordinate to final goal realization which is maximization of value created for shareholders15." „Value-oriented management enables to identify competitive advantage elements and manage them appropriately16".
T. Dudycz perceives value based management as „[...] the transformation of a company into an organization of an increased number of mechanisms enabling to provide higher value for owners and to generate bigger benefits for employees and
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company customers " The core of VBM consists in the use of a company market value conception while analyzing, evaluating, undertaking and then controlling company strategic and operational processes and correcting them. In practice, the realization of the VBM conception comes down to the implementation of such decisions which maximize company value, and thus owners wealthiness.
There are a lot of value based management determinants, both endogenous and exogenous. Before taking decisions leading to maximize company values it is necessary to identify their conditions and determine how the undertaken activities may influence value.
Value based management requires focus on the future, which consists in using solutions catching signals about approaching changes and reacting to them early enough. In addition, the conception of value based management enables to organize activities forming organization value and to design and implement mechanisms of influencing its growth, translate paramount value growth targets into specific activities of an organization and motivate employees to make right decisions. The VBM conception treats company value for owners as a paramount objective which all other objectives should be subordinate to. A company creating company value may be defined as healthy financially, stable and having perspectives of development.
Among the benefits which may be brought to a company by value management it is worth noticing the most important two of them, namely:
• It may indelibly maximize previously created company value;
14 Vide M. K. G^sowska, Logistyka zaopatrzenia a zarz^dzanie wartosci^. przedsiçbiorstwa w warunkach kryzysu; in: J. Bielinski, R. Ploska (eds.), Przedsiçbiorstwo w warunkach kryzysu, Prace i Materialy Wydzialu Zarz^dzania Uniwersytetu Gdanskiego, 3/2 2009, Sopot 2009, p. 297.
15 A. Cwynar, W. Cwynar, Kreowanie wartosci spólki poprzez dlugoterminowe decyzje finansowe, Wyd. Wyzszej Szkoly Informatyki i Zarz^dzania w Rzeszowie, Polska Akademia Rachunkowosci S.A., Warszawa-Rzeszów 2007, 1p6. 9.
16 W. Skoczylas, Wartosc przedsiçbiorstwa w systemie jego oceny, Wydawnictwo Uniwersytetu Szczecinskiego, Szczecin 1998, p. 25.
17 T. Dudycz, Finansowe narzçdzia zarz^dzania wartosci^ przedsiçbiorstwa, Wyd. AE im. O. Langego we Wroclawiu, Wroclaw 2001, p. 44.
• It may increase its "transparency".
Moreover, value management may facilitate communication between investors, analysts and other persons engaged in company activity (from outside) and may improve the inner communication concerning a company strategy.
Summing up, it may be stated that the value base management conception is nowadays a good way of building and developing a successful company. This conception enables to translate paramount value growth targets and motivate employees to make right decisions.
4. Conclusions
Changes in the company surroundings force companies to adapt constantly. Therefore, in every company there must take place deep and universal transformations - both on the strategic and operational level it should be conducted in the conditions of the 21st century. Because of the market development and competition gaining intensity, it is more and more difficult for companies to achieve satisfying results permitting strategic goals realization. In the competitive surroundings, an indirect objective to continue and develop, instead of a traditional target „profit maximization", is becoming a company target „company value growth", being a dominant target. Therefore, for the companies pursuing competitiveness the most important goals are becoming costs reduction, products quality improvement, higher innovativeness and bigger creativity in management processes, as well as the implementation of more modern management methods. One of them is value based management, and its core consists in that a company should focus on developing its main activity areas where it has or may gain competitive advantage in the market. Value based management is a contemporary, dominating way of management, used in the best joint ventures and a lot of companies on almost all continents. It includes rules, offers and solutions with reference to taking strategic and operational decisions whose purpose is maximization of company value for owners and the other groups of interest related to the company. Company value multiplication satisfies the objectives of many groups of interest, from assets' owner to a state.
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