What one thing?  

What one thing indicates the vitality of your business?

Sales Income Growth?  Certainly robust sales demonstrate success and market demand for your products and services.

A great balance sheet?  Managing assets and debt to enable a business to have a solid capital base to find growth.

Skilled, productive staff?  Few businesses could do anything without good, motivated people.

Acceptable Product Quality?   Great information systems?  Minimal Customer Complaints?

These all provide a good answer to the question. Yet the one thing that stands above all these to confirm the economic soundness and increasing worth of the business is Value Growth Contribution.  When executives complete all their efforts for the year, they know it was worthwhile if the value of the business grew at a rate exceeding the company’s weighted average cost of capital.  At Source Companies, LLC, we can help you better understand your business based upon that premise. By making sure that all activities must somehow build the “drivers” that sustain and build “value”, the value of the business will grow.  To make this assurance, we take a holistic approach in looking behind the scenes at how value gets created and what erodes it.  The fundamental principles behind any worthwhile management technique become the building blocks of value for a particular company at a particular point in time. 


Quick Fixes and Management Buzz

When improvement is desired, many business leaders look to the latest management books.  They tend to reach for one of the current, popular programs like Six Sigma, Enterprise Requirements Planning (ERP) systems, Lean Manufacturing, Customer Relationship Management (CRM) or e-Commerce.  Such programs benefit many businesses and may actually enhance Value Growth Contribution. However, will the effort to implement such a program be worth it to your business?   Yes, but only to the extent that the rate of Value Growth Contribution improves from permanent changes in the individual Value Drivers in a given business and, it must be remembered that, how they work together in each business is unique. There is no one, universal formula, applicable to all businesses that will drive value creation in every business.  However, even knowing this, many “business improvement” programs offer a tempting alternative, rather than custom-fitting the solution.

Over time, however, Business Owners begin to realize that they face an endless succession of new management buzzwords, tools and techniques.  Each new wave holds out the promise of being the key to unlock productivity or to tap new markets.  Both companies and consultants explain how companies have profited by applying the ideas.  Promoters of each new approach want their buzzword or TLA (Three Letter Acronym) to be the "umbrella" that arches over all that has come before.  People find a certain amount of comfort in being able to say that they are doing the same thing that worked for another successful company, or the same thing presented at a recent industry conference, or the same thing referred to in a best selling business book.  Effective buzz and buzzwords come with the radiance of the business or academic stars affiliated with them.

Those in the trenches present another side of the story.  Employees often complain about the "program of the month" or the effort and cost associated with no real results.  Perhaps their jobs get more complicated or two programs that conflict cause their head to buzz.  They often “can't wait to try it”, but worry if they can sort through all the advice and attractions coming at them from all sides.  They wonder if they can deal with the consequences and if those consequences will be 100% positive.

Certainly such new programs do not lack some benefit to companies that embrace them.  Buzzwords provide sets of tools, a philosophy and terminology.  They provide a name for the ideas and some common understanding.  However, none address the whole enterprise nor are they formulated for your specific business.  Also, most programs go on and on without a particular end state.  No one program really works on its own unless the other supporting business processes and supporting systems already function well individually and together in harmony. 

Take the typical systems project.  Few have met the time, budget and economic return expectations of their sponsors.  Are they necessary to compete? Yes.  Taxing on the company to install?  Yes.

The groundswells triggered by Tom Peters and Robert Waterman in their 1984 book, In Search of Excellence, and by Deming, Juran, and Crosby in the idea of Total Quality Management drove companies to undertake huge efforts to meet the new standards.  Many companies won better performance for their efforts.  Just as many other companies faced confusion and retrenchment before they got it right enough to keep pace with the industry.  Through all this the common denominator of success was growth in company value, whether companies focused directly on it or not.

So if the one thing that indicates vitality is Value Growth Contribution and if the latest Management Buzzword programs come with potential risk, excess baggage to implement, and potential employee disdain, what can you do?

Building Blocks of Value

How do you measure Value Growth Contribution (VGC)?  A simplified view of VGC consists of two parts: Adjusted Earnings less the Cost of the Capital needed to get those earnings. Capital enables value growth.  By evaluating the cost of capital and the capital structure of the company, we can be certain it is ready for maximum value growth.  Financial transactions and the operations that support positive VGC go hand-in-hand.  One tends to trigger the need to consider the other.
 

Build the Structural Components of Value All the components of value must be in place: Growth Strategy, Company Capitalization, Performance Measurement and Business Governance.

Strengthen the Value Drivers Success in the Value Drivers actually creates the value.  Like the Structural Components of value, the Value Drivers work together.  Great strength or great weakness in one of the Value Drivers affects results in the others and the ability of the company to build value.  Adequacy of value drivers determines where to look to best build company value.

Value Erosion Factors (relationships among the drivers)

The value drivers must interact effectively to work.  When they do not, value erodes.  This illustrates the need to take a custom and comprehensive view of what drives value in your particular company and industry.

The Need for a Customized and Holistic Approach to Build Value

It soon becomes clear that the structure of any particular program may not address Business Value and what drives it.  The relationships between drivers and Value Creation or Erosion Factors quickly become complex.  When the company does not create value at the desired or possible rate, then a holistic approach can more efficiently deal with the significant relationships.  The efforts target improvement of Value Growth Contribution rather than the fulfillment of the goals of a Management Buzzword Program.

Building Blocks

Solid Value Drivers come from Building Blocks whose bases are fundamental principles.  The Management Buzzword programs selectively emphasize some of these building blocks and programs.  They occur to one extent or another and in differing degrees of emphasis.   For example, Total Quality Management (TQM) includes the ideas of managing variation, taking a process view, understanding what the customer wants, and measuring the process and its results.  Your company may need to improve on only one or in all of these at a particular time.