Business Value
Encyclopedia
In management, business value is an informal term that includes all forms of value that determine the health and well-being of the firm in the long-run. Business value expands concept of value of the firm beyond economic value (also known as economic profit, Economic value added
, and Shareholder value
) to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms.
Business value often embraces intangible asset
s not necessarily attributable to any stakeholder group. Examples include intellectual capital
and a firm's business model
. The Balanced scorecard
methodology is one of the most popular methods for measuring and managing business value.
or Value chain
. Each node in the network could be a stakeholder group, a resource, an organization, end-consumers, interest groups, regulators, or the environment itself. In a Value network
, value creation is viewed as a collaborative, creative, synergistic processes rather than purely mechanistic or a result of command-and-control.
If the firm is viewed as a network of value creating entities, then the question becomes how does each node in the network contribute to overall firm performance and how does it behave and respond to its own interests. When the nodes are independent organizations (e.g. suppliers) or agents (e.g. customers), it's assumed that the firm is seeking a cooperative, win-win relationship where all parties receive value. Even when nodes in the network are not fully independent (e.g. employees), it's assumed that incentives are important and that those incentives go beyond direct financial compensation.
While it would be very desirable to translate all forms of business value to a single economic measure (e.g. Discounted cash flow
), many practitioners and theorists believe this is either not feasible or theoretically impossible. Therefore, advocates of business value believe that the best approach is to measure and manage multiple forms of value as they apply to each stakeholder group.
As of yet, there are no well-formed theories about how the various elements of business value are related to each other and how they might contribute to the firm's long-term success. One promising approach is the business model
, but these are rarely formalized.
was an early proponent of business value as the proper goal of a firm, especially that a firm should create value for customers, employees (especially knowledge worker
s), and distribution partners. His management by objectives
was a goal setting and decision-making tool to help managers at all levels create business value. However, he was skeptical that the dynamics of business value could ever be formalized, at least not with current methods.
Michael Porter
popularized the concept of Value Chain
.
as opposed to long-term debt
. In the case of only one type of stock
, this would roughly be the number of outstanding shares times current shareprice. Things like dividend
s augment shareholder value while issuing of shares (stock options) lower it.
This Shareholder value added should be compared to average/required increase in value, also known as cost of capital
.
For a privately held company, the value of the firm after debt must be estimated using one of several valuation
methods, s.a. discounted cash flow
or others.
See Shareholder value
) or an organization with various individuals playing different roles in the buying/consumption processes. Customer value is conceived variously as utility
, quality, benefits, and customer satisfaction
.
See Customer Value and Utility
traditionally measured in terms of Customer Satisfaction, Revenue Growth,
Profitability, Market Share, Wallet Share, Cross-Sell Ratio,
Marketing Campaign Response Rates, or Relationship Duration.
(IT).
The most important factor is the alignment between IT and business processes, organization
structure, and strategy
. At the highest levels, this alignment is achieved through proper integration of enterprise architecture
, business architecture
, process design
, organization design
, and performance metrics.
At the level of computing and communications infrastructure, the following performance factors constrain and partially determine IT capabilities:
The term value-driven design
was devised to describe the approach to planning business change (especially systems) based on the incremental improvements to business value - this is seen clearly in agile software development
, where the goals of each iteration of product delivery are prioritised on what delivers highest business value drives.
Some critics believe that measuring economic value, economic profit, or shareholder value
is sufficiently complete to guide decision-making. Their logic is that all other forms of value are essentially intermediate to the ultimate goal of economic profit. Furthermore, if they do not contribute to economic profit, they are actually a distraction for the firm.
Other critics believe that extensive efforts to measure business value will be more of a distraction than a boon. For example, there is a fear that decision-makers will be confused if there are too many goals and measures that need to be accommodated.
Economic value added
In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
, and Shareholder value
Shareholder value
Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders...
) to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms.
Business value often embraces intangible asset
Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset...
s not necessarily attributable to any stakeholder group. Examples include intellectual capital
Intellectual capital
The value of an enterprise is made of physical assets, various financial assets and, finally, intangible assets, i.e., intellectual capital . The term intellectual capital conventionally refers to the difference in value between tangible assets and market value. ....
and a firm's business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
. The Balanced scorecard
Balanced scorecard
The Balanced Scorecard is a strategic performance management tool - a semi-standard structured report, supported by proven design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the...
methodology is one of the most popular methods for measuring and managing business value.
Philosophy
The concept of business value aligned with the theory that a firm is best viewed as a network of relationships both internal and external. These networks are sometimes called a Value networkValue network
A value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people . The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the...
or Value chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...
. Each node in the network could be a stakeholder group, a resource, an organization, end-consumers, interest groups, regulators, or the environment itself. In a Value network
Value network
A value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people . The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the...
, value creation is viewed as a collaborative, creative, synergistic processes rather than purely mechanistic or a result of command-and-control.
If the firm is viewed as a network of value creating entities, then the question becomes how does each node in the network contribute to overall firm performance and how does it behave and respond to its own interests. When the nodes are independent organizations (e.g. suppliers) or agents (e.g. customers), it's assumed that the firm is seeking a cooperative, win-win relationship where all parties receive value. Even when nodes in the network are not fully independent (e.g. employees), it's assumed that incentives are important and that those incentives go beyond direct financial compensation.
While it would be very desirable to translate all forms of business value to a single economic measure (e.g. Discounted cash flow
Discounted cash flow
In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...
), many practitioners and theorists believe this is either not feasible or theoretically impossible. Therefore, advocates of business value believe that the best approach is to measure and manage multiple forms of value as they apply to each stakeholder group.
As of yet, there are no well-formed theories about how the various elements of business value are related to each other and how they might contribute to the firm's long-term success. One promising approach is the business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
, but these are rarely formalized.
History
Peter DruckerPeter Drucker
Peter Ferdinand Drucker was an influential writer, management consultant, and self-described “social ecologist.”-Introduction:...
was an early proponent of business value as the proper goal of a firm, especially that a firm should create value for customers, employees (especially knowledge worker
Knowledge worker
Knowledge workers in today's workforce are individuals who are valued for their ability to act and communicate with knowledge within a specific subject area. They will often advance the overall understanding of that subject through focused analysis, design and/or development. They use research...
s), and distribution partners. His management by objectives
Management by objectives
Management by Objectives is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization....
was a goal setting and decision-making tool to help managers at all levels create business value. However, he was skeptical that the dynamics of business value could ever be formalized, at least not with current methods.
Michael Porter
Michael Porter
Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...
popularized the concept of Value Chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...
.
Shareholder Value
For a publicly traded company, shareholder value is the part of its capitalization that is equityStock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
as opposed to long-term debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
. In the case of only one type of stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, this would roughly be the number of outstanding shares times current shareprice. Things like dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s augment shareholder value while issuing of shares (stock options) lower it.
This Shareholder value added should be compared to average/required increase in value, also known as cost of capital
Cost of capital
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds , or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities"...
.
For a privately held company, the value of the firm after debt must be estimated using one of several valuation
Valuation
-Economics:*Valuation , the determination of the economic value of an asset or liability**Real estate appraisal, sometimes called property valuation , the appraisal of land or buildings...
methods, s.a. discounted cash flow
Discounted cash flow
In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...
or others.
See Shareholder value
Shareholder value
Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders...
Customer Value
Customer value is the value received by the end-customer of a product or service. End-customer can include a single individual (consumerConsumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
) or an organization with various individuals playing different roles in the buying/consumption processes. Customer value is conceived variously as utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
, quality, benefits, and customer satisfaction
Customer satisfaction
Customer satisfaction, a term frequently used in marketing, is a measure of how products and services supplied by a company meet or surpass customer expectation...
.
See Customer Value and Utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
Channel Partner Value
The value a business underpins on partner relationships in the business. Partner value here stresses that it can be critical to a firms functioning. It ceases to exist or carry out business activities if partner value is diminished or lost.Strategies for Creating Business Value
An increase or decline in Business Value that an action produces istraditionally measured in terms of Customer Satisfaction, Revenue Growth,
Profitability, Market Share, Wallet Share, Cross-Sell Ratio,
Marketing Campaign Response Rates, or Relationship Duration.
Business Value of Information Technology
Various factors affect the business value impact of Information TechnologyInformation technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
(IT).
The most important factor is the alignment between IT and business processes, organization
Organization
An organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...
structure, and strategy
Strategy
Strategy, a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked...
. At the highest levels, this alignment is achieved through proper integration of enterprise architecture
Enterprise architecture
An enterprise architecture is a rigorous description of the structure of an enterprise, which comprises enterprise components , the externally visible properties of those components, and the relationships between them...
, business architecture
Business architecture
A business architecture is a part of an enterprise architecture related to corporate business, and the documents and diagrams that describe that architectural structure of business...
, process design
Process design
Process design is the design of processes for desired physical and/or chemical transformation of materials. Process design is central to chemical engineering and it can be considered to be the summit of chemical engineering, bringing together all of the components of that field.Process design can...
, organization design
Organization design
Organization design can be defined narrowly, as the process of reshaping organization structure and roles, or it can more effectively be defined as the alignment of structure, process, rewards, metrics and talent with the strategy of the business...
, and performance metrics.
At the level of computing and communications infrastructure, the following performance factors constrain and partially determine IT capabilities:
- Usability
- Functionality
- Availability
- Reliability, recoverability
- Performance (throughput, response time, predictability, capacity, etc.)
- Security
- Agility
The term value-driven design
Value-driven design
Value-driven design is a systems engineering strategy based on microeconomics which enables multidisciplinary design optimization. Value-driven design is being developed by the American Institute of Aeronautics and Astronautics, through a program committee of government, industry and academic...
was devised to describe the approach to planning business change (especially systems) based on the incremental improvements to business value - this is seen clearly in agile software development
Agile software development
Agile software development is a group of software development methodologies based on iterative and incremental development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams...
, where the goals of each iteration of product delivery are prioritised on what delivers highest business value drives.
Criticisms
Business value is an informal concept and there is no consensus, either in academic circles or among management professionals, on its meaning or role in effective decision-making. The term could even be described as a buzz word used by various consultants, analyst firms, executives, authors, and academics.Some critics believe that measuring economic value, economic profit, or shareholder value
Shareholder value
Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders...
is sufficiently complete to guide decision-making. Their logic is that all other forms of value are essentially intermediate to the ultimate goal of economic profit. Furthermore, if they do not contribute to economic profit, they are actually a distraction for the firm.
Other critics believe that extensive efforts to measure business value will be more of a distraction than a boon. For example, there is a fear that decision-makers will be confused if there are too many goals and measures that need to be accommodated.