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Wednesday, 17 March 2010

The Trouble with Innovation – Part 5

As CeBIT 2010 ended this series of articles will move forward from the baseline discussed do far.
In the last article Part 4 we alluded to Risk and the positive Risk Management strategy of Value Based Principles.  In order to conclude the next two steps into Value Creation Chain, we need to focus on ‘Value Management’ and ‘Value Measurement’.
Firstly then, value management:

Managing the Value

We highlighted the seven Value Drivers in the previous article and below we elaborate on what lies behind the logic of each:

1. Sale Growth Rate

As the starting point profit and growth planning must set a solid platform to help drive the organisation forward.  Whether the approach is to focus on product or market development, or a combination of both, we help identify the resource allocation pressure and decision points, in order to maximise the return on effort invested.
As a top line focus point Sales Growth helps galvanise the organisational management and employees to identify suitable market opportunities to pursue to overall sales or set-off objectives.

2. Operating Margin

Operating margin becomes the focal point for operational efficiency and cost management strategies.  During the recession most organisations have looked long and hard at this particular area, partly because sales growth have suffered quite severely, but also  because they have realised that in any growth cycle such as we experienced between 2003 – 2007, ‘organisational operational  padding’  have added unwarranted inefficiencies to their operating processes.
The conundrum at the moment facing most organisations is the question of how to drive sales forward and upward, with the reduced operational cost base in place.  The two major levers of Sales Growth and Operational Cost need to be manipulated with the utmost delicacy and ‘a very steady hand on the tiller’.

3. Cash Tax Rates

It is a given that the focus of most western governments will be on maximising Treasury tax takes over the next few years, in order to manage the huge fiscal stimulus packages introduced to support the economies.  We expect quite a militant and aggressive approach in this area and a deluge of mitigation and profit extraction strategies to drive this ‘opportunity cost’ of business (your licence to operate fee) down.  This is an area best left to the specialist is the area, however, it is still a value investment of your time to keep a beady eye on this ‘hidden value driver’.

4. Fixed Capital Investment

Financing and timing are the two major factors to consider in Fixed Capital Investment area of your business.  A creative off balance sheet financing strategy might assist in extracting value in this area; however, the key issue is to have the capital infrastructure in place to support your organisational objectives.  Taking advantage of distressed assets values might will set up and gear the organisation towards supporting the initial Sales Growth driver.

5. Working Capital Investment

Liquidity and liquidity risk management are the key focus areas in maximising value in your working capital management processes.

6. Cost of Capital

A one-off opportunity to positively manage the organisational cost of capital down has emerged at the end of this recessionary cycle; however, it is up to the astute organisational leadership to take advantage of the opportunity.  We recognise that a multitude of factors currently exist which might make taking advantage of this unique opportunity quite challenging, however, if the platform and measurement dashboards, combined with the organisational structure and resources are in place to take advantage of the historically low cost of capital rates, we encourage every organisation to take advantage of this potential opportunity.

7. Planning horizon

Clearly understanding that a longer term timeframe is genuinely beneficial, combined with regulatory factors encouraging the long view at the moment, will help the organisational leadership grasp both drivers of value in this factor, namely the current departure point and value calculation and the ultimate exist strategy value or Terminal Value of the organisation.

Measuring the Value

Graphical Key Performance and Risk Indicators combined with Short Interval Cycles (SICs) focus management effort on taking corrective action very quickly.  The unique pro-active dashboards help turn around the reactive Management Information Systems and becomes a vital and integral part of the overall strategic management philosophy underpinning the Risk Based Value Management practice be have developed.
In the next article we will focus on measuring the value in more detail and on Entropy, an article posted by a fellow blogger at Cheap Seats.  We will draw our inspiration from those thoughts.

theMarketSoul ©2010

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