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This chapter is from the book

This chapter is from the book

Value Above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You've Never UsedValue Above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You've Never Used

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This chapter is from the book

This chapter is from the book

Value Above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You've Never UsedValue Above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You've Never Used

Learn More Buy

The Value of a Business

  • The value of a business depends on its future, not its past.

Managers, investors, and others concerned about the well-being of an organization need to look at where it is going, not where it has been. A company’s future financial performance depends on its long-term abilities to manage both the value it provides customers and its costs. Expected future financial performance, in turn, determines shareholder value. The company value meltdowns in the Fall of 2008, such as that of AIG, were due to lack of confidence in the future financial performance of those organizations.14

There is a huge body of thought and writing devoted to the determinants of the value of a corporation.15 Many factors have been suggested, including managerial talent, resources, innovation ability, and core competencies. While all of these factors surely affect the financial performance of an organization, none of them provide a direct link to financial performance. Managerial talent and resources are very broad categories. Innovation may be managed but is difficult, by its nature, to predict. Core competencies are specific but look inward (at the organization) rather than outward (toward the customers and competitors). Intangible assets, such as brands, have appeared to pose especially difficult valuation problems for many companies.16

In lieu of factors that are linked directly to financial performance, many managers attempt to predict performance by relying on various financial ratios such as return on sales and turnover.17 The problem with many of those measures is that they look backward rather than forward.18 A manager should always prefer leading indicators to lagging indicators because forward control is preferable to backward control. One wants to steer by looking through the windshield, not through the rear-view mirror.

CVA® is both outward looking—toward customers and competitors—and forward looking, in that it indicates the future performance of an organization.

3M: Relation of Loyalty to Growth and Profit

3M has more than 50,000 products, 36 divisions spanning almost all major markets and subsidiary companies in 65 countries. With that complexity, building powerful brands is a difficult task. A key element of powerful brands is delivering relevance and differentiation. Maintaining relevance and differentiation over a long period of time can be difficult without a solid new product engine. Fortunately, one of 3M’s greatest strengths is it’s strong culture of innovation and new product development.

To accelerate growth and build lasting customer relationships, 3M has processes for measuring end user loyalty to its brands. In studies over time, 3M has seen loyalty increase as it focuses it efforts on improving the specific drivers of end user loyalty. The businesses that have achieved above average loyalty, compared to the Corporate average, enjoy faster growth and higher margins.

An example is the Dental business at 3M. The 3M Dental business won the Baldridge award in 1997 which included tough customer measures. The business measured end user satisfaction and loyalty. The measures were connected to the drivers of loyalty and programs put in place to correct any gaps that were detected. The 3M businesses that have successfully aligned programs against the gaps have achieved above average growth.

Measures and processes are necessary but not sufficient to achieve the superior performance. Business leadership and programs that align the resources against the priorities are required. Leadership that inspires employees is necessary. No strong brand can be built without employees who know what to do, have the resources to do what is needed and are supported by their management. The Dental business has consistently delivered its brand promise over many years with several changes in management.

—Dean Adams, Director, Corporate Brand Management, 3M

Reprinted with permission of 3M Company

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