Introduction:
Although shareholder value metrics and value-based management are widely identified and well known, but they are far from being universally applied. Years of restructuring and employee layoffs often attributed to shareholder value considerations attached with self-interested management and little sighted and focus on current stock price has promoted frustration and uncertainty. Therefore, it is critical to understand the shareholder value approach and its variants. Additionally, it is essential for the shareholder value approach that the objectives of the mangers and the company's shareholders have to be aligned and should be focused on delivering superior shareholder value. Known the globalization of capital markets and their declining boundaries, economic systems will gradually run out of capital if they are not capable to create shareholder wealth and thus attract investors. If economic systems are incapable to provide superior or at least satisfying returns they will collapse further and further behind in global competition and will drop employment opportunities. Thus, a value-based system grows in meaning, as capital becomes more mobile (O'Donnell, 2008).
Anyway, this theoretical base research seeks to provide critical evaluation of measuring shareholder wealth through the qualitative and quantitative techniques, such as economic value creation (EVC). Falling within the framework of EVC are a number of similar concepts using numerous acronyms, such as EVA (economic value added) SVA (shareholder value analysis), VBM (value-based management) and qualitative measures i.e., quality, customer satisfaction, learning and innovation and internal business processes (balance scorecard). These concepts all represent ways to link the strategic decisions at executive level with the operational drivers used by the front-line managers and employees (Schuster, 2000). This research will focus simply, on the concept of shareholder value and their determinants. Shareholder value analysis (SVA) is one of the numerous non-traditional metrics used in the business world. SVA evaluates the financial value of a company by assessing the return that goes to their stockholders. SVA also supports company directors by focusing on strategic objectives as it maximises the wealth of company stockholders in general (Baker, 2001). Therefore, SVA is value-based measure, intended to evaluate business strategies, capital projects, maximising the long-term shareholders wealth etc (Pike and Neal, 2006).
3. Background:
The basic concept of value is traceable back in time to the 19th century economic theory that leads the way to the idea of "Residual Income" (Magni, 2009). However, the term Value-based Management and acronyms such as VBM or MSV (managing for shareholder value) have not used until the mid-1990s. VBM is a formal, systematic approach to managing companies to attain the objective of maximising value creation and shareholder value overtime (McTaggart et al, 1994) and shareholder value management and its analysis has been greatly stressed and introduced in recently by jack welsh.
Value-based management is a systematic approach to management, whereby the company's overall ambitions, logical techniques, and management processes (should align) to help the company to maximise its value by focusing management decision making on the key drivers of value (Copeland et al, 2000). Value-based management became popular in the mid-1980s when Alfred Rappaport published his descriptive text, "Creating Shareholder Value". However, shareholder value orientation is common in businesses and it is still on high decibel debate either the manager′s sole focus should be to raise the firm′s value. Therefore, this factor pushes me to adopt and get on with this research analysis in deep.
In new era the New Standard for Business Performance has been developing. Companies such as Boots, Lloyds TSB, and Cadbury Schweppes were soon making open public commitments to mounting value for their shareholders (Maple-croft, 2005). So we can say that shareholder value is a business term, which entails the vital measure of a company's success and shareholders' value generally understood through three key elements likely, creating value (processes), measuring value (EVA and MVA) and managing for value that is governance, management, organisation, culture and communication (ICMA, 2009). Corporations retained their earning for growth and development normally they invest in employee training, and in other business processes like physical assets just to get more enhancement; and this enhancement increases the shareholders value in business in fiscal form( Jhunjhunwala, 2009).
According to Rapport, (1986):
The SVA used in several ways as,
It is refer to the market capitalization of a company.
It is referring to the concept of the primary goal for a company is to increase the wealth of shareholders (owners) by paying dividends and/or causing the stock price to increase (Rapport, 1986).
It is refer to the more specific notion that planned actions by management and the returns to shareholders should outperform certain benchmarks such as the cost of capital concept (Swensen, 2000).
In essence, the idea "shareholders' money should be used to earn a higher return" than they could earn themselves by investing in other assets having the same amount of risk (Rapport, 1986). If risks are there then there must be accountability has to be exist so accountability of business at all levels increased perceptions of value-added in business (Baker, 2001). In recent years increasing recognition that business-based intangible assets are great drivers of value. Business base parameters can recognise as a leading force in creation and for management of these market based assets. To do this we must introduce common framework for performance measurement and its contribution in value- added management for the sake of shareholders (Reimann, 1987).
4. Performance Management:
Historically, performance measure systems was developed as a means of monitoring and maintaining organisational control, which is the process of ensuring that an organisation pursues strategies that lead to the achievement of overall goals and objectives (Nanni, et al 1990). Performance measure plays a vital role in every organisation, as it is often view as a forward-looking system of measurements that assist managers to predict the company's economic performance and spot the need for changes in operations. In addition, performance measure can provide managers, supervisors, and operators with information required for making daily judgements and decisions (Reimann, 1987). Performance measure uses by organisations regularly, as it enables them to ensure that they are achieving continuous improvements in their operations in order to sustain a competitive edge, increase market share and increase profits. Traditional measures performance measure has mainly been financial measuring ratios such as ROI (Return on Investment), RI (Residual Income), and EPS (Earnings per share) (Pike and Neal, 2006). These cost associated metrics accounts help firm's spot areas in which capital invested unprofitably. So regular judgement through strategic study must in place to achieve and regulate management focus accordingly.
5. Strategic Management:
Strategic management can be used to determine mission, vision, values, goals, objectives, roles and responsibilities, timelines etc, but at strategic level. So strategic management can define as its:
"Strategic management is the set of managerial decisions and actions that determines the long-run performance of an organisation (Robbins and Coulter, 2005: P-86)".
According to Favaro, (2003) making top management more accountable for mounting the company's intrinsic value is the key to protecting shareholder interests. The top management should understand the importance of strategic study when there is question of how to increase the shareholders wealth through business processes, it is leads long-term strategic thinking, and it results in higher organizational performance. The majority executives today understand that the need to create shareholder value is vital. However, many discover that efforts to deliver on this fundamental are frustrated in practice. Growing businesses and improving profitability by traditional factors frequently fail to earn the confidence of investors. Higher market share and broader customer recognition become unrecognized, or even worse, which are penalising by the capital markets. Generally, the most competitive management teams are responding to the pressure to create value by implementation new performance metrics and new models for managing their companies. As strategic manager, they get ready to speed up that transition. In most cases, strategic management helps by transform their organisations with the following factors:
By gaining a superior understanding of what drives value,
By redesigning financial management systems to analyse and report information from the perspective of contribution to value, and
By developing a powerful incentives system for managers to build shareholder wealth
Strategic management team carry a logical, consistent framework for approaching strategic and tactical decisions from a value-based perspective. When appropriately implemented, this framework becomes a true source of competitive advantage that finally turns in to maximum shareholders wealth.
6. A value based approach:
Increased shareholder value should be the final goal of any account able business activity. By getting better customer value and managing market-based assets, business activities contribute to cash flow generation, which leads to improved shareholder value. SVA is the philosophies for product or service of combined efforts from the management to the employees in large (Pike and Neal, 2006).
7. Sustainable Business Strategy:
The classic conversation on business strategy for sustainability has started in the business and this conversation is greater than before; and this is from consumers, employees, and shareholders on a common purpose and a passion for companies that do well by doing good. Any strategy without sustainability at its core can be plain irresponsible, and bad for business, bad for shareholders, bad for the environment in large. These challenges represent unparalleled opportunities for big brands such as Dell, Toyota, Procter & Gamble, and that are implementing integral, rather than sideline, strategies for sustainability. These companies are doing as by affirming practical framework for change (Presto, 2005) which involves engaging employees, using transparency as a business tool, and reaping the rewards of a networked organizational structure (Werbach, 2009). Leave your old notions of corporate social responsibility and environmentalism behind (more draw back). Werbach, (2009) is starting a completely new dialogue around sustainability of enterprise. Sustainability is now a great and very competitive strategic advantage, and building it into the core of any business and researcher ( I ) believe, it is the only means to ensure that your company will be survive and companies can build more of their shareholders value in monetary term.
8. Economic Value added (EVA):
EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989 (Virtanen and Salami 2001). EVA is Economic Value Added, a measure of economic profit. It is calculate as the difference between the Net Operating Profit after Tax (NOPAT) and the opportunity cost of invested Capital. This opportunity cost is determines by the weighted average cost of Debt and Equity Capital (WACC) and the amount of Capital employed (Joseph et al., 2005).
According to Stewart, (1991) given the usefulness of the measure, many companies have adopted it as part of a comprehensive management and incentive system that drives their decision processes. They strive to increase their EVA by:
Increasing the NOPAT generated by existing Capital
Reducing the WACC
Investing in new projects where the Return go over the WACC
Divesting Capital where the Return is below the WACC
Such focus on value creation has provided and served the shareholders well and this is the right way.
9. Market Value Added:
MVA is a calculation that demonstrates the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of entire capital claims, which held against the company, plus the market value of debt and equity. It is calculated as MVA= Company's Market Value- Invested Capital (Lin and Wang, 2003; Stock research, 2009).
10. Difference between economic value added and market value added:
Economic value added (EVA) is a performance measure the true economic profit produced by a company (Baker, 2001). It is frequently also demoted to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period. Such a metric is useful for investors who desire to determine how well a company has produced value for its investors, and it can be compare against the company's peers for a quick analysis of how well the company is operating in its industry (Pike and Neal, 2006).
According to Tauba, 2003) market value added (MVA), on the other hand, is simply the difference between the current total market value of a company and the capital contributed by investors (including both shareholders and bondholders). MVA is not a performance metric like EVA because MVA reflecting more likely intangible metrics compare to EVA so EVA is a wealth metric is directly related to shareholders wealth and measuring the level of value, and a company has accumulated them over time (Taube, 2003). As a company executes well over time, it will retain earnings. This will recover the book value of the company's shares, and investors will likely bid up the prices of those shares in expectation of future earnings, causing the company's market value to rise (Taube, 2003). As this happens, the difference between the company's market value and the capital contributed by investors (it is MVA) represents the excess price the market assigns to the company because of it past operating successes.
11. Advantages of Shareholder value analysis:
SVA has the following advantages: (Aglietta, 2000):
It obtains a long-term financial view on which to base strategic decisions
It offers a universal and general approach that is not subject to differences in companies' accounting policies and is therefore applicable internationally and across business sectors
It forces the organization to make spot and focus on the future and its customers, particularly the value of future cash flows
Advantages are great as these been described earlier and these forces company's management to adopt and understand the framework for measuring SVA.
12. A framework for Determining SVA:
According to Tahir and Conway, (2009, pp-7) All determining Framework should have underlying principles and that metrics should be link to business strategy and those key elements which as following:
Return on marketing investment:
Shareholder value is calculate by dividing the estimated total net value of a company based on its present and future cash flows by the value of its shares of stock. The resulting figure indicates the company's value to stockholders (Pike and Neal, 2006).
Customer satisfaction:
Satisfaction is the major driver through which retention rate of customer (repeat purchase) achieved, greater the product and service performance greater the customer delight, which has ultimate, affect on more sales thus shareholders wealth can be increase (Kotler and Armstrong, 2002).
Without hesitation, the stakeholder group seen to create the greatest challenge to the dominance of shareholder interests is customers. It is implicit that no company can create great wealth for its shareholders without a stable and growing revenue base stream, which can only come from having very satisfied and loyal customers. However, this result is by no means mechanical. It is possible to attain high levels of customer satisfaction and yet be unable to translate this supposed advantage into enough returns for shareholders, let alone great wealth (CIM, 2002).
In additions, customer satisfaction will take place when the product or service meets or exceeds expectations and is obtained at a price no higher than its apparent value. Moreover, to the value perceived by customers, every product and service also contributes some to shareholder value. The size of this contribution will depend on the volume sold, the price realized, the cost of making and delivering the Product and service to customers and the required investment. These factors interrelate to produce a cash flow stream for the business. The present value of this cash flow stream determines the monetary advantage to shareholders of producing and selling the product or service (McTaggart and Kontes, 2007).
Market share in targeted segments:
The company strategy must work to increase the number of customers on regular basis as greater the number of segmented market greater the performance of the company.
Brand equity:
According to Doyle, (2001) Brand is now, recognised by investors as a crucial source of strength and value for business marketing strategy. Brand equity of a company play positive role in increasing the wealth of their shareholders; so in this regard, management works and develop business-marketing strategy, which must make alignment with brand and its development (Baker, 2001).
Enterprise governance:
It is the set of responsibilities and practices exercised by the board and effective management with the goal of providing and entailing strategic direction through ensuring organisational objectives have achieved, and also ascertaining that the risks are managed appropriately by verifying that the organisation's resources are used sensibly (Denis and McConnell, 2003).
In business, a common set of recognised business models and a process for developing a set of metrics related to cash flow outcomes and it is important to know it is the key area of SVA programmes.
According to Tahir and Conway, (2009) to achieve shareholders value the sustainable value creation approach is important. Using the sustainable value approach (as above) economic, environmental and social resources are assessed (strategic study) and aggregated based on their relative value contribution and can be articulate in a monetary unit or can be quantify.
13. Research Aim:
The central aim of this thesis is to study the determinants of shareholders value analysis through a holistic approach by reviewing and analysing how interests of shareholders, are protected, and constrained throughout the life of a company. So the aim of my thesis can be explained as it is:
"Determining of Shareholder Value Analysis (SVA) Through Performance Management in Commercial Sector"
13.1. Research Objectives:
What are the roles of shareholders value analysis in the strategic corporate strategy in the commercial sector?
What are the determinants that play significance role to increase the shareholders wealth in the commercial sector?
How do the value added determinants (tangible and intangible) have significant impact on shareholders wealth in the commercial sector?
14. Selection of Research Methodology
14.1 Research Classifications
Research can classify into three groups as Pure Research, Applied Research, and Action Research (Easterby-Smith & Lowe 1991). Each of these are distinguished by their characteristics and intended outcomes. These could be view as the following:
Pure research is indent to lead to theoretical developments. It is results are disseminating to an academic audience. Pure research can further be branched into three categories- Discovery, Invention, and Reflection.
Discovery arises when a new idea or explanation emerges from empirical research, which may revolutionize thinking that that specific area. They are rare and unpredictable(Easterby-Smith & Lowe 1991).
Invention occurs where a new technique, method, or idea creates for a particular issue, based on the direct experiences of their inventors. Examples include Scientific Management Total Quality Management (TQM).
Reflection like the one the name suggests, occurs where an existing theory technique or group of ideas are re-examined.
Applied Research is undertaken when solutions to specific problems are required. It usually involves working with clients who identify the problems and are involved in the solution. The results then reported to the client and disseminated through journals and other publications (Sutherland, 2004).
Action Research deals with the view that research should lead to change, which should incorporated into the research process itself. It operates based on participation (Salford University, 1999), and stresses the importance of establishing a collaborative relationship between the researchers and researched a "new paradigm" research approach. It is mostly useful when working with individuals or small groups (Easterby - Smith & Lowe 1991) and most suited to situations where change has planned or imminent (Salford University, 1999). The research process itself is part of the learning process.
14.2 Methodology
According to Burns and Bush, (2006) methodology refers to the science of determining appropriate methods to conduct research.
Collis and Hussy, (2003, pp-82) refer the word research:
"Methodology associates to the overall approach to the research process, which is theoretical base of collection and analysis of the data, considered".
Similarly, the analysis of the principles of methods, rules, and postulate (hypnotized or assume) employed by a discipline the systematic study of methods that are and it can be, or have been applied within a scientific discipline a certain procedure or set of procedures is called Methodology. Methodology moreover refers to more than a simple set of methods; it refers to the rationale and the philosophical assumptions that underline a particular study. Research methodology often refers to anything and everything that enclosed for a discipline or a series of processes, activities, and tasks. Few examples can find in software development, project management and business process fields, and other Internet marketing (IMA) research. This use of the term is unified by the outline who, what, where, when and why. According to Collis and Hussey, (2003) research methodology determines the research whole process from the beginning to the end.
They also highlight the research philosophy, which refers to the assumptions concerning the world and the nature of knowledge
The term methodology may be used either to "refer to the principal paradigms of an approach" (i.e. qualitative or quantitative) or to define "an operational research technique" which can be completed through Questionnaire- Based Structured, Case Study Technique and Semi- Structured Interviews (Yin, 2002). In the first instance of use, there are two different research approaches to the collection and handling of data - the Quantitative and Qualitative Approaches.
1. The quantitative approach or scientific method (as it is also known), is founded on the assertion that there is a single reality, which is objective. It is therefore possible and necessary to
Separate the phenomenon from the surrounding environment and make a freestanding assessment.
Maintain distance and objectivity from the research subject
Observe without inter-relating to what is observed
2. The qualitative approach on the other hand has an opposite view. It is base on the assumptions that there is no singular objective reality and that the nature of the observed reality is in some way related to the researcher's interaction with it. It is a realistic though complex study since it does not impose any isolating assumptions or controls on the phenomenon. This approach yields rich, complex data and the findings focus on the qualities of the research subject, rather than their numeric measurement (Salford University, 1999). This theory is rather better for theory building then testing.
A case study approach to action research will primarily be use in this study. Case studies can categorize as the following (Yin 1994):
Exploratory- usually focuses on theory development
Explanatory- involves hypothesis testing.
Descriptive- describe an unstudied situation
Further Amartunga, (1998) stated that a case study approach to research is ideal when
a holistic, in-depth investigation is needed,
to explore those chosen situations,
To investigate a contemporary phenomenon within its real life context
To bring out the details from the viewpoint of the participants by using multiple sources of data
There are many benefits of using a case study approach as listed (Yin, 2002):
Rich insight, into the issue under consideration
Provision of examples
Flexibility
Bridging gap between industry and academia
Development of a network of people
Permission of multiple sources of information and materials
On the other hand, there are many difficulties associated with the case study approach too:
A tendency to be overly descriptive
Difficulty in sieving out proper information: volume of data generated
Generally do not seek to analyze issues
Conclusion may be statistically limited
Tend to capture the experience of an organization only at a particular period of time
For Secondary data there are following resource have to be look to collect research material and data for further research they could be have relationship up to some extent but it is great help to start primary research as:
Customer records (e.g. regular buyer)
History
Sales figures
Operational data - stock levels
Customer satisfaction survey results
Advertising spend
Customer complaints records
Effective data from promotional campaigns (good result)
Marketing research reports from past studies
14.3 Data Collection and Analysis
Data collected primarily through survey strategy carried out by the researcher, results will then analyze. The secondary means of collecting data for the research through literature review. This takes the form of books, academic and professional journals, postings on internet websites and newspaper articles. Lastly, semi-structured (Qualitative) interviews will have taken in order to flesh out issues and determine industry position and opinions regarding various issues.
