Information about Business Value
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 addedtm, 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 assets 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.
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 yet, there are no well-formed theories about how the various elements of business value are related to each other and how they might contributed to the firm's long-term success. One promising approach is the business model, but these are rarely formalized.
Michael Porter popularized the concept of Value Chain.
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
See Customer Value and Utility
At the level of computing and communications infrastructure, the following performance factors constrain and partially determine IT capabilities:
A good reference and hands on approach for this topic is Measuring the Business Value of Information Technology by David Sward (ISBN:0-9764832-7-0).
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
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Consumers refers to individuals or households that purchase and use goods and services generated within the economy. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary.
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Business value often embraces intangible assets 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.
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 network 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 yet, there are no well-formed theories about how the various elements of business value are related to each other and how they might contributed to the firm's long-term success. One promising approach is the business model, but these are rarely formalized.
History
Peter Drucker 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 workers"), and distribution partners. His management by objectives was a goal setting and decion-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.
Components of Business Value
Shareholder Value
For a publicly traded company, shareholder value is the part of its capitalization that is equity 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 dividends 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
Customer Value
Customer value is the value received by the end-customer of a product or service. "End-customer" can include a single individual (consumer) 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
Employee Value
Channel Partner Value
Supplier Value
Managerial Value
Societal Value
Strategies for Creating Business Value
An increase or decline in Business Value that an action produces is traditionally 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 Technology (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:
- Usability
- Functionality
- Availability
- Reliability, recoverability
- Performance (thruput, response time, predictability, capacity, etc.)
- Security
- Agility
A good reference and hands on approach for this topic is Measuring the Business Value of Information Technology by David Sward (ISBN:0-9764832-7-0).
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 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
For the television series, see Profit (TV series)
Profit generally is the making of gain in business activity for the benefit of the owners of the business...... Click the link for more information.
Economic Value Added or EVA® is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital.
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Shareholder value is a term used in many ways:
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- To refer to the market capitalization of a company (rarely used)
- To refer to the concept that the primary goal for a company is to enrich its shareholders (owners) by paying dividends and/or causing the stock price to
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Stakeholder may refer to:
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- Stakeholder (corporate), a party who affects, or can be affected by, the company's actions
- Stakeholder theory, identifies and models the groups which are stakeholders of a corporation
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Intellectual Capital was a pioneer webzine opinion and discussion forum begun in 1996 by Pete duPont. After several years it was bought by Speak Out and subsumed into its portfolio of web offerings.
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External links
- An Inside Look At...IntellectualCapital.
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The term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, such as operational processes, organizational structures, and financial forecasts.
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In 1992, Robert S. Kaplan and David P. Norton introduced the balanced scorecard, a concept for measuring whether the activities of a company are meeting its objectives in terms of vision and strategy.
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Value networks are complex sets of social and technical resources. They work together via relationships to create economic value. This value takes the form of knowledge. Value networks exhibit interdependence. They account for the overall worth of products and services.
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The value chain, also known as value chain analysis, 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.
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Stakeholder may refer to:
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- Stakeholder (corporate), a party who affects, or can be affected by, the company's actions
- Stakeholder theory, identifies and models the groups which are stakeholders of a corporation
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Value networks are complex sets of social and technical resources. They work together via relationships to create economic value. This value takes the form of knowledge. Value networks exhibit interdependence. They account for the overall worth of products and services.
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In finance, the discounted cash flow (or DCF) approach describes a method to value a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value.
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The term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, such as operational processes, organizational structures, and financial forecasts.
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Peter Ferdinand Drucker (November 19, 1909–November 11, 2005) was a writer, management consultant and university professor. His writing focused on management-related literature.
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Management by Objectives''' (MBO) is a process of agreeing upon objectives within an organization so that management and employees agree to the objectives and understand what they are.
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This article or section needs sources or references that appear in reliable, third-party publications. Alone, primary sources and sources affiliated with the subject of this article are not sufficient for an accurate encyclopedia article.
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The value chain, also known as value chain analysis, 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.
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In financial markets, the stock capital of a corporation or a joint-stock company is the capital raised through the issuance, sale and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
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Debt is that which is owed; usually referencing assets owed, but the term can cover other obligations. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned.
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In financial markets, the stock capital of a corporation or a joint-stock company is the capital raised through the issuance, sale and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
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Dividends are payments made by a company to its shareholders. When a company earns a profit, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders of the company as a dividend.
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Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or
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The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt (see the financing decision). It is also known as the "Hurdle Rate" or "Discount Rate".
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Valuation may refer to:
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- Valuation (finance), the determination of the value of an asset or liability
- Valuation (mathematics), an assignment of particular values to the variables in a mathematical statement or equation
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In finance, the discounted cash flow (or DCF) approach describes a method to value a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value.
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Shareholder value is a term used in many ways:
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- To refer to the market capitalization of a company (rarely used)
- To refer to the concept that the primary goal for a company is to enrich its shareholders (owners) by paying dividends and/or causing the stock price to
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- Heterotroph.
Consumers refers to individuals or households that purchase and use goods and services generated within the economy. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary.
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In economics, utility is a measure of the relative satisfaction or desiredness from consumption of goods. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility.
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Quality in everyday life and business, engineering and manufacturing has a pragmatic interpretation as the non-inferiority, superiority or usefulness of something. This is the most common interpretation of the term.
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Customer satisfaction, a business term, is a measure of how products and services supplied by a company meet or surpass customer expectation. It is seen as a key performance indicator within business and is part of the four perspectives of a Balanced Scorecard.
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