Copyright 2008 by Robert B.

Carton
Value Systems, Value Chains and
Value-Based Management
The Essence of Organizational
Performance Is the Creation of Value
Copyright 2008 by Robert B. Carton
The Value System
Supplier
Value Chains
Firm
Value Chain
Channel
Value Chains
Buyer
Value Chains
Value chains differ among firms in an industry reflecting their
histories, strategies, and success at implementation.

Competitive advantage derives from creating more value for the next
position in the value chain then competitors.

Competitive scope, the industry segments it serves, differs between
firms.

Firms may exploit the benefits of broader scope internally or they
may form coalitions with other firms to do so.

The Value System
Each Box represents a transaction between entities.
Copyright 2008 by Robert B. Carton
The Value Chain
Inbound
Logistics
Operations Outbound
Logistics
Marketing
& Sales
Service
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
Primary Activities
M
a
r
g
i
n

Comparing firms value chain to competitors identifies competitive
advantages where the firms activities are technologically or strategically
distinct.
The Value Chain
Copyright 2008 by Robert B. Carton
Value Chain Analysis
Divide the companys operations into specific
activities or processes
Identify discrete activities within each process
Are these strengths or weaknesses for your firm?
How do these activities integrate with each other?
Attach costs to each activity
Disaggregate costs of each activity to find opportunity
Identify activities that create value for customers
Focus analysis on these activities
Importance of activities varies by industry
Value Chain Analysis
Copyright 2008 by Robert B. Carton
Value-based Management
VBM is the process of maximizing the value of a
company on a continuing basis.
It is an integrative process designed to improve strategic
and operational decision making by focusing on key drivers
of corporate value.
Value drivers are unique to each organization based upon their
competitive advantages and industry structure.

Copyright 2008 by Robert B. Carton
Value Is Contextual
Value may be tangible or intangible, operational or financial
Public companies focus on return to shareholders
Private companies may define value creation in may other ways
Lifestyle
Combined returns to owners including family
Not-for-profit companies
Progress towards social ends
Development of a cure
Our focus will be financial
Copyright 2008 by Robert B. Carton
Value Drivers Are Not All Financial
A value driver is any variable that affect the value of the
organization.
Non-financial objectives may be used to inspire and guide
behavior of employees, many of whom will not care about
financial value creation.
Customer satisfaction
Product innovation
Employee satisfaction
Non-financial objectives still ultimately translate into financial
performance.
Copyright 2008 by Robert B. Carton
Organizational Key Value Drivers
Organizations cannot act directly on value.
They act on things that influence value.
It is through these drivers of value that senior management learns to
understand the rest of the organization and establishes strategy.
Those value drivers that have the greatest impact should be the
focus of management.
Value drivers must be developed down to the level of detail
that aligns the value driver with decision variables under the
control of line management.
Key value drivers are not static so they must be reviewed
periodically.


Copyright 2008 by Robert B. Carton
Company Valuation Is Based Upon
Discounted Cash Flows
Value is created only when companies invest capital at returns
in excess of their cost of capital
Entails managing the balance sheet as well as the income statement
Must balance short and long term perspectives
ROIC and growth are the fundamental drivers of a companys
value
A company must do one or more to increase value
Increase ROIC on existing capital
Increase ROIC on newly invested capital
Increase growth rate (so long as ROIC exceeds WACC)
Reduce weighted average cost of capital (WACC)

Copyright 2008 by Robert B. Carton
Value Driver Identification
Return on
Investment
Market Value of
Investment
Opportunity
Costs
Financial Capital
Your Money
Other Peoples
Money
Retained
Earnings
Profits
Return to
Owners
Cash Flow Paid
Out
Increase In
Market Value
Creation of New
Opportunities
Remaining Value
of Exiting
Opportunities

+
+
+
+
+
Copyright 2008 by Robert B. Carton
Profit Value Drivers
Profits
Revenues
New
Customers
Quantity
Price
Existing
Customers
Quantity
Price
Costs
Cost of Goods
Sold
Purchased
Inputs
Labor
Overhead
Administration
Sales and
Marketing
Research and
Development
Copyright 2008 by Robert B. Carton
VBM and Organizational Change
VBM and four key aspects of organizational change.
Helps define the specific financial performance objectives that a
company should adopt.
Helps decide between alternative strategies and resource allocations.
Requires clear performance targets and follow-up measurement.
Provides focus on what is important key value drivers.
VBM is a marriage between a value creation mindset and the
management processes and systems necessary to translate that
mindset into action.
Copyright 2008 by Robert B. Carton
VBM Management Processes
Strategy development and alternatives evaluation
Achieve competitive advantage that translates into value
creation
Target setting
Based upon key value drivers
Action plans
Performance measurement