Evan works for a small manufacturer that has successfully implemented shareholder value-based management (SVM)—a framework for managing a business to maximize value—into various aspects of its culture, including financial planning, decision making, reporting, and compensation. Managers at the company recognize that SVM has become a mainstream tool to align their interests with those of the business owners. By viewing everything through the lens of shareholder value, the company stays focused on the goal of increasing value for shareholders.
Accounting and other advanced methods for measuring product-level operating profit have been in place for many years, whereas extending the concept of value-based management to that level is a more recent development. Because SVM has worked so well for the company, managers now want Evan to help develop a plan to progress from using SVM at the enterprise and business unit levels to using it at the product level where they make many important business decisions. Management knows that measuring performance at this granular level can have a big impact on shareholder value.
Typically, companies do not structure systems and internal reporting practices with the objective of allocating capital to products. Changing systems and modifying processes to report shareholder value at a product level can be complicated and cost prohibitive for most organizations. Evan knows the key challenge is to allocate capital at the product level in a cost-effective way.
Evan has several immediate questions to resolve, including:
- How can the company set measurement boundaries that meet its needs without overcomplicating the calculation?
- How can the company identify which capital is appropriate to allocate to products?
- How can the company establish a way to assign fixed capital, particularly shared machinery, and equipment to the products?
Answering these questions will help Evan and his company see a clearer picture of the economic value that products generate and pursue tactical and strategic actions to increase their value. Implementing SVM at the product level will also allow the company to identify where and how to allocate capital so that it earns a return above the cost of capital.
How does your company make decisions that ensure its needs align with shareholder requirements? The Accenture Academy course Measuring Product Profitability in a Shareholder Value Model demonstrates how you can extend shareholder value-based management practices to the product level, focusing your efforts at the point where you make critical business decisions and providing a strategic lens into value creation performance.