FREE online courses on Financial Management and Creating Value - Chapter 4 -
Real Sources of Value
We have focused our attention on how financial management
creates value, such as departing from the traditional accounting model and
measuring value with EVA, CFROI, and RCF. We have also emphasized that value is
a function of cash flows. However, we have not truly identified what drives this
entire process of cash flows and higher values. This final chapter will take a
look at real sources of value; i.e. what does it take to generate higher cash
flows and higher values.
We already covered a key element of value-creation: Financial
Restructurings. One problem with this approach to value-creation is that it
tends to be incremental. You can only go so far with creating value through
restructurings. Things like spin-offs, stock buy backs, slashing payrolls,
selling off under-performing assets, and other restructurings lack staying power
when it comes to value-creation; i.e. they are short-term sources of value. We
need more long-term sources of value.
If we look at companies that create lots of value, we will
often find that these companies do at least one thing exceptionally well. Here
are three examples:
Wal-Mart: How does Wal-Mart create value? Compare Wal-Mart to
its competition, such as K-Mart. What happens when you walk into a Wal-Mart
store? When you enter Wal-Mart, someone greets you and when you checkout, the
cashier thanks you by name. Compare this approach to K-Mart and it becomes
apparent how Wal-Mart creates value. Wal-Mart creates value through great
customer service. Customer service becomes the strategic advantage that provides
Wal-Mart with its source of value.
Federal Express: What one thing did Federal Express do in
order to grow and create value? What happens when you send a document via
Federal Express? Federal Express can trace the document at every exchange point
so that it is impossible to lose the document. Federal Express emphasizes
efficiency in their operations and this becomes their strategic advantage for
creating value.
Nike: What makes Nike such a great company? How does Nike
create value? Why do people buy Nike products? Nike emphasizes a great product
and this becomes Nike's way of generating higher values for its shareholders.
By getting one thing 99% right, organizations gain a
competitive advantage that becomes a great source of value. For many
organizations, this involves things like:
- Higher Quality - Producing an exceptionally high
quality product.
- Customer Service - Delivering products and
services to customers with speed, solving the customers problem, possessing
knowledge about the customer for better service, etc.
- Continuous Improvement - Constantly looking for
ways to improve internal processes of the business as well as the product
and/or service.
- Lower Prices - Delivering products and services at
the lowest possible price in a highly competitive marketplace.
Creating value is the reward an organization receives when it
does things like continuous improvement. These are the real sources of value and
well-managed companies pay close attention to these sources of value.
