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Step 1 in Value Measurement is to decide how to segment or
disaggregate the business to unlock strategic and financial
insight. Usually the best way is to segment into groups of
customers whose needs are so similar that a company can serve them
in a way that is “value creating for them and cost effective for
us”. Another way is to disaggregate into different “lines of
business”.
Step 2 is to decide how economic profitability and value will be
measured at a disaggregated level. There are a number of
alternative approaches. The key is to ensure that the
approach adopted is agreed and properly understood.
Step 3 is to determine current return and economic profitability
by segment. KBA has software specifically designed for this
purpose.
Step 4 is to assess the sustainability (or otherwise) of current
levels of return. This involves a systematic assessment of
the economic attractiveness of each segment, and a company’s
competitive position in each case. This step is also
supported with software.
Step 5 involves integrating the outputs of steps 3 and 4 to
develop either economic profit or cash flow forecasts as a basis
for valuing the business at a disaggregated level under the current
strategy. There is also software to support this step.
Once management knows where and why value is being created,
conserved or destroyed, it can begin to make decisions and take
action aimed at enhancing value.
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