EVALUATING THE CREATION OF BUSINESS-VALUE

Opening remarks

 The enterprise must excel in creating value in its business with and for its 5 stakeholders, namely the customers, the suppliers, the distributors and the allies, the relevant communities, and the shareholders and creditors.

Business-value is crated in the frame of the interactions and the transactions the enterprise has with each of its stakeholders. Both the enterprise and each of its stakeholders launch their 5 management processes, which are captured by the acronym SP.I.D.E.R., i.e. <studies and plans>, <investments>, the <strategic and organizational deployment>, the <execution>, and the <reviews-evaluations-recognitions-reporting>. (1) 

The aforementioned management processes input a given configuration of corporate capitals, they process them, thusly they add value on the outputted configuration of corporate capitals. This author proposes the model of the 5 <corporate capitals> namely: the <organizational capital>, the <talent capital>, the <market capital>, the <life and time cycles>, and the <financial capital>. (2)

The same definition is used for the management processes and of the corporate capitals whether they are deployed by the enterprise or by one of its stakeholders.

The last of the management processes of the SP.I.D.E.R., the <review-evaluation-recognition-reporting>, focuses first on the effectiveness of each of the management processes used by the enterprise. Then, the management looks at the value that has been added over the period of time on the <corporate capitals>. If the enterprise follows a win-win policy in dealing with its major stakeholders, then both parties should achieve a comparable level of satisfaction from their transactions. However, should this not be the case, the management has to look at the synergies between the processes and the capitals deployed by the enterprise and the ones employed by the stakeholders.

In this paper, this author presents a set of guidelines designed to help business leaders to establish and to run the appropriate system of evaluations of the <corporate capitals> of their enterprise. To this effect, we revert to an old axion that suggests that the evaluations should be s.m.a.r.t., i.e. systemic, measurable, actionable, result oriented, and timely.

Systemic performance-evaluations

 In the 50s, MIT Prof. Jay Forrester posited that business runs a dynamically complex system. Since, the business environment has become much more connected, much more complex, and much more disruptive.

Scientific, technological, and business innovations are among the drive-shafts of our highly interactive business environment, and all of them are powered by intangible resources. We cannot understand business as a dynamically complex system unless we understand the intangible resources.

In 1977, T.A. Stewart announced the importance of the “Intellectual Capital” (3) In the 90s several authors presented models that include intangible resources among the capitals. (4) Kaplan and Norton, the authors of The Balanced Scorecard, found that “Over 75% of the firm’s market value is now derived from intangible assets, which are not captured by financial metrics”. (5) At this time, financials are widely and rapidly available from different channels, whereas intangible resources generally take a lot of time and efforts to develop. 

Unlike the tangible resources, the intangible resources cannot be touched, and they cannot be measured per se in financial terms. However, they can be felt, occasionally they can be heard when emotions flare up. Moreover, the results that they generate can be evaluated in qualitative as well as in quantitative terms. The intangible resources can lead to very tangible results!

While the tangible resources are consumed during a commercial transaction, the value of the intangible resources increases with every new project a part of a learning process. The intangible resources generally work in connection with other intangible resources as well as with tangible resources. Thus, in order to achieve given objectives, business leaders at all levels and in all functions invest a highly interactive bundle of tangible and of intangible resources. It may be  difficult to figure out precisely how much each of the invested resources has actually contributed to the final results, however the critical success factors among the deployed resources should be fairly obvious.

The intangible resources generally work in medium-term loops. And so, a proficient management of the intangible resources should break the yoke of  financial short-termism that may be engendered by fixating the next quarterly reports.

This author proposes a fairly simple model for the web where the 5 <corporate capitals> interact. On top we have on the left side the <financial capital> and on the right side the <talent capital>. Below on the left-side we have the <life and time cycles> and on the right side the <market capital>. At the center of the model we have the <organizational capital>. Let us look at some of the unique features of this model. (2)

Firstly, the <financial capital> is the only tangible resource, while the other 4 <corporate capitals> are intangible resources, namely: the <organizational capital>, the <talent capital>, and the <market capital>. Thus, the intangible resources are where they should be, i.e. at the center of the attention all the business leaders should pay to the performance-enablers, and then to the performance-results. As Tito Conti, one of the architects of the model of the European Foundation for Quality Management pointed out that sometimes business leaders are so concentrated on the results that they neglect their enablers and miss out.

Secondly, as we will see in the next section, the <organizational capital> drives all the other corporate capitals. Thirdly, unlike the models of the Balanced Scorecard (5) and of the International Integrated Reporting Council (IIRC) (6), the 5 <corporate capitals> include the <life and time cycles>, which duly take into account the fact that time and the timeliness are now hyper-critical to the sustainable success of the enterprise.

The business leaders must pay attention to the life-cycle of the industry-sectors the enterprise is active in because each of Bruce Henderson’s question marks, stars, cash-cows, and dogs have a distinct time-cycle and a different profitability and sustainability profile. The enterprise’s positioning on the industry-lifecycles, i.e. emerging-developing-maturing-declining markets, is highly indicative of the management strategic agility.

 The business leaders must also pay attention to the time that things take. Time is money, and Prof. R. S. Kaplan showed how to manage time in his “Activity Based Costing”. (7)  The time-cycle of each of the management processes as well as of major projects must be carefully planned and reviewed. Dr. J. M. Juran cautioned to eliminate rework, and lean management focuses on just in time. This author posited “Everything takes time, but time takes everything”. (2)

And so, the <life and time cycles> provide clear indicators of the strategic and operational agility of the enterprise, which are critical factors of sustainable success. Thus, unlike the models of the Balanced Scorecard and of the IIRC, the model that is proposed here features the <life and time cycles> as one of the <corporate capitals>, and thereby it puts them up in front of leadership attention.

Measurable

 To some, performance-measures must be precise to be credible. Since the intangible resources cannot be counted, accountants disregard them. (8)

The fact that financial figures are precise makes them look trustworthy, although occasionally we are reminded that “Figures can lie and that liars can figure”. Maynard Keynes submitted: “Being approximately right is more important than being precise and wrong”, and Albert Einstein added: “Sometimes what counts cannot be counted and what can be counted does not count”.

The Balanced Scorecard features 2 intangible resources, namely <the customer> and <learning and growth>. For each of them, the management sets its objective, its measures, its targets, and it initiatives. The IIRC proposes 6 capitals: financials, manufactured, intellectual, human, social and relationship, natural. Like the proposed 5 <corporate capitals> these are headings or generalities, which they were effective when the management was commanded and controlled top-down. Today the agile innovative enterprise is active and proactive top-down, bottom-up, inside-out, and outside-in.

So, let us leave generalities to the generals, and let us give the troops what they need to understand the enablers and the results that are relevant to their work as well as to their internal and/or external partners. To this effect, this author follows the principle of the Agile Management, which step-by-step breaks down business-strategies in relatively small and simple tasks that the teams can implement smartly and swiftly. So, unlike the other aforementioned models, each of the 5 <corporate capitals> is broken down in 5 <capital components>.

Breaking down the <corporate capitals> into <capital components> enables us to evaluate their potential when planning and their performances when reviewing. This author proposes a method called the <return on total resources> that enables business leaders at all levels and functions to evaluate the potential and the performances of each and all of the <capital components> they need. Then, step-by-step, the <reviews-evaluations-recognitions-reporting> regroups and consolidates the performances on the 5 <corporate capitals>. (2)

Because of space limitations, we cannot list and discuss each of the 25 <capital components>, which can be further broken down as necessary. So, will only outline hereafter the <capital components> of the <organizational capital> and of the <market capital>.

T. J. Peter & R. H. Waterman, the authors of “In Search of Excellence” proposed their model of the 7S to understand the inner workings of the organization. (9) In the model of the 5 <corporate capitals> proposed by this author, the  <organizational capital> drives all the other <corporate capitals> of the enterprise with its breakdown of the following 5 <S>, namely: the <strategic fundamentals> that set guidelines for strategizing; the <style of the leadership> that shapes the corporate culture; the <systems of management> that set guidelines for implementing the management processes; the <structures of the organization>; the <shared critical capabilities>. The senior management is in charge of establishing the 5 <S> and of monitoring the effectiveness of their interactions. The 5 <S> should provide the network of business leaders a clear and connective set of vectors to manage the workings of the enterprise.

The leadership should pay close attention to their interactions of the 5 <S> in order to avoid debilitating dysfunctions. MIT Prof. Alfred Chandler posited that business strategy drives structures. Indeed, sometimes strategies are changed faster than the structures, and the latter stymie the strategies. Let us be clear, unless all the 5 <S> work hand-in-hand and effectively synergiz

e serious dysfunctions will soon stifle the stamina of the whole organization.

This author tends to focus on the <style of leadership> rather than on the corporate culture. First of all, next to the corporate culture there are regional and industry cultures that must also be taken into consideration. Then, cultures can be difficult to grasp while the <style of leadership> is quite easy to see.

 Bill Joiner & Stephen Joseph suggested that there are 3 types or levels of the style of leadership, namely: 1. the expert, 2. the achiever, and 3. the catalyst, and they show their respective impact on the organizational agility. (10) Managing the migration from a lower level to a higher level of the style of leadership can be most challenging. The character of the dominant leader(s) can have a determining role on the style of leadership of the enterprise, but changing the character, the habits, and the agendas of the dominant leader(s) and thereby the corporate culture is very difficult. This author believes that intangible resources such as the corporate culture cannot be changed without deploying also tangible means, changing some of the key people, and the <structures of the organization> and the <systems of management>.

The 5 <S> are more comprehensive and more detailed than 5 elements of The Balanced Scorecard’s vision and strategy, and they can be used to manage effectively the other <corporate capitals>. As concerns the IIRC, this author is not really familiar with its model. It appears to focus on reporting, which is part of the last of the 5 management processes of the SP.I.D.E.R. However, most recently the IIRC appointed a new Chairman and CEO who will launch a new strategic phase of this organization. So, it is possible that their model will be revised.

The <market capital> features the external partners of the enterprise, namely: the customers, the suppliers of goods, of money, and of services, the relevant communities, and the shareholders. In addition, the <market capital> features the value the enterprise achieves on the market through its line of products and through its brands.

The business leaders can select the external partners that are of particular importance to the enterprise, and they can monitor the value added in their interactions and transactions. The value of the customer capital can be appraised using the method advocated by Peppers and Rogers.(11) Some consultancies like Interbrand appraise the value of brands.

The distinction between industry-segments has blurred and some companies are active in completely different fields. Yet, on some of the elements of the <market capital>, the business leaders can compare their performances with the ones other companies are achieving.

Actionable

As mentioned earlier, Agile Management breaks down the objectives in small and simple tasks that are entrusted to teams that can manage them smartly and swiftly. In the frame of the process of strategic and organizational deployment, one of the management processes of the SP.I.D.E.R., the teams organize the <capital components> they need to achieve the planned results. They organize internally and externally the proper interactions and transactions. The breakdown of the <capital components> enables them to organize things smartly and swiftly.

The strategic and operational deployment, part of the management processes of the SP.I.D.E.R., works first top-down and then laterally as the teams have to organize their cooperation with other teams. The execution and the <reviews-evaluations-recognitions-reporting> are entrusted to the front-lines who can take the appropriate actions without delays unless problems come up.

As previously mentioned, this author proposes the <return on total resources>, a system that enables the team- leaders, the networks-leaders, and the management to evaluate the potential of each of the <capital components> they plan to use as enablers and then of the ensuing results. However, as also already mentioned, at all levels and functions the business leaders should bear in mind that the intangible resources work in loops over the medium-range where different <capital components> interact.

Relevant

One of the principles of Agile Management states “first people then processes”. It breaks down the organization to teams where the group-dynamics is much stronger than in large administrative units. People work in teams, they perform in teams, and they review the performances as a team. 

Unlike the traditional one-on-one reporting and that tends to focus on financials, Agile Management suggest that the reviews should build the relational and the emotional behavioral drivers as the team-members take a little time to socialize and share their experiences and their learning. The evaluation and the reporting build on the rational and on the result-oriented behavioral drivers. The recognition done by team-members to the ones that have out-performed is a very important behavioral driver not only because it is provided very promptly at the next team-review, but also because it strengthens the team-spirit.

Timely

 The amplitude and the acceleration of changes have considerably shrunk the amount of time the senior management has to find and to prepare for new strategies, and the amount of time the operations management has to implement new strategies or to react to gyrations on the market.

The first thing the agile innovative enterprise has to do is to facilitate open communications top-down and bottom-up as well as inside-out and outside-in. It is like an ant-hill where all the individuals communicate with all others, go out in groups to get the food and to bring it back. There are no big ants that direct the little ants, and somehow things seem to work out.

The second thing is to reduce rework as advocated by Total Quality Management, and to keep the whole organization lean … but not mean.

Closing remarks

 Jack Welch admonished: “People measure everything and understand nothing”. Measuring performances requires that we understand the <why>, the <who>, the <how> performances are achieved. This author started addressing these questions while lecturing post-graduate MBAs, and he published a prototype of his <corporate capitals> in 2000. (12) In his following books, he showed the development of his model of the corporate resources of the enterprise as well as a detailed and pragmatic method to evaluate them.

This author did not use this model and method consulting with companies that plan and evaluate performances in financial terms, and that stick to the good old budgets. However now the tectonic turbulences of today’s business environment challenge the traditional budgeting.

Agile Management shows how to plan, to manage, and to evaluate performances in a decentralized and delayered organization that delegates many responsibilities and resources. The advocated 5 <corporate capitals> and the 5 management processes of the SP.I.D.E.R. help breaking down business-strategies step-by-step into tasks that are entrusted to networks and to teams. Thus, the advocated models and methods should be introduced in the frame of a management program designed to transform a traditional organization in an innovation agile enterprise.

 Bibliography

 1-    W. A. Sussland “The SP.I.D.E.R. Web of the Management Processes” LinkedIn

2-    May 14, 2018

 2- W. A. Sussland “The Platform of Agile Management and the Program to

     Implement It”, Routledge 2018

 3- T. H, Stewart “The Intellectual Capital” Nicholas Brealey 1977

 4- Olve, Roy, Wetter “Performance Drivers” Wiley 1999

 5- R. S. Kaplan, D. P. Norton “The Balanced Scorecard” HBS 1996

 6- The International Integrated Reporting Council Model published on Wikipedia 2013

 7- R. S. Kaplan “Time Driven Activity Based Costing” HBS 2007

 8- B. Lev, F. Gu “The End of Accounting” Wiley 2016

 9- T. J. Peters, R. H. Waterman “In Search of Excellence” Harper Row1982

10- Bill Joiner, Stephen Joseph “Leadership Agility” Jossey Bass2007

11- D. Peppers, M. Rogers “The Return on Customer” Marshal Cavendish 2005

12- W. A. Sussland “Connected A global Approach to Managing Complexity”

    Thomson Learning 2000