Analysis of Control Parameters Used in European Enterprises and Evaluation of Corresponding Metrics - Research Proposal Example

Project Proposal Value Based Management - Analysis of control parameters used in European enterprises and evaluation of corresponding metrics The Proposed Project For any business to grow all the stakeholders have to put in efforts in a supportive manner. But it is equally true that the stakeholder will be supportive as long as it is found that the activity being supported by the stakeholder is resulting in some tangible or intangible gains for the stakeholder. In other words the organization would continue to get support from the stakeholders if the activities of the organization are able to generate value for their money. Therefore creating, managing and measuring the value proposition is of utmost importance for the organization. This project is therefore an effort to find out the importance of value based management and how companies are doing it. Background The realisation for a need to identify the key stakeholders in order to optimise their contributions towards the cause arose when the modern management principles were experimented with. Stakeholder concept was originally defined as, "those groups without whose support the organization would cease to exist". But the term 'stakeholder' as such was introduced by the Stanford Research Institute in 1963, for generalising the notion of 'stockholder' when the term was made a part of the internal memo (Zsolnai, 2006). These days management encompasses a range of issues involving various aspects like environment friendliness, adherence to rules and regulations, management of the human resources, ethical business practices and of course the profitability of the operations. Japanese management philosophy of commitment to serving the timely needs of a stakeholder has been at the back of the concepts like JIT, and Kaizen. Value based management, in a way is termed to carry forward these very principles. Koller (1994) finds out that one of the key reasons behind the failure in delivering the objectives is the setting of unrealistic performance targets. While underlining the fact that value is created only when companies are able to invest the capital at rates exceeding the cost of that capital, Koller (1994) state that value based management helps companies in devising the targets in such a manner that they get strategic as well as operating advantages. Even an ordinary individual investor expects profits from investing in shares of an enterprise. As a result, the investor keeps comparing his or her holdings with other such investment opportunities. It is for the company and its management to retain the interest of such investors into the enterprise. While devising suitable strategies for value based management, it is equally important that the enterprise is able to take stock of the outcome as a result of implementing certain policies and decisions. Therefore, the search for suitable metrics in order to measure economic performance represents an essential area in theory and practice of company management. In these times of globalization, liberalization, market deregulation, cut-throat competition and industry consolidation, value-based company management becomes all the more important. The manner in which some of the reputed banks and companies have melted during the ongoing recession around the world, is an indicator that if the company is not able to make itself strong enough to take on uncertain times, it will have to face the heat. Rationale of the Study As the industrial activities see an upsurge on global scale, it requires the stakeholders to be more conscious about their investments, risks and operating conditions. For example, when the Lehman Brothers announced bankruptcy in 2008, the world community was taken aback. But, subsequently, stakeholders started taking more active interest and becoming more aware about the operational details and financial health of the companies. With an objective of maximizing the market value and using the 'shareholder value' enterprises have now started resorting to newer evaluation models. The idea behind this is that the primary objective of management must be to orientate oneself on the market value of the equity capital, and to sustainably increase the value of a venture. Starting with Rappaport in 1986, individual concepts for value-based enterprise control were developed in American business schools. In these concepts, existing ideas from the theory on financing and capital markets were transferred to company management. These ideas were picked up by management consultancies, which specialized on implementation of a shareholder value approach. This facilitated the wide-spread propagation of the shareholder value idea in enterprise practice. When devoting oneself to the idea of shareholder value, the question must be asked as to how this objective can be realized in operational practice, and how it can be measured. For this, some key figures have been developed in the previous years, the application of which today ranges from the original idea of determining the enterprise value for evaluation purposes via resource calculation to performance evaluation. The most popular and widely used value-based, financial metrics are the Discounted Cash Flow method propagated by McKinsey , the Economic Value Added (EVA ) metric developed by the New York Stern Stewart & Company consultancy firm , the Cash Flow Return on Investment (CFROI) key figure primarily used by Boston Consulting Group , and the Cash Value Added (CVA) metric. Having good knowledge about these parameters is important not only for the enterprises but for an ordinary investor as well. Objectives of the study The era of globalization is known for many things like liberalization, customer focused policies, more alternatives for the customer, better earning opportunities for investors etc. An effort is being made through this study to find out some such cases and correlate the findings to come out with factors contributing to the 'value' in management parlance. The basic objective of this study is to perform an analysis with respect to the degree of implementation of value-based management in Dow Jones Euro Stoxx 50 enterprises. The potential research questions for this study include; Which are the different types of risk factors associated with investments in general How some of the reputed companies have been able to keep pace with the developments and able to generate value for different types of stakeholders in their enterprise Which are the key metrics' used to measure the value based management and what are benchmarks associated with these metrics Methodology Some empiric research projects with respect to the propagation of value-based management amongst the DAX 30 companies have been conducted in Germany in the last few years. Comparable studies dedicated to the same topic have so far not been submitted for the Dow Jones Euro Stoxx 50. This study will try to come out with a comparison of the value-based management instruments amongst the Dow Jones Euro Stoxx 50 companies. Research will be carried out to determine at which degree value-based management methods have been established, and at which degree the set of management instruments has been focused on this approach. In order to identify relevant enterprise control concepts or control metrics, and to determine their degree of implementation, a survey amongst the Dow Jones Euro Stoxx 50 companies is to be carried out by means of a questionnaire. In the scope of this study, predominant concepts are critically compared with respect to their suitability as instruments for measuring the company's performance. The key figures are going to be represented against the background of their basic theoretical concepts in order to illustrate relationships and differences between the individual variables. Comparison criteria are derived from relevant scientific publications with respect to the topics of value-based management and performance measurement. The six essential requirements to a value-based variable are: Value orientation, freedom from manipulation, practicability, comparability, accrual accounting suitability and incentive orientation. This analysis is to show that individual metrics of success show different and individual advantages, but also disadvantages, and that no individual metric is clearly dominant. The assessment of whether a certain concept is suitable for a value-based performance management approach thus primarily depends on how the individual criteria are weighted. In principle, DCF methods are better suitable for evaluation of long-term questions as well as for strategic support (planning process), while the EVA and CFROI methods are more beneficial with analyzing short-term problems and operational issues (control and supervision). References: 1. Koller, Timothy (1994). What is value-based management The McKinsey Quarterly, No-3. Available online at http://www.exinfm.com/pdffiles/whba94.pdf (Sept 22, 2009) 2. Zsolnai, Laszlo (2006). 'Extended stakeholder theory'. Society and Business Review. Vol. 1 No. 1, 2006. Emerald Group. Read More