{"id":5265,"date":"2019-08-12T06:27:17","date_gmt":"2019-08-12T11:27:17","guid":{"rendered":"http:\/\/flevy.com\/blog\/?p=5265"},"modified":"2020-12-18T22:48:22","modified_gmt":"2020-12-19T03:48:22","slug":"go-beyond-traditional-value-based-management-value-creation-through-relative-shareholder-return","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/go-beyond-traditional-value-based-management-value-creation-through-relative-shareholder-return\/","title":{"rendered":"Go beyond Traditional Value-Based Management: Value Creation through Relative Shareholder Return"},"content":{"rendered":"<p><img decoding=\"async\" class=\"alignright size-medium wp-image-5328\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/08\/accounting-blur-budget-128867-300x200.jpg\" alt=\"\" width=\"300\" height=\"200\" srcset=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/08\/accounting-blur-budget-128867-300x200.jpg 300w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/08\/accounting-blur-budget-128867-768x512.jpg 768w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/08\/accounting-blur-budget-128867-1024x683.jpg 1024w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/08\/accounting-blur-budget-128867.jpg 1920w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-based-management-vbm-2655\">Value-Based Management (VBM)<\/a> has been regarded traditionally as a tool to help investors evaluate firms, optimize <a href=\"https:\/\/flevy.com\/business-toolkit\/performance-management-perf\">performance management<\/a>, and maximize\u00a0<a href=\"https:\/\/flevy.com\/business-toolkit\/shareholder-value\">shareholder value<\/a>.<\/p>\n<p>However, there are mixed opinions on whether to utilize <a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-based-management-vbm-2655\">VBM<\/a> as a mandatory investment or management tool.\u00a0 Many investors, analysts, and executives, to this day, are skeptical of the influence and role of VBM in confronting the dot-com bubble or other financial downturns.\u00a0 They are even cynical of the efficacy of VBM as a robust management approach for the future or its effectiveness in creating <a href=\"https:\/\/flevy.com\/business-toolkit\/competitive-advantage\">competitive advantage<\/a> for them.<\/p>\n<p>The following are some shortcomings associated with the traditional VBM approaches that leaders should negotiate:<\/p>\n<ul>\n<li><strong>An inadequate link between VBM practices and capital markets realities<\/strong>\u2014absence or lack of analysis of the capital markets to expose gaps between a company\u2019s intrinsic value and actual stock price.<\/li>\n<\/ul>\n<ul>\n<li><strong>Aligning VBM with the organizational systems and its culture for value creation<\/strong>.<\/li>\n<\/ul>\n<ul>\n<li><strong>A broken process for managing the controls that govern value creation<\/strong>\u2014traditional VBM offers rich insights on managing economic principles, but lacks a process on how to further align strategic, cultural, and behavioral levers.<\/li>\n<\/ul>\n<h2><strong>Value Creation Framework<\/strong><\/h2>\n<p>The lack of trust in the effectiveness of VBM necessitates formulating a more thorough, fact-based approach to executing VBM.\u00a0 In developing a value creation agenda, it is quite uncomplicated to conceptually convince managers and employees that it is their main shared focus, but the core challenge is to devise a practical and integrated implementation approach.<\/p>\n<p>The <a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-creation-framework-series-primer-3911\">Value Creation Framework<\/a> depends on 4 <a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-creation-framework-series-direct-levers-3912\">value creation levers<\/a> that senior management can pull in order to effectively achieve their value creation goal.\u00a0 These levers are not autonomous and needs to be activated in tandem:<\/p>\n<ul>\n<li><strong>Operational Effectiveness<\/strong><\/li>\n<li><strong>Competitive Strategy<\/strong><\/li>\n<li><strong>Portfolio Management<\/strong><\/li>\n<li><strong>Investor Strategy<\/strong><\/li>\n<\/ul>\n<p><a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-creation-framework-series-primer-3911\"><img decoding=\"async\" class=\"aligncenter size-full wp-image-5327\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/07\/Value-Creation-Framework.png\" alt=\"\" width=\"1024\" height=\"768\" srcset=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/07\/Value-Creation-Framework.png 1024w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/07\/Value-Creation-Framework-300x225.png 300w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2019\/07\/Value-Creation-Framework-768x576.png 768w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/p>\n<p>The framework first stresses the management team to agree on the shared aspirations, prioritized levers, and how the headquarters activities are to be aligned with the business units.\u00a0 This entails revisiting the assumptions, priorities, decisions, tools, and culture at all levels across an organization to harness VBM to achieve improved value creation.\u00a0 The framework warrants the VBM approach to be embraced as a culture to maximize value creation&#8211;which is measured in Relative Total Shareholder Return.<\/p>\n<h2><strong>Relative Total Shareholder Return (RTSR)<\/strong><\/h2>\n<p>Focusing and aligning the organizations around a shared mission is important for the leadership. \u00a0Clearly laid out, compelling vision and aspirations\u2014that are reinforced daily\u2014have a profound positive impact on an organization\u2019s value creation potential.<\/p>\n<p>Value creation best practices necessitate establishing a single, long-term goal\u2014the <a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-creation-framework-series-primer-3911\">Relative Total Shareholder Return (RTSR)<\/a> performance. \u00a0The Relative Total Shareholder Return reflects a firm\u2019s capital gains plus dividend yield relative to a peer group or market index.<\/p>\n<p>The RTSR concept is not new, but practically most companies find it hard to implement RTSR as a goal-setting tool.\u00a0 The RTSR should be clearly quantified and communicated across the board as a long-term goal.\u00a0 The RTSR aspirations motivate and empower line management to work as entrepreneurs to achieve it, set objective targets, and connect business unit management to capital markets discipline.\u00a0 If done right, RTSR is a useful method to specify and communicate a firm\u2019s objectives and the supporting <a href=\"https:\/\/www.mckinsey.com\/business-functions\/strategy-and-corporate-finance\/our-insights\/how-to-improve-strategic-planning\">execution plans<\/a>.<\/p>\n<h2><strong>Measuring RTSR Objective<\/strong><\/h2>\n<p>Measuring the RTSR goal achievement at the corporate level can be done by ranking a firm\u2019s TSR against its peers\u00a0 TSR. \u00a0A RTSR target can be set to analyze the effect of corporate and business unit plans. \u00a0This can be done by quantifying a subjective goal\u2014e.g., top half or top quartile TSR\u2014into a specific number. \u00a0The calculations warrant developing a forward-looking RTSR target on the following 3 footings:<\/p>\n<ul>\n<li><strong>Anticipated 5-year company cost of equity<\/strong>\u2014to gather an investor\u2019s view of the risk-adjusted average expected return that a firm or market index is priced to deliver.<\/li>\n<\/ul>\n<ul>\n<li><strong>Anticipated spread to achieve relative TSR goal<\/strong>\u2014calculating stretched, above-average TSR goal needs personal discretion. It can be done through superior performance improvements instead of maintaining superior absolute levels of performance.<\/li>\n<\/ul>\n<ul>\n<li><strong>Forward looking 5-year RTSR target<\/strong>\u2014calculation of this goal requires 2 key considerations: RTSR probability of reaching above-median TSR and benchmarks to meet a cumulative top quartile TSR target over different time periods.<\/li>\n<\/ul>\n<p>Interested in learning more about the Value Creation Framework?\u00a0 You can download <a href=\"https:\/\/flevy.com\/browse\/flevypro\/value-creation-framework-series-primer-3911\"><u>an editable PowerPoint on <\/u><strong><u>Value Creation: Relative Total Shareholder Return <\/u><\/strong><u>here<\/u><\/a> on the <a href=\"https:\/\/flevy.com\/browse\">Flevy documents marketplace<\/a>.<\/p>\n<h2>Do You Find Value in This Framework?<\/h2>\n<p>You can download in-depth presentations on this and hundreds of similar business frameworks from the <a href=\"https:\/\/flevy.com\/pro\/library\">FlevyPro Library<\/a>. <a href=\"https:\/\/flevy.com\/pro\">FlevyPro<\/a> is trusted and utilized by 1000s of management consultants and corporate executives. Here&#8217;s what some have to say:<\/p>\n<blockquote><p>&#8220;My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today\u2019s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Bill Branson, Founder at Strategic Business Architects<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 David Coloma, Consulting Area Manager at Cynertia Consulting<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;As a small business owner, the resource material available from FlevyPro has proven to be invaluable. The ability to search for material on demand based our project events and client requirements was great for me and proved very beneficial to my clients. Importantly, being able to easily edit and tailor the material for specific purposes helped us to make presentations, knowledge sharing, and toolkit development, which formed part of the overall program collateral. While FlevyPro contains resource material that any consultancy, project or delivery firm must have, it is an essential part of a small firm or independent consultant&#8217;s toolbox.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Michael Duff, Managing Director at Change Strategy (UK)<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;FlevyPro has been a brilliant resource for me, as an independent growth consultant, to access a vast knowledge bank of presentations to support my work with clients. In terms of RoI, the value I received from the very first presentation I downloaded paid for my subscription many times over! The quality of the decks available allows me to punch way above my weight \u2013 it&#8217;s like having the resources of a Big 4 consultancy at your fingertips at a microscopic fraction of the overhead.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Roderick Cameron, Founding Partner at SGFE Ltd<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;Several times a month, I browse FlevyPro for presentations relevant to the job challenge I have (I am a consultant). When the subject requires it, I explore further and buy from the Flevy Marketplace. On all occasions, I read them, analyze them. I take the most relevant and applicable ideas for my work; and, of course, all this translates to my and my clients&#8217; benefits.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Omar Hern\u00e1n Montes Parra, CEO at Quantum SFE<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>Value-Based Management (VBM) has been regarded traditionally as a tool to help investors evaluate firms, optimize performance management, and maximize\u00a0shareholder value. However, there are mixed opinions on whether to utilize VBM as a mandatory investment or management tool.\u00a0 Many investors, analysts, and executives, to this day, are skeptical of the influence and role of VBM&hellip;&nbsp;<a href=\"https:\/\/flevy.com\/blog\/go-beyond-traditional-value-based-management-value-creation-through-relative-shareholder-return\/\" rel=\"bookmark\"><span class=\"screen-reader-text\">Go beyond Traditional Value-Based Management: Value Creation through Relative Shareholder Return<\/span><\/a><\/p>\n","protected":false},"author":110,"featured_media":5328,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","footnotes":""},"categories":[83,408,81],"tags":[1692,1691,1690,1688,1197,1199,1689,1083],"class_list":["post-5265","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate-finance","category-management-leadership","category-strategy","tag-aspirations","tag-investor-strategy","tag-portfolio-management","tag-relative-total-shareholder-return","tag-value-based-management","tag-value-creation","tag-value-creation-framework","tag-vision"],"_links":{"self":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/5265","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/users\/110"}],"replies":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/comments?post=5265"}],"version-history":[{"count":8,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/5265\/revisions"}],"predecessor-version":[{"id":7879,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/5265\/revisions\/7879"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media\/5328"}],"wp:attachment":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media?parent=5265"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/categories?post=5265"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/tags?post=5265"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}