value based management (1)

7/25/2019 Value Based Management (1)

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VALUE BASED

MANAGEMENT


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MARAKON APPROACH

The key steps in the marakon approach are asfollows:

1. pecify the !nancial "eterminants of #al$es%. &n"erstan" the strate'ic "ri#ers of #al$es

(. )orm$late hi'her #al$e strate'ies

*. +e#elop s$perior or'ani,ational capa-ilities.


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. pec y e nanc adeterminants f !al"es

The marakon approach is -ase" on marketto-ook ratio

mo"el. Accor"in' to this mo"el/ sharehol"er wealth creation ismeas$re" as the "i0erence -etween the market #al$e an" the-ook #al$e of a !rms e2$ity. The -ook #al$e of e2$ity/ 3/

meas$res appro4imately the capital contri-$te" -y thesharehol"ers/ where as the market #al$e of the e2$ity/ M/re5ects how pro"$cti#ely the !rm has employe" the

contri-$tion of sharehol"ers/ an assesse" -y the stock market.Hence/ the mana'ement creates #al$e for sharehol"ers if Me4cee"s 3/ "ecimates #al$e if M is less than 3/ an" maintains#al$e if M is e2$al to 3.

Accor"in' to the marakon mo"el/ marketto-ook #al$esratio is a f$nction of the ret$rn on e2$ity/ the 'rowth rate of"i#i"en"s 6as well as earnin's7/ an" the cost of the e2$ity.

M83 9 6r'786k'7

here M is the market #al$e of e2$ity/ 3 is the -ook #al$e ofe2$ity/ r is the ret$rn on e2$ity/ ' is the 'rowth rate in "i#i"en"

an" k is the cost of e2$ity.


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#. Understand the strate$ic dri!ers f !al"es

The key !nancial "eterminants of#al$es/ are the sprea"6-etween the ret$rn

on e2$ity an" the cost of e2$ity7 an" the'rowth rate in "i#i"en"s. The two primarystrate'ic "eterminants of sprea" an"'rowth an"/ hence/ #al$e creation are:

a7 Market economics an"-7 Competiti#e position.


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a7 Market economicsMarket economics refers to the str$ct$ral factors

which "etermine the a#era'e e2$ity sprea" as wellas the 'rowth rate applica-le to all competitors in

a partic$lar market se'ment. The key forces whichshape market economics 6 or pro!ta-ility 7 are asfollows :

;ntensity of in"irect competition

Threat of entry$pplier press$res

;ntensity of "irect competition

C$stomer press$res


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-7 Competiti#e position.

The competiti#e position of a !rm refers toits relati#e position in terms of e2$ity sprea"an" 'rowth rate #is< a


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%. &rm"late hi$her !al"e strate$ies

=al$e is create" -y participatin' inattractin' market an"8or -$il"in' acompetiti#e a"#anta'e. Th$s/ the keyelements of the !rms strate'y are its

i7 The participation strate'y an"

ii7 The competiti#e strate'y.


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i7 The participation strate'y:

The participation strate'y of a !rm "e!nes

the pro"$ct markets in which it will complete.At the corporate le#el the iss$e is :;n whichnew -$sinesses the !rm sho$l" enter an"from which e4istin' -$sinesses the !rm

sho$l" e4it>ii7The competiti#e strate'y:

The competiti#e strate'y of a -$siness $nitspells o$t the means /the mana'ement will

employ to -$il" competiti#e a"#anta'e an"8or o#ercome competiti#e "isa"#anta'e in themarket ser#e" -y it.

' D


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'.De!e p s"per rr$ani(atinal capa)ilities.

A competent an" ener'etic chief e4ec$ti#e who is f$lly

committe" to the 'oal of #al$e ma4imi,ation.A corporate 'o#ernance mechanism that promotes the

hi'hest "e'ree of acco$nta-ility for creation or"estr$ction of #al$e.

A mana'ement compensation plan which is '$i"e" -ythe principle of ?relati#e pay for relati#e performance@

The reso$rce allocation system which is -ase" on fo$rprinciples : i7 The principle of ,ero -ase" reso$rceallocation. ii7The principle of f$n"in' strate'ies/ not

proects.iii7 The principle of no capital rationin' an" i#7The principle of ,ero tolerance for -a" 'rowth

A performance mana'ement process.

value based management (1)

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