Beyond Business Process Re-engineering
How can CEOs continue to grow
shareholder value against a backdrop of low inflation and rapid global competition?
The Method Of Value Based Management
Every revolution of the
Action-Plan-Do-Check cycle propels the organisation forward increasing economic value
added (EVA) and cash-flow
| Regionalisation to
increase shareholder value is a trend that has spawned much conventional wisdom. The
freedom of employers to locate factories wherever labour costs are cheapest is said to
have reduced the power of labour. The ability of companies to choose countries with
user-friendly tax and regulatory regimes is alleged to have undermined the power of the
nation state. Income inequality in the developed world is often attributed to the
regionalisation of production. Geographical spread focuses management attention on
reducing cost through refocusing, delayering, decluttering, right sizing and
re-engineering. While there is an element of truth
in each of these assertions, they are all potentially misleading short-cuts to
shareholder's value. Shareholders require companies to deliver value in the long term as
well as the short term. Moreover, shareholders are claiming greater control over cash
flows of the company, limiting managers' discretion to spend on low return activities.
Therefore, the aim for corporate managers would be not just to achieve one-off gains in
shareholder value but to grow shareholder value continually against a backdrop of intense
pressure due to low inflation, rapid global competition and technological change, whilst
minimising all risks.
Just from the examples that we have seen over the past few
years, the emergence of Value Based Management (VBM) is more than a coincidence. It is a
method that corporate managers are using to produce an integrated balance between 1) the
short-term financial objectives focused on shareholder value add and 2) the core process
policies, which is equally vital to developing and implementing successful longer-term
business value. As shown in the diagram, the approach is based on the Act-Plan-Do Check
cycle. The cycle can be used to guide the process of continuous improvement
corporate-wide, as the concept is easy for everyone to remember. Furthermore, every
revolution of the APDC cycle propels the organisation forward adding economic value.
When using this method, it is vital to identify the nature
of the problem and have defined feasible vision. The next step is to develop a strategy
whereby the vision can be realised. Then, to move forward from its strategy, the
management team needs to re-engineer their business processes and to use policies to guide
its employee actions. Finally, as the company implements its policies and as "what
gets measured gets managed", companies need to use cash flow and the two proprietary
measures of value popularised by Stern
Stewart (http://www.sternstewart.com/), market value added (MVA) and economic value
added (EVA), to see how successful implementation of the policies is moving the company
towards its vision.
The effectiveness of value-based management
has been demonstrated by its successful
application in a variety of corporations. This has been particularly evident in
restructuring moves of companies like GE, TRW, Wal-Mart, and Compaq. In each case the
shareholders were rewarded with substantial increases in the value of their equity
holdings. The value-based management can help to building
regional demand chain which is the next major source of shareholder value. By having an
agile strategic process with a very short strategic process cycle, the value of a business
can be improved quite dramatically.
By Paul Simon
Enterprise
Change Consultant
Homepage |
| Further Reading & Topical Sites
EVA
In Europe
Re-engineering
Of Business Processes In Multinational Corporation
Successful
Reengineering
From
Value Chain to Value Constellation
Business
Re-engineering In Financial Services
Benchmarking
Benchmarks
For Your Business
Balance Scorecard
BPR |
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From Multinational to Global Company Plc.
Suggested flight plan for Airbus Industrie to attract outside
investment and win market share from Boeing.
Airbus
Industrie, founded in1970, has its headquarters in Toulouse, France. It is structured as a
Groupement d'Interet Economique structure, a tax shield under French law. This means that
profits and losses accrue to the four partner companies, France's state owned Aerospatiale, Germany's DaimlerChrysler Aerospace Airbus Gmbh,
privatised British Aerospace
and Spain's state owned Construcciones
Aeronauticas. The four-country European aerospace consortium has about 30 per cent
market share compared with Boeing's 60 per cent. Its annual sales are believed to be $9-10
billion. It claims that it has generated substantial operating profits and that its member
companies are steadily reimbursing loans to their governments. Its structure is such that
design and manufacturing are shared out in accordance with each partner's stake in the
consortium.
However, Airbus faces four main strategic
issues. The first is that its current business structure makes decision making
complicated, thwarts the search for scale economies and encourages each partners to
maximise its share of contracting and profits at the expense of the venture's overall
interest. The second is that the European Union and US have agreed to limit aid to one
third of the development cost of new aircraft. The third is that Boeing's aggressive cost
reduction campaign is putting Airbus's cash flow under pressure. The forth is that the
consortium needs to secure 50 per cent of the world's market for large commercial
transport aircraft by developing new products so that costs and lead times are reduced.
The development cost for the new products is estimated to be around $12 to $15 billion
before a supper-jumbo or new aircraft flies. Therefore, competitive pressures are forcing
Airbus to evolve rapidly or die.
There are four strategic options on offer
to the Airbus management. The most recommended solution, by many analysts, would be for
Airbus Industrie to become a design and marketing house, which can put manufacturing out
to the lowest-cost supplier. Another recommend solution would be for the new company to
take over the manufacturing assets used by the consortium, but owned by partners. The next
solution is not to change anything. The best option is for Airbus to transform itself into
a structure used by top performers such as General Electric of the US and ABB, the
Swiss-Swedish power engineering group.
The new organisation structure might
consist of four core business. There is the design and marketing unit, which included
project management. Then, there is the product supply unit which will be divided into
Airframe manufactures, Defence, Space and Electronics. Next, there is the Support Service
Units which will included customisation, online support service, training, spares,
and repair and Overhaul. Finally, there is business support service, which include
information technology, human resources, finance, planning and asset management.
Airbus partners and their respective
governments agree that Airbus needs to change. But both DaimlerChrysler Aerospace Airbus
Gmbhand British Aerospace (BAe) illustrate the magnitude of the challenges in creating
integrated companies that increase shareholder value rather than just consolidating
financial accounts. Therefore, the hard work is not in completing the merger, but it is
re-engineering the business processes into single company, which is not easy. But the
question is would the individual culture that exist in each consortium member prevent this
from happening. |
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