Can Companies Create More Wealth Than They Do?
New Management Metrics and Tools Make It Possible to Deliver Maximum Results
Two recent developments will let companies indeed deliver the best possible results:
- Investment analysts often create their own financial pictures of a public company's reported results, to see how it's really doing. (See, for example, "Earnings Per Share? Phooey!," Business Week, June 12, 2006, page 66.)
They don't believe that the measures many boards and executives use, and report on, accurately portray value creation. We can reasonably expect greater value-creation (and higher share prices) from companies
managed with valid metrics—because you can't steer well blindfolded by poor ones.
- Rather than merely improving results, it has just become possible, using a combination of new management tools, for executives to literally maximize profits, revenue and shareholder-value creation.
By building on the work of several others and adding its own, Great Numbers!, an executive-skill development firm in NJ, has created a roadmap that the CEOs,
division heads and general managers of large and middle market companies can use to deliver maximum results. The paper, Leading Your Business to Maximum Results, available at www.greatnumbers.com, poses three questions that every executive first needs to answer in order to create the greatest wealth for their long-term investors.
1.What are we being scored on?
Drew Morris, Great Numbers! Founder and CEO said that this requires learning what the market wants more of: revenue growth or profitability. We saw this at work on June 1st when Wal-mart announced a slowdown in new
store openings (revenue growth), so it could improve profit margins, and buy back stock. The tool described in the late Nathaniel Mass's April 2005 Harvard Business Review article, The Relative Value of Growth ® (RVG), provides a ratio, based on company financials, that resolves the question.
2. What should we do to maximize our score?
With RVG in hand, CEOs and division heads can establish the appropriate profit and revenue emphasis for each of their company's businesses. Maximizing the score based on that emphasis falls to the general
managers—those with profit and loss responsibility for the company's individual businesses. These executives often find themselves under intense pressure to "make their numbers."
Now they can use a new decision-making tool that Great Numbers! created to find the best actions they can take to meet, even beat, their RVG-weighted results targets.
Morris explains, "There are more than 60 honest ways to increase profits and/or grow the revenue of a business. A few of these actions relate to strategy; most are simply ways to 'get the numbers up,' like optimized
pricing, improved design, purchase-compelling advertising, etc. Few general managers have time to tackle even 10 of these actions, let alone 60."
The tool he created, called The Fortune Finder SM, lets general managers find what he calls their
"best shots," the handful of these 60+ actions that will increase desired results the most, and that they can really pull off, given their budgets, resources and management time. (The best shots are unique to a
business—there's no one right answer.)
Morris' paper describes the gains of the $22 million US division of a booming traditional marketing and distribution company. Well run, it was growing 30% per year, with an operating profit margin of 16%. Yet they
found 6 actions (their best shots) that in the next 3 years would increase their annual revenue growth rate another 14.5%, more than double profits, and lift operating profit margins 7%. Without The Fortune
Finder these gains would have been left on the table.
3. Is the wealth-creation ability of the businesses we're in better than others we can create, or get into?
Managing a company's portfolio of businesses is usually handled at the CEO or division-head level. It's best done using a wealth-creation measure that
- applies to the company, its individual businesses, and to it's planned major investments,
- is not subject to accounting manipulation or distortions like financing methods,
- reflects risk-adjusted returns that exceed capital costs, and
- can be easily understood at all levels of management.
Given the above, Morris found the only satisfactory measure to be Economic Margin ® (Operating Cash Flow less an appropriate Capital Charge divided by Invested Capital). It was developed by Daniel Obrycki and Rafael Resendes of The Applied Finance Group.
Summary
Now that there's a roadmap for creating maximum results (a results best practice) executives can begin to get good at using it and its tools. It will be interesting to see how much shareholder wealth they can create.
About Great Numbers!
In simple terms, Great Numbers! is a performance driving school for executives, where they can acquire and hone the skills needed to create maximum results.
The following are registered trademarks, shown with their respective owners: Relative Value of Growth—N.J. Mass Associates, Inc.; Economic
Margin—The Applied Finance Group. Great Numbers! is a registered trademark and The Fortune Finder is a service mark of Great Numbers! LLC.
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