Business value

In management, business value is a informal term that includes all forms of value that determine the health and well-being of the firm in the long-run. Business value expands concept of value of the firm beyond economic value (also known as economic profit, Economic value added, and Shareholder value) to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms.

Business value often embraces intangible assets not necessarily attributable to any stakeholder group. Examples include intellectual capital and a firm's business model. The Balanced scorecard methodology is one of the most popular methods for measuring and managing business value.

Philosophy

The concept of business value aligned with the theory that a firm is best viewed as a network of relationships both internal and external. These networks are sometimes called a Value network or Value chain. Each node in the network could be a stakeholder group, a resource, an organization, end-consumers, interest groups, regulators, or the environment itself. In a Value network, value creation is viewed as a collaborative, creative, synergistic processes rather than purely mechanistic or a result of command-and-control.

If the firm is viewed as a network of value creating entities, then the question becomes how does each node in the network contribute to overall firm performance and how does it behave and respond to its own interests. When the nodes are independent organizations (e.g. suppliers) or agents (e.g. customers), it's assumed that the firm is seeking a cooperative, "win-win" relationship where all parties receive value. Even when nodes in the network are not fully independent (e.g. employees), it's assumed that incentives are important and that those incentives go beyond direct financial compensation.

While it would be very desirable to translate all forms of business value to a single economic measure (e.g. Discounted cash flow), many practitioners and theorists believe this is either not feasible or theoretically impossible. Therefore, advocates of business value believe that the best approach is to measure and manage multiple forms of value as they apply to each stakeholder group.

As of yet, there are no well-formed theories about how the various elements of business value are related to each other and how they might contributed to the firm's long-term success. One promising approach is the business model, but these are rarely formalized.

History

Peter Drucker was an early proponent of business value as the proper goal of a firm, especially that a firm should create value for customers, employees (especially "knowledge workers"), and distribution partners. His management by objectives was a goal setting and decision-making tool to help managers at all levels create business value. However, he was skeptical that the dynamics of business value could ever be formalized, at least not with current methods.

Michael Porter popularized the concept of Value Chain.

Components of Business Value

Shareholder Value

For a publicly traded company, shareholder value is the part of its capitalization that is equity as opposed to long-term debt. In the case of only one type of stock, this would roughly be the number of outstanding shares times current shareprice. Things like dividends augment shareholder value while issuing of shares (stock options) lower it. This Shareholder value added should be compared to average/required increase in value, also known as cost of capital.

For a privately held company, the value of the firm after debt must be estimated using one of several valuation methods, s.a. discounted cash flow or others.

See Shareholder value

Customer Value

Customer value is the value received by the end-customer of a product or service. "End-customer" can include a single individual (consumer) or an organization with various individuals playing different roles in the buying/consumption processes. Customer value is conceived variously as utility, quality, benefits, and customer satisfaction.

See Customer Value and Utility

Employee Value

The value aavil

Strategies for Creating Business Value

An increase or decline in Business Value that an action produces is traditionally measured in terms of Customer Satisfaction, Revenue Growth, Profitability, Market Share, Wallet Share, Cross-Sell Ratio, Marketing Campaign Response Rates, or Relationship Duration.

Business Value of Information Technology

Various factors affect the business value impact of Information Technology (IT). The most important factor is the alignment between IT and business processes, organization structure, and strategy. At the highest levels, this alignment is achieved through proper integration of enterprise architecture, business architecture, process design, organization design, and performance metrics.

At the level of computing and communications infrastructure, the following performance factors constrain and partially determine IT capabilities:

• Usability
• Functionality
• Availability
• Reliability, recoverability
• Performance (thruput, response time, predictability, capacity, etc.)
• Security
• Agility

In Extreme Programming the goal of delivering incremental business value drives each iteration of development.

A good reference and hands on approach for this topic is Measuring the Business Value of Information Technology by David Sward (ISBN:0-9764832-7-0).

Criticisms

Business value is an informal concept and there is no consensus, either in academic circles or among management professionals, on its meaning or role in effective decision-making. The term could even be described as a "buzz word" used by various consultants, analyst firms, executives, authors, and academics.

Some critics believe that measuring economic value, economic profit, or shareholder value is sufficiently complete to guide decision-making. Their logic is that all other forms of value are essentially intermediate to the ultimate goal of economic profit. Furthermore, if they do not contribute to economic profit, they are actually a distraction for the firm.

Other critics believe that extensive efforts to measure business value will be more of a distraction than a boon. For example, there is a fear that decision-makers will be confused if there are too many goals and measures that need to be accommodated.

External links

An easy to use method to evaluate Business Value related to agile software projects is the Business Value Game