Challenges of Managing Value Drivers
Identifying and using key value drivers are not easy tasks. They demand time and resources that not many organizations are willing to commit – despite the obvious pay-off.
Some of the challenges of managing value drivers include:
Lack of information
Identifying key value drivers requires having access to information that not necessarily is readily available. In an ideal world, all components ‘add-up’ and can be easily identified. This is rarely the case and therefore, companies need to engage in a targeted data gathering exercise before attempting identifying key value drivers.
Once all the data is handy and organized, the different categories need to be broken down into manageable and actionable components that most likely have never been measured before. Without a way to determine the current status of a key value driver, is impossible to know how changing it will impact the business. For example, unless a plant knows how much it exactly pays for electricity (both rate and consumption), is impossible to define what actions need to be taken to reduce its energy costs.
After key value drivers have been identified, their appropriate measure needs to be clearly defined and actively shared with all relevant parties – for example, by creating a new management reporting system or adding these measures and their desired targets to the annual budget review.
Not enough control
There is no ‘perfect’ value driver. In many instances, either control over them is partial and insufficient to create real impact or the company finds out that a driver is not really under its control as previously thought. For example, a home improvement retailer might think that has full control over the mix of products it offers in one of its branches, but it turns out that suppliers just don’t ship certain products to that region. For that specific branch, the company has less control over the product mix driver than what it thinks.
In this case, a company has three options: (1) find another key value driver ‘below’ the one just found and over which management has more control (e.g. focusing on product mix for the largest category of home improvement products for which suppliers do offer shipping instead of the overall product mix); (2) change the company’s structure to capture control over the key value driver (e.g. shift business to suppliers that do offer shipping to that specific branch); or (3) reduce the impact of the non-controllable part of the value driver (e.g. offering substitute products on that particular branch or paying for the shipping of the desired products).
Just because a value driver has been identified, doesn’t mean that its relevance will continue indefinitely. Many value drivers, particularly sustainability drivers, have limited life spans and those that have been actively managed before tend to present diminishing returns when they move towards their optimal level (e.g. there is so much value that can be added by increasing prices – at some point demand will subside). Value drivers need to be constantly monitored. When a driver’s value generation potential has been ‘exhausted’, management needs to find new value drivers.
Key value drivers are interconnected and do not work in isolation. What can be achieved by managing a value driver might have unintended consequences at a different level in the organization or even affect the value generated by another driver. For instance, layoffs might have immediate positive impact on value created as less cost is in the system, but they can undermine staff morale and reduce productivity as well, thus destroying value in the long term.
In implementing Value Driven Management, companies should consider the potential impact these challenges could have. The whole process needs to be continuously tested against these and adjusted accordingly to maintain its integrity and ensure that value is indeed created.
Identifying a business’s key value drivers and acting upon them are powerful tools. Value driven management aligns the company’s operational and financial ‘tactics’ with its long-term strategy. It allows management to focus on what can be done today to create value in the future and adjust the course when needed. Finally, it serves as a natural prioritization tool – enabling companies to discern what is important (i.e. what creates more value) and consequently channel the always limited time and resources to the right areas.
Article power by : http://www.krogger.co/