The Blue Line Imperative E-Book

Kevin Kaiser

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 522

Veröffentlichungsjahr: 2013

Beschreibung

A groundbreaking guide to making profitable business decisions Do you wonder why your value initiatives aren't providing the payoff you'd hoped for? Could it be because you've been thinking about value all wrong? According to the authors of this groundbreaking guide, there's a very good chance that you have. Using examples from leading companies worldwide, they explain why every decision a company makes either creates value or detracts from it, and why, if they hope to survive and thrive in today's increasingly competitive global marketplace, company leaders must make value-creation the centrepiece of every business decision. Authors Kaiser and Young have dubbed this approach "Blue-Line Management," (BLM), and in this entertaining, highly accessible book, they delineate BLM principles and practices and show you how to implement them in your company. * Explains why the failure to properly define and assess value often makes it difficult for the people who manage businesses to effect long-term success * Offers guidelines for making the satisfaction of customer needs and wants--i.e. value creation--the driver of all business activities * The authors are respected academics at INSEAD, the world's largest and most respected graduate business school, with campuses in Europe, Asia and the Middle East

Leseprobe

Table of Contents

Endorsements

Title page

Copyright page

Dedication

Preface

Acknowledgments

Chapter One: What Is Value?

We Want Our Stuff

Centuries of Subsistence

A Matter of Power

The Rise of the Consumer

Chapter Two: The Global Capital Market

How Capital Markets Help Us Get Our Stuff

Making Balance of Lopsidedness

But Who Decides Which Projects See the Light of Day?

The Downside: Agency Costs

In the Best Systems, No One is in Charge

The Relationship Problem

Bacteria, Crowds, and the Markets

Chapter Three: The Opportunity Cost of Capital

Fooling Nature

So How Do We Make the Right Guesses in the World of Business?

A Matter of Risk

The Premium

Summary

The Mathematics of the Opportunity Cost of Capital

How Do I Calculate the Opportunity Cost of Capital for the Investment My Company is Considering?

So Why isn't the Opportunity Cost of Capital Zero?

Chapter Four: The Expected Future Free Cash Flows

It isn't Price

Getting at an Idea of Value

Free Cash Flow

Net Present Value: Discounting the Expected Future Free Cash Flows at the Opportunity Cost of Capital

Getting the Right Cash Flows: Modigliani and Miller

What about Weighted-Average Cost of Capital?

Chapter Five: Blue Line Management

Value Creation and the Blue Line

Seeing the Blue Line

The Curse of the Red Line

The Problem with Indicators

A Blue Line Approach to Key Performance Indicators

Getting Indicators and Value Drivers Straight

When Red is Blue

Chapter Six: Shifting to Blue

The Indicator Illusion

Goodhart's Law

Chapter Seven: The Hazard of Growth

Competitive Advantage

Growth Versus Value

Value-Destroying Growth: A Cautionary Tale

If Growth is So Bad, Why are Companies Obsessed with It?

The Problem with Executive Pay

Chapter Eight: Creating a Blue Line Culture

The Three Pillars

Fair Process

The Perils of Opinion

Visions, Missions, and the Blue Line

Chapter Nine: Trust and Hierarchy in Blue Line Management

Why Trust Matters

Fairness, Trust, and Information Flow

Getting the Right Information to the Right People, Fast: The Case of Alcoa

Hierarchies and Information Flows

Trust Leads to Quicker Decision-Making and Happier Customers

The Future of Hierarchy

Chapter Ten: Value and Decision-Making

Value and Physics

Indicators, Data, and the Blue Line Firm

Value-Based Decision-Making in Action

A Brief Digression Regarding Management Consultants

Chapter Eleven: Getting Net Present Value Right

Mechanics and the Definition of Free Cash Flow

The Mechanics of Estimating an Appropriate Discount Rate

Chapter Twelve: Becoming a Blue Line Manager

How can I Become More of a Blue Line Manager?

Design Your Own Blue Line Questions

A Final Word

Appendix: Blue Line Questions

Index

“The Blue Line Imperative is compelling, fun and provocative. It is a must-read!”W. Chan Kim, bestselling author ofBlue Ocean Strategy, The BCG Chair Professor of INSEAD and the Co-director of the INSEAD Blue Ocean Strategy Institute

“Professors Kaiser and Young bring a unique, entertaining and irreverent approach to teaching executives what it really means to create value – including the dangers of relying on conventional wisdom about performance measurement.”Tim Koller, author ofValuation: Measuring and Managing the Value of Companies

“Kaiser and Young introduce a fresh perspective on what value really means and how to manage toward it. This is an indispensable new look at the most important business issue all companies face.”Merlin Swire, Director, John Swire & Sons, Ltd

“In our firm, we implemented a new culture emphasizing that Each of Us Counts to get everyone motivated to contribute. When we added the focus on value creation as outlined by Kaiser and Young in The Blue Line Imperative, it ensured those contributions were oriented in the right direction for long-term success!”Alberto Grua, Senior Vice President, Grünenthal Europe, US & Australia and Management Board member

“The Blue Line Imperative provides valuable lessons about what value is, how to measure it, and how to create it. Many companies follow the red line, thinking it is the right thing to do. This book explains why the red line ultimately does not work and why the blue line does.”Steve Kaplan, Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance, The University of Chicago Booth School of Business

“The Blue Line Imperative is insightful, impactful, humorous and unique – and the first guide that I have ever come across that gets to the core of why leaders, managers and companies fail. Embrace and apply these concepts.”Douglas Rosefsky, Managing Director at Alvarez & Marsal and two-time winner of the Turnaround of the Year Award (Turnaround Management Association, 2003 and 2010)

“Kaiser and Young's The Blue Line Imperative connects the dots in the customer–shareholder value puzzle and delivers a resonating message on the necessity of building a data-driven company. In other words, stop chasing KPIs and start focusing on value creation that lasts.”Martin Heijnsbroek, Managing Partner, MICompany

© 2013 John Wiley & Sons, Ltd

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Library of Congress Cataloging-in-Publication Data

Kaiser, Kevin.

The blue line imperative : what managing for value really means / Kevin Kaiser and S. David Young.

1 online resource.

Includes index.

Description based on print version record and CIP data provided by publisher; resource not viewed.

ISBN 978-1-118-51089-6 (ebk) – ISBN 978-1-118-51090-2 (ebk) – ISBN 978-1-118-51088-9 (hbk) 1. Management. 2. Value. 3. Strategic planning. I. Young, S. David, 1955– II. Title.

HD31

658.4'01–dc23

2013020502

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-51088-9 (hbk) ISBN 978-1-118-51089-6 (ebk)

ISBN 978-1-118-51091-9 (ebk) ISBN 978-1-118-51090-2 (ebk)

Kevin Kaiser. To the thousands of MBA, EMBA and executive participants I have taught who have inspired me, driven me, and helped me over so many years to develop countless insights and concepts. And to the thousands more I hope to teach in the future.

S. David Young. To my daughter Adiva.

Preface

The effort to write this book began with a conversation we had years ago about the difficulty of teaching business school participants what it means to “manage for value.” In our view, this topic incorporates four essential elements: (1) What is value?; (2) Why is it important?; (3) If it's so important, why aren't managers already doing it?; and (4) How can we help managers to do it? The more time and energy we spent trying to explain, the more we realized that none of these questions has a simple answer. As we developed the material to support these efforts, and as we delivered that material to an increasing number of participants, we received more and more requests for book recommendations that would summarize the increasingly broad-thinking ideas we were teaching. Some books address the finance element while others address the accounting element, but those books explain only the “silo” dimension of value and are more about tracking and modeling value than how to manage for it. What we observe, and teach, is that managing for value requires taking a more holistic approach, to consider economic (micro and macro), scientific (biology or physics) and psychological and customer-value aspects. We found we had increasing difficulty finding books to recommend which covered the “manage for value” topic. So, in answer to the repeated requests from our students, we decided to write this book.

We had both faced the difficulty of conveying the principles of value creation to our executive and MBA participants, and realized that if these current and future managers don't understand what value is, then it is extremely unlikely they will successfully manage for value in their organizations. We noticed that when we would ask a class of 40 participants to write down a definition for value, we would usually receive 40 different answers. So how were we to write a book on managing for value if no two managers understood or agreed on what value meant? We talked to different faculty at our business school to see how they defined value. Asking faculty in Finance, Marketing, Organizational Behavior, Strategy, and other areas, it turned out that business school academics were also using different definitions (and often disagreed quite strongly with the definitions offered by their colleagues). Thus, we perceived the need to establish a common definition of value in order to have any chance of helping people manage for it.

It is relatively easy to show what is not managing for value – for example, managing for profit is not equivalent to managing for long-term value. However, knowing what value is not doesn't really clarify what value is. To answer this question, we took a somewhat unconventional “crowd-sourced” approach, to try and incorporate the different perspectives we encountered. Our aim in this book is to talk about value in a way that our academic colleagues across the disciplines can be comfortable with using in their research and in the classroom, as well as one which our seasoned executive education participants can accept and see fitting with their experience. We also chose to define it using a method of backward induction as the answer to the question: What does an organization have to accomplish in order to not end up bankrupt over a century or more? This approach enabled us to avoid the opinions and differing perspectives of individuals, and to define value in an objective way. So although each person may hold a definition of value that is personal and unique to them, we also found there is a definition that is objective and common to all of us, including organizations. We explain both in this book. We also demonstrate the critical connection between the two definitions, in which one drives the other.

Blended into the ongoing development of the effort to define value was the analysis of why it is important to manage for it, and similarly, why it is so difficult to do. The question of why it is so important to create value, which appeared self-evident at the beginning, turned out to be a rather broad discussion. As we demonstrate in this book, it is the combination of a market-based system for allocating resources and a well-functioning market for capital, which is forcing organizations to align the two definitions of value if they wish to sustain their existence. This means, simply, that in order to be confident of generating the cash to sustain the organization, it is increasingly important that the organization delivers sustainable happiness to those it serves with its products and services. In this way, the creation of value becomes an imperative (rather than a choice dependent upon what the manager feels like doing on any given day) – those organizations that create and deliver value will have a future, and those that do not, will face economic ruin. Upon closer inspection, we noticed that this system is no more, nor no less, than an evolutionary force of nature. When viewed over thousands of years, rather than a year, or a decade, or even a century, the need to deliver value, as defined herein, is clearly not a question upon which humanity can easily choose to agree or disagree. Those who create value will be defined as sustainable, and they will sustain, and those who do not will soon face extinction.

Despite this “imperative,” we observe many organizations destroying value – sacrificing the longer-term sustainability of the organization to achieve a short-term target. Indeed, we like to pose the question in our executive programs to those who've worked in any of these organizations: “How many of you have knowingly destroyed value in order to deliver on a target or indicator that you've been assigned to hit?” Initially we were shocked by the high percentage of hands which were raised in confirmation that they had engaged in this behavior. (Now we are accustomed to it, so we are no longer shocked.) When asked to explain how they destroyed value, the responses were remarkably similar: it was whenever they engaged resources for an objective which could have been attained using fewer resources. This behavior was found to be rampant in all organizations; from companies and banks to charities and governments. This begs the question: Why do people destroy value if they actually know what value is? And why is it important for them to create it and avoid the demise of their organization? We devote a considerable amount of space and time in this book to this question, which we now know to be far more important than we appreciated at the outset of this project.

Once we had uncovered the “what,” “why,” and “why not” of value, we then tackled the profoundly difficult question: How do we orient our organizations around value as an objective? What techniques and tools can we apply in order to (1) know when we are creating value (at least, within a range), (2) encourage our people to take value-enhancing decisions, and (3) build a culture across our organization that will attract and reward those who create value? Our approach to these questions again followed a similar process as those above, where we would pose hypothetical tools, frameworks, techniques and ideas, based on insights from several areas of academia (with emphasis on psychology, neuroscience, organizational behavior, and finance), to our classroom participants. With their challenges and feedback, and based on observations of their behaviors and answers to carefully designed questions and case studies, we were able to test the validity and effectiveness of alternative techniques and hypotheses.

What emerged is presented in this book as blue line management. It seeks to incorporate insights from many areas of study to enable a manager to design, and continuously adapt, a management system and process that will keep the organization and its people oriented around value creation, while remaining highly motivated and keen to show up each day in order to do it again.

We continue this process of testing our insights and ideas, and in this way the book will never be complete. But the time has come to get this out to a broader group than those people we have in our MBA and executive classrooms, so that the benefits can be spread far and wide, and the learning can be accelerated. We hope you enjoy the journey on this path to value creation, and look forward to any and all feedback, and additional insights, which we are certain you can offer to improve still further both our understanding and our ability to effectively convey the key messages related to “managing for value.”

Kevin M.J. Kaiser

S. David Young

Acknowledgments

The efforts and support of many people made this book possible. We would like to single out Kate Kirk from Cambridge Editorial Partnership and the stellar editorial work she did in the early stages of the project. Her judgment and skill were indispensable. We would also like to thank I.J. Schecter—friend, confidant, writer, and literary agent. His efforts in getting the manuscript ready for publication were consistently outstanding. Thanks are also due to the thousands of participants in our executive and MBA programs who allowed us to test the core ideas of this book on them. Their insights and active participation strengthened the focus and key arguments of the text in so many ways.

Katherine Philips-Kaiser has been a sounding board and reliable provider of constructive criticism for years, which has improved, refined and strengthened the coherence and clarity of the themes and concepts in this book immeasurably.

And finally, we would like to thank our families for their love and support and inspiration throughout this endeavor.

Chapter One

What Is Value?

“Oh Happiness! our being's end and aim!”

– Alexander Pope, English poet, 1688–1744, An Essay on Man, Epistle 4

What does the word “value” mean to you? In a business context, perhaps you define it as your company's share price, or the book value on your corporate balance sheet. If you're a marketer, you may think of it in terms of market share or customer satisfaction. As a parent, spouse, friend, or shopper, you may consider it a measure of something decidedly more personal.

With so many competing notions of value, and with the temptation to interpret value as whatever notion is most convenient for us at the time, how can anyone confidently talk about “managing for value”?

In the pages that follow, we offer a perspective on value and value creation that we hope clears away the confusion over these much-abused terms. What makes our definition of value different from the myriad of others is that our notion of value is not a social construct. It is not specific to time, place or context. It has nothing to do with anyone's opinion. It is an idea driven by nature through an instinctive, collective process.

Value creation has nothing to do with beliefs – yours, ours, or anybody else's. You may be familiar with the expression, “Fifty million Frenchmen can't be wrong.” Well, yes they can. The same goes for 300 million Americans, a billion-plus Chinese, and so on. After all, it is entirely possible that every person working for Enron thought that their company was creating value when, in fact, it wasn't. Tens of thousands or even tens of millions of people believing that they are creating value does not make it so. Value creation, when properly understood, is not simply someone's ethical perspective on how to manage a company. Value creation is a self-generating, self-governing, basic planetary imperative based on nature itself, and if you don't uphold it, the planet will shut you down every time.

Consider a continuum of value where on one end we have the most basic of raw materials, and on the other, the consumers of these materials. Whether we're drilling for oil, pumping gas at the local service station, or driving the latest Jaguar, we are all participants somewhere within this value chain which rules the globe.

The reason it rules the globe is simple. Beyond our basic drives of food, shelter, and sex, we are driven to try to make each day of our lives a little better than the day before. To do so means finding ways to become happier, and that, at its most basic level, means taking the resources available to us and using them to create value. No matter what products or services we strive to create, our overall purpose is the same: delivering happiness to ourselves and creating ongoing value in our lives.