Value-Based Management (VBM) has been regarded traditionally as a tool to help investors evaluate firms, optimize performance management, and maximize shareholder value.

However, there are mixed opinions on whether to utilize VBM as a mandatory investment or management tool. Many investors, analysts, and executives, to this day, are skeptical of the influence and role of VBM in confronting the dot-com bubble or other financial downturns. They are even cynical of the efficacy of VBM as a robust management approach for the future or its effectiveness in creating competitive advantage for them.

The following are some shortcomings associated with the traditional VBM approaches that leaders should negotiate:

• An inadequate link between VBM practices and capital markets realities — absence or lack of analysis of the capital markets to expose gaps between a company’s intrinsic value and actual stock price.
• Aligning VBM with the organizational systems and its culture for value creation.
• A broken process for managing the controls that govern value creation — traditional VBM offers rich insights on managing economic principles, but lacks a process on how to further align strategic, cultural, and behavioral levers.

Value Creation Framework

The lack of trust in the effectiveness of VBM necessitates formulating a more thorough, fact-based approach to executing VBM. In developing a value creation agenda, it is quite uncomplicated to conceptually convince managers and employees that it is their main shared focus, but the core challenge is to devise a practical and integrated implementation approach.

The Value Creation Framework depends on 4 value creation levers that senior management can pull in order to effectively achieve their value creation goal. These levers are not autonomous and need to be activated in tandem:

• Operational Effectiveness
• Competitive Strategy
• Portfolio Management
• Investor Strategy

The framework first stresses the management team to agree on the shared aspirations, prioritized levers, and how the headquarters activities are to be aligned with the business units. This entails revisiting the assumptions, priorities, decisions, tools, and culture at all levels across an organization to harness VBM to achieve improved value creation. The framework warrants the VBM approach to be embraced as a culture to maximize value creation — which is measured in Relative Total Shareholder Return.

Relative Total Shareholder Return (RTSR)

Focusing and aligning the organizations around a shared mission is important for the leadership. Clearly laid out, compelling vision and aspirations — that are reinforced daily — have a profound positive impact on an organization’s value creation potential.

Value creation best practices necessitate establishing a single, long-term goal — the Relative Total Shareholder Return (RTSR) performance. The Relative Total Shareholder Return reflects a firm’s capital gains plus dividend yield relative to a peer group or market index.

The RTSR concept is not new, but practically most companies find it hard to implement RTSR as a goal-setting tool. The RTSR should be clearly quantified and communicated across the board as a long-term goal. The RTSR aspirations motivate and empower line management to work as entrepreneurs to achieve it, set objective targets, and connect business unit management to capital markets discipline. If done right, RTSR is a useful method to specify and communicate a firm’s objectives and the supporting execution plans.

Measuring RTSR Objective

Measuring the RTSR goal achievement at the corporate level can be done by ranking a firm’s TSR against its peers TSR. A RTSR target can be set to analyze the effect of corporate and business unit plans. This can be done by quantifying a subjective goal — e.g., top half or top quartile TSR — into a specific number. The calculations warrant developing a forward-looking RTSR target on the following 3 footings:

• Anticipated 5-year company cost of equity — to gather an investor’s view of the risk-adjusted average expected return that a firm or market index is priced to deliver.
• Anticipated spread to achieve relative TSR goal — calculating stretched, above-average TSR goal needs personal discretion. It can be done through superior performance improvements instead of maintaining superior absolute levels of performance.
• Forward looking 5-year RTSR target — calculation of this goal requires 2 key considerations: RTSR probability of reaching above-median TSR and benchmarks to meet a cumulative top quartile TSR target over different time periods.

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Corporate Social Responsibility (CSR) is an organization’s commitment to produce an overall positive impact on society. CSR encompasses sustainability, social and economic impact, and business ethics. It makes a company socially accountable of its operations, stakeholders, and the public. Businesses undertake CSR programs to benefit society while boosting their own brands.

CSR affects every aspect of business operations and functions. Encouraging equal opportunities; partnering with organizations practicing ethical business methods; putting part of earnings back into environment, health, and safety initiatives; and taking care of communities and charity are all examples of CSR initiatives.

Communities, customers, employees, and media consider CSR vital and gauge companies based on these initiatives. Executives of leading companies consider CSR as an opportunity to deal with critical issues innovatively, reinforce their organizations, and serve the society simultaneously.

The Need for CSR Implementation

Organizations need to come up with a robust approach to unlock potential benefits and value from CSR for them and for the society. The organizations practicing Corporate Social Responsibility do that with one of the following 4 objectives in mind:

• Philanthropy: These initiatives (e.g. corporate donations) make the companies and society feel good, but produce low value for the business — questionable repute building benefits to companies, but offer much to society.
• Propaganda: These CSR initiatives are predominantly geared towards promoting a company’s standing, but offer little real value for the society. This form of CSR is more of advertisement and becomes risky if there are any gaps between the firm’s commitments and actions.
• Pet Projects: Some companies engage in CSR initiatives that support the personal interests of senior executives. These initiatives are much touted about, but are actually of little value to the business or community.
• Smart Partnering: These initiatives concentrate on common themes between the business and the community. Organizations, in this case, create innovative solutions by drawing synergies from partnerships to tackle major issues concerning all stakeholders.

Among these objectives, Smart Partnering offers maximum opportunities for shared value creation and finding solutions to crucial business and social challenges. Whereas for the society, smart partnering helps create more employment opportunities, improve livelihoods, and enhance the quality of life.

Guiding Principles for CSR Initiative Selection

An effective way for the companies to maximize benefits of their CSR efforts is to map the current initiatives; identify the objectives, benefits, and resources responsible for realizing value from those initiatives; and define the projects valuable for addressing key strategic challenges.

Pet projects, philanthropy, or propaganda are easy to plan and execute. However, the real issue is to implement CSR opportunities that bring value for the business as well as society (smart partnering). This goal can be achieved by applying these 3 guiding principles:

1. Focus on the right segments

Real opportunities lie in the segments where the business collaborates with and influences the society the most. These segments help the business interpret mutual dependencies and uncover maximum mutual benefit.

2. Recognize challenges and benefits

After finalizing the opportunity segments, it is imperative to appreciate the potential for mutual benefit. The key is to find the right balance between the business and community and recognize the challenges that both sides face.

3. Find the right partners

Collaboration with right partners — who benefit from business endeavors and capabilities of each other — creates a win–win situation for both sides and motivates them to achieve mutual value. Sustainable collaboration demands long-term alliances and deeper insights on the strengths of each other.

These principles are helpful in selecting appropriate CSR opportunities, identifying societal and business needs to be addressed, and the required resources and capabilities.

The Case for CSR Benefits

The goal of unlocking mutual benefits — associated with CSR (specifically Smart Partnering) — is critical for long-term success of the program. As required by any other strategic initiative, the mutual value creation objective needs to be carefully assessed based on the true value-creation potential, prioritized, designed, staffed, and audited.

The next step is to outline the list of potential benefits for the business and community. A well-defined business case and a compelling story immensely helps involve and gain commitment from the senior leadership, investors, and employees.

Interested in learning more about how to tap CSR opportunities effectively? You can download an editable PowerPoint on Corporate Social Responsibility (CSR) Opportunities here on the Flevy documents marketplace.

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Takeovers can turnaround companies in a short period of time, but there is a significant degree of risk to be anticipated and mitigated prior to undertaking such transactions.

Lack of careful deliberation of the potential risks, insufficient planning, weak execution, and lack of focus on Post-merger Integration are the major reasons why many Merger & Acquisition deals fail to achieve their desired goals.

The course of an M&A transaction has to be set at an early stage, way before the actual deal closure. The period prior to the deal approval by the regulatory authorities and while due diligence is being done is most critical, and should be utilized by the leadership to clearly define the goals of integration, the potential risks, and a layout for the execution of the actual integration process. It is the right time to perform a structured evaluation of 3 core pre-merger considerations associated with such deals, i.e.:

1. Strategic Objectives
2. Organization & Culture
3. Takeover Approach

Understanding these PMI Pre-merger considerations helps the stakeholders ascertain the unique challenges and constraints related to M&A transactions and make informed decisions. These considerations assist in developing a systematic approach to undertaking a Post-merger Integration (PMI) — which is devoid of any “gut decisions,” and ensures realization of synergies and value. These considerations set the direction and pace of the post-merger integration process.

Now, let’s discuss the 3 core considerations in detail.

Strategic Objectives

Organizations undertake Mergers and Acquisitions as a way to accelerate their growth rather than growing organically. The foremost core consideration associated with an M&A transaction is the strategic objectives that the organizational leadership wants to achieve out of it.

M&A deals take place to fulfill one or more of these 5 strategic objectives:

• Reinforcement of a segment
• Extension in new geographies
• Expansion of product range
• Acquisition of new capabilities
• Venturing into a new domain

The PMI approach needs to be tailored in accordance with the desired strategic objectives of the deal.

Organization & Culture

The senior management should be mindful of the significance of organizational and cultural differences in the two organizations that often become barriers to M&A deals. Small companies, typically, have an entrepreneurial outlook and culture where there aren’t any formal structure and the owner controls (and relays) all the information and decision making. Whereas, large corporations typically have formal structures and well-defined procedures.

A takeover of a small firm by a large entity is bound to stir criticism and disagreement. M&A process often faces long delays between the offer, deal signing, and closing — due to antitrust reviews or management’s indecisiveness — triggering suspicion among people. This should be mitigated during the PMI process by orienting the people of the small firm with the new culture and giving them time to transition effectively.

For M&A deals to be effective, leadership needs to carefully evaluate the behavioral elements of the organizational culture and contemplate the overriding principles guiding a company.

Takeover Approach

Integrating the operations of two companies proves to be a much more difficult task in practice than it seems theoretically. Organizations have the option of selecting the takeover approach most suitable for them from the following 4 methodologies — based on their organizational structures, people, management, processes, and culture:

1. Direct Hit
2. Hiatus
3. Deferred Decisions
4. Quick and Unsympathetic Disposal

Interesting in learning more about the takeover approach and the pre-merger considerations in detail? You can download an editable PowerPoint on Post-merger Integration: Pre-merger Considerations here on the Flevy documents marketplace.

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Mergers and Acquisitions (M&A) are unique and complex endeavors. These initiatives demand tailored solutions keeping in view the varying environments, ways of doing business, culture of the two combining organizations, and internal and external forces influencing the deal.

These transactions necessitate making 8 important decisions based on thorough deliberation and analysis of all relevant factors well before the integration process. These fundamental decisions and relevant factors form the 8 decision levers of Post-merger Integration (PMI). These 8 decision levers of PMI are essential for devising an optimal integration approach and, subsequently, the success of an M&A initiative:

1. Form of Synergy to Be Created: Cost-cutting versus growth
2. Required Pace of Integration: Quick versus steady
3. Degree of Integration: Extensive versus partial
4. Nature of Integration: Buyout versus a merger
5. Commencement of Integration: Urgent or delayed
6. Integration Project Team Organization: Clean or shared
7. Decision Making Style: Implicit and prompt versus lengthy and analysis based
8. Transaction Change Management: Tacit versus one that requires comprehensive actions

These decision considerations facilitate Post-merger Integration across all industries and organizations of various sizes. Let’s discuss the first 3 decision levers in detail now.

Lever 1 — Form of synergy to be created

The foremost element of a PMI is deciding on the type of synergy to be achieved through integration. The question is to either focus on achieving cost reduction or growth synergies.

If cost cutting is the objective of an M&A then the leadership of the combined organization needs to outline potential costing saving opportunities across the board. This should be followed by robust communication strategy to convey the implications of the M&A program. However, if the management’s objective is to unlock growth synergies from the acquisition, then the integration is to be treated as a strategic endeavor — e.g., understanding the customer needs, evaluating market potential, generating innovative business ideas, and developing execution plans.

Lever 2 — Required pace of integration

The 2nd lever demands from the senior leadership to determine the pace most appropriate for the integration of their newly combined enterprise — i.e., to choose between a fast track and a steadier integration approach.

A majority of executives believe that PMI should be executed as quickly as possible, so that upon completion of the initiative they could divert their center of attention back to business operations. This approach, however, involves decisions that aren’t backed by detailed analysis of facts and data, and is likely to face increased risks and uncertainties.

On the other hand, a slower pace of integration is beneficial in case of a friendly takeover or expansion in a new domain. A steadier pace of integration works well to reduce any apprehensions, cynicism, bottlenecks, and risks due to oversight.

Lever 3 — Degree of Integration

PMI necessitates gauging the appropriate degree of integration beneficial for the organization — i.e., choosing between extensive across the board versus partial integration.

An absolute focus on cost synergies warrants an extensive degree of integration across all departments and geographies. This puts extra pressure on teams in terms of work and risks dwindling enterprise focus on the customer. Committing more resources and setting the priorities right aids in offsetting the risks associated with an extensive degree of integration.

A partial integration, on the other hand, is simpler, less controversial, and predominantly warrants consolidation of sales or alignment of mission-critical processes. This typically works well in takeovers requiring new products acquisition or addition of new customer segments.

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Stiff market competition, expansion into new territories, product portfolio extension, and gaining new capabilities are the prime reasons why more and more organizations are seriously looking into the prospects of — and carrying out — Mergers and Acquisitions. However, only a few M&As achieve their desired revenue objectives.

Revenue Synergies are a decisive factor in closing such deals. However, identifying precisely where these Revenue Synergies lie and then capturing them isn’t as easy as it sounds.

A McKinsey study comprising of 200 M&A executives from 10 different sectors revealed that all the respective organizations of the respondents remained short of achieving their Revenue Synergy targets (~23% short of the target on average). Securing Revenue Synergies is a long-term game. The companies that succeed in securing Revenue Synergies achieve the target in or around 5 years.

Leaders aspiring to achieve Revenue Synergies should first clarify the objectives from and the schedule of the revenue synergies, lay out the organizational priorities and go-to-market strategies, remove obstacles from realizing value, and gain across the board readiness and commitment for the initiative. Organizations that are most successful in securing revenue synergies pay close attention to these 7 guiding principles during the Post-merger Integration process:

1. Source of Synergies
2. Leadership Ownership
3. Customer Insight-driven Opportunities
4. Salesperson Driven Strategy
5. Ambitious Targets and Incentives
6. Sufficient Support
7. Performance Management

These 7 guiding principles to capturing Revenue Synergies are critical for effective integration of two firms after a merger and unlocking potential benefits from the deal. Let’s discuss the first 3 principles in detail now.

1. Source of Synergies

The inability of the leadership of the acquiring company to spot major sources of revenue that integration brings in results in losing significant pools of opportunity and failure of M&As. Realizing Revenue Synergies demands a thorough methodology to ascertain and qualify revenue prospects along markets and channels, Go-to-Market Strategies, and developing commercial capabilities. This entails:

• Evaluating customers and markets, selling offerings of the combined firms utilizing existing and additional channels, and adequately training and rewarding the sales teams.
• Coming up with innovative new products and bundles utilizing combined R&D capabilities.
• Sharing best practices and commercial capabilities that mergers offer.

2. Leadership Ownership

Organizations that accomplish their Revenue Synergy objectives guarantee that their top management and employees commit themselves fully to the initiative from the onset. They identify potential value pockets from the integration, examine the assumptions about securing value, and get them endorsed by the senior management and front-line staff. The potential Revenue Strategies are regularly evaluated by inter-departmental experts.

3. Customer Insight-driven Opportunities

Accurate estimation of Revenue Synergies demands top-level estimates — assumptions on market share gain, revenue enhancement, or improved penetration — alongside comprehensive bottom-up customer insights, and evaluation of customer relationships. Other important elements to consider include analyzing the offerings being offered to customers, discerning other potential products and services required by the customers, and assessing the ability of the sales team and brands in terms of the potential they offer to the clients.

Interested in learning more about the other guiding principles of securing PMI revenue synergies? You can download an editable PowerPoint on Post-merger Integration (PMI): Securing Revenue Synergies here on the Flevy documents marketplace.

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