2. Literature survey
2.5. Business value
2.5.4. Value creation and management
Chapter 2: Literature survey
Literature available on the link between benefits management or benefits realisation management and strategy execution is limited and most of what is available pertains to information systems or information technology projects. It is therefore more on programme and projects management as the need to demonstrate value for the quantification of the return on the investment made. References were made in the literature, cited in this sub-section, on the potential relationship between strategy and organisational objectives but very little could be evaluated to assess the views of contributing authors on effective strategy execution. This area is one of the critical areas that need further research given the need to identify methods used to quantify value created by organisations as strategy is executed. This is another area, which this study seeks to contribute to, through demonstrating how benefits realisation management could be integrated into strategy execution.
Chapter 2: Literature survey
basis (accuracy and precision) of the numbers that are shared with decision makers which one needs to pay attention to. Furthermore, measures of performance need to be a fair representation of the value created by the organisation, not only for shareholders but the broader stakeholders’ community.
Additional studies were conducted on economic value added given the importance of organisation to quantify value given its importance in measuring the extent to which strategy execution was effectively delivered. Worthington and West (2001) conducted a literature review on economic value added and their findings are that:
“The measure itself is almost identical to the non-proprietary measure of residual income”.
“The empirical evidence concerning economic value added has been mixed and thus there is a need for further research”.
“Examination of economic value added over a longer period would allow greater empirical certainty on its status as a corporate performance measure”.
Further contribution in the area of economic value added came from de Wet (2005) who conducted a study using data from South African listed companies to investigage the strength or the relationship between economic value added and other tradtional accounting measures relative to market value added (MVA), and to compare the findings with those of studies already published elsewhere in the literature. He indicates that the results are interesting and of interest to financial mangers and analysts since a way to identify the driver(s) of value with the strongest impact on may be extremely helpful in developing financial strategies that can optimise value creation for shareholders. He proved theoretically that economic value added is superior to other measures of performance (excluding residual income) on the grounds that it accounts for the full cost of capital, including the cost of equity. He argues that economic value added is the same type of measure as residual income, in which the difference lies in the adjustments required to the net assets and operting profits for the calcuation of economic value added.
De Wet (2005) reports that the study conducted based on the data of companies listed on the Johannesburg Stock Exchange (JSE) for the period from 1994 to 2004 revealed that on a year-on-year basis, economic value added did not show the strongest correlation with MVA. He explains that given that MVA is equal to the present value of all future expected economic value added, therefore one can expect the correlation between MVA and economic value added on a year-on-year basis not to have a strong correlation. He further adds that another intersting finding of the South African study was the insignificant correlation between MVA and Earnings per share (EPS) and Dividends per share (DPS), given that both earnings and dividends are frequently used as the basis for share valuation. He highlights that one could infer that, for South African listed companies, the valuation methods are unreliable in the extreme.
Chapter 2: Literature survey
Another contribution came from a study that was conducted by Palliam (2006) that showed that economic value added is a relatively poor predictor of share performance and enhanced shareholder value. He found in his study that there is little or no relationship between shareholder return and a firm’s economic value add. He furthermore, found minimal evidence of a difference between market return of firms that use economic value added compared to firms that do not use economic value added. He concluded that strategies that incorporate economic value added did not outperform strategies that incorporate simple metrics of corporate valuation based on reported earnings. He thus said that economic value added by itself will probably be no more effective in enhancing shareholder value than will other metrics if they do not ultimately drive earnings and earnings growth.
Despite the volume of literature on economic value added, Biddle, Bowen & Wallace (1998) say that clear evidence is still lacking on the benefits of economic value added on shareholder value. They suggest that economic value added is the subject of on- going investigation. Although economic value added lost its lustre over time, it was noted as a proposed approach to measure the performance of an organisation beyond the traditional financial and non-financial measures.
The ultimate measure of business success is how much economic value is created by an organisation. Literature indicates that this is an area which has been researched to gain insight on how to best present the value created by an organisation. The extent of the need is highlighted by Ballow, Burgman & Molnar (2004) who say that managers face a daunting task when it comes to increasing shareholder value as managing intangible assets, one of the key drivers of value, is perplexing because accounting systems fail to track or analyse them. They shed light that the biggest issues in managing shareholder value that is facing executives in high performance companies is that it is driven by intangibles. They explain that companies cannot just ignore intangible assets since shareholder value is eroded should the market lose faith. They highlight that executives are often left with inadequate insight into how various investment choices link to the creation of shareholder value. They indicate that management needs an approach that is able to handle this complexity and make the final connection from assets use to create shareholder value. They conclude by saying that the reality that the tangible assets on a company’s balance sheet account for such a small percentage of the market value led them to believe that simply tweaking traditional financial reporting and analysis will not be sufficient. They say that ultimately a more scientific approach to value creation can provide executives with the insight they need to proactively manage all components of their valuation and the assets of the high performance enterprise. This is another area which the study seeks to make a contribution. It is the intention of this study to generate insights on how organisations define economic value and measure it to demonstrate how well they have performed.
Furthermore, the survey of the literature indicates that accounting measures are still relevant in measuring shareholder value even though management need to consider
Chapter 2: Literature survey
the contribution of both tangible and intangible assets to value creation. Literature indicates that there is still a need for further research on the measures of value creation. It is also important to assess how executives percieve the concept of value creation, shareholder value and demonstrated value. This will go a long way in understanding the views and opinions of executives on how they manage the process of creating value for stakeholders.
In conclusion
The fourth research question sought to understand how companies could improve the level of business success, measured through value created, which is achieved through the execution of strategic objectives by means of project portfolios. It was noted in this sub-section that there have been a number of developments in how value is defined, measured and managed. The review of literature pointed out that researchers advocate for value based management since it has fundamentally changed how managers think about their businesses. Value based management received its prominence since it demonstrated how an organisation creates value. It also emerged that literature places an increasing emphasis on the management of project benefits to ensure organisational strategic goals are achieved.
It was noted that performance management influences the behaviour of people across the organisation since what gets measured is managed and what is managed, is done.
In order to measure and manage this value, a number of performance management frameworks, models and systems were developed over time. It was observed that these tools provide a method of articulating value and ways of affecting value drivers.
It was noted from literature that performance management systems are valued due to their role in strategy implementation since it creates organisational alignment and facilitates the process of translating strategy into action.
Furthermore performance management systems are valuable since they allow communicating, across the organisation, the performance achieved in the execution of the strategy. In extension, it was encouraged by a number of researchers that measures need to be balanced between financial and non-financial as well as those that track internal and external performance indicators. Although it came out strongly that shareholder value creation should be the ultimate goal of strategy, there was a shift in value management to include other stakeholders as well. This further presented a challenge since different stakeholders view value differently. This then led to different views on the definition of value or business value which need to be managed well by management in order to cater for the different stakeholders that have a vested interest in the organisation.
Chapter 2: Literature survey