Balancing the Value-Based Corporate Scorecard

Diplomarbeit von Mario Schmidt

Introduction:

Today operating companies are exposed to a whole series of influence factors. The globalization and deregulation of capital markets, the end of capital and exchange controls, new challenges on the information technology sector, more liquid securities markets, new trends with regard to investment decisions especially for institutional investors represent only some of these factors. The competition around investment capital moves more to the foreground. As a consequence of this fact is mentioned that the orientation is specified at the shareholders. Thus a focusing is carried out on the profit of the shareholders. With other words a culture of shareholder value has developed.

A special meaning befits the corporate value with regard to the shareholder value. The corporate value represents the result of the investments of the shareholders. Therefore the effort to increase the corporate value is mirrored by the claims of the shareholders.

In the recent years the term Value Based Management as synonymous has become noted for a whole series of approaches to increase the corporate value. Value Based Management focuses the view on the tools, which are necessary to produce performance and value. It means that everything, every process and every part of a company has to be oriented in creating value.

This diploma thesis therefore will analyze how corporate value can be created, which activities are necessary and how it can be measured. Furthermore it will be represented how this process can be embedded in an integral approach.

Therefore in Chapter 2 will be explained main aspects of the Value Based Management. In connection with this, special attention is given to the components of value. The meaning and problems of the intangible assets shall particularly be stressed in section 2.1.2. A general analysis of the process of value creation follows it in section 2.1.3.

A further aspect of Value Based Management is the measurement of the results of the company’s activities. Therefore a bundle of different measures can be used. As examples for this shall be mentioned the Cash Flow Return On Investment (CFROI), the Economic Profit (EP), the Added Value (VA) or the Economic Value Added (EVA™).

The CFROI approach was developed by the Boston Consulting Group. The internal rate of return of an investment can be expressed with the CFROI.

The Economic Profit is a development of the McKinsey & Company, Inc. and is explained by Copeland, Koller and Murrin. They say that the Economic Profit measures the money of economic value, which was created by a company in one year.

Another approach is the Added Value (AV) concept of the London Business School (LBS). For Davis and Kay is the Added Value „…the amount by which the value of corporate output exceeds the value of all inputs which the company uses – including not only material inputs, but also capital and labor.” The EVA concept is a development of Stern Stewart and Company. This assignment will prefer EVA as the measure for the company’s value and performance, because EVA is actually very popular in practice. The ability to adept this approach is higher for every company and their special circumstances. EVA can be applied in many cases, because it is more than a short view on single aspects in a company.

EVA works every time and it represents the right approach for every company and every business environment.

The EVA concept is object of chapter 3. In section 3.1 will be explained the basic requirements of the calculation of EVA. The calculation of the individual components follows in the sections 3.1.1 to 3.1.3. In section 3.1.4 a calculation example is given and further aspects of EVA will be mentioned. The various application fields of EVA are explained in section 3.2. On the basis of EVA is described an incentive and compensation system (section 3.2.1), corporate valuation (section 3.2.2) and performance measurement (3.2.3). The section 3.2.4 explains the implementation of EVA and it follows a critical appreciation of the concept.

Value Based Management includes not only the development of value based measures and a strategy. Furthermore it is necessary to create a maneuvering system. A Balanced Scorecard can be used to fulfill this requirement.

The Balanced Scorecard approach goes back to Kaplan and Norton. It is an instrument for the implementation of a strategy in a company. Chapter 4 will discuss the general structure, the benefits (section 4.1.1) and the perspectives of a Balanced Scorecard (section 4.1.2 – 4.1.5). Afterwards follow explanations of the special relationships between the perspectives, the so called cause and effect relationship (section 4.1.6). Section 4.1.7 will give a simple Balanced Scorecard example.

Because the Balanced Scorecard is a strategy implementation tool, basic information for the strategy development will be described under section 4.2. The stages of the implementation are explained in section 4.2.1 to 4.2.6. With these explanations the role of the management as an important factor at the introduction and conversion of a Balanced Scorecard gets clear. Also is pointed out the meaning of the employees as executive persons in a company (section 4.2.5).

In the last section of the chapter Balanced Scorecard critical remarks regarding possible weaknesses will be made. The problems of the approach examined scientifically frequently mentioned are the reason for these remarks.

This thesis will explain the basis factors of Value Based Management and how changes of the corporate value can be measured by EVA. In the following will be shown how these two approaches can be integrated into the Balanced Scorecard.

Hereby shall be mentioned that in this thesis, the terms company and corporation as well as corporate will be used synonymously. The same is valid for the words Balanced Scorecard and scorecard.

Einleitung:

Die vorliegende Diplomarbeit befasst sich mit dem Thema der wertorientierten Unternehmensführung. Als essentieller Bestandteil dieser Arbeit wird dabei auf die vielfältigen Aspekte des VBM (Value Based Management) eingegangen. Insbesondere wird der Aufbau und die „Funktionsweise“ einer Balanced Scorecard beschrieben und in Einzelheiten betrachtet. Der zweite Schwerpunkt in dieser Arbeit ist dem EVA (Economic Value Added) gewidmet. Der Aufbau dieser Kennzahl bzw. die Berechnung wird ausführlich dargestellt.

Diese Arbeit beschreibt die wertorientierte Unternehmensführung mit Hilfe des Kennzahlensystems der Balanced Scorecard und unter Berücksichtigung des Economic Value Added als führender Kennzahl.

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