Page 37 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Customer Relationship Management

Notes price which you receive in exchange for providing the output to others. That said, there are
always opportunities, inefficiencies, and ways to create value.
The essence of investing is putting funds at risk with the hopes of receiving a greater amount in
return. If this is accomplished, it can be said that one has created value. The purpose of this article
is to explore the theoretical basis of value creation as well as its practical application in the
context of a going business.
Most corporations have some sort of capital budgeting process in place to evaluate their
opportunities for investment. While the metrics used vary widely, they typically revolve around
calculations of the net present value of the future benefits associated with the investment. They
may also include measures of internal rate of return or payback period. Investments that clear
the hurdles established by management can then be pursued based on their future benefits and
strategic importance. These investments are pursued because they are expected to deliver
economic profits and create value.
While capital budgeting is a routine activity at most corporations, most do not have a similar
process in place to evaluate the performance of their existing operations.
Take a company with a market capitalization of US $200 million that is considering how to
spend its US $20 million capital budget.
Wouldn’t the company benefit far more from evaluating the value contribution of each aspect of
its operations and the opportunities for value improvement than focusing its financial inspection
on the deployment of additional capital?
When evaluating a capital project, the decision point is basically binary, to invest or not to
invest. When evaluating existing businesses, the decision point is more complex. Essentially,
four courses of action may be indicated by this sort of analysis.
When allocating capital and resources, first priority should be given to business activities that
show significant return on investment and have significant opportunity for growth.
These activities hold the greatest potential for value creation. Activities that have high returns
but limited growth opportunities should be managed and exploited. Cash flow from these
activities can be distributed to owners or used to fund more attractive investments. Activities
which produce poor returns but have significant promise should be fixed. Perhaps the most
difficult decisions are faced when it is demonstrated that an activity produces low returns and
has limited promise. Companies should exit these activities and re-invest proceeds in other
areas.
As you can see, value creation analysis is instrumental in assessing the merits of existing corporate
strategy and forming optimal strategies for the future.
The path to value creation requires that economic profits be earned. In order tonsure that
economic profits are being earned, the same type of capital budgeting analysis used to evaluate
new investments must be applied to the existing assets and operations of the going concern
business. This process is vital not only to forming a coherent strategy for the future, but to
prioritizing management resources as well.
Value creation is a never-ending cycle. It begins with modelling business operations, prioritizing
areas for more detailed investigation, identifying opportunities for improvement, implementing
the changes required to maximize success and the measurement and revision that starts the
process over again and allows management to stay abreast of company and market changes.
Value creation analysis is a critical but often overlooked component in the financial management
of every company. Without this type of inspection, value will not be created at the maximum
pace.

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