Author Archive: Reyherb

The Dangers Of Over-Reliance On High-Level Metrics To Manage A Company

“It is not enough to be busy. So are the ants. The question is: What are we busy about?” Henry David Thoreau – Letters to Harrison Blake (1848-1861) 

 

– The Mechanics Of Identifying ‘Pockets of Value Creation’

The title of this post was borrowed from an article i came across published on McKinsey website  “Unearthing the sources of value hiding in your corporate portfolio.”

The article provides interesting facts about the dangers of being too focused on specific financial metrics which could hinder company executives from spotting potential sources of Value creation. As an example, the article highlights a common case scenario where a large number of top managers pay much attention to  averages of top-line growth,” economic profit,” and “return on invested capital (ROIC)” and focus less on other important indicators  of growth and returns.  The article points out that even though a company may be experiencing a top-line growth, it is also important to also take a closer look at the market share and how well the company is competing. To achieve that, the authors state:

“…successful intervention requires executives to understand the more important leading indicators of growth and returns that are often overlooked. These include the growth of the relevant market, in size as well as in market share; changes in pricing and gross margin; and R&D and sales, general, and administrative expenses…” (Read on- Source: McKinsey)

–  Show Me The Money- The Money Is In The Strategy

A separate McKinsey quartely article (‘How to put your money where your strategy is’), highlights some common mistakes companies make when it comes to allocating resources. So what’s the deal? Is there a right or wrong when it comes to company resource allocations? There is no straight answer. It’s all abouth the right strategy. From the article, keeping an eye on how resources are allocated could help a company it’s performance. In the article, an interesting discussion about why companies should try and avoid allocating their resources to the same business units on a prolonged level of years,  is best described using the following scenario:

“..picture two global companies, each operating a range of different businesses. Company A allocates capital, talent, and research dollars consistently every year, making small changes but always following the same broad investment pattern. Company B continually evaluates the performance of business units, acquires and divests assets, and adjusts resource allocations based on each division’s relative market opportunities. Over time, which company will be worth more?…”  (Read on- Source: McKinsey)

–  The Relationship Between Resource Allocation Decisions And Higher Returns For Shareholders

I came across a variety of published studies and articles highlighting the importance of  companies’ senior executives consistently reevaluating how, why, how much and where their companies’ resources are allocated. Regular reevaluation of resource allocations not only helps  create more value to a company but also helps a company to strategically deliver higher returns to shareholders. Below are 3 + 1  further readings suggested to give you valuable insight about the importance of resource allocation-

 

 

Why Corporate Shared Value (CSV) exceeds Corporate Social Responsibilities (CSR)

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

Adam Smith, 1776 (An Inquiry into the Nature and Causes of the Wealth of Nations)

Studies show that many business executives view the concept of Corporate Social Responsibility (CSR) as a challenge. The biggest challenge for some of these executives is finding a suitable strategy and approach, which they could apply to make their business organizations profitable and at the same time be responsible towards the society.

According to sources, the fundamental problem begins with a misunderstanding about what Corporate Social Responsibility really is. Many researchers and experts in this field have repeatedly pointed out the problem of a lack of  a single and universally accepted definition of what CSR is. It is no surprise that there is plenty of confusion about what constitutes CSR activities.

In fact, one of the leading experts in this field, the late professor William Frederick, openly highlighted in his book ‘Corporation, be Good!: The Story of Corporate Social Responsibility’ the problem of not finding an actual accepted definition  of CSR. In his book, he stated that “the actual meaning of CSR has dogged the debate from the beginning.”

More recent studies focusing in CSR, not only highlight the obvous problem of a lack of universally accepted definition, but also the lack of a proper understanding of the essential nature and purpose of a business organisation. A major dilemma lies in the –‘why’ and ‘if’ Profit seeking companies should also engage in social responsibilities especially in cirumstances where there is clearly limited or no financial benefits.

As a result,  Professor Michael Porter and Mark Kramer coined the Term ‘Corporate shared Value’ CSV  as a means to resolve this dilemma. The concept of Corporate Shared Value goes beyond Corporate Social responsibility. As described on article on The Institute for Strategy and Competitiveness, Michael Porter describes  Creating shared value  as-

“ a framework for creating economic value while simultaneously addressing societal needs and challenges. When businesses act as businesses—not as charitable donors—they can improve profitability while also improving environmental performance, public health and nutrition, affordable housing and financial security, and other key measures of societal wellbeing. Only business can create economic prosperity by meeting needs and making a profit, creating infinitely scalable and self-sustaining solutions”-Michael Porter, Havard Business School

On the following link, Professor Michael Porter explains the CSV in depth and how applying the capitalism model can help address problems of the society.