Running a successful business is never easy. However, even as business owners in different industries face different challenges — and ultimately need custom solutions — there is one common denominator we can all likely agree on: most companies are focused on growth. And while growth brings opportunities, it also brings complexities. Fortunately, there are some general concepts you can tailor to your organization to help you better align daily activities with the priorities that drive its success.
In my recent presentation kicking off the firm’s virtual “2022 Summer CPE Series,” I focused on value taxonomy. In short, this is the concept of studying the fundamental principles of value creation and systematically determining how a company can align performance and achieve measurable value.
The key? Keep it simple, and align everyone in your organization to the levers of shareholder value. Aligning your employees at every level creates engagement, purpose and a common goal you’re all working toward. Simplicity is key in creating a common language for discussing, and achieving, business performance. The more your team understands what you are doing and why, the more they will want to contribute, and suddenly day-to-day decisions support the shareholder value principles.
And while Balance Scorecards/KPIs (key performance indicators) and Traction EOS (entrepreneurial operating system) are helpful and common ways to align, track and monitor success, there are limitations. These methods are generally reserved for executives who create the strategy and metrics and then unveil it to the rest of the company — often creating a disconnect between employees “on the ground” and missed opportunities for incorporating intellectual capital employees have to offer.
Below we take a look at how you can break down silos and connect your organization around the same goals in a more integrated way.
Building Blocks of Value Taxonomy
The goal is to align your people and act as a team, consistently, to effectively drive toward your company’s common goal. Here’s where you start:
Take a Simplified View of How Your Business Works
Create and evaluate business value in financial terms by using a foundational framework like the DuPont Model to focus on key financial levers:
Net Profit Margin x Asset Turnover x Financial Leverage = Return on Equity
This is foundational to creating value. By looking at your business in this simplified financial way, you can easily connect commercial, operational and financial data points to goals around shareholder value. Departments, functions and processes that drive results across the supporting financial levers of revenue growth, cost of goods sold, SG&A expenses and asset utilization begin to connect the dots to operational activities. Each department can own its own scorecard but must draw lines from department activities up to the common value levers of the business and shareholder value goals.
How to Build Your Value Taxonomy
Everything must be directed at achieving shareholder value — that’s your True North. Shareholder value is the ultimate measure of a company’s ability to create value, and your employees must understand this as well.
Identify Two to Four Simple Metrics that Truly Mean Value for Your Company
Most metrics that matter generally revolve around revenue growth, cost of goods, SG&A and taxes. Others include asset efficiency, including property, plant, equipment (PPE); inventory; or the cash conversion cycle within your accounts payable and receivables. Financial leverage — how you are managing the business in terms of debt or other financing — also can be critical. The metrics you define should be top-down and easy to measure.
This is the operational part of the business. As you review your metrics, do not include opinions; represent the facts. Show how actions drive value, in plain English, and let each department decide how to set subsequent actions. Then consistently communicate how the model guides everyone to your destination.
Listen to the full presentation and download the slides now!
Get the Most from Your Value Taxonomy
You’ve taken a simplified, objective view of your most pertinent financial metrics. Now it’s time to put that information to work:
Communicate How Your Business Strategies and Operations Create Shareholder Value
Point out to your entire organization the key financial drivers executives are measuring. Explain industry and internal factors impacting value, and talk about how business functions can contribute. Regularly share updates at the corporate level and, more frequently, at the functional level of detail.
Focus on Value Drivers that Have the Greatest Impact
Specifically, highlight the operational activities and business capabilities that are strategic differentiators for your business. Projects and results in these areas should be top of mind for people in every department, so they can make the connections to their efforts.
Align Activities Across the Business
Prioritize investments against the value drivers you’ve identified — only invest in a new technology or initiative if it will positively impact one of those key drivers that makes your company successful. Incentivize behavior throughout the organization that supports those priorities.
Measure Results Against Plans and Intended Benefits
Plan initiatives that will deliver needed improvements, and develop a business case to articulate the benefits and costs for your initiatives based on how you anticipate they will impact the company’s key drivers. Then measure against those drivers as to real-world results.
When using your value taxonomy in strategic planning, it’s easy to get bogged down in the financials, but focus on connecting with your operational team. Make sure your people know the strategy and their potential influence and impact on it. That includes clarity around commitments, accountability and regular follow up. Specifically, remember to:
- Educate your employees deep into the organization on how they contribute to performance.
- Simplify concepts and terminology for your team members lacking formal business training.
- Increase leaders’ ability to communicate how the company is performing and where improvement is needed most.
- Create windows into the process and into the priorities of company execs and shareholders.
- Find ways to evaluate and respond to different opinions and investment requests from your employees who speak up.
Final Questions to Consider
As a business owner or executive, ask yourself the following questions to see where your organization falls on creating a unified value language within the business:
- Does your company have a clearly documented strategy today? If you were asked to define it amongst your peers, would all of you say the same thing?
- If a junior level staff person were asked to describe the strategy for your company, would they be able to do so, and would that answer be consistent across departments?
- How is the strategic plan used within the company? What does it impact? What decisions does it change? Does it feel restrictive to driving revenue and profit growth, or does it feel like it sets appropriate boundaries and guidelines?
- How does your company track progress toward delivering the strategy? How do you know you are making progress toward it? How do you know it is still relevant?
There is no silver bullet for managing through all of the challenges businesses face, but a shared understanding, perspective and language can lay the groundwork for alignment around consistent value creation.
Beyond tangible financial performance, organizational alignment creates a cohesive, engaged team working toward a common goal. The resulting culture can lead to improved performance and employee satisfaction and retention.
Contact Jim Boland at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.