Business is a continual process of discovery, where economic success is measured by the value that is created for the investors who embark on the journey. The management challenge is to chart a course which identifies and exploits the best strategic options available – a challenge which requires information resources, decision making capabilities and skill in financial and operations management that are fully aligned with value creation. While it is difficult to predict what is over the horizon, it is possible to ensure that the information resources, decision making capabilities, and underlying managerial motivation to understand and best respond to emergent opportunities and threats are available. Securing these capabilities will inevitably improve economic performance over time.
Value Discovery poses the following key questions:
Value creation is best measured as Economic Profit. Economic Profit provides the firmest foundation upon which to build a management system focused on improving economic performance and value creation over time. Quite simply, Economic Profit represents what is left over after all of the bills have been paid including providing an adequate return to those that invested capital.
Economic profit, therefore, can be considered an operational financial equivalent of Free Cash Flow, but with the significant advantage of being both a period performance measurement and a sound basis for valuation. Economic Profit provides the only comprehensive, value focused basis for a management system. Economic Profit offers a practical and powerful approach for strategy formulation and decision making, business performance measurement and management, planning and target setting, financial strategy formulation, management incentive compensation and governance. Most importantly, it offers an overarching objective for a business culture which espouses continuous improvement, ethical, responsible and accountable management, and long-term value creation.