Value Drivers

Understanding what creates value and how it is created is critically important. A good format to grasp this is through a value creation tree diagram:

First, let’s start with the idea that the opportunities for value growth are greater at the lower levels of the organization. Therefore, the lower the level we observe on the diagram, the better the potential will be revealed.

Next, we must understand that the ingredients for value creation vary across different time frames. Identifying healthy “drivers” should begin with a long-term perspective, not the other way around. For example, in the short term, cutting R&D might give us annual profit growth, and it may appear as if the value of the organization has improved. However, this could kill the organization in the long run.

Then, it’s important to recognize that not all drivers represented in the diagram impact the organization’s value equally. Some have a particularly strong influence (this is where sensitivity analysis is needed). The significance of the drivers depends on the industry, operating model, segment, etc.:

Additionally, viewing the value diagrams from different perspectives can provide more and better insights:

It’s also possible to synthesize the mechanics of value creation seen from different perspectives:

Building a value diagram for new growth opportunities is especially interesting, as the impact of drivers might differ between new and existing markets:

To put all of this into practice, we need to be able to see the connection between planned initiatives and the mechanics of value creation:

Finally, if we can see our organization from the perspective of competitors, we will also see where the good potential for value growth lies:

Source:
Valuation: Measuring and Managing the Value of Companies – by McKinsey & Co, T. Koller, M. Goedhart, D. Wessels