Dec 13, 2012

The Job at Hand: Creating Real Value

Here is this month’s piece from Brand Velocity, an Atlanta-based consulting firm that is putting Peter Drucker’s ideas into practice at major corporations.

Politicians of both major parties talk nonstop about creating jobs. But here’s something few, if any, ever say: Our great challenge is for companies to create value and thereby grow employment.

Unfortunately, we have been failing to meet this challenge so far. It is very difficult to create jobs unless companies sustainably grow enterprise value. Peter Drucker stressed the importance ofthis linkage for decades, beginning in 1959 in Landmarks of Tomorrow and as late as 1999 in Management for the 21st Century, where he wrote that the most needed management contribution of today is to increase the productivity of knowledge work to create value. This required, according to Drucker, the need to properly answer the question “What is the task?”

Growing value has long been the challenge of every business and the responsibility of every board. Yet in the past five years, 240 companies in the S&P 1500 have lost more than 50% of their market value. These companies have also lost jobs—and, at the same time, whacked retirement and pension reserves.

Over time, as value creation declines—whether we like it or not—employment rates will not increase or even be maintained.

When it comes to answering “What is the task?” Drucker pioneered the need for companies to use Management by Objectives—a way to align the organization’s goals and broader vision from the bottom up. But what too many companies have done is to confuse a range of financial measures with their real objectives. The implicit assumption is that by focusing on these metrics, value will be created, revenue will grow and employment will increase.

This assumption, however, is wrong. Researchshows that managing to many widely used financial measures (return on assets, return on equity, Economic Value Added, earnings per share, etc.) correlates below 35% with actual changes in shareholder value. Optimizing such measures leads, at best, to short-term profit gains with poor or negative long-term value growth.

Jobs cannot be created out of thin air. They require that companies produce real value so that they can invest in the capital, other assets and knowledge that spur innovation and support the addition of workers. At the same time, you cannot create corporate value by focusing on accounting profits, not for long anyway.

This is not simply a theory. For example, we worked with a major aerospace company that used a value-based vs. accounting-based framework to increase its market capitalization more than five-fold over a five-year period, while its competitors increased their stock price by less than two times over the same stretch.

What distinguished this company was its emphasis on return on capital (measured correctly), value contribution by business unit, capital productivity growth and changes to its fundamental business model to reflect economic and market realities. This approach transformed capital investment strategies, product development programs, supply chain structures and line operating decisions to focus on long-term value growth while others focused on quarterly earnings per share. In the end, revenue grew, the company’s value soared, and it was able to generate good and lasting jobs. Other corporations in other industries have achieved similar gains.

If we want to create jobs, we need to build sustainable value-creation capabilities in our companies. One will not come without the other.

— Wally Buran and Jack Bergstrand

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