As I stated earlier, comprehensive object analysis (COA)
consists of two components that can (and should) be executed in parallel. First,
object performance is analyzed using the corresponding questions from the comprehensive
COA questionnaire and COAQ-based Aggregate Efficiency Scorecard (AES) for the
business system. Second, it is analyzed by measuring and analyzing the
benchmark, planned and actual values of object-related KPI – using the Object
KPI Scorecard (KPIS).
You can find the template KPIS for business system analysis here (KPIS tab) and the Key Business Management
Diagram here.
Aggregate Efficiency Index
Aggregate Efficiency Index (AEI) measures the aggregate efficiency of the business system
as a whole. It is calculated bottom up, starting from the lowest-level
performance indices (PI), AEI for individual corporate objects and object
portfolios (see the AEI computation diagram here).
To maximize the AEI for your whole company, you must (1) maximize PI and AEI
for individual objects and object portfolios and (2) maximize the synergy
between corporate objects. It is measured on a scale from 0% to 100%.
Corporate Happiness Index
Corporate Happiness Index (CHI) measures the degree of corporate
happiness. In other words, it measures, how well your company satisfies the needs
of its internal (employees) and external (clients, suppliers, partners, etc.) stakeholders
– financial, functional, emotional and spiritual. Like AEI, CHI is measured on
a scale from 0% to 100% (both extremes are highly unlikely).
To measure and maximize the CHI, you must (1) identify all
aggregate needs of your external and internal stakeholders; (2) measure the
degree to which the company satisfies the aggregate needs of its stakeholder
and (3) develop and execute financial and operational plans to satisfy these
needs to the fullest possible extent. And thus to create the maximum amount of aggregate value for its stakeholders.
It is important to compute CHI both for your company and for
its competitors as your company can be truly competitive only if it satisfies
the aggregate needs of its stakeholders better than its direct and indirect competition.
External Harmony Index
External Harmony Index (EHI) is the ‘mirror’ image of CHI as
it measures the degree to which external stakeholders of your company satisfy
its aggregate needs - financial, functional, emotional and spiritual. Like CHI,
EHI is measured on a scale from 0% to 100% (both extremes are highly unlikely).
External harmony principle is illustrated here.
To measure and maximize the CHI, you must (1) identify all
aggregate needs of your company that can – and must – be satisfied by your
external stakeholders; (2) measure the degree to which these needs are satisfy;
and (3) develop and execute financial and operational plans to satisfy these
needs to the fullest possible extent. And thus to maximize amount of aggregate value created for your
company by its stakeholders.
Financial Value
Entrepreneurs start businesses to make money. In other
words, to create financial value. Which ultimately needs to be monetized –
converted into a cold, hard cash. By either conducting an Initial Public
Offering (IPO) or selling the company to a strategic buyer in a Mergers &
Acquisitions (M&A) deal. Or by paying out dividends. Or by buying out
corporate stock.
Financial value of your company is measured in monetary
terms (dollars, euro, etc.) and is determined by four interrelated and
interconnected variables – revenues, expenses, changes in working capital and
corporate risks reflected by weighted-average cost of capital (WACC). Therefore,
in order to maximize the financial value of your company, you must optimize values of these four variables.
To calculate the financial value, you must develop a
financial valuation model by engaging the services of either your internal financial
analyst or an external consultant. You can find a template for a financial
valuation model here.
Free Cash Flow
Free Cash Flow (FCF) determines whether your business makes financial sense. FCF is the
amount of money generated by your business left after paying all corporate
expenses and making all necessary investments into your working capital. In
other words, FCF is the amount of money that can be distributed to owners/investors
of your business.
Calculation of free cash flow is a part of a financial
valuation model for your company. Like the financial value of your company, FCF
is determined by several (three, in fact) variables – revenues, expenses and
the increase in working capital. Therefore, in order to maximize your FCF, you
must optimize values of these four
variables.
Economic Profit
Economic Profit (EP) determines whether your business makes
economic sense. In other words, whether the rewards are worth the risks. EP is
calculated as the difference between your return
on invested capital (ROIC) and your weighted-average cost of capital (WACC).
It is measured in percentage points.
ROIC and WACC are interconnected; typically the higher are
the risks, the higher are the rewards. But the ‘delta’ – the difference between
the two peaks at certain optimal values of these two variables. Therefore, to maximize
your economic profit, you must optimize
values of your ROIC and WACC.
Corporate Stock Price
If your company is traded publicly, your most important KPI
is the price of your corporate stock because it determines exactly how much are
the owners of your company worth (in monetary terms, of course) at any given
time. In other words, how much money they are going to make if they decide to
monetize the value of their stock holdings.
In the long run, your stock price is determined mostly by
two factors: financial value (more precisely, intrinsic value) of your company and the overall dynamic of the
stock market in general and of the stock exchange where shares of your company
are listed, in particular. In the shorter term, there are a number of internal
and external factors that influence the day-by-day changes in your stock price.
Price of your corporate stock at any given time is quoted by
the corresponding stock exchange. To maximize your stock price, you will need
to (1) maximize intrinsic financial value of your company and (2) influence the
relevant stock market participants – analysts, investors, brokers, traders,
etc.
The best way to do it is to continuously create high market
expectations of your company performance – and then exceed them no matter what.
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