Value Based Management example essay topic

INTRODUCTION Cadbury Schweppes is a UK-based beverage and confectionary group founded in 1969 with the merger of two English groups (Cadbury and Schweppes). This family-managed group grew and flourished through the years. It became an international major player in the late 80's and was admired by its peers for such an ascent. In 1990 the group bought two little entities from the same business and merged them into a single unit: Trebor Bassett. The CEO of this unit soon became the CEO of the group (1993) and he then realized that the success of the past years was seriously in danger and that a real turn needed to be taken. John Sunderland (CS " CEO) and John Stake (Human Resources Director) decided to spend time trying to understand the problem and finding the adapted solutions.

Let us see how to change from a budget-driven strategy to a sustainable value-driven strategy. The following pages will try to show how the precedent success was in fact a satisfactory under performance of CS, then how a real change in the way of seeing the business helped to recover and finally what became the challenge in 1999. I. Cadbury Schweppes in 1996: a satisfactory under performance 1. An admired company Cadbury Schweppes, born after the merger of two major companies in 1969, was an admired company in 1996. Indeed thanks to Sir Dominic Cadbury's governance from 1983 to 1996, based on an international development and several strategic acquisitions, the company had become a truly global player: the financial company turnover increased by 30% between 1990 and 1996, the operating profit by 144%. This performance was underlined by the Most Admired UK Company Prize, awarded by the representatives of Britain's top 250 publicly traded companies and 10 leading investment dealer companies. In 1996, Cadbury Schweppes gathered activities in two major fields, both consumer-oriented: confectionary and beverages.

The beverages branch was highly competitive, all the more so as few giant players operated on the market. Cadbury Schweppes owned international bottling and partnership operations and sold products in 149 countries. The company, divided into five divisions in 1996, had a varied product portfolio, based on international brands such as Schweppes or Dr. Pepper / Seven Up, acquired by the group in 1995. As for the confectionary stream, it was a capital intensive, very fragmented and highly competitive market.

A lot of brands operated in the market, the majority of which were supported through extensive marketing expenditures. Cadbury Schweppes was a global force in chocolate and sugar confectionary, had plants in 25 countries and sold products in more than 170 countries. The company defended its position with many power brands, like Lion for instance. In 1996 the company had two major objectives: to grow internationally and to get bigger. For example, the confectionary branch's goal was to sell 1 million tons of consumption by the year 2000. However, although the company was globally admired for its performance and its management, its results were certainly not as good as believed.

As evidence, the annual shareholder return was only 8.8% (Coca Cola offered to its shareholders a return of 32, 8%). In addition the operating profit had decreased yearly since its peak in 1994, suffering for a fall of 16% between 1994 and 1996.2. A control and management system... Cadbury Schweppes had a complex control and management system, which we can define as a budget-driven decision making process and corporate control system: the budget had an essential place. Indeed, every day the yearly budget drove all the company's strategic and operating decisions. The "meet the numbers" culture was the one we could find in the company.

Due to the preponderance of the budget, Cadbury Schweppes' top managers controlled over business units through extensive series of mechanism, symbolized by all the "coloured Books". The annual budget established specific performance targets between the group and the business units. Few strategic tools were thought about by the managers: indeed, the only control tool was the "Green Book", which aimed at covering the long-term performance of the business units over a five-year programme. However, it presented basically the budget for the following year. And even if some figures were notified for the next 5-year, nobody cared about them. Used in a responsible way, a budget provides the basis for clear understanding between organizational levels and can help senior executives maintain control over multiple divisions and business units.

However in the wrong hands it can result in "earnings management". As a result, Cadbury Schweppes did not implement a lot of long-term projects, simply because profits had to increase year after year. 3... that leads to management difficulties: the example of Trebor Bassett Cadbury Schweppes acquired in 1989 the George Bassett Group and the Trebor group, two of the largest British sugar confectionary firms. Trebor Bassett started life as a full entity in 1990 and became the sugar confectionery market leader with a 27% market share ahead of its major competitors Nestl'e (12%), Mars (7%), and Wrigley's (6%). However, after its results peak in 1994, TB came to symbolize all the shortcomings of Cadbury Schweppes management process.

Indeed, TB's financial performance had fallen from its maximum in 1994 and its current strategy of achieving market volume and exploiting scale economy was no longer valid. First, the budget-driven policy of the group was leading to a financially dominated dialogue centered on budgeting process, which was limiting all possible discussion between the top management and any business unit. Communication was formal and a relation of control had been set up. Added to this, the group was too far away to appreciate the complex strategy issues of TB and was missing strategically-rooted mechanisms and systems on which to base a dialogue. In fact, the Group was keeping tracks of the numbers through several "books" that finally were isolated documents that contained very little strategic analysis.

The "culture of variance" that came with the reach of budget objectives led to a lack of trust between the Group and TB since managers just gave enough results of what they needed to shield their performance from blemishes and "under promised" in order to subsequently "over deliver". Moreover, this "game playing" was leading to a lack of accountability of the business unit managers. As TB's business strategy was a reflection of CS' culture of targeting annual revenue, TB had focused on generating additional profits by getting bigger and exploiting scale efficiencies. Therefore, TB saw the solution to high short-term revenues in line extensions and broadened product portfolio. New products were introduced without much marketing support to increase total sales and production volume. And within the same product range, TB pushed for more volume by introducing a greater variety of pack sizes and formats.

TB's product lines were getting too large and would require rationalization. In spite of these weaknesses numbers were met. However this was not a sign of performance for the company. On the long term Cadbury Schweppes would risk to collapse if any change was not made. II. Introducing a culture of accountability and performance Once it had been established that the challenges confronting Trebor Basset came from the Group and were a result of the company's management systems and processes the top management decided to deal with these fundamental problems.

Sunderland was responsible for undertaking the changes. He implemented the Managing for Value (MfV) program. MFV places the focus of management attention firmly on the creation of value and provides businesses with a consistent framework and set of principles for making and evaluating strategic decisions. Emphasis had been on increasing scale and there was a change from a "budget-driven strategy" to a "value-driven" strategy.

1. Importance of shareholder value For the period 1990-1996 returns to CS's shareholders were mediocre, only 8.8%. Having made an investment in a business, shareholders are concerned with assessing the profitability of their investment. A basic method of evaluating investments and making a judgement about the competence of the organisation in which they have invested is simply to make comparisons across similar companies. And CS had the lowest returns of a group of global companies most comparable to it. Cadbury Schweppes has more than two billion shares.

It is important that the shareholders trust managers to make decisions and manage the company to create value on their behalf. It is also important for the company's stability that shareholders continue to hold shares. Investors have a number of different companies and investment options to choose from and, if a company in which they have invested is not producing returns for them, they may sell their shares and invest elsewhere. Sales by large institutional shareholders can create uncertainty about the company's performance and future and cause the share price to fall.

This can limit the company's ability to grow and develop. Continued confidence and stability are important. Moreover, shareholder value is driven by net operating margins after tax, capital efficiency, weighted average cost of capital and growth. Thus acting on shareholder value means improving all these indicators. For these reasons Sunderland created a "sense of urgency" to motivate all the actors of the Group and chose TB as a pilot for the new strategy based on value. MfV was the process which drove the group's primary objective: growth in share owner value.

2. Piloting a strategy through VBM in Trebor Basset In Cadbury Schweppes, MFV has five elements. The most strategic one was the Value Based Management (VBM). It is a systematic way of analyzing a business, the market in which it operates, its strengths and weaknesses together with those of its competitors.

The VBM approach focuses everybody on what they can do to maximis e returns for shareholders. VBM can help organizations to win in each of these 4 markets: the market for its products and services, the market for corporate management and control (competition on determining who is in charge of an organization, threat of takeovers), the capital markets, and the employee and managers market (competition for company image and ability to attract top talent). VBM is by far the most powerful mechanism existing today to manage a corporation. Its benefits are: - VBM can maximis e creation value consistently- VBM increases corporate transparency - VBM improves internal communication on strategy (which was a real problem for TB) - VBM sets clear management priorities (allowing TB to obtain the budget approval for the value creating operations) - VBM encourages value-creating investments (avoiding acquisition like Craven Keeler) - VBM improves the allocation of financial and human resources To identify their real potential, Trebor Basset's senior management team made a deep analysis of its activity and products through the VBM approach. That revealed the elements which were value creating and those which were value destroying. Following on from this information they understood that the breadth of market participation with a focused approach was the most decisive factor for value creation.

Then they took measures: two factories were closed; the existing portfolio was reduced to 25 packs sold at one price in one clearly branded format: Basset's Fun day. Finally, the changes they introduced to the company's systems and processes were broad and inclusive rather than focused narrowly on financial reports and compensation. 3. Management and culture In order to make people accept these changes in the Group, Sunderland and Stack realized it was necessary to change their attitude and to re-create a strong culture in the Group. Therefore 3 of the 5 key elements of the Management for Value were people and culture oriented: Leadership Capability, Sharpening the culture and Rewards.

Indeed the lack of trust as well as the comfort that such a situation implied were big hints for a "wind of change" and it is known that the reason most often cited for VBM's failure is cultural resistance to change. Understanding that VBM is about cultural rather than financial change may itself be part of the answer. Paying attention to people and culture issues allowed the pilot Trebor Bassett to begin with the program in 1997 giving accountability to the unit managers to "sharpen their thinking and broaden their vision". In order to give them a better insight and a real sense of such a challenge, they were given more strategic power and responsibilities. A more extensive communication was settled too with training workshops for the managers and communication tools around the MfV way of work.

This great deal of time, effort and money was extremely successful as it allowed a real "shaking out" of the team: the forces were re-allocated at the end of the program in a better implementation. In order to make people get involved in their job and in their business environment the program aligned the interests of the whole Group with those of the shareholders and created a feeling of ownership. Employees at all levels were strongly encouraged to invest in Cadbury, and the top managers were supposed to purchase Cadbury stock in proportion to their positions and salaries then executive team was expected to own Cadbury shares equal to four times their salary. This Rewards part of the program had a double effect: encouraging employees to work enough to get value and signal ling them "a failure to embrace the MfV program would be a career limiting move at the new CS". This new management based on the attitude of the employees in the changing Group had good results and re-introduced trust in the Group and among the managers. The first results of this new strategy were encouraging: CS's hare price had nearly doubled between late 1996 and early 1999..

Establishing a sustainable value creation over the long term The implementation of VBM throughout CS' organization, needed to be improved in order to ensure long term value creation. This signified a holistic change effort and a complete commitment from the top management in order to reach MfV's full benefits. The simply fact of saying that the company commits to shareholder value or aims at becoming "best in class" or "biggest", is not a guarantee for success. Therefore, creating a consistent basis of value creation may appear unconnected with the organization.

1. Limitations In such a large corporation, managers have to cope with organization's complexity and to ensure employees are connected with each business, from the top to bottom and across. Implementing VBM could be profitable but there are some drawbacks to consider like: - VBM often requires cultural change: some CEOs are reluctant to implement it for fear of creating unnecessary conflicts inside the company or within the community at large. In some countries, it is still viewed as in bad taste, if not unacceptable, for a CEO to discuss shareholder value openly. - It takes time, resources and patience to be successful, because it involves all key management processes and large numbers of managers and employees.

This process takes time to mature. - It is very important to take care not to measure the wrong things for this could lead to value destruction. - VBM requires strong and explicit CEO and executive board support: the adoption of Economic Profit as the measure of corporate and business unit performance, and the linking of incentive pay of senior line executives to improvements in the economic profit metric is a first step. The communication challenge is very important too, to make shareholder value work. Some CEOs have to drive differently in the USA than they do in Europe for instance. - Comprehensive training and consulting support is advisable or even necessary, but can be quite costly.

- And lastly, delivering superior shareholders returns consistently may lead them to become more and more demanding. Therefore they could always ask for growing expectations so that it will be an endless race. Concerning Leadership, it is not so simple to have enough confidence to go against the grain of conventional business wisdom or best practices. Moreover, a study showed that almost half of the companies that have adopted a VBM metric have met with mediocre success. The successful VBM program is really about introducing fundamental changes to a big company's culture. Putting VBM into practice is far more complicated than many of its proponents make it out to be, requiring a great deal of patience, effort, and money.

The emphasis is on the employees feeling a responsibility toward the business in such a way that they would base their judgement on the question "if this was your business, what would you do?" This commitment has to be obtained through a good communication, transparency and confidence with the top management. Impacts on improving communication between Corporate and the Business Units sometimes takes several years before giving good results. 2. Managing for sustainable value: what next? In order to succeed in managing for sustainable value, CS Corporate should establish a culture for change in order to make its staff familiar with it and thus more reactive when the competitive position of their business units requires new strategic developments. Sustained communication about VBM is one of the main success key for deeply rooting this new culture within the group.

CS had already implemented a communication pack, but it should always integrate the last modern means (such as today CD-ROMS and Intranet to spread the VBM philosophy deep inside the organisation. The communication processes have to be revamped in order to establish a good level of information and to exchange ideas. It will also help to advertise early successes in VBM implementation to break down the organisation inertia. Training should be extended to all employees for them to be totally integrated in the culture of change demarche. Training can help people to challenge the way they operate and interact with each other and to focus on working more effectively and producing better results. For example, the launch in Australia of a new product called Cadbury Favourites was undertaken much more swiftly than usual and using less money because the employees involved approached the task more accountably, aggressively and with adaptability.

The creation of a Corporate University could allow the transmission of strategic values, culture and CEO's vision. It would be a way to implement the same VBM framework and common language within all the business units. The CU enables companies to share best practices between employees, managers, top management and even customers and suppliers. Corporate should become internal experts acting as coaches for the business units by giving advice and assistance. Closeness should be another management practice allowing a better comprehension of the situation, and a better way of communicating with the operational forces. Indeed, many managers and employees have difficulties in understanding the link between their day-to-day activities and economic profit.

It is thus very important to educate and train them as already experimented by CS. But once they have a better knowledge of their contribution, it becomes imperative to have available managers in the field for receiving employees' feedback about their main concerns such as irrelevant means for reaching their objectives, bad working conditions or new constraints in their activities. By analyzing and reporting the main issues to the top head management, the managers who are in the field will gain in reactivity which will allow them to bring strategic answers in coherence with the circumstances. It is also important to pay attention to managing "executive time" in order to be sure that resources like capital and talent will be used to create value.

Then, a reward system such as the one launched by CS allows employees to see a tangible link between their actions and how they are rewarded. However, the corporation should remember that rewards must be both financial and psychological. Indeed, people are value creators but their motivation often depends on the recognition for their services; it is better to reward widely but not necessary heavily, throughout the organisation. For example, factory workers at Cadbury have launched an aggressive 'offensive' on waste.

Teams have been appointed 'waste Champions' to lead the assault and reduce waste in factories to a minimum as one of their contributions to MfV. Efficiency needs to be rewarded in order to promote autonomy and motivation. CS made its incentive systems linked with performance but for creating sustainable value, these systems should rely on appropriate tools such as balanced scorecards. The choice of the action variables and indicators must be coherent with the objectives and the tools must be permanently animated in order to create a necessary dynamism. In order to achieve sustainable value, CS Corporation needs to know what drives the business, what customers want and what competitors are doing for they are important strategic and operating factors affecting value. Thus marketing is another lever for creating value.

Once the core portfolio is cleaned up and the bleeding of value has been stopped, or at least largely stemmed, VBM's discipline is subsequently unleashed on exploring new acquisitions, new market entry opportunities and the promotion of corporate brand equity. Thus, Turkish Delight, Caramel and Cadbury's Buttons were identified as Cadbury's brands that generated a high return so that they received greater marketing support, which is helping to boost sales. Therefore, when allocating resources, CS Corporate should remain aware of the strategic importance of marketing and innovation in businesses success. Finally, managing for sustainable value implies that the corporate office should play the role of a partner and facilitator for the businesses. Although they have different missions, they should still be reminded that they have one common goal which is value creation. The decentralization of decision-making is necessary for developing mutual confidence between corporate office and businesses.

Autonomy and responsibility will allow business managers to develop an entrepreneurial instinct but they will remain related to the corporate strategy through the common language of value. The change in mentality is a necessary step to create a sense of accountability and make business managers act as owners of the company. In order to break out of the culture of mediocrity and avoidance, the organisation has to move toward a more organic one. Then, the benchmark should be a sustained practice allowing the comparison with peer competitors to assess the results of the VBM program.

CONCLUSION Today, it is no longer sufficient for companies to create value, but it is necessary for them to be among the top value creators on a sustained basis. In order to break down the organisational inertia and satisfactory under performance built up over time, Cadbury Schweppes implemented Value Based Management which is a method of making strategic decisions based upon whether a chosen path will create or destroy value. The VBM way of life goes from commitment and goal setting, to corporate and business strategy re-definition, decentralization of decision-making and, finally, linkage of performance and incentive systems. However, in order to succeed in creating sustainable value, CS had to initiate change within its culture and organisation by challenging the mentalities. Implementation of so-called Value Based Management had to focus on a broader managerial rather than the typical financial perspective in order to ensure continued confidence and stability. Finally, Cadbury Schweppes took the right decision by turning to the holistic practice of Value Based Management.

Indeed, according to the famous physicist Albert Einstein, "everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted". EXHIBIT 1: SWOT MATRIX OF TREBOR BASSETT IN 1996 Strenght's Weaknesses- Amal gation of the two largest British sugar confectionary firms - Clear market leader with a 27% market share (major competitors Nestl'e-12%, Mars-7%, Wrigley's-6%) - Power brands (advertised brands with consumer recognition) - CS' Culture had outlived its usefulness- Fall of financial performance and under performing shareholder value - No support of CS' Group Office and TB's functional managers for taking new strategic direction Group Office not willing to tinker with a strategy that had worked very well in TB's early years Managers seemed to be preoccupied with different priorities- Budget-driven decision making process strategy limited to specific performance targets established by the annual budget financially dominated dialogue between the group and BU keeping tracks of the numbers through a number of isolated documents with little strategic analysis Very few strategy within the group and no long term projects- Lack of trust between the Group and BU: BU were "over promising" in order to "over deliver" ( = Game playing) - The Group was too far away from the BU and markets to appreciate the complex strategy issues- Strategy of achieving market volume and exploiting scale economy in order to protect short-term revenues " Grow bigger through steady volume increases" price discounts in an attempt to protect volumes irrational brand and packaging size proliferation with no real marketing strategy (and risk of cannibalization) - No Piloting tools (managers' comments: "A lot of data, not a lot of good facts") Opportunities Threats- Fragmentation of the market- Long term potential of the sugar confectionary business - Total sweets market was stagnant- Low end market: private labels had already captured 20,000 tons owing to the strength of British major retailers- New competition entering the market in its most profitable niches- Raw material prices shooting up- Price competition EXHIBIT 2: COMPETING ENVIRONMENT OF THE BRITISH SUGAR CONFECTIONARY MARKET The five forces model of Porter allows a better analysis of the attractiveness and value of the British sugar confectionary market in the 1990's:.