Business Company Managers Growth and Shareholders

Question: Discuss about the Business Company Managers for Growth and Shareholders. Answer: Introduction: Each and every company manages its business in such a manner so as to create the value of the company in the market. In order to increase the value of the company, each company shall identify key driver which helps in increasing the value. These drivers are known as the value drivers. (Trackmaven Dictionary). Through these drivers the value to the product manufactured or traded by the company or services delivered by the company can be added which further help in increasing the advantage over the competitors (Lek). There are three types of value drivers namely Operational, financial and sustainability drivers and these includes the variables relating to the income and expenses of the company, to the cost of financing incurred by the company for carrying on the operations and the external forces outside the company which help in sustaining the company for long respectively. (Sledzik K, 2003) In this digital era, being the intangibles, the traditional practice of achieving growth and increasing the shareholder or customer value cannot help in accomplishing the value creation goal of the company. Its mainly because of the fact that the company needs new indicators through which the companys performance can be measured from time to time and can company will be able to take an informed decision. This digital era is known as New Economy in the year 1997. In this period of new economy, the shift has been made from tangible assets to intangible and importance has been given to the matters other than fixed tangible assets like customer value, branding, strategies and relationship with customers and supplier, etc. Part A Prior to the 21st Century, each and every company place emphasis on the tangible and fixed assets which includes land and building, furniture and fixtures, plant and machinery and other. These tangible fixed assets forms part of the financial statements of the company and the owners of the company or managerial personnel lying at the top level of management of the company views that the companys value is created through these tangible fixed assets. But this conception has been mentioned as the wrong and vague in the beginning of 21st Century. The main cause of its being vague idea is that all the companies operating in the industries have similar or equivalent return on their tangible assets. It does not give any way through which the company can have better edge over its competitors (Hert and Willmot, 2014). This major drawback has led the companies to have paradigm shift of placing emphasis from tangible assets to intangible assets. Identifying an intangible assets is a difficult t ask of every company and valuing them is much more challenging task. In the plethora of studies from the 21st Century, intangible assets have been given due importance. Intangible assets consists of three elements namely Human Capital, Organization Capital and Relationship Capital (Krogger, 2015). Human capital is considered as major intangible assets in an every organization as without them organization cannot perform any function. It consists of assets like know how and experience of the employees, their level of motivation, their level of creativity, how much are they capable of learning new things and bringing out new and innovative ideas, their level of loyalty towards the company as well towards the society and their level of academic and professional education. Because of its utmost importance the companies are identifying ways and developed a system whereby the accounting of human capital employed in an organization can be employed. Secondly, Relationship capital has been re ceiving an importance from the very beginning but it role in increasing the value of the company has not been considered. It also plays very vital role in creation of the value of the company and consists of proper branding of products, maintenance of relationship with the customers and the suppliers of products or services, maintaining the agreements entered into as franchisees and licensing and maintenance of other alignments. Third is the Organizational Capital which consists of two segments one is Intellectual property and other is Infrastructural Assets. Segment of Intellectual Property consists of Patents, copyrights, trademarks and the origin from where the goods have been developed or manufactured. Infrastructural assets consists of how the culture of an organization is being managed within which the employees work, how effective is the system of decision making and internal control systems and procedures within which every department and employee of an organization has to perform work. In other words, human capital is what the employees have and obtain from an organization in which they are working, Relationship capital is how to develop the relations with factors external to an organization and Organizational Capital is what the organization has internally and which remains inside the premises of an organization. Across the world, many mergers and acquisitions take place. Earlier the acquirer company is ready to pay the consideration for Target Company equal to the net worth of the company which Assets less Liabilities. But in the current scenario the acquirer companies usually pays an amount higher to the net worth of the company. It mainly because the target company has hidden assets which though are not reflected in the financial statements but is counted as the major factor in determining the purchase consideration. Higher amount so paid is counted or treated as Goodwill of the company in the accounting books. For instance Facebook Inc has offered a price of US $ 1 billion for Waze Inc. Waze is service Provider Company for free GPS service. Waze Company will be making some profit in the next year. It shows that the acquisition is mainly due to some hidden assets which are in fact the intangible assets. Another example is of Flipkart company which has been incorporated in the year 2007 by two people. The company in 2007 set an objective of becoming one of the leading companies in e commerce business. Cofounder of the company is earlier an employee of Amazon Company. With this objective the company has started its business with USB and Tablets and now deal in each and every item. The company does not have any fixed assets but has developed an intangible assets which does not have any existence and not shown on the financial statements. These intangible assets are the Human Capital and Relationship Capital (Krogger, 2015). The value drivers that have been identified for these assets are. Managing the employee base. Maintaining the level of motivation Providing good atmosphere and culture within an organization Providing the platform where employees can grow. Maintaining the relationship with the customers and suppliers Maintaining good experiences with the customers and suppliers. Management of the company has identified that the actual assets of the company are its relations with the customer and suppliers and the relation with employees (PWC, 2013). With this the company has been able to increase its customer base and employee base. The company in order to give effect to the aforementioned objectives has entered into series of acquisition. The company has acquired the rights of Chakpak company which includes thousand of likes made by the customers, thousands of films and movies on its site in 2011 for US $ 25 million. These rights are the intangible assets and this acquisition has increased the customer base of the company. Second major acquisition it made was in 2014 of Myntra.com for US $300 Million. Through these major acquisitions the company has not only maintained the customer relations and increased the customer value but also increased the shareholders value and which is now to the value of $15 billion. Second example is of Google Inc. Company has identified the importance of its intangible assets in the year 2007. It is when it is recognized that the value of Google network and search engine has not been included in the financial statements. The income from these third party vendors counts for the thirty five percent of the total income of the company amounting to US $ 6 billion. One third of the total revenue of the company is arrived from the intangible the value of which has not been reflected in the annual report. Earlier the management of the company has denied the fact of including the same in the financial statement along with the statement that its the effect of the powerful team that is creating the revenue from the Google network and in case any one of the management team says something in market then the market fluctuates very speedily. It is then the company realized that the companys worth for 60% to 80% is attributable to the intangible assets. By recognizing the same the company has considered the human capital, relationship capital and the organizational capital as the intangible assets and identified the drivers for each capital. This further has increased not only the customer satisfaction but also the shareholder value. Another example is of CISCO Company incorporated in 1997 which has also focused on major three areas customer relations, acquisition to get the product developed and delegation of all business processes to the business partners. Thus, in this manner the improved customer and shareholder value in business. Part B The company faces many hurdles in using the intangible value drivers for the value creation of the company. The first hurdle is that the Relationship capital is very difficult to manage and identifying the value driver for them is another difficult task. It is because the company offices are generally located at different areas of country or across the globe and also with that the customers are also located geographically in all the locations. Similar case is with the suppliers of the product wherein they are located at different areas. To maintain relations with them in an efficient way sometimes become tedious task for companies. Keeping the data of customers and suppliers and marketing products to them on periodical basis will not serve the purpose of achieving the good customer relation or cordial supplier relations. In our case with reference to Flipkart Company which has various offices in Singapore and India finds it difficult to manage the one to one customer relations. Also it is very difficult to manage the relation with suppliers. Due to this for some products customers are diverted to other online portals and suppliers have got them registered on other portals also. Another hurdle in using the intangible value drivers is Valuation which means how to value the intangible assets. The valuation is very complicated task with lots of disputes but is of utmost importance as there has been shift from tangible asset to intangible assets across the globe in th 21st Century. Tangible assets which have physical presence require the service of professionals for its accurate and fair valuation and are also sometimes become as challenging task for them (Marr B, 2006) Thus, in such case, valuation of an asset which does not have any physical presence and is hidden is task more challenging than the valuation of tangible assets. This hurdle has been overcome by the use of valuation methods. Various methods have been and are being adopted by the qualified practitioners. These methods include three approaches namely market based approach, Income based approach and Cost based approach. As per the first approach, the company values the intangible assets on the basis of the market prices of similar assets. This approach is rarely in use as comparable assets are not available in the market. As per the second approach, the present value of cash flows directly related to the intangible assets is identified and the amount so calculated is the value of an intangible assets. Cash flows or income generation is very difficult to ascertain as the income cannot be bifurcated easily. As per the third approach, the value equals to the replacement cost or the reproduction cost of an intangible assets. In our first case of Flipkart Company, the second approach has been used for valuing the intangible assets. Through this valuation, the value of the company is US$ 15 billion as on date. Google Inc has found it very difficult to measure the value of intangibles due to uncertainty in availability of particular income structure. The same approach has been used by second case which is Google Inc. Conclusion: Valuation of intangible assets plays vital role in increasing the value of an organization in terms of shareholder as well as customer. There has been major shift in the 21st century that has been welcomed by many countries from valuing tangible assets to valuing intangible asset. Many companies have recognized their value considering the aspect of valuation of intangible assets and identifying the value drivers. Through this report, major shift has been described through the data of three companies Flipkart, Google Inc and Cisco have been illustrated and how the company have succeed to created high value. Further hurdles in adopting the value drivers and valuation of intangible assets have been listed and ways have highlighted to overcome the same. In the way to conclude with the study, intangibles have significant value to the business and it shall be valued accordingly. References: https://trackmaven.com/marketing-dictionary/value-drivers/ Sledzik K, 2013, Financial and Non Financial Value Drivers in Shareholder Value Creation Process available on https://www.academia.edu/5396666/FINANCIAL_AND_NON-FINANCIAL_VALUE_DRIVERS_IN_SHAREHOLDER_VALUE_CREATION_PROCESS accessed on 30/08/2016. LEK, Executive Insights available on https://www.lek.com/sites/default/files/Volume_I_Issue_1.pdf accessed on 30/08/2016. Krogger, 2015, Key Value Drivers available on https://www.krogger.co/key-value-drivers.html accessed on 30/08/2016. Hirt M and Willmott P, 2014, Strategic Principles for competing in the digital age, available on https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategic-principles-for-competing-in-the-digital-age accessed on 30/08/2016. PWC Journal, 2013, Leading from the Front : Redesigning finance for the digital age, available on https://www.pwc.com/gr/en/publications/leading-from-the-front-redesigning-finance-for-the-digital-age.pdf accessed on 30/08/2016. Marr B, 2006, Strategic Performance Management : Leveraging and Measuring your Intangible Value Drivers, available on https://books.google.co.in/books?id=k6iIBkz9YLcCpg=PA152lpg=PA152dq=hurdles+in+using+intangible+value+driversource=blots=d7iGCVbhtXsig=4IFapjDfuxd8wX6HPfd8YD0xU44hl=ensa=Xved=0ahUKEwjWp9GbnevOAhWFrY8KHXUDAwoQ6AEILjAD#v=onepageqf=false accessed on 31/08/2016.