3. Value-based management
Breac’s chief executive officer (CEO) was recently at a presentation on value-based management (VBM) where the main presenter（演讲人）indicated that it was a management methodology（方法论）best suited to a large-scale manufacturing company such as Breac. VBM was further explained as a methodology which takes the idea of creating value through the return of future cash flows and embeds this in（嵌进）an organisation’s culture. It should align（调整一致）all a company’s processes with the key drivers of value.
An example of Breac’s strategic performance report is provided in Appendix 1. This strategic performance report is produced by each SBU for the Management Board of Breac on a monthly basis. The format and structure of this strategic performance report has not changed in three years.
The CEO now wishes to investigate the possibility of using VBM in all of Breac’s SBUs and he has asked you, as an external consultant in this area, for your views on this. He has indicated to you that he specifically requires you to consider the effect of the introduction of VBM on the measures in the example strategic performance report.

4. Appendix 1
EXAMPLE OF BREAC’S PERFORMANCE REPORT
Financial
Sales revenue
Gross profit margin
Operating profit margin
Manufacturing
Percentage of goods returned (from either end user or the retail outlet)
Percentage of goods produced and delivered on-time to the retail outlets
Number of stock-outs per month per retail outlet (Note 1)
Marketing
Marketing spend
Marketing contribution to revenue (Note 2)
Notes:
1. A stock-out is when the retail outlet does not have inventory of a particular product.
2. The percentage of overall SBU revenue that can be traced back to the marketing team’s efforts.

Requirements (25 marks)
It is now 1 September 20X5.
(a) Assess the problems which may be faced by Breac when developing a service level agreement (SLA) with Gowan. (10 marks)
So, in summation, the best way to answer this part would have been to:
a) Identify the area that could be a problem re the SLA
b) Explain why it is/could be a problem
c) Assess the extent to which it is a problem – and how - for Breac in trying to develop and agree the SLA with Gowan

3 (a) Responsibility for damaged and/or faulty goods
One of the problems which the management board (MB) of Breac will need to address in the service level agreement (SLA) is the point at which Gowan ceases to be responsible for the faulty goods. Breac must ensure that Gowan is responsible for the defect, most likely with a financial penalty, whenever the defect is detected. This point may depend on the nature of the actual problem detected.
For example, as Breac is undertaking additional manufacturing work on the clothing, it may be relatively easy for the manufacturing departments at Breac to detect if the quality of the material is sub-standard or if the stitching has disintegrated at this stage.

However, issues of poor quality and stitching disintegrating may manifest（显示）themselves later when the goods have been purchased by the end-user. Additionally, Breac would be unwilling to undertake the time-consuming process of checking that every good which it receives is correctly sized and would probably only check a sample of the clothing for this error. It is possible, therefore, that this problem may also be detected by the end-user.
Unless Gowan can guarantee that the clothing goods it supplies are defect free, that the stitching will not disintegrate and that all correct size labels are on the respective items of clothing, Breac has to be able to hold Gowan to account whenever these problems are detected. Breac would be very keen to impose different levels of financial penalty on Gowan depending upon when the fault was detected. Faulty goods detected by the end-user, for example, are likely to bring significant reputational damage to Breac and Breac would be keen to impose a stronger financial penalty on Gowan for faults detected at this stage.

This is an area where Gowan is likely to resist. Gowan would be keen to ensure that its liability is limited to initial inspection on arrival of the material at Breac’s manufacturing plant and that any quality-related problems detected thereafter are the responsibility of Breac.
Currently, for example, it is not clear that all the quality-related problems Breac is experiencing have been caused by Gowan. These problems may well have been caused by the additional work Breac has undertaken or, perhaps, Breac may have damaged the goods which Gowan has supplied somewhere in Breac’s manufacturing process.

Delivery time
Another problem may arise regarding any agreed delivery time. Both Breac and Gowan are global companies and therefore delivery to individual countries may depend upon global trading regulations and, most likely, shipping conditions. Given this situation, it should be clear in the SLA exactly what Gowan is responsible for and which conditions are considered to be out of Gowan’s control.
For example, Breac may wish to place the entire responsibility for delivery onto Gowan and suggest that if there is a problem with shipping that Gowan must find another way to deliver the material, which would most likely be by air. Gowan would be keen to resist this given the cost implication.

Information systems
It is very clear that the information systems of both these companies cannot communicate with each other. This may prove to be problematic with regard to the actual operation of the SLA. It is important that Breac is aware of Gowan’s production schedules, for example, to ascertain when it is likely to receive batches of goods from Gowan. It would also be very helpful for Breac to have access to Gowan’s own internal quality control data as Breac may have concerns over the quality of material being sent to it if Gowan’s internal failure rate is high.
Specific targets will also be set between the two companies around such areas as quality assurance and delivery times. It would be beneficial to the operation of the SLA if these targets could be agreed upon and shared on a common platform. Without a shared system, there is the potential for disagreement between the companies based on different interpretations of this data. For example, it would be helpful to Breac if Gowan’s quality control data were displayed on such a platform. This would, potentially, remove any suspicion that Breac may have about the accuracy of that data.

(b) Evaluate how the introduction of VBM would affect the current measures in the strategic performance report prepared by the SBUs and recommend, with justification, as to whether VBM should be introduced at Breac. (15 marks)
So in summation, the best way to answer this part would have been to:
a) Explain the basic measure that underpins VBM
b) Assess whether each measure in Breac’s performance report would be helpful in a VBM approach
c) Evaluate those measures in the light of the specifics of Breac’s situation
d) Suggest and justify other potential measures (if appropriate – this part is not necessary to score full marks, but some candidates may feel it helps answer the question)
e) Offer a conclusion as to whether Breac should adopt VBM or not

(b) Financial measures
Value based management’s (VBM) main ethos is that the value of a company is measured by its discounted cash flows. Companies therefore enhance their value when they invest in projects which return a positive net present value. It is clear that Breac is not using the cost of capital in its financial measurements at all, with the main measures being profit-based in the form of operating and gross profit margin. The revenue figure is less helpful from a VBM perspective as it offers no indication of any costs which have been incurred to achieve the revenue.
A common form of financial measure for companies which adopt a VBM approach is economic value added (EVA). The EVA calculation involves both the capital employed and the cost of capital in its computation.
For Breac to accept this new calculation, a culture change would be required. The fact that the current performance report has been in place for at least three years would suggest that the behaviour which the current measures encourage is embedded within the company. There is therefore likely to be both a widespread lack of understanding in the company of the new measure of EVA and a reluctance to change. Nevertheless, it is recommended that Breac adopt this measure if it adopts a VBM approach.

Manufacturing measures
The manufacturing departments throughout Breac are likely to be under more pressure to ensure that what they produce is right first time and that it is delivered on time. If not, it is very likely that the manufacturing departments would be blamed by the retail outlets for any shortfall in their targets. It is likely, therefore, that the measures of percentage of goods returned and percentage of goods delivered on time would remain and that the emphasis on them would be increased with any change to a VBM approach.
Such emphasis may also result in the further development of Breac’s quality assurance processes to ensure that the material which is delivered to Breac is to the required standard and on time. As a result, further specific quality assurance measures may be introduced and Breac could consider introducing quality costing to allow it to analyse, understand and correct problems in this area.

The measurement of stock-outs per month is likely to continue in a VBM environment. Managers of each strategic business unit (SBU) will be responsible for the capital at their disposal and will be required to make a return on it. The inventory which the managers hold is a significant part of that capital and it will be important for managers to ensure that they have sufficient amounts of inventory to satisfy demand. If they do not have the inventory, manufacturing and/or delivery departments are likely to be blamed if the SBUs do not achieve the required return on capital.

Marketing measures
The measure of marketing spend alone is unlikely to be useful in a VBM environment. Spend alone offers no indication as to whether that expense has returned value. Perhaps if the spend was measured alongside any change in brand value, then it could be said that there was a connection between marketing spend and brand value. However, this would be impossible to measure at the level of each individual SBU as the brand value would relate to the entire company and not any individual retail outlet. Breac should therefore not continue with this measure in a VBM environment.

The measure of marketing contribution to revenue, however, does ensure accountability and would be appropriate in a VBM environment. This measure seeks to attribute revenue directly to specific advertising spend and, as such, makes an attempt to relate spend in a specific area to an increase in revenue from that spend.
However, there are significant problems with this measure. First, advertising spend is being linked with revenue and not value. A more accurate measure would be to link advertising spend with enhanced EVA rather than revenue. Second, it is also difficult to establish a clear link between advertising spend and either revenue or EVA as these factors may have increased due to other aspects, such as growth in the market, rather than because of the individual marketing spend of the SBU.

Recommendation
There is a strong argument for introducing VBM into Breac. This argument is based on a recognition that Breac is a large-scale manufacturing company and therefore has significant capital at its disposal. It is not currently assessing whether that capital is being utilised effectively as the required return on it is not being measured.
However, the culture change involved in introducing VBM into the entire company at once may be too difficult to undertake in a practical sense and it might be helpful to introduce VBM into one SBU initially. This would allow Breac to learn from any mistakes which may be made before embedding it within the entire organisation.