Value based management (VBM) is rooted in finance theory which states that a business creates value only when its return exceeds its cost of capital. One view of VBM expounds that a company need only get two things right: first, it must adopt an economic profit metric as the key measure of corporate and business unit performance; second, incentive compensation must be tied to agreed-upon improvement targets within this metric. While this offers a clean, uncomplicated view of VBM, the authors of this Case Study series show, through the example of Cadbury Schweppes (CS), that the practice of VBM is much more holistic and covers a broad set of management practices.
Cases A & B, written by Tomo Nodo, Assistant Professor of Strategy and Management, Fares Boulos, Executive in Residence, and Philippe Haspeslagh, Professor of Strategy and Management, provide the background for the story. In Case A, we learn that Cadbury Schweppes, a highly reputed UK-based food and beverage company, is facing a dilemma as to whether to innovate or ride on the back of its past success. When in 1996 John Taylor is appointed Managing Director of CSs sugar confectionery division, Trebor Bassett he is concerned. The divisions financial performance is down compared to its peak in 1994, and Taylor believes that the companys existing strategy achieving market volume and exploiting scale economy is no longer of value. He sees opportunities to change, but is tied to "making the numbers", a value that overrides nearly everything at CS. On the other hand, how can a new manager propose a change to a strategy that has worked so well for the company?
In Case B we find out that Taylor is not alone. CSs new CEO, John Sunderland, has also re-evaluated the companys strategy and decides to implement pilot VBM programs dubbed 'Managing for Value' (MfV) in two business units. (Trebor Bassett being one of those selected.) The program consists of five key elements: Raising Financial Performance, Value Based Management, Rewards, Sharpening the Culture, and Leadership Capability. Implementation is carried out through a top-down process, while feedback and experimentation re-circulate via bottom-up feedback. To show the importance of the program, the CEO himself sits on the steering committee.
The early results of the MfV program were encouraging: CSs share price nearly doubled between late 1996 and early 1999, and the program was well underway throughout CS. The question remained as to how CS could continue to sustain these positive early results.
Case C, written by Marjolein Bloemhof, Research Associate, Regine Slagmulder, Associate Professor of Accounting and Control, and Philippe Haspeslagh, provides some answers as it checks back with the company in 2002. At this point the MfV program has been underway for five years. After a description of the various elements that went into the initiative (goal setting, strategy development, performance contracts, performance delivery and resource agreements), the strategy is put to the test at Cadbury Schweppes Beverages Spain, which had increased its profits by 158% between 1997 and 2001 but which is now facing a strong challenge from the Coca-Cola Company. MfV clearly needs to stimulate fresh initiatives within the existing businesses.
Sunderland believes that sustainability rests on two key shifts: creating a flatter organization in order to react faster to market developments and redesigning CSs performance management system so that managers take ownership of the MfV methodology. Is the new organization flexible enough to accommodate these modifications? And how can corporate managers build in new capabilities and systems to unlock potential opportunities?