To subscribe to the Houston Business Review, simply type your email in the text box. Remember to tune into the Houston Business Hour, Monday through Friday at 11:00 a.m. on AM 650. Brought to you each week by HoustonBusiness.com™, Houston’s Address for Doing Business™.

Join Our Email List Your Email Here:

HOUSTON BUSINESS REVIEW

Strategic Planning: The Four Dimensions of Value, Part 2 in a Series
By Gary Cooper

GARY N. COOPER, C.P.A., C.V.A., is managing partner of Cooper, Bergman & Company, L.L.P., certified public accountants which was formed in 1991, assisting small businesses and individuals with accounting, consulting and income tax planning and compliance. Services provided include medical practice consulting, business valuation, assistance with buy/sell transactions, development and implementation of policies and procedures, accounting services and tax compliance and planning. The Company has offices in Plano and Houston, Texas.

In Part 1 of this series I reviewed some of the factors in determining a company’s value. In this article I will be focusing on the four dimensions of value, which are growth, productivity, profit, and the utilization of assets.

Increasing a company's profitability and future value can be improved if management considers its strategic decisions focusing on one or more of the four dimensions of value. Every strategic action to create value should correspond to one of the four dimensions listed below. The four dimensions of value are related to growth and productivity within a company as follows:

Growth dimensions
1) Increase market share using a constant capital investment.
2) Invest capital in business lines that yield a higher economic return, such as a new product or service. Through proper analysis, you could identify segments of the business that generate higher profit margins can be identified.

Productivity dimensions
1) Increase profit through operating efficiency while using a constant capital structure.
2) Maintain profit while using less capital to improve asset utilization.

Management should focus on the four dimensions of value to analyze its strategic initiatives. Before a final decision is reached, management should analyze each direction to determine if the action will accomplish the defined goals and objectives outlined. All small businesses are different therefore require varying approaches to maximize profitability.

The first of the four dimensions (increasing market share using a constant capital investment) means that long-term consistent growth and profits can be accomplished by expanding the company's market share and therefore its revenues. The growth and the size of the market place may increase revenues temporarily without the company attaining a larger market share, but eventually, most markets flatten or decline in size due to many factors such as new technology or changes in consumer's buying habits. Management should continually focus its efforts on increasing market share. Most small businesses should expect a defined level of attrition.

The second of the four dimensions (investing capital in business lines that yield a higher economic return) such as a new service line, means simply that a higher profit margin will increase a company's free cash flow. Each dollar of new sales should provide higher profit margins, therefore more free cash flow than the replaced activity. Also, new products and services could provide additional revenue for an expanded service line reaching a larger market. With limited resources such as time and personnel, it is critical to focus on product and service lines that generate increase profit margins.

The third dimension of value (increasing profit through upgrading efficiencies while using a constant capital structure) recognizes that profits and the related free cash flow can be increased to operate in efficiencies with lower operating costs without requiring investment in new assets. For example, companies can use overtime or second shift without significant capital expenditure as opposed to building a new factory or factory addition. Small businesses can also better utilize technology to complete tasks versus hiring additional personnel.

The fourth dimension (maintaining consistent profits while using less capital through improved asset utilization) means that increased efficiencies will lower capital invested in the company and thus, creates excess assets which can be distributed to the owners, either directly through cash distributions or through potential liquidations. This additional free cash-flow can be invested in other activities that will increase the owner's personal return in the future.

In part 3 I will propose a holistic approach to strategic planning that will demonstrate how the proper utilization of a CFO or CPA can improve a company’s performance.