Compared to other posts, this is going to be a rather long one. Please bear with me as the theme of this post is probably the most important one (albeit a little technical) in the whole corporate happiness and aggregate value management methodology (AVMM).
The fundamental business management objective is maximization of an aggregate value (AV) of an organization. To be maximized, AV must be carefully and efficiently managed. We can manage only what we can adequately measure; therefore, AV of an organization must be adequately and reliably measured.
In reality, aggregate value of an organization is substantially below its maximum value and the key objective of any corporate plan, project or activity is to increase (hopefully, radically) the aggregate value. Therefore, we are primarily interested not in absolute, but in relative aggregate value of each key business object (product, brand, business unit, asset, etc.) which gives us an idea of how far actual AV lags behind its maximum.
Measuring AV of an organization is done in a ‘bottom up’ direction and starts at the lowest level in the corporate hierarchy – of each key performance indicator (KPI) - financial, functional and emotional - of each key business object (KBO). Before we start discussing the actual procedure for measuring AV of a KPI, it should be noted that there are two kinds of KPI – simple or ‘basic’ (e.g. monthly sales of a company product to a particular customer) and composite (e.g. monthly sales of a company product to all customers).
Maximum AV of a simple KPI is defined using the popular and well-known method – benchmarking. The benchmark is obtained from the most appropriate for each KPI source – either internal (other objects from the similar category) or external (from the company in the same or different industry, etc.).
After the benchmark value of the KPI in question is obtained, we determine its actual value (from the appropriate corporate records). The key ‘KPI ratio’ (actual KPI value divided by its benchmark value) yields the aggregate value index (AVI) of a simple KPI. Naturally, AVI is always below 100%.
To calculate the AVI of a composite KPI you must first compute AVI for each simple KPI in the composite KPI (e.g. for sales to each key customer or a group of customers). Then you must assign an appropriate weight (importance) to each simple KPI in the composite one. Then AVI for a composite KPI is calculated as a weighted sum of AVI for simple KPI:
[weight(1)*AVI(1) + weight(2)*AVI(2) +… + weight(n)*AVI(n)] {1},
where n is number of simple KPI in a composite KPI. If and when appropriate, some of the simple KPI measure the synergy between simple KPI in a composite KPI.
Key business objects can also be either simple (e.g. an individual employee, product, brand, etc.) or composite (e.g. department or product group). To compute AVI for a simple KBO you must first compute AVI for all composite KPI for the KBO in question as well as for all stand-alone simple KPI (which are not included into any composite KPI).
Then you must determine the appropriate weight for each composite and stand-alone KPI for the simple KBO in question and then compute AVI for this KBO using the formula similar to {1}.
To compute AVI for a composite KBO you must first compute AVI for all simple KBO included in the KBO in question (e.g. for each employee in the corresponding department) as well as for all composite and stand-alone KPI specific to the corresponding composite KBO (including those that measure the synergy between its simple KBO).
Then you must determine the appropriate weight for each simple KBO as well as for each composite and stand-alone KPI for the composite KBO in question and then compute AVI for this composite KBO using the formula similar to {1}.
To compute AVI for your company/organization, you must first compute AVI for each of its KBO – composite and stand-alone simple – and for each of its specific KPI (i.e. the ones pertaining to the organization as a whole rather than to some of its KBO – composite or stand-alone simple).
Then you must determine the appropriate weight for each simple and composite KBO in your company as well as for each composite and stand-alone KPI for your company and then compute AVI for this composite KBO using the formula similar to {1}.
In other words, AVI for the company and its KBO are computed in the following sequence:
simple KPI -> composite KPI -> simple object -> composite object -> company/organization
AVI computed in this fashion become the foundation and the starting point for performing a strategic corporate reengineering (SCR) for the whole company and/or its key business objects. I will discuss the SCR project in detail in one of my next posts.
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