e-Value Creation Index for automotive business

The automotive world has long recognized that intangible assets such as brand equity, innovation and human capital play a role in determining business success or failure. But measuring and managing those assets and their impact on a company’s market value has never been easy. Therefore, as published in an article, it tells that Dr. Pam Cohen Kalafut developed CGE&Y’s Automotive Value Creation IndexSM (VCI) based on the principles put forth in her book. “This 50 percent is based on intangibles like strategy execution, brand, human capital, innovation and leadership. The reason behind this, according to Kalafut, is lies within the fact that the markets are valuing your intangibles every day, whether you want them to or not. Yet, most companies aren’t able to measure, let alone manage and capitalize on these aspects of their business.”

The Value Creation Index (VCI) that had been developed by CGE&Y are for automotive OEMs and a second VCI specifically for automotive suppliers. The Automotive VCI models create a quantified performance measurement system, allowing intangibles to be linked to firm performance.

The VCI measures three broad categories of intangibles: Management—consisting of leadership, strategy execution, and communication and transparency; Relationships—brand equity, reputation, and alliances and etworks; Organization—technology and processes, human capital, workplace organization and culture, innovation, intellectual capital and adaptability.

The VCI is built using multiple measures for each of the individual intangible driver categories. Data are ollected from a variety of sources: objective and proprietary, academic, other research and publicly available information.

The index scores demonstrate the correlation between a particular company’s intangible assets and its market value. Kalafut points out that the correlation between the overall Value Creation Index score and market value is very strong for automotive manufacturers and suppliers.

CGE&Y’s Automotive VCI methodology creates a detailed performance measurement system through which critical company-specific intangible value drivers are measured and linked to performance. This approach allows businesses to quantify the expected effect of a change in the intangible’s VCI score on financial indicators such as stock price, P/E ratio, EBITDA, cash flow or market share, and to determine which strategic or capital investment decisions will have the most significant return.

The VCI value analysis can quickly identify the operational value drivers that have the biggest impact on a company’s bottom line. With this information, executives can:
• Reallocate capital expenditures to gain higher paybacks.
• Measure the impact of growth and similar initiatives.
• Implement a robust measurement system that correlates non-financial drivers to financial results.
• Create a performance measurement benchmarking system that can be used to track changes across time, and understand a company’s competitive advantages as well as those of their competitors.

In summary, the result of this Value Creation Index enable the companies to make strategic and capital investment decisions based on quantitative values rather than relying on educated guesses.

Source: Cap Gemini (Ernest & Young)