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In-Depth Information
also occur merely because of the customer's illusive urge for innovation and the need for more
than ordinary experiences. Added to this is the complication arising from the fact that the
customer base itself is not static and keeps on changing dynamically, depending on the shift in
critical value determinants (CVDs).
The customary way to determine the relative importance of value determinants is through
customer satisfaction surveys and subsequent customer value analysis to generate normalized cus-
tomer satisfaction indices. These indices may differ depending on the objectives of the customer
value analysis.
15.2.2 Value to Shareholders
Shareholders expect a reasonable ROI in the long term. It must be mentioned that whereas none
can deny that higher returns are the basic motives for any investment, shareholders also value their
contribution in the creation of wealth and job opportunities for their community. They derive
immense satisfaction by sharing the created wealth with the community through the employees
of the company. If a company demonstrates that it is utilizing its capital competitively and has a
viable strategy that will sustain this rate of return or better it in the future, they will continue to
maintain their financial interests in the company.
From the traditional earnings point of view, for industrial enterprises geared to mass production
strategies, the investors look for Return on Capital Employed (ROCE), Earnings per Share (E/S),
Return on Assets (ROA), etc., in terms of integrity and quality of accounting information like
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Relevance
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Reliability
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Neutrality
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Fidelity
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Veri iabi lit y
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Comparability
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Consistency
However, the earnings point of view has not proven to be a reliable indicator of the value of a com-
pany. It is primarily oriented toward existing and past values and is not geared to address its arc in
the future. Earnings are a static concept that uses linear projections based on the figures of the last
accounting year. The underlying assumption in the traditional approach is that a company's value
can be forecast based on its reported earnings. That this is erroneous has been established beyond
doubt by the fact that market values of successful companies have always been greater than twice
its topic value.
On the other hand, the cash flow perspective sees value as a function of the expected future
cash flows, which reflects the company's value in the long term and makes due allowance for the
attendant risks. Unlike the accounting approach, in the cash flow approach, a strong correlation
has been found to exist between the market price per share and predicted value per share based
on cash flow forecasts.
According to the cash flow perspective, the investors look for
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Increased future surplus cash flows
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Assured future cash dividends
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Share price appreciation
