The Business Value Growth Constant: Rethink Business Value Growth Series
Introduction
In our prior article titled Rethink Business Value Growth, we posited that business is a system. This position is consistent with Dr. W. Edwards Deming’s account in Chapter 3: Introduction to a System in his book, The New Economics for Industry, Government, Education.
Using Systems science to represent business, we modeled its growth using physics field theory. Second, we disaggregated the elements of an electrical systems domain and disaggregated the elements of the business growth domain. Third, we mapped the business elements to a force field framework. We stated that we would explain the business value growth constant, kg at a later time.
The purpose of this article is to explain the business value growth constant, kg. As with any field, such as the gravitational constant in gravitational field theory (Newton’s constant, kg = 6.67 x 10-11), or the electrostatic constant (Coulomb’s constant, ke = 8.99 x 109) in electric field theory, the business value growth (BVG) constant, kg, is a proportionality constant that connects the elements of the value growth field with the strength of the value growth force.
Business Value Growth Field
A field is a region of space where we observe forces. Gravity, electricity, and magnetism create fields.
Business also creates a field. Energy is consumed while inputs are converted to customer output value. Input and output value can be measured as worth in units of money.
This idea of converting value is analogous to converting position to velocity in physics through the consumption of energy per time. We may deem this as operating in a Conversion Field because we are converting input value to higher output value. It can be applied to the entire business system or any function/sub-system in business.
What we are interested in though is BVG, not value conversion. Business value growth is the transformation of the current business capability so that it systemically produces more value per time in the future.
This challenge is analogous to converting velocity to acceleration in physics through the consumption of additional energy per time. We deem this as operating in the Transformation Field, which we’ll call T1. Great companies have learned to use the Conversion Field (operating the business) to inform the Transformation Field (growing the business) in order to systematically and systemically accelerate value growth capability and outperform their peers by over 2X. This is usually compared over any five-year period because the compounding effect of the change in growth rate works in favor of growth focused organizations.
Business Value Growth Constant, kg
From our prior article, we defined the equation:
NOTE: In the previous article, we referred to the gv variable as “c” = communication of the strategy in terms understood by the people with the ability (focus, capability, and capacity) to execute strategically aligned initiatives or projects.
The business growth constant, kg is a proportionality connecting the future state and current state business value gap (equivalent to velocity gap in physics) between the two growth charges—strategy and execution. In order to understand kg, we need to understand a unit of value growth charge or basic unit of value growth energy. This is not energy you invest in operating the business. It is energy you specifically invest in value growth. It is the dollar investment you inject into the growth charges of strategy design and strategy execution.
While you may leverage your business for higher growth through debt or equity, we will outline the sustainable growth rate to anchor a growth investment strategy. This way, you may be better positioned to focus your time on a deeper discussion on how to improve the quality of your strategy design and your execution ability.
Sustainable Rate of Growth
The business growth constant, kg, is the amount of growth investment. To determine how much a business should invest in value growth, we will present work from Robert C. Higgins from his book, Analysis for Financial Management on sustainable rate of growth measured in financial terms. Unlike gravitational or electrical systems, where the gravitational and electrostatic constants are constant in their respective fields, the business growth constant is unique to each business because each business operates in its own unique field of opportunity, competition, and capability.
Letting kg represent the sustainable growth rate,
Assuming the firm issues no new equity, the numerator, change in equity, equals (R) Earnings, where R is the business’ retention rate, defined as the portion of earnings retained in the business.
Thus,
Where bop denotes beginning-of-period. Representing Earnings/Equitybop as ROE-hat
Where the hat denotes beginning-of-period equity. From the well-known DuPont formula, or levers of performance:
Where P is the profit margin, R is the retention rate, A is the asset turnover, and T-hat is assets divided by beginning-of-period equity.
Integrating the traditional financial approach to business growth with our new scientific approach, we learn that you can increase your sustainable growth rate by developing and executing better strategy as depicted by the Fallon's Business Value Growth Force™ equation:
Conclusion
Business is a system governed by Systems science. Strategically transforming it is a different system that causes the growth of the underlying business system.
Business value growth is also governed by Systems science. The primary responsibility of leadership teams is to coordinate and cooperate on strategic business value growth, not day-to-day operations.
The business unit leader owns strategy. It is directional but not transformational. Ultimately, the teams and resources report through the function layer, and the function leaders own the responsibility for transformation. Transformation is change-related but not directional.
Great strategy is realized when they are clearly delineated and combined for accelerated BVG. That’s why we say, there is no strategy-execution gap, a concept purported by many strategy consultants. There is just bad strategy and/or bad execution.
Utilizing a BVG automation platform is the best solution to ensuring you will effectively deploy your strategy for value growth. If an automation platform is valuable in improving your operating functions, such as sales or accounting, it’s absolutely essential to accelerate business value growth. Just ask, when has your ERP or accounting system helped you grow value faster? They help you operate better but may actually impede value growth acceleration because they wed your teams to operating versus strategically transforming.
Your current technology might be your biggest impediment to growth.
About Pivotal Innovation
Pivotal Innovation’s purpose is to empower leaders to grow value faster for lower cost by helping you automate the growth disciplines of Strategy, Execution, and Innovation with our Pivotal Innovator™ SaaS platform, combined with acceleration support services. Contact us at info@pivotalinnovation.com for a Value Growth Discussion.
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