VALUE BASED
MANAGEMENT
MARAKON APPROACH
The key steps in the marakon approach are as
follows:
1. Specify the financial determinants of values
2. Understand the strategic drivers of values
3. Formulate higher value strategies
4. Develop superior organizational capabilities.
1. Specify the financial
determinants of values
The marakon approach is based on market-to-book ratio
model. According to this model, shareholder wealth creation is
measured as the difference between the market value and the
book value of a firms equity. The book value of equity, B,
measures approximately the capital contributed by the
shareholders, where as the market value of the equity, M,
reflects how productively the firm has employed the
contribution of shareholders, an assessed by the stock market.
Hence, the management creates value for shareholders if M
exceeds B, decimates value if M is less than B, and maintains
value if M is equal to B.
According to the marakon model, market-to-book values
ratio is a function of the return on equity, the growth rate of
dividends (as well as earnings), and the cost of the equity.
M/B = (r-g)/(k-g)
Where M is the market value of equity, B is the book value of
equity, r is the return on equity, g is the growth rate in dividend
and k is the cost of equity.
2. Understand the strategic drivers of values
The key financial determinants of
values, are the spread(between the return
on equity and the cost of equity) and the
growth rate in dividends. The two primary
strategic determinants of spread and
growth and, hence, value creation are:
a) Market economics and
b) Competitive position.
a) Market economics
Market economics refers to the structural factors
which determine the average equity spread as well
as the growth rate applicable to all competitors in
a particular market segment. The key forces which
shape market economics ( or profitability ) are as
follows :
Intensity of indirect competition
Threat of entry
Supplier pressures
Intensity of direct competition
Customer pressures
b) Competitive position.
The competitive position of a firm refers to
its relative position in terms of equity spread
and growth rate vis- a vis the average
competitor in its product market segment. It is
shaped by two factors: product differentiation
and economic cost position.
3. Formulate higher value strategies
Value is created by participating in
attracting market and/or building a
competitive advantage. Thus, the key
elements of the firms strategy are its
i) The participation strategy and
ii) The competitive strategy.
i) The participation strategy:
The participation strategy of a firm defines
the product markets in which it will complete.
At the corporate level the issue is :In which
new businesses the firm should enter and
from which existing businesses the firm
should exit?
ii)The competitive strategy:
The competitive strategy of a business unit
spells out the means ,the management will
employ to build competitive advantage and
/or overcome competitive disadvantage in the
market served by it.
4.Develop superior
organizational capabilities.
A competent and energetic chief executive who is fully
committed to the goal of value maximization.
A corporate governance mechanism that promotes the
highest degree of accountability for creation or
destruction of value.
A management compensation plan which is guided by
the principle of relative pay for relative performance
The resource allocation system which is based on four
principles : i) The principle of zero based resource
allocation. ii)The principle of funding strategies, not
projects.iii) The principle of no capital rationing and iv)
The principle of zero tolerance for bad growth
A performance management process.
