Value drivers

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Value drivers are indicators of a company’s core values. Expressed in terms of measurable operating variables or activities that approximate the potential and often intangible assets of companies, changes in value drivers significantly impact the market value of a company. For example, a hotel company’s value drivers may include growth, market share, technology, level of service, and amenities. The main utility of a value driver lies in its function to measure an overall corporate performance and estimate the company’s market value by adding non financial aspects to the evaluation process. To this end, value drivers are of interest to anyone concerned with measuring corporate performance such as investors, operators, and shareholders. The significance of value drivers may be inferred from the estimation that non financial performance accounts for as much as 35% of institutional investors’ valuation for public companies (Low & Seisfeld, 1998). In this respect, value drivers have significant implications for the hospitality industry, given the intangible nature of hospitality products. They provide some critical insights into foodservice operations that often go unnoticed under the conventional accounting based approach to property valuation often based on Uniform System of Accounts or RevPASH.

Although there is no specified list of value drivers, critical value drivers may be categorized into nine areas (Kalafut & Low, 2001) as follows:

1. Innovation involves a company’s value in terms of its future growth. Value drivers for innovation in the hospitality industry may include, for example, R&D expenditures.

2. Quality reflects a company’s focus toward product and service features as its core values. Specified quality standards or product features are examples of value drivers reflecting quality.

3. Customer relations address a company’s commitment to its clients. Loyalty programs for customer relations or online reservation services may be examples of value drivers in this category.

4. Management capabilities reflect the value of human resources and leadership in a company. Performance appraisals for key managerial employees or the quality of executive development programs may be used as value drivers to measure management capabilities.

5. Alliances refer to a company’s strength in terms of external resources. Value drivers in alliances may be measured in terms of the number of external alliances and joint ventures, or the market value of the alliance companies.

6. Technologies are the fastest growing category of value drivers. In room Internet connections and express checkout using TV monitors are examples of technology related value drivers.

7. Brand value is one of the major concerns of chain hospitality corporations. The image associated with a brand has significant impact on a company’s performance. The value of the brand may be influenced by value drivers such as strength of brand image among main competitors.

8. Quality of employees also impacts value creation. After all, employees play a main role in service delivery in the hospitality industry. Value drivers that reflect employee quality include performance appraisals and the quality and quantity of training offered to employees.

9. Environmental and community concerns also affect a company’s value. For example, two restaurants offering identical products and services may perform differently in different neighborhoods.

A recent study of US hospitality operations from the perspective of the operators revealed that value drivers have changed for them in the recent years (Watkins, 2003). Operators use value drivers to identify specific product features that motivate customers to purchase their products and services. While the price and location are still the dominant value drivers that attract customers, increasing numbers of customers lead to new value drivers. The findings suggest that while traditional value drivers, such as price and location, still account for approximately 70% of customers’ selection criteria, approximately 30% of the selection process is led by new value drivers such as technology, loyalty points, and customization options. The study further suggests that hospitality corporations, in an effort to respond to rapidly changing market needs, are offering varieties of new value drivers such as wireless internet access (e.g., cyber cafes) and customized frequent customer programs. However, merely adding new drivers without identifying what a company’s core values are will be misleading. In order to maximize the gain from their value drivers, hospitality companies should first thoroughly understand their markets, identify the core values that differentiate them from the competition, and add or create new value drivers that are meaningful. Obviously, different value drivers influence different market segments, and the value is added only if the new drivers tap into target markets that are significant for the company.

A good example of this is McDonald’s strategy in 2004. In response to concerns of obesity and possible linkages with diets high in fat, the multi national quick service giant launched a campaign surrounding a line of salads. Tying quality, brand value, and community concerns together, the firm successfully increased stock price and customer loyalty.

References

Kalafut, P. C., & Low, J. (2001). The value creation index: quantifying intangible value. Strategy & Leadership, 29(5), 9 15.

Low, J., & Seisfeld, I. (1998). Measures that matter: Wall Street considers non financial performance more than you think. Strategy and Leadership, 26(2), 24 28.

Watkins, E. (2003). How guests choose hotels. Lodging Hospitality, 59(20), 36 40.

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