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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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“My concern, however, is that decision makers are too often caught in traditional, linear thinking or too absorbed by immediate concerns to think strategically about the forces of disruption and innovation shaping our future” (Schwab, 2017).

“Uber, the world's largest taxi company, owns no vehicles. Facebook, the world's most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world's largest accommodation provider, owns no real estate” (Goodwin, 2015).

It is clear from the two statements above that the Fourth Industrial Revolution (industrial revolution) will change the way we live, communicate and do business. There are clearly businesses which are thriving and increasing shareholder wealth, this essay will analyse the different ways in which this can be measured and managed in tech companies of the industrial revolution, for long term growth.

There are essentially two approaches to measuring and managing performance, one being the shareholder approach and the other being the stakeholder approach. The shareholder approach aims to create shareholder value and this can be done by using the Economic Value Added (EVA) method, the latter focuses on satisfying stakeholders which in turn creates shareholder value. The first half of this essay will discuss how effective EVA is and then discuss specific Key Performance Indicators (KPI's).

Managers have a duty to ensure the needs of shareholders are met, which is to increase shareholder wealth. EVA assists in decision making scenarios in order to do exactly that.

EVA is made up of [Net operating profit after tax (NOPAT) – (WACC * {total assets- current liabilities}]. Therefore, it can be said that to improve EVA operating profit should be increase, less capital used and to invest capital in high return projects. One of the benefits of using EVA as a measure is that there are a number of adjustments that can be made to the profit figure, this helps in avoiding the misrepresentation of results which helps result in goal congruent decisions. However, it can also be said that this makes the calculation complex, and this could turn into a time-consuming process. In addition, there is no official standards which gives guidance on how to use the, therefore, companies may apply the metric differently than others, this leads to results which cannot be fairly comparable.

Another benefit of this measurement is that this measurement also works well in a large decentralised business to create effiency, for example each decentralised unit can work out their own EVA contribution and this can help build a bigger picture. It also helps in ensuring that all the managers goals are in line with the shareholders and the agency problem is eradicated. The agency problem is well explained by Jensen and Meckling (1976), they have portrayed the firm as a black box in which its main aim is to maximise value and profitability (Panda and Leepsa, 2017).

Efficiency can be described as making the most out of what is put in, in this case capital which is explained by Stewart (2008). On the other hand, It is important to note the practicalities of decentralisation and the difficulty in gathering the information in a timely manner. The extent to which this is beneficial depends on the size of the company as well as the competency of the different managers of every decentralised unit.

There are a number of KPI's which also have the aim of creating shareholder value, however the measures focus on stakeholders in order to do so, which are mainly non-financial measures. According to Bhimani (2015, p.587) non-financial measures provide clear advantages over financial. For the purpose of this essay we will look into 2 KPI's; Customer Lifetime Value (CLV) and Customer Acquisition cost (CAC).

CLV can be described as a measure which calculates the value of each customer to the business. According to Kotler and Armstrong (1996) a profitable customer can be described as “a person, household, or company whose revenues over time exceed, by an acceptable amount, the company costs of attracting, selling, and servicing that customer”. Berger and Nasr (1998) describe the excess as CLV. This is particularly useful with regards to technology companies as it has become easier to track customer behaviours (Jackson, 1985). If we take a look at Netflix which “has been in the tech business for more than a decade” (Alvarez, 2018) an average Netflix subscriber sticks with the firm for 25 months and has a lifetime value of $291.25 (Patel, 2018). The advantage of knowing this figure helps in figuring out how much a company should be spending on marketing costs over their customers. One of the advantages that Netflix has is that the new technology is aiding it into looking into what individual customers really want; this is done by using analytics which will only improve as the industrial revolution progresses.

One of the drawbacks with this KPI is that it doesn't take into account that customer revenues and costs can change over time, it also doesn't take into account any external factors such as, competitors and assumes that customers will remain to stay loyal over time.

Another KPI that we will look into is the CAC; it can be defined as the cost of resources in order to attract customers to the business. The costs consist of marketing and research. It is extremely useful for investors who can use it to see whether the business is worth investing in new internet tech companies. “Second biggest cause of start-up failure is the cost of acquiring customers turns out to be higher than expected” (Skok, 2016). This KPI works hand in hand with CLV, as it helps in understanding whether the CAC is too high, average or low. In Monzo's Annual Report (2017-18) it states that the cost of running one active account has reduced by 80% in 10 months, this shows that they have been using internal KPI's to keep track of this and it has successfully worked (Monzo.com, 2018).

In conclusion it can be said that tech start-ups in the Fourth Industrial Revolution will have access to an abundance of technology and big data enabling them to track customer trends more easily. In this era with low barriers to entry and increased encouraged competition it is important to focus on measures with are external, for example customers, rather than pure financial measures which is what the EVA measure focuses on. The EVA is primarily used for whether a project should be taken on, but the best result will be to combine this with KPI's.

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