Value-Based Management and Strategic Analysis Based on Modified Cash Value Added (MCVA) Model

Abstract

The concept of Value-Based Management (VBM) emerged in early eighties as a product of strategy and management consulting. During the last two decades it has gained significant popularity not only among American and Western European corporations, but also in some companies operating in emerging markets. The Cash Value Added (CVA) model stands in line with other VBM models. It was originally developed in 1996 by Swedish financial consultants E. Ottoson and F. Weissenrieder. The model combines ex ante and ex post analysis of the corporate performance. The logic of CVA is based on matching the firm’s operating cash flows with demanded operating cash flows (OCFD) equivalent to economic depreciation. The Modified Cash Value Added (MCVA) model discussed in the present article represents an evolutionary development of the CVA model. The major modification relates to incorporation of expectations in OCFD calculation algorithm. MCVA model is a toolbox that tracks that the current operating cash flows cover the minimum required level (OCFD), providing efficient mechanism of control and timely intervention in the process of investment decisions implementation (if required).MCVA model provides the management of the firm with a base for comparison underlining strategic objectives that should be met and if possible exceeded in each reporting period. As a result, this gives a better understanding of the company’s business, the interrelations of internal and external processes and ability of strategic investments to generate cash flows in short and long term perspective.