Frank just blogged about a new measure he has derived called “TVI” - a True Value Index.
He says this could be a reality check for most companies: to see if their sources of profit are sustainable. It seems like a good idea, so I did a little digging to try and validate it or at least to see if it’s redundant.
I started by comparing/contrasting TVI with Stern Stewart’s EVA which includes a charge against profit for the cost of capital (and therefore penalizes inappropriate behaviors in income from non-primary sources as well as unnecessary cost), and in thinking of examples I saw what he’s talking about...about the thing that is missing: are we investing in/ earning from the ‘right’ things? So I tested his idea against PRVit (Stern Stewart’s valuation & MVA stuff) - and again, they don’t account for the unfair / In-transparent / Non-primary / unnecessary stuff.
And I looked at the ingredients of Altman’s Z-Score (for predicting bankruptcy), and again, no accounting for unfair /In-transparent / Non-primary/ unnecessary activities. So you could combine TVI with Z-Score for predicting failure (since you could still be allowing suppliers a decent margin, in a cartel, have appropriate treasury income, and have low irrelevant costs....and still fail).
Then I thought about other examples in Income from non-primary sources such as hedging. I would say hedging is not part of the core business, but has shown to be invaluable in some businesses (like Southwest Airlines) - so you cater for that by deeming it, in some cases, vital....so far so good.
I looked around at “Inclusive Value Management” (IVM) which is mostly about intangibles, and TVI still holds true (for financial/operational/intangibles). It looks like Frank is on to something new.
I completely agree that the discussion around the assumptions & decisions of unfair / In-transparent / Non-primary / unnecessary activities is invaluable. In our “x”PM whiteboard we say that’s in the “Debate” phase of connecting strategy to plans - where you model your assumptions and constraints, both operationally and financially to determine if your budgets, plans & forecasts can deliver on your strategic objectives and targets.
Have a read of Frank’s TVI formula and then see if you think TVI could be a predicative indicator for business failure.