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 The Relative Value of Growth
(RVG) method from Mass is a technique that can be used for
comparing how growth- and margin improvements effect shareholder value creation.
RVG expresses the value of an extra
percentage point of growth as a multiple of the value of a percentage
point increase in a company's operating profit margin. The higher the
multiple, the more valuable growth is to a company.
An RVG of 3, for example, means that a firm would generate three times
as much shareholder value from adding 1% of growth than it would from
increasing operating profit by 1%.
Mass claims that the shareholder value creation potential of growth
strategies often outweighs that of cost cutting strategies by a factor.
In his article in HBR of April 2005, Mass concludes furthermore that
growth is often far more valuable than managers think, especially when
considering long-term.
Calculation of the Relative
Value of Growth. Formula
RCG is calculated by dividing the value of 1% revenue growth by the
value of 1% margin improvement (see fig).
The Relative Value of Growth model can be used for making investing
decisions, corporate strategy formulation, business strategy
formulation, establishing a long-term focus, show the potential of
growth as a source of value, understanding shareholders expectations,
performance management and executive compensation.
The main strengths of the RVG framework are it helps to find the
right balance between growth and margin improvement at corporate and SBU
level, to establish a long-term investing focus, to show the potential
of growth as a source of value, to provide managers with an
understanding what shareholders expect of them. It may also prove useful
for performance management and executive compensation. It's relatively
easy to use.
The main limitations of the
Relative Value of Growth method are:
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Margin calculation
is EBIT / Operating Profit-Based: limited reliability and can be
relatively easy manipulated.
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Technically flawed
and not very precise (DCF model does not distinguishes short-term
and long-term, Cost of capital and growth-return prospects are taken
at corporate level, No distinction made between acquisition-driven
growth and organic growth)
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RVG is a relative
measure: does not show the actual amount of the contribution of
growth and margin improvement.
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Although TVG helps
shifting the investment focus to the long term, it does not actually prevent
analysts or investors from taking a short-term view.
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Intangibles
valuation?
Compare with Relative Value of Growth:
Economic
Value Added | Market Value
Added | CFROI |
CAPM |
WACC |
Discounted Cash Flow |
Return on Investment |
EBIT |
EBITDA |
Growth Phases |
BCG Matrix |
Product Life Cycle |
Product Market Grid |
Profit Pools |
Competitive
Advantage
More management models
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