DYNAMIC OF THE BUSINESS MODEL OF METALLURGICAL PRODUCTS SERVICING AND TRADING COMPANY VERSUS THE GROWTH OF ITS EFFECTIVENESS AND VALUE.

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1 DYNAMIC OF THE BUSINESS MODEL OF METALLURGICAL PRODUCTS SERVICING AND TRADING COMPANY VERSUS THE GROWTH OF ITS EFFECTIVENESS AND VALUE Jan BRZÓSKA POLITECHNIKA ŚLĄSKA WYDZIAŁ ORGANIZACJI I ZARZADZANIA ul.roosevelta Zabrze Poland EU sbrzoska@poczta.onet.pl Abstract Very interesting approach related to the company management is concepts oriented at its growth. These concepts, within the last twenty years strongly affected both the strategic behaviour and operational management, frequently shaping new business models. They are generally specified as systems oriented at value growth, e.g. VBM Value Based Management or EVM Economic Value Management or EVC Economic Value Creation. Evolution and development of the approach to creating the value means, that its growth is universal and superior goal for all stakeholders of the company. This creates development of such set of operations, that are oriented at utilization of factors increasing the assets of the company and creating the programs of changes, increasing the effectiveness of resources utilization and meeting the expectations of customers, which should lead to obtaining superior market standing because of gaining competitive advantage. Goal, that is value, should combine the investors (owners), employees, customers, suppliers and social partners. One of the most important factors of the company value growth is the effectiveness management. Dynamics of the surroundings, especially the increasing competition and changing expectations of the stakeholders, including within the complexity of economical processes, necessitate the improvement of tools measuring and controlling the effectiveness. Subject of the study presented in the paper is the measurement of effectiveness of operations performed within different areas of the company activity. In the constructed research model, one used both qualitative methods and the balanced scorecard. Using the developed research model, effectiveness measurement of the company was performed in the aspect of the strategy changes and business models related to them. Object of the study was trading and servicing company of metallurgical products Keywords: effectiveness, value,business model, management, stakeholders, economic value 1. INTRODUCTION Company management concepts oriented at growth of its value are currently well perceived by the global economy, especially the UE economy. It can be characterized not only by the progressing globalization but also by crisis threats (and frequently, by the observed crisis phenomena), which fact affects the scale and intensity of competition. Companies develop and implement business strategies and models that enable competing in a variable situation. Their intent is to translate into such profitability, that would ensure covering capital costs and generating surplus that provides development. They use different management methods and instruments, one of them is value based management. Value based management concepts are not completely a novelty in the management sciences, however, one can say that: - within the past twenty years, they exerted significant influence on both strategic behaviour and operational management of companies, frequently shaping new business models, - they undergo continuous evolutionary changes and mastering, finding new applications within the economy.

2 Based on observations and research [1] related to the value based management systems (such as e.g. VBM Value Based Management, EVM Economic Value Management or EVC Economic Value Creation), one can easily see the increasing interest. At the same time, we must agree with conclusion from the value based management research, that is formed by H. Ryan and E. Trahan[2]: there is a lot of space for improvement of VBM systems, both within their designing and implementing scope. Evolution and development of the approach to creating the value means, that its growth is universal and superior goal for all stakeholders of the company. This creates development of such set of operations, that are oriented at utilization of factors increasing the assets of the company and creating the programs of changes, increasing the effectiveness of resources utilization and meeting the expectations of customers, which should lead to obtaining superior market standing because of gaining competitive advantage. Goal, that is value, should combine the investors (owners), employees, customers, suppliers and social partners. One of the most important factors of the company value growth is the effectiveness management. Dynamics of the surroundings, especially the increasing competition and changing expectations of the stakeholders, including within the complexity of economical processes, necessitate the improvement of tools measuring and controlling the effectiveness. Currently, there is a conviction about the influence of many factors that shape and increase the company value. One of the most important value factors is a management instrument such as company strategy. In this context, using own research, one made a hypothesis, that a change of the business model significantly affects the company value. This value is presented quantitatively by the measures given in the form of the balanced scorecard. Subject of the study presented in the paper is the measurement of effectiveness of operations performed within different areas of the company activity. Object of the study was trading and servicing company of metallurgical products The goal of the paper is to present the relationship between the dynamics of the business model of metallurgical products servicing and trading company and the results that characterize the company value. Using the developed research model, effectiveness measurement of the company was performed in the aspect of the strategy changes and business models related to them. 2. BUSINESS MODEL VERSUS COMPANY VALUE GROWTH Companies operating at the open market search for methods and ways to provide themselves with the possibly stable competitive edge. New methods and management systems emerge while existing ones are being developed. Among them, management concepts oriented at effectiveness and innovativeness growth are important, which, in the consequence, should to lead to the company value growth principles or paradigm of contemporary company. It is understood in wider context than the shareholders interest primacy [3], because it is included in the new interpretation of the company of the future sustainable enterprise[4]. It is linked with sustainable development in relation to the business. This leads to understanding the value and factors shaping it in significantly wider context and means the increase of subjective and methodological scope of the company value based management. In this relation, subjective spectrum of value based management becomes wider by far more, covering among other things strategy, management system, marketing, innovation, investments, finances, human resources, quality and cooperation potential. In this context, one can say, that creating value is the basic condition and the goal of functioning and development of companies as well as other entities of the economical and social zone. In the general meaning, the value can be understood as the ability to organize to: - bear profits for the broadly comprehended surrounding (customers, partners and other stakeholders, owners and employees), - use and gain resources (own and global). Such abilities of the companies are affected by proper strategies, business models and management instruments. In case of a company (business organization), value based management can be understood as a management system (strategic and operational) that provides relatively reliable and long-term growth of value measured mostly by the growth of economical profit

3 and assets. In practice, it means application of proper strategies, business models and instruments that enable performing actions, that allow to: - select and increase the resources in order to increase the effectiveness of the company functioning, - increase the competitiveness gaining better market position, - prepare and execute restructuring programs oriented at the effectiveness growth, - meet the stakeholders expectations, especially financial requirements of the owners (return on capital, volume of economical profit), - better perform the role of an organization the develops sustainably. Within the wide spectrum of the concepts and approaches to creating the value, special role is played by those, which unequivocally and reliably direct the company at the growth of economical effectiveness. They are identified with the company management system, in which all decision of financial, market, investment, organizational and production character are subordinated to execution of the goal which is maximization of value of the invested capital. In general, they are called value growth oriented systems. Among them, the most popular is VBM Value Based Management [1], where the grounds for appraisal of value is economical value added (EVA, economical profit). In the value based management approach, VBM is used as the managers control system. Volume of the economical profit is treated as the grounds for the value measurement and its implementation as well as information and warning as well as motivating and evaluating tool in the VBM application system. In the presented paper, VBM method elements were used to assess the business model results and measure the value, treating the economical profit as its basic measure.within the analysed area of the research, such perception is related to perceiving the strategy and business model as creators of added value for customers, owners, employees or society. Business model is understood as contemporary form of model capture of concept of the strategy and organization system or even company management. It should be noted, that there are many definitions of business models given in the literature together with their relationship with the company strategy [5]. In the performed research of business model, in the aspect of shaping the company value, business model creating and analysing principles based on assets were assumed, that are presented by R. Boulton, B. Libert, S. Samek [ 6]. These are assets that shape so called Value Dynamics. This term means approach to strategy, focused on assets, proportions and combination of which affect economical results of a company. It is assumed, that creating the value is the result of reaction of four holistic, interrelated challenges, that the company should overcome. These challenges are: designing the business model, risk management, assets portfolio management, measuring and reporting the whole assets base. In this context of creating the value, business model is defined as unique combination of tangible and intangible assets that decide about whether a company is able to create the value or to destroy it [6]. Based on this definition, business model elements were created together with research method that enables capturing the influence of changes of a company business model on shaping its value. 3. METHOD OF EXAMINING THE CREATION OF MEASUREMENT OF VALUE The presented model of examining the creation and measurement of value is based on two basic research domains. First of them, is a set of elements and features of qualitative nature (including structural), the other is scorecard representing quantitative elements. Scheme of the concept of the method of examining the

4 creation and measurement of value is presented in the Fig. 1. Combination of quantitative and qualitative changes enables capturing the spectrum of creating the value that takes into account the concepts of sustainable company. Qualitative elements of the model, such as characteristics of the company, competitive advantage, resources and competences, processes decide, to high extent, about the effectiveness, thus the company value as well. In the presented concept of the business model effectiveness method, surrounding concept, in which a company is functioning, is taken into account. It is obvious, that the processes creating the value are affected by the common and sector surrounding. The latter, is 5 classic competitive strengths that represent the model of M. E. Porter [7]. The part characterizing qualitative features, covers, for example, the following elements: value offered to customers, covered segments of the market, zones of profit, types of competitive advantages, assets, strategic competences, basic operations and processes, types and structures of value chain these, to high extent, are the elements of the business model, that directly shape the ability to create the value. Quantitative measures are given in the form of scorecard. It is based on a well known management instrument, which Balanced Scorecard (BSC)[8].The made modification of the card was related to its adaptation to the metallurgical products servicing and trading company and the subject of the research, which is creating and measuring the value. That is why perspective of resources and processes is present, however, it means tangible resources and does not cover the HR issues. In the developed research mode, one assumed, that the most important measures of creating the value are: - economical profit (understood as the difference between net profit and capital cost), - number of regular customers and their share in the whole set of customers, - value of sale per 1 customer (relationship of incomes to the number of customers - sales profitability (relationship of profit to the volume of sales), - value and profitability of assets (net assets value and relationship of net profit to assets), - quality of services (measured by the number of claims and point-based assessment of customers). The observed measures of value are the result of functioning of the specified business models indicating the directions of their changes and improvements. 4. CHANGE OF THE BUSINESS MODEL OF THE METTALURGICAL PRODUCTS SERVICING AND TRANDING COMPANY VERSUS GROWTH OF VALUE (CASE STUDY) The subject of the paper was metallurgical products servicing and trading company located in the Silesian Province, that own three warehouses of metallurgical products. Servicing centres of steel products are already operating in two of them. Subject of the Company s operations, according to the founding act, is among other things:

5 Fig. 1 Scheme of the concept of the method of examining the creation and measurement of value Model of creating and measuring the value Surrounding Effectiveness of the J company s business model Balanced Scorecard S Suppliers Finances Customers (market) e c t o r M a c r o Recipients Competitor s Potential Economy policy Job market Financial market Law Development and human resources Company characteristics Legal form Basic type of activity Domain Competitive advantage: Value offered to customers Covered segments of the market Resources and processes Resources and competences: Tangible assets Intangible assets Organizational structure Processes: Processes map Business processes Type of value chain Measure of value: Economic profit Number of regular customers Sales value per 1 customer Sales profitability Value and profitability of Main products Ownership Type of competitive advantage Strategic competences Structure of value chain Source : own study

6 - wholesale sale of metal products, - wholesale sale of metals, - production of metal constructions and their parts, - mechanical working of metal elements, - sale of construction materials, - design services and technical advisory. The Company was established in 1999 and gains profits at the level ca. 40 million PLN (ca. 10 million EURO); at the end of 2011, it employed 112 employees. The company is owned by 6 physical persons and the equity is 10.8 million PLN. Within the Company, that applies the balanced scorecard, research of the business model change in the aspect of creating value in was performed. Within this period, the company changed the business model from trading company to servicing and trading company by starting the servicing centres of steel productsstarting the servicing centre, commissioning the sale of fuels and performing design and advisory services within the scope of steel products application necessitated the increase of capital expenditures and gaining new competences also. Table 1 presents the characteristics of the business model in the examined company within and It uses qualitative features of the business model captured in the method, diagram of which is presented in the Fig. 1. To depict the dynamics of the business model, these elements which underwent significant changes were presented. Elements and features are given, that show the changes in the applied business model. When analysing the data given in Table 1, one can see the changes in the structure and features of the business model of the examined company. The way the business model dynamics influenced the company value can be noted based on the value measures analysis assumed in the applied research method, as given in Table 2. Direct cause of the business model change was the drop and deterioration of the value measures of the company operating as a wholesaler and retailer of metallurgical products. Reasons for such situation should be looked for in the development of the network of hypermarkets. Implementation of the new business model (2009), significantly improves most of the value measures. Table 1 Dynamics of the business model of metallurgical products servicing and trading company Periods Elements and features of the model Main types of business Main products Value offered to customers Field: Character of the business operations Retail and wholesale sale of metallurgical products Wide assortment of flat and long metallurgical products Field: competitive advantage Products offer covering wide scope of metallurgical products and limited assortment of complementary construction materials Retail and wholesale sale of metallurgical products,servicing of metallurgical products, Performing design and advisory services within the scope of steel products application, Wide assortment of flat and long metallurgical products,bending, welding, cutting metallurgical products,welded structures.designs and advisory related to metallurgical products application Comprehensive services: Product offer covering wide scope of metallurgical products, metallurgical products machining services, designing, advisory, transport to construction site Covered segments of Construction and repair All groups of customers interested in

7 the market Type of competitive advantage Material resources (size and structure of capital, characteristics of the potential of supplies source, organization) competences Processes map Business processes Type and structure of the value chain companies Individual customers Resulting from competitive prices, high quality and location Field: sources and their utilization Logistics and property resources used while retail and wholesale sale. Relatively low level of equity. Well organized supplies system (leading manufacturers of metallurgical products). Good location of trading warehouses. Trading competences: sales of metallurgical products and construction materials. Customer service. CRM in relation to the selected regular customers, cooperation competences related to the manufacturers of metallurgical products. Field: operations and processes Business processes: procurement, sales of metallurgical products, marketing at the metallurgical products market. Poorly developed HR processes. Outsourcing of transportation services. Simple chain of value source of creating the value based on the trading margin application of steel products (except automotive and mining corporations) Resulting from differentiation gained by comprehensiveness of the offer and design solutions Resulting from competitive prices, high quality and location Increase in equity. Logistics and property resources used while retail and wholesale sale. Modern devices for plastics working, steel structures machining and producing. Means of transportation. Well organized supplies system (leading manufacturers of metallurgical products). Good location of trading warehouses. Engineering and trading competences: services of metallurgical products, production of steel structures. Flexible response to customers needs. CRM in relation to many customer, designing and advisory competences, cooperation competences with the manufacturers of metallurgical products. Business processes: services of metallurgical products, sale of metallurgical products, marketing of the metallurgical products market, designing and advisory. More developed HR processes, development and selection of HR, motivation system. Developed chain of value, adaptation of the whole chain to the customer s needs, Creating source based on specialist services. Source : own study CONCLUSIONS Gaining competitive edge and development of the company is conditioned by the application of suitable strategies, business models and management instruments. Important role is played by those, which are oriented at the value growth. The imperative of the company value growth in the contemporary economy, that is characterized by changing surrounding and crisis threats, is related to wider spectrum of factors, methods and conditions for creating the value. One of them is business model applied by the given company.

8 Table 2 Selected measures characterizing the effectiveness and creating the metallurgical products servicing and trading company Value measure Economical profit* (million PLN) Number of regular customers ** Sales value per 1 customer ** (thousand PLN) Sales profitability ROS (%) Assets value (million PLN) Assets profitability net profit / assets value (%) Quality of services measured by the value of complained services (million PLN) Years * Rate of equity cost COE = 10% ** Applied to customers purchasing for more than 5000 PLN Source : own study To perform the examination of the business model dynamics influence on creating the value, one used author s method that covers qualitative and quantitative features and elements of the business architecture. The work considered also the surrounding context, elements of which, such as competition and economic trend, are very important for the gained effectiveness of the companies within the metallurgical sector. The performed research, which synthetic results are presented in the paper, point at an important influence of the applied new company business model on the growth of its value. Significant factors of success that minimize the risk of the undertaking was gaining the private investors capital, quick mastering of new technology related to servicing metallurgical products and gaining customers by flexibility and high quality.

9 LITERATURE [1] CWYNAR, A.,DŻURAK, P. Systemy VBM i zysk ekonomiczny. Projektowanie, wdrażanie, stosowanie.wydawnictwo Poltext,PRICEWATERHOUSECOOPERS, Warszawa 2010, p.40. [2] RYAN, H.E.,TRAHAN,E.A.The Utylization of Value-Based Management;AnEmpirical Analysis, Financial Practice &Education, 1999,vol1,Nr1.p.46 [3] HAMEL,G.,Zarządzanie jutra,red Horse, Warszawa, p.9 [4] GRUDZEWSKI,W.M.,HEJDUK I.K., SANKOWSKA,A.,WAŃTUCHOWICZ,M.,Sustainability w biznesie, Wydawnictwo Poltext.Warszawa,2010p.19 [5] BRZÓSKA,J.Model biznesowy współczesna forma modelu organizacyjnego zarządzania przedsiębiorstwem.organizacja i Zarządzanie,Gliwice 2009, Nr 2, p.6. [6] BOULTON,R LIBERT B, SAMEK, S.Cracking the Value Code, Arthur Andersen, Harper Colinns, USA, 2000, p. 159 [7] PORTER M.E.Competitive Advantage:Creating and Sustaining Superior Performance, The Free Press, New York,1985, p.22 [8] KAPLAN R.S, NORTON D.P.The Office of Strategy Management,Harvard Business Review, October 2005, p