## **Learning Outcomes**

This article explains how financial managers can drive long-term value creation for their organisations. You will learn to identify primary value drivers, link them with key performance indicators (KPIs), and assess how strategic KPIs align with corporate objectives. By the end, you should be able to recommend and evaluate KPIs in support of financial and non-financial goals, ensuring decisions support sustainable shareholder value.

## **ACCA Advanced Financial Management (AFM) Syllabus**

For ACCA Advanced Financial Management (AFM), you are required to understand the factors that create sustainable value and how managers select and monitor KPIs linked to strategy. Key syllabus areas covered include:

- The identification and assessment of organisational value drivers
- The selection of strategic KPIs relevant to long-term value creation
- The measurement and evaluation of both financial and non-financial performance
- The alignment of KPIs with shareholder wealth maximisation and broader stakeholder objectives
- The role of strategic KPIs in monitoring and controlling financial management decisions

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is a value driver, and why is it important for financial managers?
2. How can non-financial KPIs contribute to long-term shareholder value?
3. True or false? A company's return on investment is a strategic KPI only if linked to its main business objectives.
4. Explain the difference between a leading and a lagging KPI in the context of value management.

## **Introduction**

Managing for long-term value is a core responsibility of the senior financial manager. This means moving beyond short-term targets to achieve sustainable growth and risk-adjusted returns for shareholders. Achieving this requires a clear understanding of what drives value in an organisation and how to select measurable indicators—key performance indicators (KPIs)—that support strategic objectives.

Value drivers are fundamental factors that influence the overall value of a business. Strategic KPIs translate these drivers into practical, measurable targets. The right set of KPIs enables proactive performance management and ensures alignment between day-to-day actions and long-term strategic goals.

> **Key Term: value driver**
> A specific factor or activity that significantly impacts the ability of an organisation to create, grow, and sustain value for its shareholders.
>
> **Key Term: strategic KPI**
> A quantifiable measure, directly linked to strategy, that enables tracking of critical activities or outcomes influencing long-term value.

## KEY VALUE DRIVERS

Value drivers differ depending on the industry, strategy, and structure of the organisation. They can be financial (such as revenue growth or cost efficiency) or non-financial (like customer satisfaction or innovation rate).

### Categories of Value Drivers

1. **Growth Drivers**: Increasing revenue, expanding market share, or launching new products. Examples include sales volume, customer acquisition, and product pipeline development.
2. **Profitability Drivers**: Enhancing margins and controlling costs. Examples: operating margin, cost per unit, process efficiency.
3. **Risk and Capital Drivers**: Managing risk, optimal capital structure, and investment efficiency. Examples: return on invested capital, gearing ratio, risk-adjusted returns.
4. **Intangible Drivers**: Developing non-tangible sources of value such as brand, intellectual property, employee skills, and relationships.
5. **Stakeholder and ESG Drivers**: Environmental, Social, and Governance practices; relationships with key stakeholder groups; regulatory compliance.

> **Key Term: ESG factor**
> An environmental, social, or governance consideration that affects a company's value, reputation, or access to capital.

## STRATEGIC KPIs AND PERFORMANCE MEASUREMENT

KPIs put value drivers into actionable metrics. Effective KPIs must be:

- Linked to strategy
- Quantifiable and reliable
- Action-oriented
- Monitored regularly

There are two key types:

### Leading vs Lagging KPIs

- **Leading KPIs**: Predict future performance and enable corrective action. Example: Number of qualified sales leads (predicts revenue growth).
- **Lagging KPIs**: Measure the outcomes of actions taken. Example: Net profit margin.

> **Key Term: leading indicator**
> A performance metric that provides early signals about future results.
>
> **Key Term: lagging indicator**
> A performance metric measuring outcomes after the fact, usually reflecting past decisions.

### Alignment with Corporate Strategy

A strong KPI framework links each KPI to one or more value drivers and ensures that all are consistent with shareholder wealth maximisation and wider stakeholder interests.

For effective alignment:

- Start from mission and strategy
- Identify critical value drivers
- Select or design KPIs to measure progress on each driver
- Use a balanced scorecard approach where appropriate to integrate financial and non-financial indicators

### **Worked Example 1.1**

ABC Ltd operates in the technology sector and pursues a strategy based on market leadership through innovation. Identify two likely value drivers and recommend a strategic KPI for each.

> **Answer:**
> Likely value drivers include speed of product development and customer retention. Appropriate strategic KPIs could be:
>
> - Average product development cycle time (innovation value driver)
> - Annual customer retention rate (customer base value driver)

## USING KPIs FOR CONTROL AND INCENTIVES

KPIs should guide managerial action and support performance management systems:

- Set targets based on historical data and external benchmarks
- Assign KPI ownership to managers or teams with direct influence over outcomes
- Regularly monitor and report KPI results to drive accountability
- Use KPIs in incentive schemes, ensuring behaviours incentivised align with long-term interests

### **Worked Example 1.2**

A financial manager wants to encourage efficiency and innovation. Which KPIs could cause dysfunctional behaviour if used alone, and why?

> **Answer:**
> Solely using 'cost reduction' as a KPI may encourage managers to cut essential investment in research or staff, harming future value. 'Number of new patents filed' without quality checks might incentivise creating low-value patents. KPIs must be balanced and structured to avoid such problems.

### **Exam Warning**

> A common exam mistake is to focus exclusively on financial KPIs like earnings or cash flow, neglecting non-financial drivers such as employee engagement or regulatory compliance. In modern value management, these can have significant long-term impact.

## KPI SELECTION AND LIMITATIONS

Selecting the right KPIs requires understanding both the successes and risks of the business model. Limitations and pitfalls to avoid:

- Too many KPIs dilute focus—prioritise a small set of critical measures
- Poorly defined KPIs can lead to confusion and gaming of targets
- KPIs must be tailored to organisational context; avoid generic measures
- Over-reliance on past-focused (lagging) indicators can miss future threats

### **Revision Tip**

> Review your organisation’s most important goals. For each, identify which value driver they relate to, and how success can be measured with a clear, specific KPI.

## **Summary**

Financial managers must select, monitor, and evaluate strategic KPIs to ensure long-term value creation. Effective KPIs track progress on key value drivers, balance financial and non-financial priorities, and provide early warning of challenges. Their design and application must align with corporate strategy and support informed decision-making throughout the organisation.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define value drivers and explain their significance in value creation
- Differentiate between financial and non-financial, leading and lagging KPIs
- Outline how to select strategic KPIs aligned to organisational objectives
- Demonstrate how KPIs link to value drivers and long-term shareholder value
- Recognise common pitfalls in KPI selection and use
- Assess the role of KPIs in managing, controlling, and incentivising performance

## **Key Terms and Concepts**

- value driver
- strategic KPI
- ESG factor
- leading indicator
- lagging indicator

Managing for long-term value - Value drivers and strategic KPIs