What
is the Relative Value of Growth? Description
The Relative Value of Growth framework (RVG) from Nathaniel J. Mass
is a technique that can be used for comparing how growth and margin improvement
effect shareholder value. The relative value of growth 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. If the multiple is
higher, the growth will be more valuable to a company.
An RVG of 3, for example, means that a firm would generate three times
as much shareholder value by adding 1% of growth, than it would add by increasing
operating profit by 1%.
Mass claims that the shareholder value creation potential of growth strategies
often outweighs by a factor that of Cost Cutting strategies. In his article
in HBR of April 2005, Mass concludes furthermore that growth is often far
more valuable than managers think, especially when considering longterm.
Calculation of the Relative Value of Growth. Formula
RVG is calculated by dividing the value of 1% revenue growth by the value
of 1% margin improvement (see fig).
Usage the Relative Value of Growth model. Applications
 Making investing decisions.
 Corporate Strategy formulation.
 Business Strategy formulation.
 Establishing a longterm focus.
 Show the potential of growth as a source of value.
 Understanding shareholders expectations.
 Performance Management.
 Executive Compensation.
Strengths of the Relative Value of Growth framework. Benefits
 Ease of use and simplicity.
 Find right balance between growth and margin improvement at corporate
level.
 Find right balance between growth and margin improvement at SBU level.
 Establishing a longterm focus.
 Helps to show the potential of growth as a source of value.
 Provide managers with an understanding what shareholders expect of them.
 Maybe used in the future for Performance Management and Executive Compensation.
Limitations of the Relative Value of Growth method. Disadvantages
 Margin calculation is EBIT based / Operating Profit based: limited reliability.
Relatively easy to manipulate.
 Technically flawed and not very precise:
 DCF model does not distinguish shortterm and longterm.
 Cost of capital and growthreturn prospects are taken at corporate
level.
 No distinction is made between acquisitiondriven growth and organic
growth.
 RVG is a relative measure: does not show the actual amount of the contribution
of growth and margin improvement.
 RVG helps shifting the investment focus to the long term. However
it does not prevent a shortterm view by analysts or by investors.
 Intangibles valuation?
Assumptions of the Relative Value of Growth model. Conditions
 A simplified numeric approach can help to make the right strategic choices
and investment decisions
 The limited reliability of the Relative Value of Growth formula is not
a major problem.

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The Steps in Calculating Relative Value of Growth
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Business Valuation  Company Valuation  Firm Valuation
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Relative Value of Growth Diagram
Effect of Growth on Corporate Value (...)







Compare with Mass's Relative Value of Growth:
PEG Ratio 
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
framework  Rule
of Three
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