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Leveraging Financial and Non-financial Strategies for Shareholder Value Growth: A Study of Selected Hotels in Zimbabwe

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1. Introduction

The study sought to answer the following questions:

1. What business strategies do hotels employ to achieve shareholder value growth?

2. What is the perceived performance in terms of EPS, PE ratio, and dividend yield ratio?

3. Is there a relationship between hotel performance and their business strategy?

4. What factors affect hotel performance?

Share holder value growth is a performance strategy measure. Like any other nature of business, management for hotel industry strives to satisfy shareholders by focusing on those actions that will result in the maximisation of the wealth of the shareholders. As a result there is generally a relationship between shareholder value growth and the business strategies employed by management. It is from the research questions highlighted above and the propositions made that the researcher proposed the following hypothesis.

H₁. There exist a significant relationship between hotel’s shareholder value growth and the business strategies employed by the hotel.

2. Literature Review

2.1.1. Return on Investment (ROI)

Most businesses exist to maximize wealth for its stockholders. In this regard, the operating success of the business is measured by its profitability over a given period of time. The basic measure for evaluating the performance of capital investments is the return on investment (ROI), which always is expressed as a percent [20 ] .

The general expectation is that the current ratio for a business should be 2 to 1 or higher and most short-term creditors prefer dealing with a business that carry current liabilities that are half or less compared to the value of the current assets [20 ]. A low current ratio indicates that the firm is likely to have liquidity problems in the year ahead. A high current ratio, on the other hand, may not be healthy as it may signal large inventory and trade debtors. Although ratio analysis is a very useful technique for evaluating financial performance [25 ] it is advised that it may not be a good indicator as there are other non-financial variables at play. It is more effective if other performance measures are assessed for their effectiveness in the attainment of performance goals, and this is what the researcher sought to do in this study.

2.2. Non-Financial Measures of Performance

The PE ratio shows how much investors are willing to pay per dollar of reported profits such that a low PE ratio may signal an undervalued stock or may reflect a pessimistic forecast by investors for the future earnings prospects of the business while a high PE ratio may reveal an overvalued stock or reflect an optimistic forecast by investors [Prentice Hall. London, 2007.>20. 4 th edition, Juta & co. Ltd. South Africa, 2000.>22 ]. It is very useful when a company proposes an issue of new shares, in that it enables potential investors to better assess whether the expected future earnings make the share a worthwhile investment [22 ]. Generally speaking a company’s PE ratio is compared to industry and market ratios to see if they are high, low or within the range. Although financial strategies are very useful technique for evaluating financial performance, literature [25 ] counsels that these may not be a good indicator as there are other non-financial variables at play. Financial measures alone have proved inadequate in assisting companies attain their strategic performance goals, let alone steer a company through difficult times [26 ]. In recent years, it has become clear that a company’s most important assets are not the ones that accountants measure [27 ]. but even those that cannot be quantified. This has led companies to rely on non-financial performance measures and the balanced scorecard is the non-financial performance strategy in vogue these days.

2.2.1. The Balanced Scorecard (BSC)

The BSC is a modern performance measure first introduced to the business world by Robert Kaplan and David Norton, at the Harvard Business School, in 1992. It came about as a result of coming up with a performance measurement system that addressed the deficiencies of the former performance measurements and its various forms have been widely adopted across the business world [28 ] having evolved from the 1 st generation through the 2 nd generation and up to the 3 rd generation BSC. It is regarded as a strategic destination statement drawn by the company describing what the organization is likely to look like at an agreed future date [29 ] and unlike the financial and non-financial performance measurements, the BSC incorporates the benefits from both performance measurements and also other variables that are intangible, namely the financial, customer, innovation and learning perspectives.

Although it is agreed that financial variables alone may not be a sufficient measure of corporate performance, other authors suggest that it is only suitable for top managers in an organization and complicates the decision making and performance evaluation processes [15 th edition, McGraw-Hill , Irwin, 2010.>30. Houghton Mifflin. 2001.>31. In Hoque, Z. (ed.), and Methodological Issues in Accounting Research: Theories and Methods. Spiramus, London, 2006.>32 ]. Its ability to simultaneously monitor the financial results and the effect of intellectual assets on future business grow has made it popular over the years [33 ]. Initially focused on finding a way to report on leading indicators of a business’s health rather than traditional accounting measures which are lagging indicators, the balanced scored was refocused to measure the firm’s strategy. Instead of measuring anything, firms should measure those things that directly relate to the firm’s strategy [33 ]. The BSC [34 ] is understood as a system for performance measurement that links the company’s strategy to specific goals and objectives, provides measures for assessing progress towards these goals, and indicates specific incentives to achieve these goals. The BSC looks at the firm from four perspectives (views): the financial perspective, the customer perspective, the business process perspective, and the learning and growth perspective [35 ]. These views are graphically illustrated below. Table 2 below depicts the Balanced Score Card (BSC) as summarised in literature [36 ] .

The BSC does not disregard the traditional need for financial data by using them as a basis for strategizing a desired future financial position. For the purposes of this study we look at the non-financial perspectives that drive financial performance, namely customer satisfaction, internal business process and innovation and learning perspectives.

Table 2. BSC perspectives, strategy and measure