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Value Based Management

VBM has been developed to facilitate the realization of the objective Create value for share holders Institutional Investors have begun exerting influence on corp. mgmts. to create value. Business press emphasizes shareholder value creation in performance rating Top management compensation is linked to shareholder value creation

Marakon Approach

Specify the financial determinants of value. Understand strategic drivers of value. Formulate higher value strategies. Develop superior organizational capabilities.

Understand the Strategic Determinants of Value

Market Economics: Intensity of indirect competition, Threat of entry, Supplier Pressures, Regulatory Pressures, Intensity of direct competition, Customer Pressures. Possible sources of relative economic advantage are:

Access to cheaper raw materials, Efficient processes, Low cost distribution channels, Superior management, Economies of scale.

Formulate Higher Value Strategies

Participation strategy: Which business to enter which to exit? Competitive Strategy: Product differentiation, configure and manage business unit costs, pricing.

Develop Superior Organisational Capabilities.

Competent and energetic CEO who is fully committed to the highest degree to shareholder wealth maximization. Corporate Governance that promotes the highest degree of accountability for creation and destruction of value. Top mgmt pay based on the philosophy Relative pay for Relative Performance

4 Principles of Resource Allocation:


Zero based resource allocation Funding strategies and not projects. Principle of no capital rationing. Zero tolerance for bad growth.

Alcar Approach

Value drivers which affect shareholder value are

Rate of Sales Growth Operating Profit Margin Income Tax Rate Investment in Working Capital Fixed Capital Investment Cost of Capital Length of the high growth period

Mckinsey Approach

Key Steps to Value based maximization

Ensure the supremacy of value maximization Find the value drivers Establish appropriate managerial processes. Implement value-based management properly.

The thinking behind VBM is simple. The value of a company is


determined by its discounted future cash flows. Value is created only when companies invest capital at returns that exceed the cost of that capital. VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating

decisions. Properly executed, it is an approach to management that


aligns a companys overall aspirations, analytical techniques, and management processes to focus management decision making on the key drivers of the value.

The focus of VBM should not be on methodology. It should be on the why and how of changing your corporate culture. A value-based manager is as interested in the subtleties of organizational behavior as in using valuation as a performance metric and decision-making tool.

Value-based management can best be understood as a marriage between a value creation mindset and the management processes and systems that are necessary to translate that mindset into action.

Why VBM? - Because organizations have to change constantly in order to meet expectations

Superior executive performance is defined by delivery of value - to investors, customers, employees and others who have material influence Growth in market value is a key to executive survival and the winning organization Executives need new skills, new tools and a responsive organization to deliver value Possession of facts is critical when making high risk decisions Information Portals provide consistent communication to employees and other stakeholders

Benefits of VBM
Focus the efforts of people in the organization on driving to achieve whats important in a holistic manner:

satisfied customers correctly assigned resources growing profits streamlined processes that deliver business facts to manage the business motivated and accountable people waste eliminated

The bottom line: VBM = Performance

Value-based management (VBM)

A discipline that focuses on the management of the organization holistically


Emphasizes the creation of value as defined by its stakeholders and priorities defined by management Focuses on the deployment of strategy and value creation by managing processes, activities, jobs, compensation and organization structure Uses analytical methods, facts, computing /communications technology in an integrated framework

Why Value?

The creation of value is the primary goal of managers in leading companies Organizations exist to create value for all constituencies / stakeholders

Stakeholders include customers, owners, employees, suppliers and society in general

managers,

Organizations determine the degree to which they will prioritize the interests of each stakeholder group and will therefore balance performance goals accordingly

What Values?
Values depend on the stakeholder, however, examples might be:

Markets and owners expect that economic value be created Customers may expect to obtain desired goods and services on time and at competitive prices Employees may expect a substantive and meaningful job with commensurate compensation Suppliers may expect to be paid on time Society may expect that their environment will be improved

Value Based Management Framework


Strategy
Stakeholder Needs / Values Customers Employees Regulators Owners Investors
T

Organization Values Goals Results

I M E

Activity Based Costing/ Budgeting


Q U A L F I I N TAQ N U YCA I AN LT I T Y

Step1

Step 2

CUSTOMER

Process Management
Objective

Process Goals Results

Performance Measurement / Scorecard

Behavior

Best Practices

Consequences Performer

Activities Goals Results

Feedback

Human Performance
PERFORMANCE
Focused Management Information Inc. August 1999 (Rev 4)

Organization Design & Compensation

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