Page 1 of 7

WITH THE AID OF SUITABLE EXAMPLES DISCUSS THE RELEVANCE OF VALUE BASED MANAGEMENT
SYSTEM IN MANAGING BUSINESS ORGANISATIONS IN A COUNTRY LIKE ZIMBABWE

We measure value creation today in terms of Economic value added, Value Based
Mangement have a positive effect on shareholder value, and better reflect today’s thinking on
value creation. VBM provides management with a complete management system, compared
to a more pragmatic system that was used before. This paper succinctly tries to discuss the
relevance of value based management system in managing businesses in country like
Zimbabwe with the aid of suitable examples

Value-based management can be defined as an integrated management control system that

Measures, encourages and supports the creation of net worth. Value based management is a
practical concept that consists of value creation, value retention and value enhancement of
business enterprise in a highly competitive environment characterised by market economy
and others. Business can create, enhance its value only by helping all its stakeholders that is
its employees, customers, competitors, money lenders, government and mainly shareholders.
Value-based Management is a term that describes a management philosophy based on
managing a firm with Economic Value Creation principles.
(Armitage and Fog, 1996)

It is a new way for managing, focused on the creation of real value not paper profits. Real
value is created when a company makes returns that fully compensate investors for the total
costs involved in then investment, plus a premium that more than compensates for the
additional risk incurred. Value-based Management is based on the notion that the central
objectives for all public traded companies is to maximize shareholder value. Because it offers
companies a logical and systematic way to pursue improvements in shareholder value, it has
received considerable action in the business press. (Bannister and Jesuthasan, 1997)

VBM is a framework for measuring and managing businesses to create superior long-term
value for shareholders. Rewards are measured in terms of enhanced share price performance
and dividend growth. (Marsh, 1999)Value-based Management is a management philosophy
 Page 2 of 7

which uses analytical tools and processes to focus an organization on the single objective of
creating shareholder value. (Condon and Goldstein, 1998).In the last decades, management
accounting faced increasing challenges to adopt new approaches, designed to fit the changes
in the economic environment and to correct perceived inefficiencies in existing controlling
structures especially in third world countries like Zimbabwe. This paper focuses on one of
those recent developments and adoption of the value based management philosophy in
Zimbabwe, viz. value-based management (VBM). Since VBM is claimed to be changing
financial management at the highest level in some of the world’s largest companies, this
literature review compares the value-based management approaches of six consultants, Value
Associates and tries to assess the potential of their management frameworks
.
A typical example of the application of value base management in Zimbabwe is Zimbabwe
Agenda for Sustainable Socio Economic Transformation (ZIMASSET).This a tool being used
to reform and modernise Zimbabwe’s entire public sector in general, government parastatals
and state enterprises as well as local authorities, despite the economic challenges facing the
country the VBM has reengaged the government for development in capacity building
programmes implemented through the public sector, ministries have been able to produce
integrated performance documents, departmental integrated performance documents,
departmental work and performance monitoring plans as well as departmental quarterly
performance reports

Value-based management measures, encourages and supports the creation of net worth
through encouraging stakeholder participation hence generating value to all stake typical of
one of the most dominant retail outlets in Zimbabwe i.e. TM PnP Pay supermarkets, they
introduced V.B.M.to match the ever changing modern day technological advancement in the
manner at which business organisation are being managed. Noted from TM PnP Motto
‘REAL VALUE ALWAYS”. Value based Management is a combination of beliefs,
principles and Processes that effectively arm the company to succeed in the battle against
competition from the outside and the institutional imperative from the inside. These beliefs,
principles and processes form the basis of a systematic approach to achieving the company’s
governing objective. (Mc Taggart et al., 1994).Value based Management can be all
embracing. It aligns strategies, policies, performance, measures, rewards, organization,
processes, people, and systems to deliver increased shareholder value. (Black et al., 1998), it
is a managerial approach in which the primary purpose is shareholder wealth maximisation.
 Page 3 of 7

The objective of the firm, its systems, strategy, processes, analytical techniques, performance
measurements and culture as their guiding objective shareholder wealth maximisation.
(Arnold, 1998)

Better implementation, clarifying goals to all stakeholder enabled such business organisations
as TM PnP and OK Zimbabwe to deal with differences in understanding before and helps
implementers communicate results clear unambiguous manner, VBM also creates stronger
capacity development, identifying intended results in a clear, workable and realistic way,
helps business with a clear ,workable and realistic way, clarifies what needs maximum
concentration and the exact resources that are needed for the job,VBM also promotes clear
result based planning, produces more realistic schedules, forcing business to through the
preconditions and sequence for action and the resources they require

In early 2000 the organizational structure of TM supermarkets was changed, resulting

in new corporate staff departments and the adaptation of the employee participation structure
in the Zimbabwe. Former division offices and corporate offices were integrated in order to
effect a higher level of decentralization. At that point, the two-layer organization model
turned more visible. Applying this structure effectively, TM PnP’s widespread activities were
attributed to business units that report directly to the Board of Management. The business
units had such delegated authorities that they could adequately and quickly respond to market
developments. In turn, the business units were clustered into so-called Groups (i.e.,
Maintenance, Marketing IT support, Central Procurement etc.). The General Managers were
responsible for the performance of their business units. To safeguard consistency and
coherence for the total organization, corporate directives had been established by the board of
management. At the corporate level, certain functions were centralized in order to execute a
coherent policy, e.g., regarding administration and control, finance, human resources, legal
affairs, strategy and technology

It is remarkable, told the business unit director, who technically educated people who
understand EVA are more aimed at finding solutions and being more proactive, compared to
business-educated people who are more backward looking and can perfectly tell why
something went wrong. Or, in his words: ‘Business-educated people can tell you why a
company went bankrupt, while technically schooled people try to avoid going bankrupt.’
 Page 4 of 7

Since the implementation of EVA in 1997, considerable time and effort was dedicated to
make management aware of EVA and its drivers, said the Finance Director. However,
throughout the years enthusiasm gradually

Regarding the stock market, TM PnP noticed that their share price lagged the market index.
This was a sign that the firm might become a target for a (hostile) takeover, fuelling the urge
to keep a closer eye on corporate performance. From that perspective, a sub-business unit
controller was of the opinion that the most important reason to implement EVA was to link
Capital with the Profit & Loss account. ‘EVA is a logical link between these two blocks,
therefore making it easier to explain. This last external reason links to the reasons of
implementing VBM from an internal perspective.

By means of VBM, TM PnP encouraged entrepreneurial behaviour, since all business units
have a very high level of autonomy. Managing for value is, according to TM PnP, a solid
push in the back to accomplish a change of mind set among management and employees to
behave like owners, and manage the company at the lowest possible costs, including the cost
of capital. Division management tries as in the case of most Retail outlets in Zimbabwe like
TM PnP, OK Zimbabwe tries to pick the best pieces from operational management to share
these with other operating companies. For example, if an operating company has a good time
schedule or system for controlling their accounts receivable, this is communicated to the
other operating companies.

Value Based Management is a management approach which puts shareholder value creation
at the centre of the company philosophy Innscor Zimbabwe and Brands Africa implements
the VBM philosophy through the introduction of Strategic Business Units where there are
small several business units which work in alignment with the company primary goals. The
maximization of shareholder value directs company strategy, structure and processes, it
governs executive remuneration and dictates what measures are used to monitor performance.
(KPMG Consulting, 1999) The founding principle underlying Value-based Management is
the discounted cash model of firm value. However, VBM is more than a performance
measurement system. Proponents argue that if it is to be successful it must be used to tie
performance to compensation. The guiding principle underlying the use of VBM, then, is that
measuring and rewarding activities that create shareholder value will ultimately lead to
greater shareholder value. » (Martin and Petty, 2000) Value-based Management says, in a
 Page 5 of 7

nutshell, the key to increased shareholder value lies in the integration of strategic planning,
performance measurement and compensation.(Leahy, 2000)

Value-based Management is a different way of focusing an organization. Strategic and

financial management processes. In order to maximize value, the whole organization must be
involved. We found only one source that describes just the process. Value-based
Management is a holistic management approach that Encompasses redefined goals,
redesigned structures and systems, rejuvenated strategic and operational processes, and
revamped human-resources practices. Value-based Management is not a quick fix but a path
requiring persistence and commitment. (Boulos, Haspeslagh and Noda, 2001)
.
As in every economic trade-off, managers are confronted with optimising the allocation of
scarce resources. The current economic and social environment, characterized by countless
changes and evolutions (Young and O.Byrne, 2001) provides management and more
particularly those in management accounting and management control functions, with new
challenges. Those challenges not only reveal inefficiencies in the existing management
systems but also support the need for an integrated management tool. The most important
challenges and inefficiencies are briefly discussed below. In the Anglo-Saxon countries and
more recently also in continental Europe much attention is directed towards the issue of
shareholder value. (Mills and Weinstein, 2000; Young and O.Byrne, 2001) The attention for
shareholder value has always been on the management agenda but in the 1960s and the 1990s
the focus on shareholder value was less explicit. A McKinsey &Co research reveals that
shareholder-oriented economies appear to perform better than other economic systems, and
other stakeholders do not suffer at the hands of shareholders. (Copeland et al., 2000)
Furthermore it appears that there is a paradigm shift with regard to management objectives.
In the past (and probably still even these days in some organizations) sales-growth or
revenue-growth was often the governing objective.

Residual income theory applied to customer or product profitability analysis reveals us that
not every growth is a good thing to pursue. This is however not the only change in
management objectives, since management more and more realizes that traditional earning
measures do not reflect the real value creation. The present value of future EVAs. Stewart’s
claim that it is the only performance measure that ties directly to the intrinsic market value of
any company (Dodd and Chen: 1996) is also true when taken into consideration all metrics
 Page 6 of 7

that are being used in the residual income-based valuation framework like economic profit,
shareholder value added, economic value creation but also shareholder value analysis (see
infra).Both academics and practitioners point out numerous benefits of EVA. Because it is a
single period measure, it allows for an annual measurement of actual not-estimated or
forecasted, value created performance. (Armitage and Fog, 1996) Others refer to the fact that
it corresponds more closely to economic profit than accounting earnings do and, as an
objective, is consistent with the pursuit of shareholder interest. (Grant, 1998)

Young and O.Byrne, 2001) Claims have also been made that EVA can drive behavioural
change by providing the incentive for managers to promote shareholder wealth as the primary
objective. (Dodd & Chen, 1996; Biddle et al., 1997; Brewer et al., 1999; McLaren
1999)Although some research indicates that EVA indeed is quite well correlated with stock
price performance (O.Byrne, 1996; Lehn and Makhija, 1996; Bacidore et al., 1997) other
research points out that EVA does not dominate earnings in association with stock market
returns(Dodd and Chen, 1996; Biddle et al., 1997; Günther et al., 1999). The implied
effectiveness of economic value added as a performance measure based on the association
between EVA and stock return is therefore at least ambiguous.

If well implemented in modern day business organisation, VBM can have a positive tell-tale
impact on business especially factors aligning to the reason for existence of many business
organisations, value-based management maximises value creation consistently, increases co-
operate transparency as well as helping to deal with globalised and deregulated capital
markets which always pose enormous challenges in modern day business circles.
 Page 7 of 7

References

Ittner, C., & Larcker, D. (2001). Assessing empirical research in managerial accounting: A
Value-based management perspective. Journal of Accounting and Economics, 32(1–3),
349–410.
Jensen, M. (2001). Value maximization, stakeholder theory, and the corporate objective
function.
Journal of Applied Corporate Finance, 14(3), 8–21.
Langfield-Smith, K. (1997). Management control systems and strategy: A critical review.
Accounting, Organizations and Society, 22(2), 207–232.
Malmi, T., & Ika¨ heimo, S. (2003).