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To create and maximize value, you need to understand the source of value. Simply saying that
you want to create value isn't descriptive enough, so you must define how you intend to do it.
Essentially, value is created when the return on capital exceeds the cost of capital.
Start by looking at all of the ways that you invest resources in your organization, and then assess
the value of those resources. Some of these value investigations are purely financial. For
instance, before making capital investments, do a thorough financial analysis of future cash
flows, and ask yourself how this investment will benefit your shareholders in the long run.
Your organization also creates value in many other places that you can't measure as easily. For
example, when you create value for your customer, you may also, ultimately, create value for
your shareholders and your organization.
Use value chain analysis to identify and measure key areas within your company where you can
maximize total value.
The value mindset is essential to a successful VBM program, and this mindset must start at the
top and continue through every level of the company. With a clear and well-defined value-based
strategy, you can show that the value of the organization is more important than other success
measurements, and you can help direct people's actions and decisions toward creating value.
Ultimately, VBM provides a framework for analyzing every decision made within an
organization.
When developing a VBM strategy for your organization and its various units, do the following:
Assess how you defined the value behind each strategy that you're considering. Note the
assumptions that will impact the value of the organization, and use these to analyze other
strategic options.
Weigh the value of each strategic option. (Conventional project analysis, Decision Tree
analysis, Decision Matrix Analysis and the Analytic Hierarchy Process can be useful for
doing this.)
Define the resources (investment) required for each strategy. Look at financial as well as
nonfinancial resource commitments.
Analyze how your expected value returns compare with your competitors' value returns.
You probably want to provide more value to your customers and shareholders than your
competitors do.
Look at your alternatives in terms of the effect on your competition, and how they'll place
you in your industry. These are important elements of overall organizational value.
When you start with a strategy that supports VBM, you can then set performance goals
to ensure that everyone within the organization works toward that common objective. This is
how a culture of VBM spreads. When each person is accountable for value-based results,
eventually the idea of organizational value becomes a "shared value" throughout the company.
To promote this idea, communicate how the performance goals relate to the value of the
organization. Make a direct connection between the 10-year plan, the three-year plan, and the
one-year plan, for example. When you link performance and outcome clearly, it's much easier for
people to understand. Management By Objectives
is a useful system for making this clear.
You'll also need solid action plans for people to follow. These plans break your strategy down
into the smaller action steps required to reach the goal of boosting the value of the organization.
Value as a goal is not very easy to measure, so the action plans provide the day-to-day structure
for VBM to be successful.
Ensure that your performance management system reinforces the ultimate goal of maximizing
organizational value. When something gets measured, it's more likely to get done. Therefore, you
need specific performance metrics to motivate and encourage everyone to work toward the
value-based strategy. Again, it's critical to link everyone's performance to the long-term strategy
- and to communicate this link clearly.
Remember these guidelines:
Challenges of VBM
Although a VBM approach can boost the value of your organization, it's important to remember
that it's not suitable for all situations. This is because it adopts a longer-term perspective, where
you must rely on forecasts, projections, and assumptions about what will (and will not)
contribute to the value of the organization.
For example, while you may be sure that an upgrade to your software systems to improve
efficiency will create value, it's much harder to predict the effects of a new technology that
disrupts your services, yet has the potential to increase market share significantly. Using VBM as
your only criteria may cause you to discount projects and strategies that have a highly uncertain
outcome, but could make a large contribution to long-term growth and sustainability. This may
make it unsuitable for early-stage technology ventures, for example.
Also, VBM may not be suitable in companies that are well established and that have successfully
used a particular business model for a long time. For instance, commodity-based companies,
such as those in the steel and lumber industries that have stable markets and reasonably stable
stock prices, may find that implementing VBM is actually more disruptive than any potential
gains. So, in creating new organizational value, you also have to make sure that the projects that
you take on as part of the VBM process don't detract from the value of the work that you already
do.
A VBM-focused approach may also cause you to lose sight of social or non-financial measures
of corporate success. Being a good corporate citizen can be a factor that adds significant value.
Costly projects that reduce the impact on the environment may not appear to add shareholder
value in the strictest of terms. However, when you analyze these projects with a broader view of
social value, they can actually contribute to long-term, sustainable value. Likewise, decisions
that put shareholder needs above those of other stakeholders like employees and customers, can
quickly backfire in some industries.
It is important, therefore, to use an approach like VBM with a scope and perspective that
matches your organization's overall mission and goals.
It is characterized by a commitment to long-term growth rather than short-term profit. Not all
companies' first and foremost objective is to increase value. Some companies are established
merely to exploit a short-term opportunity, other companies would like to maintain the company
at its existing size: the objective of VBM is to grow the business the actively plan for the long-
term. Bakhresa Group started in a humble manner with a small restaurant in the Port City of Dar
Es Salaam, Tanzania, in mid-seventies, it has now emerged as a respected business group in the
Region. The Group has its operations spread in Tanzania, Zanzibar, Uganda, Kenya, Malawi,
Zambia and most recently in Mozambique. Plans are in place to spread its wings to other
countries. The group now boasts of a turnover of more than Three Hundred Million United Sates
Dollars and is a proud employer of more than two thousand employees associated directly. There
are several companies under its umbrella and have investments mainly in Food and Beverage
Sector, Packaging, Logistics and Real Estate. Bakhresa Group has been working to expand their
business by long term growth by emphasis long term vision and making implementation of it,
those implications have been taken a long time, and some of them are still need a time to be
implemented. Bakhresa succeed to making steps on creating value through growth of the
manufactures of Food and Beverage Sector, Packaging, Logistics and Real Estate, product,
which leads to the expand of branch company in different parts in Tanzania and beyond
Tanzania. Bakhresa offers two groups of product and services: Food & Beverages and Services.
Conclusion
Value-based management (VBM) is a mindset that views the value of an organization as the
ultimate measure of success.
Successful VBM depends on highly effective strategic planning, supported by a performance
management system that drives the value mindset into the organization's overall culture.
Applying VBM effectively can create a cycle of increased awareness and recognition of the
elements that create long-term and sustainable profitability. With the resulting investor
confidence, your company will be able to endure market downturns and economic pressures
better.
However, VBM is not suitable for all situations and organizations. If you apply any of the
strategies or ideas behind VBM, make sure that it fits with your organization's overall goals and
objectives.
Reference
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http/www.bakhresa.com, Last accessed on 19th January 2023
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