Value Based Management
- Value-based management (VBM) provides a precise and unambiguous metric—value—upon which an entire organization can be built.
- 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.
- The focus of VBM should not be on methodology. It should be on the why and how of changing your corporate culture.
- Traditional financial performance measures, such as earnings or earnings growth, are not always good proxies for value creation
- To focus more directly on creating value, companies should set goals in terms of discounted cash flow value, the most direct measure of value creation.
- We strongly believe that value is the only correct criterion of performance.
- for VBM to stick, it must eventually involve every decision maker in the company like with every change management initiative
Value drivers
- performance variables that will actually create the value of the business
- it is through these drivers of value that senior management learns to understand the rest of the organization and to establish a dialogue about what it expects to be accomplished
- A value driver is any variable that affects the value of the company
- Key value drivers are not static; they must be regularly reviewed
- To be useful, however, value drivers need to be organized so that managers can identify which have the greatest impact on value
- ROIC trees as a tool to illustrate company value drivers hierarchy
- usually divided into 3 levels
- generic
- operating margins and invested capital are combined to compute ROIC
- business unit
- variables such as customer mix are particularly relevant
- grass roots
- value drivers are precisely defined and tied to specific decisions that front-line managers have under their control
AI-assisted summary
Value-Based Management (VBM) is a strategic approach that focuses on maximizing company value through decisions that generate returns exceeding capital costs. The framework emphasizes discounted future cash flows as the primary value metric, rather than traditional financial measures like earnings growth which may not accurately reflect value creation.
VBM implementation requires identifying and organizing "value drivers" - the performance variables that influence company value - into hierarchical levels: generic (organization-wide metrics like ROIC), business unit specific variables, and grass-roots factors controllable by front-line managers. For successful implementation, VBM must be integrated into corporate culture and decision-making processes at all levels of the organization.