Today I want to deal with “Value Based Management”. I think it is a very important topic related to Change Management…
In many companies the following situation is quiet common:
- Strategy is not explicitly defined or available
- Strategy was poorly or not at all communicated
- Strategy, objectives and actions are not known to the employees
- Comparing strategy scenarios using a common scale is missing
- The influence of significant strategic and operational issues on the company’s success is widely unknown
- There is uncertainty about products or business units contributing to the success
- Growth opportunities remain untapped
As a result permanent advantages towards competitors often can not be obtained:
- The broad variety of metrics leads to contradicting results
- Necessary data often is not available
- Investors feel badly informed about the “performance” of the company
- An increase of the volume of credit causes worse conditions (interest rate, personal collateral); Investments must be financed out of operations or be omitted
Out of my personal experience: “The introduction of value-based management addresses these weaknesses and problem areas. Value Based Management supports the strategy of education and communication and is addressing five levels within each company.”
Step I: Definition
Option 1: Value Based Management (VBM) is the management approach that ensures corporations are managed consistently on value (normally: maximizing shareholder value).
Option 2: Value Based Management aims to provide consistency of:
- the corporate mission (business philosophy)
- the corporate strategy to achieve the corporate mission and purpose
- corporate governance (who determines the corporate mission and regulates the activities of the corporation)
- the corporate culture, corporate communication, organization of the corporation
- decision processes and systems
- performance management processes and systems
- and reward processes and systems
- with the corporate purpose and values a corporation wants to achieve (maximizing shareholder value)
Step II: The Elements of Value Based Management
- Creating Value: How the company can increase or generate maximum future value. More or less equal to strategy.
- Managing for Value: Governance, change management, organizational culture, communication, leadership.
- Measuring Value: Valuation.
Value Based Management is dependent on the corporate purpose and the corporate values. The corporate purpose can either be economic (Shareholder Value) or can also aim at other constituents directly (Stakeholder Value).
Step III: Why is Value Based Management important?
Note that any (large) company operates and is competing in multiple markets:
- The market for its products and services.
- The market for corporate management and control (competition on determining who is in charge of an organization, threat of takeover, restructuring and/or a Leveraged Buy-out).
- The capital markets (competing for investors’ favor and money).
- The employees and managers market (competition for company image and ability to attract top talent).
Any failure to be competitive in one or more of these markets, may seriously jeopardize the survival chances of a corporation. Value Based Management can help organizations to win in each of these 4 markets.
In recent years, traditional accounting methods and metrics have turned out to be very unreliable. This has also supported the emergence of new value-based oriented metrics such as Economic Value Added, CFROI, Market Value Added and other Value Based Management mechanisms.
Step IV: Benefits
- Can maximize value creation consistently.
- It increases corporate transparency. It helps organizations to deal with globalized and deregulated capital markets.
- Aligns the interests of (top) managers with the interests of shareholders and stakeholders.
- Facilitates communication with investors, analysts and communication with stakeholders.
- Improves internal communication about the strategy. Prevents undervaluation of the stock.
- It sets clear management priorities. Facilitates to improve decision making.
- It helps to balance short-term, middle-term and long-term trade-offs.
- Encourages value-creating investments.
- Improves the allocation of resources. Streamlines planning and budgeting.
- It sets effective targets for compensation.
- Facilitates the use of stocks for mergers or acquisitions.