{"id":2855,"date":"2017-03-23T08:43:31","date_gmt":"2017-03-23T13:43:31","guid":{"rendered":"http:\/\/flevy.com\/blog\/?p=2855"},"modified":"2020-12-18T12:45:36","modified_gmt":"2020-12-18T17:45:36","slug":"what-is-value-based-management-vbm","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/what-is-value-based-management-vbm\/","title":{"rendered":"What Is Value Based Management (VBM)?"},"content":{"rendered":"

Value Based Management (VBM)<\/a> is a management philosophy that states management should foremost consider the interests of shareholders in its business actions. \u00a0This framework encompasses the processes for creating, managing, and measuring value.<\/p>\n

It is important to note VBM differs from a profit-focused way of managing business.\u00a0 Specifically, VBM means that the decisions that you make today are not simply driven by short-term profit. Instead, we consider the longer-term effects that the decisions will have on organizational sustainability and profitability, reflected in future cash flows.<\/p>\n

VBM asks people within a company to think like owners and to make decisions that will ultimately benefit the owners.\u00a0 Managers and executives must constantly look for investment and growth opportunities that will create value\u2014and use the company’s capital in ways that ensure long-term, sustainable success.<\/p>\n

The Definition of Value<\/h2>\n

First, let’s define what “value” means to us within the context of Value Based Management. \u00a0In VBM, the value of a company is determined by its discounted cash flows (DCF). \u00a0In other words, value is created only when companies invest capital at returns that exceed the cost of that capital. \u00a0We employ DCF, because it is the only metric that takes a long-term view, while still focusing on the balance sheet.<\/p>\n

VBM can best be seen as a combination between a Value Creation Mindset<\/strong> and the Management Processes and Systems<\/strong> that are necessary to translate that mindset into action. \u00a0Let’s take a deeper look into each of these 2 components.<\/p>\n

Value Creation Mindset<\/h2>\n

First, we must adopt the Value Creation Mindset.\u00a0 This means we need to embrace value maximization as the ultimate financial objective for a company. 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. These targets also need to be translated into shorter-term, more objective financial performance targets<\/p>\n

To determine where we create value, we need to uncover our \u00a0Value Drivers<\/strong>. \u00a0A Value Driver is any variable that affects the value of our organization. \u00a0These are often best visualized and captured using a tree structure, where we see how Value Drivers at varying levels are derived. \u00a0See the image below as an example.<\/p>\n

\"vbm\"<\/a><\/p>\n

When developing our Value Drivers, we should follow these 3 guiding principles:<\/p>\n

    \n
  1. Value Drivers need to be organized, so that managers can identify which have the greatest impact on value and assign responsibility for them to individuals who can help the organization meet its targets.<\/li>\n<\/ol>\n
      \n
    1. Value Drivers must be defined at a level of detail consistent with the decision variables that are directly under the control of line management.<\/li>\n<\/ol>\n
        \n
      1. Generic value drivers (e.g. sales growth, operating margins, and capital turns) might apply to most business units. \u00a0However, these lack specificity and cannot be used well at the grass roots level.<\/li>\n<\/ol>\n

        Management Processes & Systems<\/h2>\n

        Adopting a Value Based Mindset and finding the Value Drivers only gets you halfway there. Managers must also establish processes and systems that bring this mindset to life in the daily activities of the organization.<\/p>\n

        The 4 essential management processes to consider, in sequence:<\/p>\n

          \n
        1. Strategy Development<\/strong>
          \nFirst, our company or business unit develops a strategy to maximize value.<\/li>\n<\/ol>\n
            \n
          1. Target Setting<\/strong>
            \nNext, we must translate this strategy into short- and long-term performance targets.\u00a0 These are defined in terms of our key Value Drivers.<\/li>\n<\/ol>\n
              \n
            1. Action Plans and Budgets<\/strong>
              \nWe then develop action plans and budgets to define the steps that will be taken over the next year to achieve these targets.<\/li>\n<\/ol>\n
                \n
              1. Performance Management<\/strong>
                \nLastly, we need to institute performance measurement and incentive systems in place to monitor performance against targets and to encourage employees to meet their goals.<\/li>\n<\/ol>\n

                These four processes are linked across the company at the corporate, business-unit, \u00a0and functional levels.<\/p>\n

                Are you a management consultant?<\/strong>\u00a0\u00a0You can download this and hundreds of other\u00a0consulting frameworks<\/a>\u00a0and\u00a0consulting training guides<\/a>\u00a0from the FlevyPro library.<\/div>\n

                Interested in gaining more understanding on how to implement VBM? \u00a0You can learn more and download an editable PowerPoint about Value Based Management here on the Flevy<\/a>\u00a0documents marketplace.<\/p>\n

                Do You Find Value in This Framework?<\/h2>\n

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                \u2013 Omar Hern\u00e1n Montes Parra, CEO at Quantum SFE<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

                Value Based Management (VBM) is a management philosophy that states management should foremost consider the interests of shareholders in its business actions. \u00a0This framework encompasses the processes for creating, managing, and measuring value. It is important to note VBM differs from a profit-focused way of managing business.\u00a0 Specifically, VBM means that the decisions that you… What Is Value Based Management (VBM)?<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":2856,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","footnotes":""},"categories":[408],"tags":[1200,450,77,1197,1199,1198],"class_list":["post-2855","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-management-leadership","tag-dcf","tag-performance-management","tag-strategy-development","tag-value-based-management","tag-value-creation","tag-vbm"],"_links":{"self":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/2855","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/comments?post=2855"}],"version-history":[{"count":5,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/2855\/revisions"}],"predecessor-version":[{"id":7752,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/2855\/revisions\/7752"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media\/2856"}],"wp:attachment":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media?parent=2855"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/categories?post=2855"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/tags?post=2855"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}