"The purpose of a company is to create and keep a customer," remarked management consultant Peter Drucker. This essential truth underscores the idea behind Value Based Management (VBM)—a management philosophy that aligns a company's operations with its overarching mission to create value for shareholders, customers, and employees alike. By leveraging this performance-driven approach, C-level executives can consistently ensure long-term profitability and business sustainability.
Value Based Management is inherently tied to the concept that maximizing shareholder value is the principal objective of a business. To achieve this, companies must align their corporate strategy, business processes, people, and culture around delivering maximum shareholder returns. According to McKinsey & Company, businesses should follow three guiding principles: managing for value, managing with value, and managing towards value. Executing these principles ensures the strategic intent and the consequent results are anchored around value creation, thus enabling Performance Management to thrive.
The Role of Corporate Strategy in VBM
A well defined Corporate Strategy is key to effectively implementing Value Based Management. Goldman Sachs asserts that a robust strategy should integrate financial targets, risk parameters, and operational metrics at a granular level. The key is "strategic alignment," which entails ensuring that business practices, from budgeting to employee performance evaluations, support the creation of shareholder value. Whether it's guided by Digital Transformation efforts or a drive towards Operational Excellence, the strategy must unambiguously link business actions to value generation.
The Importance of Organizational Culture
Transforming a company's culture is not an optional part of Value Based Management—it's an essential pillar. Bain & Company observes that culture change is twice as predictive of superior shareholder returns than mere strategy or operating model transformation. By promoting a culture that recognizes performance against value metrics, companies can steer employees to work towards tangible targets that bolster the bottom line. Change Management, in this regard, plays an instrumental role in aligning the organizational culture with the company's strategic intent.
Metrics in Value Based Management
Metrics form the heart of any well-implemented VBM framework. From traditional financial metrics such as net operating profit after taxes (NOPAT) and free cash flow, to value-based ones like Economic Value Added (EVA), they bring rigor and discipline to the value creation process. Deloitte suggests that for a VBM system to work, there must be the right balance between financial and non-financial metrics, and between leading and lagging indicators. Rigorous Performance Management using these metrics can guide executive decision-making and influence behavior throughout the organization.
Towards Superior Performance with VBM
Accenture states that Value Based Management is not just a tool—it's a mind-set. When fully embraced, VBM can drive all aspects of performance—from Risk Management to Strategy Development and operational execution, all through the lens of value creation. Gartner research found that companies practicing VBM outperformed their competition by 15% on average in terms of annual total shareholder returns. The advantages of VBM are clear, but they can only be realized through an unwavering commitment at all levels of the organization to drive and sustain this change.
Key Takeaways
VBM represents a holistic approach to managing business, centered around value creation.
Corporate Strategy is an integral part of a successful VBM implementation, linking business practices directly with value generation.
An organizational culture supportive of VBM efforts is pivotal to achieving superior shareholder returns.
A well-chosen mix of financial and non-financial metrics is central to effective Value Based Management.
The adoption of Value Based Management, while challenging, presents immense potential for companies committed to strategic, cultural and operational alignment in the pursuit of value creation. As Peter Drucker put it, the only valid purpose of a firm is to create a customer; in the context of VBM, we can extend this assertion—the ultimate purpose, indeed, is to create sustained value for all stakeholders.
For more information, have a look at these management topics:
"I have used Flevy services for a number of years and have never, ever been disappointed. As a matter of fact, David and his team continue, time after time, to impress me with their willingness to assist and in the real sense of the word. I have concluded in fact that it is not at all just a repository of documents/resources but, in the way that David and his team manage the firm, it is like dealing with consultants always ready to assist, advise and direct you to what you really need, and they always get it right.
I am an international hospitality accomplished senior executive who has worked and lived during the past 35 years in 23 countries in 5 continents and I can humbly say that I know what customer service is, trust me.
Aside from the great and professional service that Flevy's team provide, their wide variety of material is of utmost great quality, professionally put together and most current.
Well done Flevy, keep up the great work and I look forward to continue working with you in the future and to recommend you to a variety of colleagues around the world."
– Roberto Pelliccia, Senior Executive in International Hospitality
"As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value."
– David Coloma, Consulting Area Manager at Cynertia Consulting
"I like your product. I'm frequently designing PowerPoint presentations for my company and your product has given me so many great ideas on the use of charts, layouts, tools, and frameworks. I really think the templates are a valuable asset to the job."
– Roberto Fuentes Martinez, Senior Executive Director at Technology Transformation Advisory
"Flevy is our 'go to' resource for management material, at an affordable cost. The Flevy library is comprehensive and the content deep, and typically provides a great foundation for us to further develop and tailor our own service offer."
– Chris McCann, Founder at Resilient.World
"[Flevy] produces some great work that has been/continues to be of immense help not only to myself, but as I seek to provide professional services to my clients, it give me a large "tool box" of resources that are critical to provide them with the quality of service and outcomes they are expecting."
– Royston Knowles, Executive with 50+ Years of Board Level Experience
"As a young consulting firm, requests for input from clients vary and it's sometimes impossible to provide expert solutions across a broad spectrum of requirements. That was before I discovered Flevy.com.
Through subscription to this invaluable site of a plethora of topics that are key and crucial to consulting, I have been able to exceed expectations and deliver quality advice and solutions to my clients. The quality and expertise of the authors are exemplary and gives me great confidence to use as part of my service offerings.
I highly recommend this company for any consultant wanting to apply international best practice standards in their service offerings. "
– Nishi Singh, Strategist and MD at NSP Consultants
"If you are looking for great resources to save time with your business presentations, Flevy is truly a value-added resource. Flevy has done all the work for you and we will continue to utilize Flevy as a source to extract up-to-date information and data for our virtual and onsite presentations!"
– Debbi Saffo, President at The NiKhar Group
"I have used FlevyPro for several business applications. It is a great complement to working with expensive consultants. The quality and effectiveness of the tools are of the highest standards."
– Moritz Bernhoerster, Global Sourcing Director at Fortune 500
SELECT CUSTOMERS
Since 2012, we have provided best practices to over 10,000 businesses and organizations of all sizes across the world—in over 130 countries.
Below is just a very small sample of our customer base.
Did you know?
The average daily rate of a McKinsey consultant is $6,625 (not including expenses). The average price of a Flevy document is $65.
Download our free compilation of 50+ Strategy & Transformation slides and templates. Frameworks include McKinsey 7-S Strategy Model, Balanced Scorecard, Disruptive Innovation, BCG Experience Curve, and many more.
Download our free compilation of 50+ Strategy & Transformation slides and templates. Frameworks include McKinsey 7-S Strategy Model, Balanced Scorecard, Disruptive Innovation, BCG Experience Curve, and many more.