What is Value Based Management? Definition
Definition 1: Value Based Management (VBM) is the management approach that
ensures corporations are managed consistently on value (normally: maximizing
Definition 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 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 (normally:
maximizing shareholder value).
The three 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).
Why is Value Based Management important?
Note that any (large) company operates and is competing in multiple
- 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,
Value Added and other Value Based Management mechanisms.
What are the benefits of Value Based Management?
- Can maximize value creation consistently.
- It increases corporate transparency.
- It helps organizations to deal with globalized and deregulated capital
- Aligns the interests of (top) managers with the interests of shareholders
- Facilitates communication with investors, analysts and communication
- 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.
- Prevents takeovers.
- It helps to better manage increased complexity and greater uncertainty
Limitations of Value Based Management
The drawbacks of Value Based Management are the opposite of its benefits.
- VBM is an all-embracing, holistic management philosophy, often requiring
culture change. Because of this, VBM programs are typically large scale
initiatives. To be successful they take considerable time, resources and
- Value creation may sound more simple than corporate strategy, but it
isn't. It is actually more or less the same.
- Economic Value Added,
and Balanced Scorecard are
very powerful management support tools and processes. However they have
their own costs. Therefore it is generally not advisable to go too deep
in detail and use measuring methods that are over-complex.
- Extreme caution should be taken not to measure the wrong things as this
will almost certainly lead to value destruction.
- VBM requires strong and explicit CEO and Executive Board support.
- Comprehensive training and management consultancy are advisable or even
necessary, but can be quite costly.
- The perfect VBM or valuation model has not been invented yet. Any method
you choose, will always have drawbacks which you should consider.
Book: Andrew Black
- Questions of Value -
Book: S. David
Young and Stephen F. O'Byrne - EVA and Value Based Management -
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