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What is Value Based Management?
Value Based Management (VBM) is a management philosophy which uses analytical tools and processes to focus an organisation on the single objective of creating shareholder value. Through the alignment of strategic management, performance reporting and incentive compensation, staff at all levels are encouraged to act like shareholders, making decisions that maximise value. Ultimately, these decisions can lead to real changes in stock market performance over the long term.
The VBM approach comprises the following four areas (see figure 1):
The Value Model
This model allows companies to understand which areas and activities within the business create (or destroy) value, and they are able to set realistic future performance goals. The first input to the value model is a restatement of past performance using an appropriate value measure. The identification of key value drivers helps create focus on value adding activities, while the setting of value goals articulates a company's value aspiration.
Value Maximising Strategy
It is vital that companies identify their value maximising strategy and therefore the value required to reach their future goals. The process identifies the company's strategic issues and opportunities. The value framework then focuses on alternative ways of addressing these issues. A value measure is used to evaluate options, and those which add the most value should be chosen.
Organisational Alignment
Implementation of strategy is achieved through aligning management processes and structures, for example, linking the strategic goals to performance measures and incentives schemes. The drivers of value and the strategic initiatives determine the strategic plan. This plan, rather than the budget, provides targets for both performance management and incentive schemes.
* Value Climate
This area ensures companies help staff understand their role in delivering...