The Value Based Management was developed by the leading management consultants McKinsey & Company and has a comprehensive approach to the value based management based on the principle of the discounted cash flow that has a direct measurement of the value creation.
Breaking down Value Based Management
Value Based Management works on the approach and philosophy that enables and supports the management of the organization to create the maximum value. It mainly focuses on the maximization of the value of the shareholders of the company.
It comprises the varied processes of creating, managing, and measuring the value. The entire process of the Value Based Management requires a thorough understanding of the market attractiveness in which the company is operating and is in the competition with other players to create a niche for itself in the industry.
The management of the organization is able to accomplish a competitive strategy for success and value maximization and is modified to maximize the future returns once the understanding is created and linked with the key value chain drivers for the regular cash flows and the facets of profitability.
The model and theory of Value Based Management by McKinsey has an astute focus on the identification of the key value drivers at the various steps and levels of the business operations and the organization. It lays the emphasis on all the value drivers in all the facets such as setting up of the targets, performance measurements, and other management and business related process amongst other such crucial aspects.
The entire model helps and allows the management of the company to run the business with the focus on the value creation, improvement, and delivery that results in the attainment of the overall goals and objectives. It helps to align the company’s objectives, aspirations, analytical techniques, and all the other management processes that help the company to maximize its value by focusing on the decision making of the key value drivers.
The three elements of Value Based Management :
1) To create value :
The model of Value Based Management is more or less like a business strategy with its main focus on helping the organizations to generate and increase the future value.
2) To manage value :
It involves the aspects of leadership, communication, organizational culture, governance, and change management.
3) To measure value :
Importance of Value Based Management :
- It helps the organizations to market their products and services in an optimum and successful fashion gaining the competitive advantage over their contemporary brands in the market.
- It helps to attract the investors for the organizations resulting in the attainment of the financial goals and objectives.
- It helps the organization to formulate the levels of corporate management and control that helps it restructuring the hierarchy, and prepares it for the threat of takeover and buy-out.
- The helps the organization to build a favorable and a qualitative image in the market that will attract top talent from the industry
Benefits of the Value Based Management :
- It helps the organizations in the creation of value on a constant and continuous basis.
- It helps to increase the level of corporate transparency.
- It helps and facilitates the organizations to deal on the global level as well with the deregulated markets.
- Defines and aligns the interest and objectives of the top management with that of the shareholders and stakeholders of the company.
- It facilitates the smooth flow of communication amongst the investors, analysts, and stakeholders.
- Helps to define the business plans and strategies for improving the internal communication
- Prevents the undervaluation of the stocks and shares of the company
- Helps the management to set the priorities straight with regards the aims and objectives
- Improves the decision-making process
- Facilitates to balance the short-term, long-term, and middle-term trade-offs
- Improves the proper and optimum allocation of the business resources
- Aligns and streamlines the processes of planning and budgeting
- Helps to set the targets for compensation
- Helps and facilitates the proper use of company stocks for the purposes of mergers and acquisitions
- Helps in the prevention of takeovers
- Helps the management to deal with the complexities of the market, competition, uncertainties, and risks
The key steps of Value Based Management :
1) The goal of value maximization
The key members of the management may have an array of conflicting goals such as maximization of PAT, attaining the highest levels of customer satisfaction, increasing the market share of the product offerings, and more but the first and foremost goal should be to maximize the value of the organization in the market in the minds of the consumers and other stakeholders. The activities of the organization are divided into financial and non-financial types.
The former helps the management to maintain focus whereas the later works as a motivational factor for the entire workforce of the organization. The financial goals comprise of the value maximization and are always given more importance over the non-financial ones. The non-financial activities and goals involve product development, customer satisfaction, and the quality improvement procedures.
2) Identifying the value drivers
The crucial aspects of the organization that affect the value of the business in the market are referred to as the key value drivers of the company and it is very imperative to identify them for the proper Value Based Management. The identification also results in the employees at various levels ensuring that their work performance is well aligned with the values, goals, and objectives of the company. The significant levels at which the key drivers of achieving the value needs to be identified are mentioned below:
A) The Generic Level :
The variables here are directly identified that helps in the achievement or non-achievement of the value maximization objectives. They can be net operating margins, return on capital investments or operating margins of the business.
B) The Department Level :
At this level, the variable factors that guide the various departments of the organization in the accomplishment of the objectives are identified. For the marketing department, the main objective will be come up with the creative and strategic marketing and promotional plans.
C) The Grass Root Level :
Here, the variables that reveal the performance at the operational level are identified such as managing the cost of inventory, utilization of capital, and more.
3) Strategy Development
The step in the process of Value Based Management is to develop the well planned strategies at all the levels of the company that is consistent in nature with an objective of the value maximization. All the strategies should have the motto for the accomplishment of the desired level of the key value drivers of the company.
4) Target Setting
The Strategy development step is duly followed by framing the short and long-term targets that are specific in nature and aligned with the desired level of the value drivers. All the targets should be well tuned with one another at all the levels and should be set for both financial and non-financial variables of the organization.
5) Action Plans
At this step of the process of Value-Based Management, the detailed action plan is devised. Aftermath the strategy and targets are in place and determined, there is a need to specify the actions that are in line with the strategy and should be undertaken to achieve the targets.
6) Performance Management System
The last and final step involves setting up a performance management system that is precise and unambiguous in nature. It should be linked with the targets set and has to reflect the goals and characteristics of each department.
Above was a complete explanation of Value Based Management and How to Apply it in your organization.