In this webinar, we began our discussion with the assertion that value and value creation are foundational to the execution and achievement of the corporation’s mission and vision. Specifically, value creation and preservation is a necessary condition to meeting the organization’s prime directives, whether they be economic, social or nationalistic. Consequently, a focus on value creation provides insight into where and how the company should grow, it provides the capital (internally generated and via the capital markets) to grow, and it develops the human capital required for growth, through management discipline and employee empowerment. Understanding and measuring value creation provides a framework to objectively
- evaluate and assess the organization’s activities and business structure,
- prioritize and allocate limited resources to maximize sustainable and profitable growth.
What is Value Based Management? Value Based Management is a specific way of looking at a business; it is a mindset, a philosophy that is ingrained in the very culture of the organization. It prioritizes long-term value creation above all other strategic metrics. All performance metrics, KPIs, organizational structures and processes, etc. are evaluated through the lens of long-term value creation. Value Based Management is stakeholdercentric. That is, all of the business’ stakeholders (whether owners, employees, customers, suppliers, community) are enriched by the creation of longterm value. To change and align behavior with the value based management philosophy, there must be accountability for actions or decisions that are inconsistent with the creation of long-term value as well as incentives, rewards and recognition for actions and decisions that result in the value creation. Lastly, and to bring us full circle, senior management leads from the top by example and supports from the bottom by empowering all levels of employees to be significant contributors of value.
The basic components of Value Based Management are:
- measuring value
- creating value
- managing value
Measuring value requires that we understand the financial factors and strategic forces that determine and impact value. Creating value involves the identification, articulation and implementation of strategies that leverage favorable industry dynamics factors or mitigate pressures caused by disadvantageous market dynamics or a weak competitive position. Finally, value is managed through the corporate governance and organizational structures of the company, the alignment of incentives, rewards and recognition and by leaders that lead by example. An important part of a Value Based Management culture is the identification and monitoring of value drivers.
Identifying and managing the key value drivers helps management focus their attention on, and prioritize those activities that have the greatest impact on value and develop specific actionable strategies to translate the overall corporate objective of value creation into tactical actions.
There are three broad categories of value drivers:
- growth value drivers achieve growth without sacrificing value
- efficiency value drivers create value either through increasing operating efficiency (doing more with less) or by the divestment of value destroying activities (pruning strategies)
- financial value drivers which reduce the organization’s cost of capital.
Value driver analysis typically comprises three main steps:
- identify the key value drivers
- test the value sensitivity to the identified value drivers
- test for the controllability of the identified value drivers.
Those value drivers that have a significant impact on value and over which management has influence become the Key Performance Indicators (KPIs) or balanced scorecard factors. The critical success factor for implementing a Value Based Management approach is changing the culture of the organization. This requires commitment (time, patience, resources); communication, application and relevancy to all levels of the organization; and compensation and recognition that is aligned with increasing value and the metrics that drive that value creation. It is not easy, but a value-centric approach to management will enable you to optimally and sustainably achieve the organization’s prime directives.