Value-based Management
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This document discusses value-based management (VBM) and its implementation. It defines VBM as a management approach that puts shareholder value creation as the core philosophy. VBM is intended to effectively link strategy, measurement, and operations to create shareholder value. The document outlines the generic VBM framework, key value drivers, example metrics like EVA and ROIC, and challenges in implementing VBM like gaining manager buy-in. It provides examples of successful VBM implementations at companies like Coca-Cola and notes that top management support is critical to smooth adoption of VBM.
Value-based Management
- 1. By: Mohamed Azmi Taufik
- 2. o o 2 A business company main objective is to maximise shareholder wealth (value). Value is created only when the rate of return is higher than the cost of capital.
- 3. o o VBM metric, measures & value creation o 3 Understand the meaning of VBM Challenges in implementing VBM
- 4. o o o o o o o o 4 Definition Framework Value Drivers Value Creation Measures and Metrics Implementing VBM Track record Conclusion
- 5. VBM is a management approach which put shareholder value creation as the core philosophy of the company (KPMG Consulting, 1999). 5 VBM is a managerial process which effectively links strategy, measurement and operational processes to the end of creating shareholder value (CIMA, 2004) VBM is a philosophical concept rather than technique intended to show the financial managers where and when value is created or destroyed within the organisation (Kaushal and Bhargav, 2011)
- 6. Generic VBM framework (Morin and Jarrell, 2005) 6 Valuation – defines the corporate value and explains the key drivers of value. Strategy – establishes a clear link between corporate value and specific business strategies. Finance – describes value enhancing financial policies available to the company. Corporate Governance – explains the actions and policies of senior management such as performance measurement, compensation systems and investor communication that foster value creation.
- 7. Value drivers are variables that affect the company’s bottom line or profit (Koller,1994) Determinants of value of a firm (Morin and Jarrell, 2005) 7
- 8. Rate of return must be greater than cost of capital – must make profit Sustain and leverage on employees intellectual capital Motivation towards company interest and value Build trust Build trust with external environment and other stakeholders 8 Increasing stock price Investors confidence Customers Government & regulatory bodies Community
- 9. The relationship between the company, shareholders & stakeholders To create the maximum possible value for shareholders the company management must be committed to creating value in relation with customers, suppliers, employees and communities (Niculescu, 1999). 9
- 10. Firm performance measure should meet the following (Peterson, 2000), Measure should incorporate risk factor Measure must be future oriented Uncontrollable factors to be excluded in the measure The following factors need to be addressed (Peterson, 2000), Measure should be in a flow manner (long process) 10 Measure must be translated to divisional level Measure should promote shareholder value
- 11. Discounted Cash Flow (DCF) Returns to Shareholders (RTS) - annual capital gains plus dividend yields Cash Flow Return on Investment (CFROI) - expresses an estimate of a company’s single-period cash flow as a percentage of total investment. Return on Invested Capital (ROIC) - the ratio of net operating profits less adjusted taxes (NOPLAT) to invested capital Economic Value Added (EVA) - measures the excess of earnings over the minimum return that shareholders could get by investing capital in companies of similar risk 11
- 12. Value-creation mindset needs to be adopted (Copeland et al., 1994) Mindset should tie-up with the necessary management process and systems (Copeland et al., 1994) Employee compensation to tie-up with performance (Martin and Petty, 2000) Top management of the firm must fully support the program (Martin and Petty, 2000) 12 Strategic planning approach – analyse long-term trend Other stakeholders need to be considered
- 13. Successful implementation by, Coca Cola, GE, Abbott Labs, Merck – has shown increased in performance & firm’s value (Morrin and Jarrell, 2005). Higher return and value creation 13 Perform better than peers Executives were highly rewarded
- 14. 14 The outcome of adopting VBM: Higher value strategies/ decision which lead to improved shareholder return. Source: Copyright © The LEK/Alcar Consulting Group, Inc. via Morrin and Jarrell (2005)
- 15. o Behavioural -such as getting managers to understand the new measures and avoiding complexity o Technical - getting the right data, volatility in WACC, the reliability of assumptions o Organisational - overcoming internal resistance, the significant effort and time required for implementation o 15 Managerial – support from Top Management
- 16. 16 Implementation of VBM by various Fortune 100 companies has proven the effectiveness of VBM in creating and increasing firm’s value. Companies need to adopt VBM with performance measures that is relevant and suitable to their organisations’ Top management support and commitment will ensure ‘smooth’ implementation of VBM To maintain the competitive edge and continue to create value performance metrics adopted need to be constantly monitored and assessed
- 18. Introduced Smart Orange under the GLC Transformation program in 2004 Process includes, 18 Introducing Core Values – Kristal Restructuring into 2 separate SBUs - Wholesale and Retail Realign Vision, Mission and Business Strategy Develop competency model – Functional & Behavioural Full Top management support and commitment To continue to create value - Teaming With Passion Program were carried out – compulsory for all staff and Leadership team to attend
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