Value Based Management T.

Koller

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The value of a company is determined by its discounted future cash

flows.
Value is created only when a company invest capital at returns that
exceed costs of capital.
VBM looks how company use these returns to make both major
strategic and operational decisions.
This approach aligns companys aspirations, analytical techniques
and managerial processes to focus management decision making
on the key value drivers.

Conditions for effective VBM

communication around planning, target setting, performance
measurement and incentive systems must be tightly linked to
value creation
performance targets should be set in the terms of discounted
cash flow values (not only financial measures) the most direct
measure of value creation. Then they can be translated into short
term more objective financial performance targets.
non-financial targets are needed concerning customer
satisfaction, product innovation, employee satisfaction.

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Objectives tailored to different levels

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The head of a business unit the objective may be explicit value

creation measured in financial terms
Functional manager goals expressed in terms of customer
service, market share, product quality or productivity
Manufacturing manager focus on cost per unit, cycle unit, or
defect rate
Product Development manager the time to a market for a new
product, the number of products developed, or their performance
compared to the competition.

Key Value Drivers

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Value driver is any variable that affects the value of the company
The performance variables that actually create value
Thats because company cannot act directly on value, it has to act on
things it can influence
Managers identify which have the greatest impact on value and
assign responsibility for them to the individuals
Key value drivers are a small part of a system, but have significant
impact on value and are clearly under the control of the line
management

Levels of value drivers

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Level2business
unitspecific

Level1generic

Revenue
Margin

Costs

Level3operational

Customermix

Unitrevenues

Salesforce
productivity

pervisit

Fixedcosts/
allocation
Capacity
management

Billablehours
tototalhrs
Percentcapacity
utilized

ROIC

Invested
capital

Working
capital
Fixed
capital

Accountsreceivable
termsandtiming
Accountspayable
termsandtiming

Key Value Drivers

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Continuously reviewed

Identifying requires different thinking of organizations processes

May require new reporting schemes

Creative process involving trial and error

Scenario analysis as a tool for exploring the interrelationships between value

drivers

Business processes must include value thinking:

developing strategy, performance targets, action plans and budgets,
performance measurement and incentive systems

VBM business processes

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Strategy
Corporate strategy including buying and selling business units
Business unit strategy - identifying alternatives valuing them and choosing
the one with the highest value
Targets
Base targets on value drivers: financial and non financial
Tailor targets to different levels of an organization
Link short-term to long-term targets: e.g. economic profit
Action plans translate the strategy into specific steps
Performance measurement
tracks progress and motivates, a shift from accounting driven to
management driven (pg 99 article)

VBM mindset

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VBM is associated with a value creative mindset and the management

and processes which are necessary to translate that mindset into
action.

A value creation mindset means that senior managers are fully aware of
that their ultimate financial objective is maximizing value
that they have clear rules for deciding when other objectives (such
as employment or environmental goals) outweigh this imperatives;
and that they have a solid analytical understanding of which
performance variables drive the value of the company

Critical evaluation of VBM method