The basic
essential to the
success of VBM
is the obvious,
the C-suite must
totally understand
and support it.
by Phil Phillips, PhD
Contributing Editor
phillips@chemarkconsulting.net
Before Value-Based Management (VBM) be- came a viable tool, organizational perfor- mance targets where imprecise or not aligned
with the ultimate goals of many organizations.
The basic thesis behind VBM is that, properly understood and implemented, it provides
precise and plain metric value upon which the
entire organization can be built.
The basic principles behind VBM is uncomplicated: The value of a company is determined
by its discounted future cash flows since value
is created only when a company invests capital
at returns that exceed the cost of capital.
Simple... yes but easy, no! VBM disciplines can
become side tracked and sometimes hurdled or
worse yet “pigeon-holed” in staff functions. The
basic essential to the success of VBM is the obvious,
the C-suite must totally understand and support it.
Given the C-Suite buy-in, there are two fun-
damental sub-functions that are musts if VBM
is to succeed in any organization:
• Focus • Alignment
FOCUS: There must be a total focus on how a
company uses capital to make everyday deci-
sions and...
ALIGNMENT: Alignment of the company’s aspi-
rations, diagnostic techniques, and management
processes to focus on decision-making on key
drivers of value at all levels of the organization.
VBM provides decision-makers at all levels,
with the correct information plus incentives to
make value-creating decisions. Incentives are
set by Senior management through specific financial targets via strategic review interplay
between managers and superiors.
VBM is considered “working” when an organizations’ management processes provide decision-makers at all levels with accurate information
and incentives to make value-creating decisions.
Additionally, the manager’s own assessment would
be based on long-term as well as short-term targets
that measure progress toward the overall value creation set of goals and objectives.
The topic of VBM cannot be comprehen-
sively examined within the confines of a col-
umn, however, we can list highlights of essential
elements that should be examined further:
• Remember, VBM is implementation of val-
ue maximization as the final financial ob-
jective for your company. Financial goals
are . . . set in terms of discounted cash flow
value and translated to short-term finan-
cial performance objectives.
• Nonfinancial goals: customer satisfaction,
innovation, employee satisfaction
• Objectives must be customized to different
levels within your organization. Functional
managers and Production manager’s ob-
jectives will be different.
• Find the value-drivers at all levels of your
organization and translate them up and
into the whole company. CW
Value-Based Management – It’s Still Around and Evolving
Into A “Best Practice” 3-Dimensional Operational Tool
Old planning systems vs. VBM
