Having spent many years in the management consulting world, I have noticed that while there are several management strategies used by enterprises, the one that seems to have a good rate of success is ‘value based management (VBM)’. VBM effectively provides leaders with factual information to make decisions that are impactful. This is not just a theoretical discussion, as we have used the VBM methodology to save over $200M USD in potential costs across national and international markets over a 3 year period.
Most traditional ‘Value Based Management’ definitions revolve around
- maximizing shareholder value &
- consideration of shareholder interest in a company’s business actions
However increase in shareholder value is directly tied to increase in company value. Therefore business decisions need to be made taking into consideration the impact to company value. This kind of management approach will then produce companies that are successful and profitable even in the absence of shareholders. Thus, a meaningful Value Based Management definition has to focus on ‘the importance of value creation or improvement in all key business decisions’ rather than just focusing on shareholder interests.
Value improvement in companies is generally seen when either top line revenue growth increases and/or internal bottom line costs are reduced. However, a more deeper analysis of the business is needed to better understand how the underlying processes influence revenue growth and bottom line costs. While the VBM methodology can be used in the confinement of a specific business area, such as sales or marketing, for complex organizations it is important to understand cross functional dependencies. For example, in a product and services company there may be inter dependencies across supply chain, delivery, design, engineering and field activities which impacts overall company value.
To ensure that the desired value outcomes are achieved, it is important to identify or design custom metrics, KPIs and value drivers which can be measured, quantified and tracked. Just as financial metrics like sales revenue, gross margins etc. have played an important role in financial decisions, equal if not more importance should be given to value metrics to ensure company growth.
VBM Core Components
Improvement of value is not a new or novel concept with strategies to improve value having been around for many years. However, strategy by itself is not always enough. Successful execution of a value improvement strategy is based on 2 core components 1) communicating the reason behind the approach to ensure adoption, especially to those who will help implement the changes and 2) setting up an improvement process that will ensure the new process changes will result in sustained value improvement.
Communication and change management is important to help with adoption and to create a positive mindset so employees understand the benefits associated with measuring value metrics. Equally as important is empowering the individuals responsible for implementation to ensure desired outcomes. Change management thus plays a key role since this involves changes in the current ways of thinking, leadership philosophy and culture of the organization.
Improvement Processes
Improvement processes tend to revolve around the following: finding the problem and/or gaps in an existing process, identifying the solution, devising an implementation plan, execution and monitoring the performance of the solution. Different process improvement approaches such as Six Sigma, PDSA or A3 can be used at this stage. While I tend to favor the Six Sigma approach because I have used and seen its success, most of the approaches have close similarities, with certain varying characteristics. One of the key learnings here is to ensure that a performance measure is put in place, to not only keep track of the expected outcomes but to also provide an indication in case the solution needs to be tweaked.
Focusing on creating, measuring, managing and monitoring value metrics, can also provide insights that might reveal new trends, patterns and habits that can impact future business decisions. This information will provide leaders at all levels of a company, with the ability to make better business decisions that will improve business performance and company profitability.
In a nutshell, ‘Value Based Management’ is a structured business approach that not only stresses the benefit of creating a value based culture mind-set but also guides companies strategically to ensure that business decisions / process changes are focused around the goal of value creation, maximization and realization at all levels of a company.
Disclaimer: By no means is this article suggesting that VBM is better than other management strategies. This is a just an approach that I have seen and used successfully with objective results.