Value based management

Question 1

What is value based management (VBM)?

Answer 1

An approach to management whereby the company’s strategy, objectives and processes are aligned

Helps the company to focus on the key drivers of shareholder wealth, and hence maximize this value

Question 2

How is VBM used to measure shareholder value?

Answer 2

Takes the interest of shareholders as its primary focus

Begins with the view that value is only created when companies generate returns greater than their cost of capital

VBM then focuses on those areas which create value.

Question 3

How is VBM implemented?

Answer 3

1. A strategy is developed to maximise value
2. Key value drivers are identified and performance targets are set. Targets may be developed by benchmarking against competitors
3. A plan is developed to achieve the targets
4. Performance metrics and reward systems are created that are compatible with these targets. Staff at all levels should be motivated to meet these targets

Question 4

What are the key measures used in value based management?

Answer 4

Key measures:
EVA
Market value added
Shareholder value analysis

Additional measures:
The balanced scorecard
Business process re-engineering
TQM
JIT
ABC and ABM
Benchmarking

Question 5

What are the disadvantages of using value based management (VBM)?

Answer 5

• Can become an exercise in valuing everything but changing nothing, wasted time
• Management information systems need to be adapted to take into account of the need to measure non-financial indicators
• Since EVA is a key measure all those disadvantages here too