Maximizing Value Through Effective Management

Breaking down Value Based Management

Value Based Management was created by McKinsey & Company, a top management consultancy, and takes a comprehensive approach to measuring value creation. It is based on the principle of discounted cash flow, which provides a direct measure of the value that is being created.

Value Based Management operates under the principle of optimizing the value created by an organization, with a primary emphasis on maximizing shareholder value. This involves a range of processes, including the creation, management, and measurement of value. To achieve success in Value Based Management, companies must have a deep understanding of their market and competition, working strategically to carve out a unique position in the industry.

The organization's management team is adept at implementing a competitive strategy that leads to success and value maximization. They are also skilled at adjusting the strategy for maximum future returns, once they have identified and connected with the key drivers of the value chain that generate regular cash flows and promote profitability. McKinsey's Value Based Management model and theory is particularly effective in identifying these key drivers at various levels of the business, and highlights their importance in setting targets, measuring performance, and managing other critical processes.

The comprehensive model facilitates the management of the company to prioritize value creation, improvement, and delivery, ultimately leading to the achievement of the overarching goals and objectives. By aligning the company's objectives, aspirations, analytical techniques, and other management processes, the model enables the company to optimize its value by concentrating on the decision-making of the key value drivers.

The three elements of Value Based Management :

1) To create value :

The model of Value Based Management is more or less like a business strategy with its main focus on helping the organizations to generate and increase the future value.

2) To manage value :

It involves the aspects of leadership, communication, organizational culture, governance, and change management.

3) To measure value :

Value Based Management is a model that centers around the corporate values and purposes. The corporate purpose can either be oriented towards economic goals or directly aim to cater to the stakeholder values. This model heavily relies on these values and purposes to function effectively.

Importance of Value Based Management :

By utilizing this strategy, organizations can effectively promote their products and services, allowing them to gain a significant advantage over their competitors in the market. This approach ensures that businesses can optimize their marketing efforts and achieve success in their respective industries.

By attracting investors, organizations can achieve their financial goals and objectives. Additionally, this can aid in the development of corporate management and control levels, enabling the restructuring of hierarchy and preparation for potential takeover or buy-out threats.

The helps the organization to build a favorable and a qualitative image in the market that will attract top talent from the industry

Benefits of the Value Based Management :

It helps the organizations in the creation of value on a constant and continuous basis.

It helps to increase the level of corporate transparency.

It helps and facilitates the organizations to deal on the global level as well with the deregulated markets.

Aligning the interests and objectives of top management with those of shareholders and stakeholders is essential. This enables effective communication and collaboration among investors, analysts, and stakeholders, promoting smooth and efficient business operations.

Helps to define the business plans and strategies for improving the internal communication

Prevents the undervaluation of the stocks and shares of the company

Helps the management to set the priorities straight with regards the aims and objectives

Improves the decision-making process

Facilitates to balance the short-term, long-term, and middle-term trade-offs

Improves the proper and optimum allocation of the business resources

Aligns and streamlines the processes of planning and budgeting

Helps to set the targets for compensation

Helps and facilitates the proper use of company stocks for the purposes of mergers and acquisitions

Helps in the prevention of takeovers

Helps the management to deal with the complexities of the market, competition, uncertainties, and risks

The key steps of Value Based Management :

1) The goal of value maximization

While the management team may have varying objectives, it is crucial that their primary focus is on enhancing the organization's value in the marketplace. This can be achieved by prioritizing customer satisfaction, expanding the market share of the product offerings, and maximizing profits. To achieve this, the organization's activities should be categorized as either financial or non-financial in nature.

The management's focus is aided by financial goals, which prioritize maximizing value. Non-financial objectives, such as developing products, satisfying customers, and improving quality, serve as motivators for the entire workforce.

Identifying the key value drivers at a generic level is fundamental to understanding the overall value proposition of the organization. This involves analyzing the company's market position, competitive landscape, and customer needs to determine the most critical drivers that impact the business value.

B) The Business Unit Level :

At the business unit level, it is crucial to identify the specific drivers that impact the value of each business unit. This involves analyzing factors such as revenue growth, profit margins, and market share to determine the key drivers that impact the success of each unit.

C) The Operational Level :

At the operational level, it is essential to identify the drivers that impact the value of the organization's day-to-day operations. This involves analyzing factors such as productivity, efficiency, and quality to determine the key drivers that impact operational success.

Overall, identifying the key value drivers at multiple levels is critical to successful Value Based Management, as it ensures that employees are aligned with the company's goals, objectives, and values, ultimately leading to increased business value in the market.

At the department level, variables such as sales growth, cost control, and employee productivity are crucial in determining the success of the department in contributing to the overall value maximization goals of the company.

The grass root level involves identifying the variable factors that guide each department in achieving their objectives. Specifically, the marketing department aims to develop creative and strategic marketing and promotional plans.

Here, the variables that reveal the performance at the operational level are identified such as managing the cost of inventory, utilization of capital, and more.

3) Strategy Development

4) Target Setting

To effectively implement Value Based Management, it is crucial to create well-planned strategies that align with the objective of maximizing value at all levels of the company. These strategies should prioritize the achievement of the key value drivers essential to the success of the organization.

The next step after Strategy development involves setting specific short and long-term targets that are aligned with the organization's value drivers. These targets should be well-coordinated across all levels and should encompass both financial and non-financial aspects of the organization.

5) Action Plans

6) Performance Management System

In order to achieve the targets set forth in the Value-Based Management process, a detailed action plan must be developed. This plan will outline the specific actions that align with the overall strategy and will guide the organization towards meeting its goals. By carefully considering each step in the process and identifying the necessary actions, the organization can ensure that it is on the path to success.