Value Based Management

Value Based
Management
A Presentation By:
Suyash Chandak
CONTENTS
o Introduction
o Definition
o Framework
o Value Strategy
o Value Creation
o Measures and Metrics
o Implementation
o Benefits
o Challenges
o Conclusion
INTRODUCTION
o A company's main objective is to maximize
shareholder’s wealth (value).
o Value in monetary terms is created only when the

rate of return is higher than the cost of capital.
3
DEFINITION
 VBM is a managerial process which effectively links
strategy, measurement and operational processes to the
end of creating shareholder value (CIMA, 2004)
 VBM is a management approach which put shareholder

value creation as the core philosophy of the company
(KPMG Consulting, 1999).
 VBM is a philosophical concept rather than technique

intended to show the financial managers where and when
value is created or destroyed within the organisation
(Kaushal and Bhargav, 2011)
FRAMEWORK
Generic VBM framework (Morin and Jarrell, 2005)
 Valuation: It defines the corporate value and explains the

key drivers of value.
 Strategy: It establishes a clear link between corporate
value and specific business strategies.
 Finance: It describes value enhancing financial policies
that are available to the company.
 Corporate Governance: It explains the actions and
policies of senior management such as performance
measurement, compensation systems and investor
communication that foster value creation.
FRAMEWORK
Determinants of
value of a firm
(Morin and Jarrell,
2005)
Value drivers are variables that affect the

company’s bottom line or profit. (Koller,1994)
VALUE STRATEGY
 Rate of return must be greater than cost of capital –
must make profit
 Increasing stock price
 Investors confidence
 Sustain and leverage on employees intellectual capital

 Motivation towards company interest and value
 Build trust
 Build trust with external environment and other stakeholders

 Customers
 Government & regulatory bodies
 Community
VALUE CREATION
The relationship between the company, shareholders & stakeholders
To create the maximum possible value for shareholders the

company management must be committed to creating value in
relation with customers, suppliers, employees and 8
communities (Niculescu, 1999).
MEASURING VALUE:
PARAMETERS
Firm performance measure should meet the following
parameters (Peterson, 2000)
 Measure must be future oriented.
 Measure should incorporate risk factor.
 Uncontrollable factors to be excluded in the measure.
 Measure must be translated to divisional level.
 Measure should be in a flow manner (long process).
 Measure should promote shareholder value.

9
MEASURING VALUE:
METRICS
 Discounted Cash Flow (DCF): Present value of future
cash flows discounted at a particular rate.
 Returns to Shareholders (RTS): Annual capital gains plus

dividend yields
 Cash Flow Return on Investment (CFROI): It

expresses an estimate of a company’s single-period cash
flow as a percentage of total investment.
 Return on Capital Employed (ROCE): The ratio of

EBIT to invested capital i.e. average of total assets less
current liabilities.
 Economic Value Added (EVA): It measures the excess of

earnings over the minimum return that shareholders could 10
get by investing capital in companies of similar risk
IMPLEMENTATION
 Value-creation mindset needs to be adopted (Copeland et
al., 1994)
 Mindset should tie-up with the necessary management

process and systems (Copeland et al., 1994)
 Employee compensation to tie-up with performance (Martin

and Petty, 2000)
 Top management of the firm must fully support the program

(Martin and Petty, 2000)
 Strategic Planning Approach – Analyze long-term trend
 Other stakeholder's needs to be kept in consideration.
11
BENEFITS
 Successful implementation by Leading Companies like
Coca Cola, GE, Abbott Labs, Merck – has shown increased in
performance & firm’s value (Morrin and Jarrell, 2005).
 Perform better than peers
 Higher return and value creation with good reward to executives.
CHALLENGES
 Behavioural: Getting managers to understand the
new measures and avoiding complexity.
 Technical: Getting the right data, volatility in WACC,

the reliability of assumptions.
 Organisational: Overcoming internal resistance, the

significant effort and time required for implementation.
12
 Managerial: Vision and guidance of Top Management.

CONCLUSION
 Implementation of VBM by various Fortune 100
companies has proven the effectiveness of VBM in
creating and increasing firm’s value.
 Companies need to adopt VBM with performance

measures that is relevant and suitable to their
organisations’.
 Top management support and commitment will

ensure ‘smooth’ implementation of VBM.
 To maintain the competitive edge, performance

metrics adopted need to be constantly monitored
and assessed. 13

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Value Based

o Value in monetary terms is created only when the

 VBM is a management approach which put shareholder

 VBM is a philosophical concept rather than technique

Generic VBM framework (Morin and Jarrell, 2005)

 Valuation: It defines the corporate value and explains the

Value drivers are variables that affect the

 Sustain and leverage on employees intellectual capital

 Build trust with external environment and other stakeholders

To create the maximum possible value for shareholders the

 Measure must be future oriented.

 Measure should incorporate risk factor.

 Uncontrollable factors to be excluded in the measure.

 Measure must be translated to divisional level.

 Measure should be in a flow manner (long process).

 Measure should promote shareholder value.

 Returns to Shareholders (RTS): Annual capital gains plus

 Cash Flow Return on Investment (CFROI): It

 Return on Capital Employed (ROCE): The ratio of

 Economic Value Added (EVA): It measures the excess of

 Mindset should tie-up with the necessary management

 Employee compensation to tie-up with performance (Martin

 Top management of the firm must fully support the program

 Strategic Planning Approach – Analyze long-term trend

 Other stakeholder's needs to be kept in consideration.

 Perform better than peers

 Higher return and value creation with good reward to executives.

 Technical: Getting the right data, volatility in WACC,

 Organisational: Overcoming internal resistance, the

 Managerial: Vision and guidance of Top Management.

 Companies need to adopt VBM with performance

 Top management support and commitment will

 To maintain the competitive edge, performance

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